What is now thought of as health insurance was not invented until the 1920s. Before then medical costs were so low that almost everybody could pay for the healthcare they needed with cash. Instead of health insurance many workers bought sickness or disability insurance that provided income for persons unable to work.

This began to change in the 1920s as medical costs increased because of the rising professionalism of doctors. The growing use of hospitalization and surgery also increased medical costs. For the first time many working and middle class families could not afford basic healthcare so some health insurance policies appeared. At the same time, demands for national or government provided health insurance began in the United States.

Blue Cross and Blue Shield

By 1929, rising healthcare costs were beginning to become a concern. Some families were not able to pay for medical care and physicians were worried that patients could not pay their bills. Baylor University hospital in Dallas formed a plan to correct this by offering a group of teachers 21 days of hospitalization for a $6 payment. This became the precursor to Blue Cross which provided prepaid hospitalization to workers.

Such plans became popular throughout the United States in the 1930s because they ensured hospital care at low cost. The American Hospital Association set up Blue Cross to provide hospitalization plans to the poor. Even though Blue Cross was nonprofit it operated like a mutual insurance company and was insurance. Blue Cross became the first widely available health insurance in the US.

Blue Cross became so popular that the American Medical Association began organizing a similar plan for physicians. First called the California Physicians Service this covered doctors bills in exchange for a modest payment usually $1.70 a month. In 1946, it was taken nationwide and called Blue Shield. Part of the motivation behind Blue Cross and Blue Shield was to provide affordable healthcare to the working class and undermine demands for national health insurance which the AMA opposed at that time.

Health Insurance for Everybody

The success of Blue Cross and Blue Shield was noticed by commercial insurance companies which began offering health insurance policies of their own. Much of the growth in the market was driven by the popularity of health insurance as a benefit by employers. This began during World War II when government regulations prevented employers from raising salaries. The war created a labor shortage so employers began offering benefits such as health insurance to attract workers. This practice became widespread after 1954 when employer sponsored health insurance was made exempt from the federal income tax.

By 1960, health insurance had become big business with 20 companies offering it. By 1975 it was estimated that most American workers had some sort of health insurance. The creation of Medicare which provided government health insurance for those over 65 increased the awareness of health insurance.

Rising Costs and Cost Containment

The rapid advance of medical technology in the late 20th Century caused massive increases in health care costs. These costs began to affect health insurance and the way it was delivered. Companies sought to contain costs by restricting treatment and access to care. One method of doing this was the Health Maintenance Organization or HMO, an arrangement in which health insurance policyholders were restricted to certain doctors. A popular variation of the HMO pioneered by Kaiser Permanente had the physicians working directly for the insurance company.

The rising costs and the unpopularity of cost containment measures increased demands for regulation of health insurance and for national health insurance. Efforts at reform led to the passage of the Patient Protection and Affordability Care Act of 2010 popularly known as "Obamacare." This mandated that all citizens who could not qualify for Medicare or Medicaid purchase private health insurance starting in 2014. The effect of this legislation on the health insurance industry remains to be seen.