How'd we get here? America's accidental “care” system.
What exists today is the accumulated result of a century of accidents, political compromises, wartime workarounds and incremental reforms bolted onto the last.
Blue Moss CapitalAugust 202618 minute read
01
The price tag
The United States spends 18% of its GDP on healthcare. That is roughly $5.3 trillion a year (CMS). Since the 70s, almost all administrations have been warning of a healthcare cost crisis. The number has more than doubled since, albeit it's possible that we've made some (but not enough) headway in the last decade in decelerating the pace of growth.
The United States spends roughly double per capita what other wealthy nations spend on healthcare. The return on that spending is poor. Life expectancy is lower. By most outcome measures used to compare developed nations, the U.S. underperforms countries that spend significantly less.
Healthcare costs are the number one economic worry for American households, above groceries, gasoline, utilities, and rent. That finding comes from KFF polling conducted in April 2026, and it is not new. Healthcare has topped or been near the top of this list for years. The average family health insurance premium is now about $27,000 a year. That is roughly the cost of a brand-new car and the average worker still faces a $1,900 deductible before insurance covers anything.
The runaway expenditures
Health spending as a share of GDP, 1940 to today.
1940
4.0%
$4B
of GDPtotal spend
Source: CMS National Health Expenditure Accounts (1960–2024).1940–55 are pre-NHEA historical estimates, shown dashed.
02
The squeeze
Since 1987, employer and employee contributions toward health insurance premiums have risen a dramatic 979% to roughly $27,000 for the average family health insurance premium (KFF Employer Health Benefits Survey). Over the same period of about 40 years, median worker wages only grew 210% (BLS data). Premiums outpaced wages nearly five to one. Many argue that every dollar an employer spends on health premiums is a dollar unavailable for wages and that it is the mechanism of healthcare-driven wage stagnation, which has been compounding for decades.
Our runaway healthcare costs have impacted workers as premiums have outpaced wage growth dramatically
Cumulative growth since 1987, in current dollars. Premium contributions against median wages, and against what premiums would be had they merely tracked inflation. The shaded area is the excess.
1987
+0%
+0%
premiumswages
Health insurance premiumsMedian worker wagesIf premiums tracked inflation
Sources: Premiums: KFF Employer Health Benefits Survey / CMS National Health Expenditure report. Wages: BLS median usual weekly earnings, full-time workers 16+. Inflation: CPI-U, Federal Reserve Bank of Minneapolis. Decade waypoints sourced; intermediate years interpolated.
Some economists frame this even more bluntly. Economics professors Emmanuel Saez and Gabriel Zucman have argued that health insurance premiums function as a privatized poll tax, a flat cost applied regardless of ability to pay. A $27,000 premium does not care whether the household earning it makes $60,000 or $600,000. Unlike income tax, it does not scale with earnings.
The counterargument is that premiums are not technically a tax and people can change jobs or opt out. At the time of Saez and Zucman writing, the ACA's individual mandate was still in effect and everyone was required to carry insurance or pay a penalty. That mandate has obviously changed, so the legal compulsion is weaker today. But the practical compulsion has not changed. For the vast majority of Americans, dropping their job or dropping coverage exposes them to financial ruin. Forty percent of adults already carry some form of healthcare debt. When Saez and Zucman add health insurance to the total tax burden, the U.S. tax system stops looking progressive. The health insurance layer hits hardest in the middle of the income distribution.
A flat cost applied regardless of ability to pay. Unlike income tax, it does not scale with earnings.
The poll-tax argument, Saez & Zucman
A healthcare “poll tax” ?
Tax rates by income group in 2018, as a share of pre-tax income. Saez and Zucman add employer health premiums to the tax system as a poll tax (the amber band). It consumes more of middle-class income than of any other group's, and almost nothing at the top.
Sources: Emmanuel Saez and Gabriel Zucman, The Triumph of Injustice (2019). “Tax rates by income group in 2018 (% of pre-tax income).”
03
So, how did we get here?
There was no commission that sat down and drew up a blueprint for how 330 million people would get healthcare.
What exists today is the accumulated result of a century of accidents, political compromises, wartime workarounds, and failed reforms. A wage freeze during World War II pushed employers to offer health insurance as a workaround. A tax ruling by the IRS made those benefits tax-free, locking the employer-based model into place. Blue Cross wrote a reimbursement formula in the 1930s that let hospitals set their own prices, and Medicare adopted it wholesale in 1965. And a string of ambitious reform proposals, from Teddy Roosevelt in 1912 to Clinton in 1993, each failed and left the previous patchwork intact.
The U.S. healthcare system was not designed. It accreted.
Each decade bolted on a new institution, a new payment model, a new coverage mechanism, without removing what came before
Each decade bolted on a new institution, a new payment model, a new coverage mechanism without really asking whether the pieces fit together. They do not.
This piece traces that history. It is the first in a series. Subsequent pieces will examine the cost drivers individually (technology, market consolidation, administrative complexity, the perverse incentives embedded in how care is paid for) and what reform might actually look like.
04
US healthcare through the years
Decade by decade, the policies, accidents and institutions that built America's accidental care system.
Share of GDP3.5%
Total spend$3.6B
Decade1900s–20s
Pre-1960 figures are historical estimates
1900s – 1920s
Before the monster
Medicine is primitive, healthcare is cheap, insurance doesn't exist, and the first reform efforts die quietly.
1900sAMA reorganizes and grows from 8,000 to 70,000 members. Organized medicine is born. Doctors practice out of homes; hospitals are for the poor.
1908No health insurance. Commercial insurers won't write it because they can't price adverse selection or moral hazard. Patients worry more about lost wages than medical bills.
1910Flexner Report reforms medical education: stricter standards, better facilities, higher fees. Quality goes up, supply goes down, costs begin to rise. The professionalization paradox.
1912Teddy Roosevelt's Progressive Party endorses social insurance, including health insurance. First serious national push. It goes nowhere.
1915AALL drafts a compulsory health insurance bill. AMA initially supports it, then reverses by 1920. European nations adopt compulsory insurance; America says no.
1918–32Hospital accreditation climbs from 13% to 93%. Hospitals transform from charity wards into scientific institutions.
1927Committee on the Costs of Medical Care forms, the first serious attempt to understand what Americans spend on healthcare.
1929Baylor Hospital and the Dallas school teachers: 21 days of inpatient care for 50 cents a month, prepaid. The seed that becomes Blue Cross.
1929Ross-Loos Medical Group in Los Angeles: $1.50 a month for city employees. In retrospect, the first HMO.
Key takeaway from the decades
Average family medical expenses in 1929: $103 a year, about 5% of an average income of $1,916. Roughly $1,950 in today's money. Hospitals are for the poor.
1930s
The Depression plants the seeds
Economic crisis forces the question of how to pay for healthcare. Blue Cross and Blue Shield emerge to save hospitals. Social Security passes without health insurance.
1929–39The Great Depression. Hospitals face collapsing revenues.
1932First Blue Cross plan, in Sacramento. By 1937: 26 plans and more than 600,000 members. These plans were designed first and foremost to stabilize hospital finances during the Depression. A hospital revenue solution, not a consumer movement.
—Legal advantage: state legislation lets Blue Cross plans organize as nonprofits, tax-exempt, free of the insurance reserve requirements that bind commercial insurers.
—Blue Shield created by physicians as a defensive move to stop Blue Cross expanding into primary care, and to preempt national insurance.
—The “cost-plus” reimbursement system is born. Blue Cross and Blue Shield pay physicians “reasonable and customary charges” that doctors set themselves, and reimburse hospitals for actual costs plus a percentage. Hospitals can charge what they like. Some argue that this is the inflation engine that propagates through the entire system for the next eighty years.
1934FDR creates the Committee on Economic Security to address old-age, unemployment and medical care.
1935Social Security Act passes without health insurance. FDR's team deliberately excluded it to avoid killing the entire bill. The exclusion shapes the next thirty years.
Key takeaway from the decade
Cost-plus reimbursement for hospitals starting in this decade is the precursor to rapid healthcare spend growth.
1940s
Three accidents that defined everything
WWII creates the employer-based insurance system by accident. While nobody planned this, it is the single most consequential decade in US healthcare history.
1943War Labor Board rules that wage and price controls do not apply to fringe benefits, including health insurance. Employers can't raise wages to attract workers, so they offer health insurance instead.
—NLRB ruling: health insurance is a legitimate subject of labor-management negotiation. Unions start bargaining for it.
—IRS ruling: employers can deduct health benefit costs; employees pay no tax on the value of employer-provided insurance. This exclusion remains the largest tax expenditure in the federal budget today.
1940–50Health insurance enrollment goes from 20.7 million to 142.3 million, almost sevenfold in a single decade. The most explosive growth of any insurance product in American history.
—Commercial insurers learn from the Blues, and gain a regulatory edge: they can experience-rate and cherry-pick healthier groups, while the nonprofit Blues must community-rate. The market splits and the adverse-selection spiral begins.
1944FDR's “Economic Bill of Rights” includes the right to adequate medical care. Never fulfilled.
1945Truman proposes national health insurance. The AMA denounces it. Members of Congress call it a communist plot. The Cold War kills universal healthcare.
1945Kaiser Foundation Health Plan founded, the HMO model twenty-five years before anyone calls it that.
1946Hill-Burton Act: federal loans and grants for hospital construction. Builds the physical infrastructure of mid-century American medicine.
Key takeaway from the decade
20.7M → 142.3M insured in ten years. None of it was planned. A wage freeze, a labor board ruling and a tax decision created the system that still exists.
1950s
The quiet escalation
Costs double, technology accelerates, more than 700 insurance companies emerge, but the people who need coverage most cannot get it.
1950National health expenditures reach 4.5% of GNP.
—Hospital care prices double over the decade.
—Medical breakthroughs accelerate: the polio vaccine, the first organ transplant (1954), and new medications for conditions from arthritis to glaucoma.
—More than 700 companies now sell health insurance — but coverage is tied to employment. The elderly and unemployed are locked out.
1951Joint Commission on Accreditation of Hospitals formed.
1952Federal Security Agency proposes health insurance for Social Security beneficiaries, foreshadowing Medicare.
1954Revenue Act formally excludes employer contributions from taxable income. The wartime tax treatment becomes permanent law.
1956Forand Bill introduced, the direct legislative ancestor of Medicare.
1957AMA reiterates opposition to any government health insurance.
Key takeaway from the decade
From 1950 to 1970, medical costs climbed 125% while general consumer prices rose only 61%.
1960s
The Great Society breakthrough (that replicated the bug)
Medicare and Medicaid pass, the most significant health reform of the century. But they adopt the same broken cost-plus reimbursement from private insurance, pouring federal money into the cost-plus engine.
1960Insurance covers 27% of personal health care costs, up from 6% in 1948. Medical share of GDP: 5.0%.
1960Kerr-Mills Act: federal funds for state programs for the poor and elderly. The Medicaid precursor.
1961–62JFK pushes for Medicare. The King-Anderson bill has organized labor behind it, but the AMA and the commercial insurance industry fight it hard.
1965Medicare and Medicaid signed into law. Part A for hospital care, Part B for physician care, Medicaid for the poor and disabled.
—Why it passed when everything else failed: Medicare passed given the large Democratic majority. And critically, the bill included no cost controls and no physician fee schedules. Nobody's revenue was threatened.
—The fatal design flaw. Overnight, the federal government was paying more hospital bills than any other entity in the country, but it adopted the same cost-plus reimbursement that private insurers had been using, accelerating runaway costs. The cost-plus engine now had federal fuel.
—Under retrospective cost-based reimbursement, insurers paid hospitals after the fact for whatever they spent, with no financial accountability. The more a hospital ordered, the more it earned. Medicare adopted this wholesale.
1967Medicare's annual hospital expenditures reach roughly $3 billion, just two years after launch. They will reach $37 billion by 1983.
—Full-time specialists rise from 55% of doctors to 69% across the decade.
Key takeaway from the decade
Healthcare was 5.0% of GDP in 1960. Medicare hospital spending: ~$3B in 1967, on its way to $37B by 1983.
1970s
Crisis declared, reform blocked
Medicare hospital expenditures explode under cost-plus. Nixon declares a cost crisis. HMOs emerge as a hope. Competing reform plans splinter support. ERISA locks in employer-based insurance.
—The cost-plus system adopted in 1965 does exactly what its incentives dictate: hospitals spend more because spending more means earning more. Hospital costs are the largest single component of healthcare spending, and this is where the costs escalate
1970Paul Ellwood coins the term “health maintenance organization.”
1971Nixon's cost crisis. Healthcare reaches about 7% of GDP. Economy-wide wage and price controls are implemented, with sector-specific caps on medical care. The broader controls come off in 1973, but medical caps stay on for another year.
1972Medicare extended to people under 65 with long-term disabilities and end-stage renal disease.
1973HMO Act: grants, loans, federal certification, and an employer mandate to offer an HMO option. HMOs grow from 26 plans and 3M subscribers to 556 plans and 35M enrollees by 1991.
1974Hawaii Prepaid Health Care Act, an employer mandate for workers over 20 hours a week. A state-level experiment.
1974ERISA exempts self-insured employers from state insurance regulation. Preemption makes it nearly impossible for states to regulate employer health plans, entrenching the employer-based system.
1974Kennedy and Nixon each put forward competing national insurance plans. Neither gets traction. Then Watergate consumes the agenda.
1977Health Care Financing Administration established (later CMS).
Key takeaway from the decade
7% of GDP in 1971 was called unsustainable. It more than doubles from here.
1980s
The DRG revolution and the privatization of care
The federal government finally tries to fix the cost-plus engine. DRGs replace retrospective reimbursement. Hospitals corporatize. EMTALA creates an unfunded safety net. And hospitals adapt.
1981Federal budget reconciliation reshapes Medicaid: disproportionate share payments, managed care waivers, nursing home rate changes.
1983Medicare DRGs. Under the old system, hospitals were paid by the day. The longer the stay, the more they earned. DRGs replaced that with a fixed price per diagnosis across 467 categories. Treat the patient efficiently, keep the surplus. Medicare hospital expenditures had hit ~$37B, up from ~$3B in 1967.
—DRGs worked — briefly. Medicare hospital inpatient spending growth dropped from 17.8% annually to 4.6%. Then costs reaccelerated as providers shifted volume to outpatient settings the system did not cover. Like most price controls, DRGs moved the cost rather than removing it.
1986EMTALA: hospitals must screen and stabilize anyone who arrives at the ER regardless of ability to pay. The de facto safety net, unfunded, delivered through the most expensive setting available.
1986COBRA lets employees who lose jobs continue coverage for 18 months. Medicaid expands to infants, young children and pregnant women up to poverty level.
1987First Census Bureau estimate: 31 million uninsured, 13% of the population.
1988Medicare Catastrophic Coverage Act passes, then is repealed the next year after backlash from elderly beneficiaries who didn't want to pay for it.
—Privatization and corporate integration of hospitals accelerates. Capitation payments to doctors spread as fee-for-service is perceived as exploitable.
Key takeaway from the decade
Medicare hospital expenditures: $3B (1967) → $37B (1983). DRGs cut inpatient growth from 17.8% to 4.6%, then it reaccelerated as volume moved outpatient.
1990s
Clinton-care dies, managed care peaks and retreats
The most ambitious reform attempt since Medicare fails. Managed care briefly slows costs, then backlash unwinds it.
—Healthcare costs consistently outpace general inflation by roughly two to one across the decade.
1993Clinton convenes the White House Task Force on Health Reform. The Health Security Act proposes universal coverage, employer and individual mandates, and managed competition.
—”Harry and Louise.” The Health Insurance Association of America runs the 'Harry and Louise' campaign: a couple at a kitchen table, anxious about what reform would do to their own coverage. It works. Public support drops.
1993–94Alternative proposals splinter support: McDermott/Wellstone single-payer, Cooper managed competition. Democrats cannot agree among themselves. The Clinton plan dies.
Late-90sPatient and physician backlash. Patients hate losing choice; doctors hate non-physician oversight of clinical decisions. Payers retreat from the strictest tools and cost inflation picks up again immediately. Every time cost discipline gains traction, the political reaction unwinds it.
1996HIPAA: portability, pre-existing condition restrictions, medical records privacy. Welfare reform delinks Medicaid from cash assistance. Mental Health Parity Act passes.
1996For-profit conversion wave: Blue Cross of California becomes WellPoint. The shareholder-versus-member question that will define the next thirty years is joined in public.
199743.4 million uninsured (16.1%). Balanced Budget Act creates Medicare+Choice and S-CHIP.
—New medical technologies account for roughly a third of annual cost increases during this era.
Key takeaway from the decade
44 million uninsured by the end of the decade. The managed-care boom and bust in one stat: growth slowed mid-decade, then accelerated the moment the tools were withdrawn.
2000s
Consumer-driven care, state experiments, and the road to the ACA
The federal government gives up on systemic reform and bets on consumer choice. States start experimenting. Massachusetts proves near-universal coverage is possible.
2003Medicare Part D, a voluntary, subsidized drug benefit administered through private plans. HSAs created.
2006Massachusetts passes near-universal coverage: individual mandate, shared responsibility, subsidies. The uninsured rate is cut in half within two years. This becomes the proof of concept for the ACA.
2006Vermont and San Francisco also pass coverage expansions. Part D takes effect.
200745.6 million uninsured (15.3%). Wyden/Bennett Healthy Americans Act would eliminate the employer-insurance tax preference; it gains support but doesn't pass.
200859% of physicians now support national health insurance, a historic reversal from decades of AMA opposition. The financial crisis opens a political window.
2009Obama establishes the Office of Health Reform. CHIP reauthorized. A $634B health reform reserve fund appears in the FY2010 budget.
—Consumer-driven health care treats healthcare as a private consumable product rather than a public good: HSAs plus high deductibles, on the premise that patients with skin in the game will shop for value. In practice patients cut back on necessary and unnecessary care alike, especially low-income adults with chronic conditions.
Key takeaway from the decade
45.6M uninsured. Healthcare passes 16% of GDP in 2006, 50% more as a share of GDP than any other developed country. Massachusetts halves its uninsured rate in two years.
2010s
The ACA: incrementalism not rebuild
The ACA passes, the most significant reform since Medicare. It expands coverage but works within the existing system rather than replacing it. Incrementalism, not a rebuild.
2010On 23 March, Obama signs the Patient Protection and Affordable Care Act, the culmination of a century of failed attempts.
—What it did: individual mandate, Medicaid expansion, subsidies through exchanges, no coverage denial, no charging more for health status or gender, young adults on parents' plans to 26, preventive services without cost-sharing. Around 20 million previously uninsured gained coverage.
—What it did not do: address the underlying cost of care, fix the employer-based system, touch hospital consolidation or pricing power, or change the fundamental payment architecture.
2010–24But something did change on costs. Healthcare spending as a share of GDP barely grew, from 17.2% to 18.0%. CMS actuaries had forecast it would reach 21.2% by 2024. The gap between projected and actual spending was nearly $1 trillion in 2024 alone, and $6.7 trillion cumulative over the period. Cutler and Klarnet (Harvard/Brookings, 2026) call this the most sustained slowdown in healthcare cost growth since systematic data began in 1960. They attribute it to five factors: technology that now saves money rather than adding cost, long-run supply becoming more elastic, a healthier population, reimbursement changes that reduce demand, and slower price growth. Their conclusion: the U.S. has bent the cost curve, though not as much as it could, or will need to.
2012The Supreme Court upholds the ACA but makes Medicaid expansion optional. Ten states still have not expanded as of 2026.
2017Trump signs the Tax Cuts and Jobs Act, eliminating the individual mandate penalty effective 2019. Promotes short-term, limited-duration plans and pooled health plans.
—The rise of high-deductible plans is the decade's defining coverage trend. Insurance increasingly means high premiums for plans with deductibles of $1,500 to $7,000 before anything is paid. Coverage is not access. Access is not affordability.
Key takeaway from the decade
Uninsured rate falls from about 15% to 9%. But underinsurance becomes the new story.
2020s
Pandemic reveals, technology disrupts, costs grind on
COVID exposes every seam. Telehealth expands permanently. GLP-1s create a new affordability crisis for a breakthrough treatment.
2020COVID-19 exposes capacity gaps, workforce burnout and disparities. Telehealth expands dramatically. Operation Warp Speed shows the government can move fast when it wants to.
2021–23ARPA's enhanced ACA subsidies drive record marketplace enrollment of about 16 million. The uninsured rate falls to a historic low of 7.7% in August 2023.
2025Enhanced subsidies expire. Out-of-pocket ACA premiums rise sharply and uninsured numbers are expected to climb.
—GLP-1s illustrate every tension in the system at once: wildly cost-effective, unaffordable for most, covered for obesity by fewer than half of employer plans, and abandoned by one in seven users because of cost.
—The affordability paradox. Despite fifteen years of historically slow cost growth, affordability concerns are at record highs because housing, food and fuel are squeezing household budgets at the same time.
Key takeaway from the decade
Healthcare remains 18% of GDP. A $27,000 family premium. The number one economic worry in the country.
05
Up Next: What's driving the costs? And what can we do about it?
That is how the system was assembled. The next question is why it costs what it costs. The history above explains the patchwork: the accidental employer-based model, the cost-plus reimbursement engine, the failed reforms. But the structural forces that keep costs rising operate on a different level: new medical technologies that account for roughly a third of annual cost increases, an industry that has consolidated both horizontally and vertically (hospitals merging into regional monopolies, payers acquiring providers, pharmacy chains absorbing insurers) until the lines between who delivers care, who pays for it, and who profits from it have blurred beyond recognition. Add an administrative apparatus that spends more on billing and coding than any peer nation, a payment architecture that still rewards volume over outcomes, and an employer-based insurance system that was a wartime accident codified into permanent law. Each of these will get its own piece in this series.
The final piece steps back from cost drivers and asks what can actually be done. Coverage first or cost containment first? Protect the tails or subsidize everyone? Markets or regulation? There is more bipartisan convergence than the political debate suggests. Left and right broadly agree that Americans spend inefficiently, that the outcomes do not match the price tag, and that ordinary people should not face financial ruin for getting sick. The disagreements are real but narrower than they appear. Our series will review what the evidence says, what the politics allow, and what we as Americans should be watching.
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Sources
CMS National Health Expenditure Accounts, historical spending and share of GDP, 1960–2024. Pre-1960 figures are pre-NHEA historical estimates (SSA / Getzen series).
KFF Health Tracking Poll, fielded 14–19 April 2026, household affordability worries.
KFF Employer Health Benefits Survey and CMS National Health Expenditure report, premium contribution growth since 1987. BLS median usual weekly earnings (full-time workers 16+) for wage growth. CPI-U via the Federal Reserve Bank of Minneapolis for the inflation data
Emmanuel Saez and Gabriel Zucman, The Triumph of Injustice (2019), the health-insurance-as-poll-tax argument and the 2018 tax-rate decomposition.
Cutler and Klarnet (Harvard / Brookings, 2026), the post-2010 cost-growth slowdown and the projected-versus-actual spending gap.
George Moseley (2008), the healthcare “non-system” and cost-plus reimbursement.
Social Security Administration, “Five Years of Medicare”; Health Care Financing Review, Medicare hospital expenditure series.
Census Bureau and KFF, uninsured counts and rates by year. Congressional and administrative records for legislative dates.
Katherine Smith (2023), "A Brief History of Health Policy in the United States," Delaware Journal of Public Health, 9(5):6–10. Legislative dates and uninsured trajectory.
Peterson-KFF Health System Tracker and OECD Health at a Glance (2025), US per capita spending relative to peer nations and life expectancy comparisons.