The Formation of Blue Cross and Blue Shield

1. The Formation of Blue Cross and Blue Shield Michael Francavilla, MD Mt. Sinai Medical Center

2. Blue Cross Blue Shield Association is the current name of a federation of 39 independent health insurance companies.  • Originally, Blue Cross (BC) and Blue Shield (BS) were separate entities • Blue Cross traditionally covered hospital charges • Blue Shield originally paid for physician services • The Blue Cross and Blue Shield organizations merged in 1982 Background

3. The prototypical Blue Cross plan was formed in 1929 by a Baylor University administrator to provide health insurance to teachers • At the time, Dallas teachers had a relatively high rate of unpaid bills • The original plan covered 21 days of hospital stay for $6/year -- after the patient paid $5/day out of pocket for the first 10 days • Until this time, hospitals had billed patients directly for all services provided • The Depression exposed the fragility of this system: revenues dropped as patients paid less of their bill and preferentially went to government-run hospitals. Blue Cross

4. To combat the decreased repayment, hospitals were eager to bill patients both regularly and in advance • Additionally, they sought to capture patients who might otherwise go to another hospital when sick • This style of plan provided benefits directly to the insured in the form of hospital services • There were no reimbursements to the policyholders; this model was similar to a prepayment plan The Rise of Hospital Care Insurance

5. The American Hospital Association (AHA) sponsored community-wide plans which charged a monthly fee and promised that all participating hospitals would provide services • Community-wide plans eventually became monopolies in hospital prepayment. The AHA specified that each plan have its own defined territory; they would not compete with each other • The AHA lobbied to have tax exempt status for its plans and legal regulations favoring control over the plans by the participating hospitals • The plans were collectively known as Blue Cross plans Hospital Care Insurance

6. Before 1939, attempts to organize group health insurance were made by both consumers and local governments • The American Medical Association (AMA) squashed the attempts, but still worried about the spectre of compulsory insurance and consumer-organized voluntary prepayment plans • Specifically, they were concerned that hospital prepayment plans (like that of Blue Cross) would set the standard for how medical care is paid -- they did not want hospitals to negotiate doctors' payments • Thus, the AMA stipulated that hospital and medical insurance would be separate Blue Shield

7. The AMA sponsored different plans out of concern for being paid from a prepaid plan, such as Blue Cross • The AMA sponsored plans which: • Reimbursed patients after paying up-front in cash (called “indemnity“) or, • Paid physicians directly, AND were physician-controlled. These were termed Blue Shield plans • The Blue Shield concept emerged from the lumber and mining camps of the Pacific Northwest at the turn of the century. • Employers wanted to provide medical care for their workers, so they paid monthly fees to "medical service bureaus" composed of groups of physicians. • These pioneer programs lead to the first Blue Shield plan, which was established in California in 1939 Blue Shield

8. References • Starr, Paul. The Social Transformation of American Medicine. New York: Basic, 1982. • "Mission/History - The Blue Cross Blue Shield of Massachusetts Foundation." The Blue Cross Blue Shield of Massachusetts Foundation. BCBS Massachusetts. Web. 07 Oct. 2011. <http://bluecrossfoundation.org/About-Us/Mission-History.aspx>. • "History of Blue Cross Blue Shield." Health Insurance from Blue Cross and Blue Shield Companies. BCBS.com. BCBS. Web. 07 Oct. 2011. <http://www.bcbs.com/about/history/>.