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the benefits of medical care, and increased the costs of that care. These developments, in turn, have led to broad-based demands that individuals and families be protected against medical expenses by means other than charity. Although third-party payment was and is among the causes of escalating health care costs, it is also a crucially important social invention to deal with that problem. Some key dates in the move to third-party payment are summarized in Table 2-1. Table 2.2 shows the shift in funding sources for selected medical care expenses over the last 60 years.

Before the 1930s, few Americans had anything resembling modern health benefit plans (Anderson, 1968, 1972; Somers and Somers, 1961). Concerns about medical costs were defined largely in personal rather than governmental or corporate terms. For example, the Committee on the Costs of Medical Care (CCMC) reported in the early 1930s that less than 15 percent of American families bore the burden of more than half of all annual family expenditures for illness (Anderson, 1968). For individuals, medical care expenses were highly unpredictable, ranging at that time "from five dollars to one thousand dollars or more" for a single illness (Rorem, 1982, p. 62). When patients and families (first parties) could not pay these costs, health care providers (second parties) absorbed them with varying amounts of assistance from other organizations (third parties) such as local governments, religious groups, and private charities.1

Among actuaries and others involved with the commercial life and casualty insurance industry that had developed in the nineteenth century, there was considerable doubt that medical care was an insurable risk (Donabedian, 1976). A classic text on insurance (McIntyre, 1962) describes traditional conditions for insuring a hazard or risk. The insured event (1) must be susceptible to unambiguous description, (2) must not be something the insured person wants or can control, and (3) must be a relatively uncommon occurrence for individuals but have a predictable incidence for a group. Medical care presents problems in all three areas.

Nevertheless, in the early 1930s, a number of individuals, influenced by the analyses of the CCMC, began a virtual social movement to organize and promote new kinds of "third-party" financing for health care—although they did not use the term explicitly (Anderson, 1968, 1975; Rorem, 1982; Somers and Somers, 1961). They believed that medical expenses—at least, hospitalization expenses—for a group of people could be projected with some accuracy so that a group could do what the individual could not:

1 In 1961, Somers and Somers wrote: "The term 'third party,' usage of which varies from a technical concept of contract law to a popular epithet, means... an organization or institution involved in the financing or provision of medical care, other than the two primary parties: the vendor— doctor or hospital—and the patient. For most practical purposes the third party is a private insurance carrier, prepayment plan, or government agency." Today, employers should be added to that list.

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