I recently started building products focused on healthcare affordability in the US. As I was ramping up on a new space, the biggest question that sparked my curiosity was: how did we get here? This question is the inspiration for this weekly series chronicling the decisions, accidents, and breakthroughs that built the US healthcare system
Over the last several editions, we’ve traced how the US healthcare system accumulated its shape — a wartime wage freeze created employer-sponsored insurance, a tax ruling made it permanent, Medicare and Medicaid covered those the employer system left behind, and EMTALA turned every emergency room into a safety net for everyone else. Each decision solved an immediate problem and created new ones.
Running alongside all of it was an insurance model that was underneath all of it. Today’s story is about that.
In 1929, a hospital administrator in Dallas noticed something in the unpaid bills piling up on his desk. A disproportionate number belonged to schoolteachers.
Justin Ford Kimball was an educator who had a plan for this. As a former Dallas school superintendent who had become executive vice president of Baylor University Hospital, he knew teachers had steady jobs but modest salaries. A hospital stay could wipe them out financially. And when it did, the hospital didn’t get paid either.
His solution was straightforward: 1,250 Dallas teachers could prepay 50 cents a month — $6 a year — for a guaranteed 21-day hospital stay at Baylor. By December 1929, 75% of Dallas teachers had enrolled. The hospital got predictable revenue. The teachers got protection. Two problems, one solution.
The idea spread rapidly. By 1932, community-wide plans offering subscribers a choice of hospitals had emerged across the country. In 1933, a Minnesota administrator named E.A. van Steenwyk put a blue Geneva cross on his stationery — a universal symbol of healthcare — and the name stuck.
The philosophical core of “Blue Cross” was something called community rating. Everyone in a community paid the same premium regardless of age or health status. The healthy subsidized the sick. The young subsidized the old. Risk was pooled across the whole community — not priced to the individual.
This was explicitly a social compact. Boy Scouts handed out brochures. Preachers urged their congregants to join. Blue Shield emerged in 1939 to cover physician services, following the same model. By postwar America, Blue Cross Blue Shield had become one of the most trusted institutions in the country.
Then commercial insurers arrived — and the model that had worked beautifully in isolation met the logic of a competitive market.
Commercial insurers in the 1950s introduced experience rating — pricing premiums based on the actual health profile of a specific group rather than the whole community. A young, healthy workforce at a manufacturing company could now get cheaper coverage than Blue Cross offered. Commercial insurers competed aggressively for those groups.
Blue Cross, committed to community rating, was left covering the older, sicker, more expensive patients the commercial insurers didn’t want.
The math was brutal. As commercial insurers siphoned off the healthy, Blue Cross premiums had to rise to cover an increasingly sick pool. Rising premiums drove away more healthy members. A slow death spiral began because the competitive logic of the market punished the community rating model structurally.
One healthcare economist argued that this dynamic was a direct driver of Medicare and Medicaid in 1965 — that by the early 1960s, commercial insurers had made the elderly and poor effectively uninsurable, forcing the federal government to step in. The employer-based system had left them behind. Now the community rating model was failing them too.
The final blow came from the tax code. In 1986, the Tax Reform Act effectively stripped Blue Cross Blue Shield of its federal tax exemption — ruling that organizations providing commercial-type insurance couldn’t claim nonprofit status. The tax advantage of being nonprofit was gone. The competitive disadvantage of community rating remained.
By the early 1990s, Blues plans were hemorrhaging members — enrollment had fallen from 87 million in 1980 to 66 million by the mid-1990s. Fast-growing for-profit HMOs were taking their market share.
In June 1994, the Blue Cross Blue Shield Association changed its rules. Member plans could now become for-profit organizations for the first time in the association’s history. The primary motivation wasn’t to charge patients more. It was to access capital markets to erase mounting deficits.
Blue Cross of California moved fastest — converting, then acquiring Blues plans across a dozen other states. It was eventually renamed WellPoint, today known as Elevance Health, the second-largest health insurer in the United States. When Blue Cross of California converted, state regulators determined the transaction had failed to protect the organization’s charitable assets. After negotiations, the company agreed to distribute all of its assets — over $3.2 billion — to two grant-making health foundations. The California Endowment and the California HealthCare Foundation both still exist today, funding health access programs across the state.
The Blue Cross Blue Shield story is not a story of corruption or greed. It’s a story of a genuinely good idea — community risk pooling — that was economically unsustainable the moment a competitor was allowed to offer healthy people a better deal.
Once again, nobody made the explicit decision that health insurance should become a for-profit industry. It became one through competitive pressure, tax law, and the logic of markets operating without a defined social purpose.
Once again, we go back to Victor Fuchs’ quote: “Part of the problem is that we have not decided what we want our healthcare system to do.”
Blue Cross Blue Shield is an instructive example of what happens when you build something on a social compact — and then surround it with a market.
A Learning a Day 