The Formation of Blue Cross and
Blue Shield
Michael Francavilla, MD
Mt. Sinai Medical Center
Background
• 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
Blue Cross
• 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.
The Rise of Hospital Care Insurance
• 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
Hospital Care Insurance
• 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
Blue Shield
• 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
• 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,
o Paid physicians directly, AND were physician-controlled. These were
termed Blue Shield plans
o
• 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
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/>.