Origins of American Health Insurance: A History of Industrial Sickness Funds (review)

John E. Murray’s Origins of American Health Insurance concerns a little-known precursor to commercial health insurance, the “industrial sickness funds” of the book’s subtitle. This well-researched book makes a compelling case for the importance of these funds in shaping the American health insurance system as we know it. Murray argues that the success of sickness funds during the early twentieth century helps to explain why European-style universal health insurance does not exist in the United States.

In 1915, industrial sickness funds covered an estimated eight million workers—about one-third of the nonagricultural workforce in the United States. But, sickness insurance was not what we think of today as “health insurance.” Most sickness plans did not pay for medical care or hospitalization, but instead provided sick pay, or short-term disability insurance. Murray contends that before paid sick-leave was common and when medicine had less to offer than it does today, sickness funds provided the benefits workers most valued

Making extensive use of government data, Murray details the different types of funds and how they operated. Industrial sickness funds fell into two categories: “establishment” or employer-based funds, and labor union funds. The establishment funds are particularly important, marking the beginning of the connection of health insurance with the workplace. Establishment funds were company-specific, and membership was not portable. But, these funds were usually managed by employees, and most of their funding came from employee contributions, giving employees a great deal of control over them.

While the costs and benefits varied from plan to plan, Murray has been able to calculate average premiums and benefits. In 1909, workers who joined an establishment sickness fund paid an initiation fee of around $1.00 and weekly premiums of about 10 cents, or roughly 1 percent of an industrial worker’s pay. In exchange, a sick worker, after waiting a week, received cash benefits averaging $5 a week for up to 13 weeks. According to Murray’s analysis, these benefits often exceeded those available to European workers covered by national health insurance systems.

Membership in establishment funds was usually voluntary. In companies with sickness funds, slightly less than half of the workers were covered. Murray argues that this level of coverage was the result of rational choices: younger workers might forgo insurance because they did not expect to get sick, and preferred to save the money they would have paid in premiums. Older workers, meanwhile, might have enough savings to act as a cushion against falling sick.

By making his workers rational actors—who chose what type of benefits they wanted, and whether they wanted them at all—Murray challenges conventional accounts of Progressive Era health reform. Most previous histories of American health insurance have adopted the rhetoric of Progressive Era reformers, who viewed workers’ preferences for limited, noncompulsory sickness funds as evidence of ignorance. Considering both sickness funds and private insurance to be obstacles to universal health care, reformers claimed that sickness funds were chaotic and poorly managed. Murray, however, turns this claim on its head, arguing that the sickness funds were often better able to manage risk than many private insurers. Until the development of modern actuarial science, beginning in the 1940s, Murray argues sickness funds offered workers a better deal.

The lack of actuarial technology is a key part of Murray’s story. As long as commercial insurers lacked the ability to determine adequate rates, they were at a disadvantage. Sickness plans also had to guess, but were able to offer lower premiums because they were better able to manage risk than outside insurers. Close oversight of members helped mitigate the risks of faked illness (moral hazard), or to remaining home longer than necessary (malingering), as did a one-week waiting period before benefits could begin. Workers also felt personally invested in their sickness plans, and thus were less likely to defraud...