A watershed event in the science of genetics would be a chromosomal alteration or a mutation that eventually leads to the evolution of a new species of plant or animal. Ecolo-nomically, a watershed event is an action that eventually leads to a permanent transformation of an old environmental milieu into a new environmental milieu--a paradigm shift.

In a new medical ecolo-nomic environment, a delay is expected before the profound change has sufficient time to express itself fully. Once the new paradigm is expressed, the evolved medical ecolo-nomic environment extinguishes remnants of any previous paradigm, therefore eliminating the possibility of taking a step back to the old paradigm. Future mutations and adaptations to find a suitable new ecological niche might resemble an old paradigm, but would never be truly the same.

During the first half of the 20th century, the first medical ecolo-nomic watershed event was the focus on physician education and training, specifically "The Flexner Report," discussed in the January 2007 issue of this magazine. The second medical ecolo-nomic watershed event was employment-based health insurance. This type of insurance changed the evolutionary course of healthcare delivery in the United States.

Even though technology was advancing and medical costs were rising, interest in indemnity health insurance grew at a relatively slow rate through the 1930s. However, World War II changed many cultural norms. In 1942, Congress passed the Wage Stabilization Act. Mid- and post-war businesses desperately competed for a limited number of employees and were forbidden to raise wages to attract employees. The business community then found a dynamic competitive advantage in a loophole: employment-based health insurance. Insurance was exempt from the Wage Stabilization Act and was also tax-deductible as a business expense.

Thanks to a National Labor Board ruling in 1949, employment-based health insurance benefits officially became a negotiable item on the American trade union collective bargaining table. Employment-based health insurance not only became a tax-free wage increase for employees, but also an income tax write-off for employers. That double benefit seemingly assured both healthier workers and fewer employee sick days for the business entity.

The particulars of the healthcare coverage--the what, where, when and why of the insurance package--were generally overlooked. Patients were not yet sophisticated about questioning healthkeepers. Businesses lacked the desire to take on the healthkeeper role and didn't care to even come close to two problematic hot potatoes--choosing quality in healthcare delivery and rationing benefits to cut cost. Employees were scarce, and the opportunity to buy employee loyalty with pretax dollars paid to an insurance carrier became instantly irresistible to businesses.

Indemnity insurance sales skyrocketed. Future Knox-Keene Act, tax-exempt mutual insurance plans, such as Blue Cross, grew proportionately. Patients enjoyed free choice of duplicate and triplicate doctor visits along with an excessive number of hospitals.

A multitude of nonexempt, independent commercial indemnity insurers with deeper reserves found dynamic competitive advantage over the mutual agencies by offering cheaper insurance rates to large corporations with less risk due to potentially healthier employee profiles. Commercial carriers soon outsold mutual insurance plans. Blue Cross, however, not only survived, but eventually became America's largest taxable and for-profit healthkeeper organization.

In that early mid-century era, physicians themselves were concerned about insurance. Members of the Los Angeles County Medical Association became worried that hospitals might offer insurance plans with fixed rates of pay for physicians. Doctors feared the loss of autonomy and the degradation of the doctor-patient relationship.

In response, LACMA developed a prepayment plan to cover physician expenses. The need for insurance to cover hospital services was also recognized, and the topic was hotly debated at LACMA until November 1938, when a combined prepayment plan--the California Physicians Service Plan of the California Medical Association--was finally approved
by LACMA.

One month later, the CMA council approved the prepayment plan, officially named California Physicians' Services. However, the name was soon changed and the plan became more commonly known as Blue Shield of the CMA.

Both hospital and physician services were, for a time, covered. The individual patient was responsible for a 20 percent co-pay for each service rendered. In order to simplify bookkeeping and billing, and to satisfy internal philosophical differences, Blue Shield was eventually split from the CMA and became an independent organization.

The medical ecolo-nomics of the pre-1950s enabled prepaid group organizations (PGOs) to provide healthcare primarily in those cities that possessed high densities of blue-collar workers and their families. The volume of PGO business steadily increased. Physician-contracting agreements within the prepaid plans, or an arrangement characterized by direct pay to various subspecialists, eventually provided PGO patients with unlimited access to most medical specialty healthcare. Workers gained more affordable access to necessary healthcare.

In Los Angeles, the Ross-Loos Medical group led the way. The budding Permanente Medical Group and Permanente Health Plan quickly followed, which would soon blossom into a combined Kaiser Foundation Health Plan.

In the early 1950s, Americans became concerned about increasing out-of-pocket expenses for healthcare. The deafening air raid sirens zapped personal freedoms and inspired purchases of fallout shelters to protect from an anticipated atomic bomb attack. Therefore, as an independent ecolo-nomic response, Americans also began to seek other types of protection--health insurance. The repeated Pavlovian sales pitch from Blue Cross and Blue Shield and other indemnity carriers produced a conditioned response for the American family to buy health and other types of insurance.

Medical financing was being rapidly taken over by third- party payers. Some physicians insisted that health insurance or insurance of any type was amoral and sinful--insurance reduced personal responsibility, allowed one to become careless with one's health and enabled a cultural norm that was self-perpetuating.

Otto von Bismarck admonished, "He who controls the purse has the power," which has been somewhat translated into the golden rule of American business, "He who controls the gold makes the rules." Many LACMA physicians warned the press and their colleagues that this shifting societal norm toward insurance would lead to the loss of physician autonomy and insurance corporation dominance. They said it would lead to the end of private medical practice and the illegal and unethical "lay practice" of medicine.

But this was the "golden era" of medical practice and doctors' incomes were at an all-time high. Because of the easy money, doctors remained undisciplined in their business financial planning. Therefore, scant few physicians heeded the writing on the wall. The erosion of physician autonomy, once begun, became increasingly difficult to slow and near impossible to stop.

Insurance allowed for expedient growth of American medical and other businesses. The progression of insurance variations could not be reversed. Independent practice associations were about to be invented. New dominant healthkeeper sets were emerging and the course of healthcare delivery was ever-changing.

The percentage of Americans paying for all their medical care out of their pockets in this first medical ecolo-nomic generation (1950-70) will never be exceeded again. Evolutionary forces shaping healthcare delivery were actively at work in the hearts and minds of patients--forces that were destined to create a new medical ecolo-nomic environment. The concept of having the right (rather than the privilege) to receive healthcare by accident of birth to American citizenship became embodied in the second medical ecolo-nomic generation (1970-90).

But by the late 20th century, employees were abundant and the pretax expense had expanded out of proportion to the perceived need for loyalty. Employers started to balk at the routine of paying employees' health insurance premiums and were much more concerned about maximizing the quality of care for which they paid.

Still, it was too late to change courses--too late to take a step back. Physicians failed to learn from this painfully obvious and sardonic lesson of history. They failed to see third-party insurance as the first stepping stone that would persistently lead by trial and error down the path to various potential national health insurance systems.