Why must insurance in the US be a commercial business? Why can't it be a public welfare program?

The structure of health insurance in the US as a predominantly commercial business is not a matter of a mandatory legal or economic necessity, but rather the result of a complex history of policy choices, political opposition, and economic incentives that favored the private, employer-based model over a public welfare system.

Here is a breakdown of why this structure exists, the role of profit, and a comparison with other countries' models.

🇺🇸 US Health Insurance: The Commercial Model

The US has a hybrid system dominated by private, commercial health insurance, supplemented by public programs like Medicare and Medicaid for specific populations.1

Why it is not a Public Welfare Program

The rise of the commercial, employer-based model in the US was shaped by several key historical factors:

• Political Opposition to National Health Insurance (NHI): Throughout the 20th century, proposals for national health insurance (under Presidents Roosevelt and Truman, for instance) faced strong and organized opposition. The American Medical Association (AMA) and commercial insurance carriers led campaigns that successfully framed NHI as "socialized medicine."

• Wartime Wage Freezes and Tax Incentives:

  • During World War II, wage freezes made it difficult for employers to compete for workers.2 Employers began offering non-wage benefits, like health insurance, to attract staff.3

  • A critical decision in 1954 made employer contributions to employee health plans tax-exempt.4 This created a massive, enduring financial incentive for the employer-sponsored model to become the primary form of coverage, making it cheaper for employers and employees than comparable cash wages.5

• Existing Private Infrastructure: Private, non-profit plans (like the forerunners of Blue Cross and Blue Shield) had already established a strong foothold with hospitals and doctors, providing a foundation for the system to grow commercially rather than publicly.6

• Constitutional Interpretation: For much of the early 20th century, the Supreme Court ruled that insurance was not "interstate commerce," which effectively limited the federal government's ability to regulate it and kept it primarily a state-regulated, private concern until later rulings.7

The Profit-Driven Model

Insurance companies, whether non-profit (like some Blue Cross/Blue Shield plans) or for-profit (commercial carriers), operate on an insurance business model where the fundamental goal is to collect more in premiums and investment income than they pay out in claims and administrative costs.8

For for-profit commercial insurers, this goal is explicitly tied to maximizing profit for shareholders.9 This model can lead to practices that prioritize financial interests:

• Risk Selection/Pooling: They seek to enroll healthier individuals ("good risks") to ensure low payouts, and in the past, have tried to avoid or charge more for people with pre-existing conditions.

• Negotiating Low Payouts: They may scrutinize, delay, or deny claims to minimize their financial outlay.10

• Administrative Efficiency: While efficiency is good, this also means devoting resources to processes like utilization review, prior authorization, and provider negotiation to control costs, which can add complexity for providers and patients.

🗺️ International Health Insurance Models

Other developed countries primarily use universal healthcare systems, which move away from the profit-driven insurance model as the main source of coverage.

CountryPrimary ModelFunding MechanismKey Characteristics🇬🇧 United KingdomBeveridge Model (National Health Service - NHS)General TaxesHealthcare is publicly funded and largely publicly delivered. Treatment is free at the point of use for residents. Private insurance exists but is a small component, mainly used to avoid wait times for non-emergency procedures.🇨🇦 CanadaSingle-Payer Model (Medicare)Provincial and Federal TaxesHealthcare is publicly funded but primarily privately delivered (doctors and hospitals are generally private, not government employees). Insurance is government-run and covers essential hospital and physician services for all citizens.🇩🇪 GermanyBismarck Model (Social Health Insurance)Mandatory Sickness FundsCoverage is compulsory. It's provided by non-profit "Sickness Funds" (public/private entities) that are funded by mandatory contributions split between employers and employees. The system is highly regulated, and competition is on service, not risk selection. Higher-income citizens can opt for private insurance.

These alternative models demonstrate that a comprehensive national health insurance or public welfare program for health care is indeed a viable, widely adopted choice by developed economies. They contrast sharply with the US system by providing universal coverage where financing is separated from individual health status or employment.