The increased severity of America's recessions under the National Banking System, which had replaced the Jacksonian Free Banking era during the Civil War, had created a strong desire for consistent economic security during the Gilded Age. The increasingly cyclical nature of the economy, riddled with unsustainable booms that resulted in catastrophic busts, drove the poor to organize fraternal societies for mutual aid, and by 1920 over one-fourth of American males were members. These societies were similar to the order of the Freemasons but emphasized the organization's role as provider of sick benefits and social security in times of need. Due to a constant need for money, members were educated in the values of thrift and reciprocity. These societies were quite selective of their members since free riders threatened the economic viability of these organizations. In addition, aid was rationed on a case-by-case basis, and requests for benefits were often denied if the person was deemed unworthy by the elected administrators of the fraternal lodge. The benefits of fraternal society membership were not charity, which was considered degrading because it fostered dependence on others. Instead, drawing benefits in times of trouble was seen as the right of any good dues-paying member. Commercial insurance and medical societies such as the American Medical Association felt threatened by the fraternal societies' cheap insurance rates and subscription-based doctors. As a result, these interest groups lobbied government to enact legislation which increased certification requirements to minimize competition from cheaper health care alternatives. With the increased government activism during the Progressive Era and the New Deal, which mandated employer-based pensions and workmen's compensation, fraternal society membership declined. The triumph of employer-based commercial health insurance was a result of its collusion with the state. Medical societies imposed sanctions on lodge doctors and urged the government to regulate these societies out of existence, allowing employer-based insurance to corner the health care market through government privilege rather than inherent economic efficiency.
Many people justified their opposition to fraternal societies by claiming that they were financially unsound, but on closer examination they were able to adjust to economic downturns. A candidate for Attorney General accused cheap lodge insurance of being prone to failure and fraud1. While there were examples of fraternal societies which could not keep up with their benefits payments and went bankrupt2, most were able to reassess their rates and continue functioning, even during times of difficulty and demography decline. One major problem was that they promised consistently low rates that they could not deliver, and this drove members away. Fraternal societies began by assessing their insurance rates at one low cost for all members, but economic necessity forced them to adjust and adopt a system with graded rates based on age. There had been an actuarial crisis within American fraternal societies in the 1890s and 1900s, and as a result they had to use the British friendly society as a model for financial soundness. Increasing regulation of rates and increasing cash reserve requirements for fraternal societies forced them to maintain economic viability. While commercial insurance may have been more statistically sound due to its highly variable premiums and deductibles, the decline of the fraternal societies cannot easily be explained by inherent financial problems. Otherwise, the Security Benefit Association would not have been able to operate a hospital that charged a quarter of the average rate for a room3.
Medical societies were afraid that the fraternal societies' cheap rates would threaten their own ability to make money, so they sanctioned lodge doctors and launched campaigns against lodge practice to discredit and destroy these organizations. The American Medical Association, for example, blacklisted all doctors who entered into a lodge contract and denied them access to their hospitals. The fraternal societies were able to maintain such cheap rates because they paid a doctor a steady salary to provide moderate medical care to all of the members. These contract doctors could not charge nearly as much as the fee-for-service doctors, who changed their rates based on the person and procedure, but these contracts were desirable because they ensured consistent employment. Organized doctors wanted to maintain their elite status and prestige, so they claimed that the lodge doctors were untrained, overworked, and unfit to practice medicine. While lodge doctors may have graduated from apprenticeship-style proprietary schools rather than universities, they still had to receive certification to practice, which the states made increasingly difficult for them. Well organized doctors also disdained the idea that contract doctors had to be responsive to their patients' needs. As a result of their disgust for lodge contracts, the professional medical community embraced the fee-for-service method of commercial insurance. The alliance between organized medicine and commercial insurance would begin a trend of using the government's coercive power to destroy the competition that was coming from fraternal societies' insurance plans. The Ohio State Medical Society, for example, pushed through legislation which would prevent organized labor from creating health centers4.
The state began its interference into the insurance market by encouraging the purchase of employer-based commercial insurance. They did this by subsidizing these companies and mandating workmen's compensation, pensions, and other employer-based social security. In addition, businesses embraced commercial group insurance so that the workers could not provide for themselves independently of their employers, which gave them increased bargaining power. This trend reduced fraternal society membership by decreasing the need for fraternal insurance, especially during times of high employment. Due to the fact that fraternal societies would not engage in political coercion to promote their institutions, expensive commercial insurance was forced upon the workers, which removed their need for cheaper health care. Contractual medical treatment at health centers was too cheap to compete with, so businesses had the government force employer-based insurance upon the workers, removing their need for fraternal health care5.
In addition to encouraging employer-based commercial insurance, states imposed regulations and licensing requirements which made it difficult for fraternal health insurance to exist. Pennsylvania, for example, revoked the licenses of thirteen fraternal orders in 1926 due to their lapses on benefits payments and their high administrative costs6. The state courts almost always decided to take the side of organized medicine, and the medical societies were given the power to set the rules of their profession. Increasingly tight certification requirements led to a decline in the number of doctors per capita in the United States between the 1900s and the 1920s. Fraternalists charged that the government was regulating their societies in order to destroy their cheap competition. A particularly petty example was a bill that was proposed to prohibit all fraternal life insurance orders from using the US postal service. Regardless of such obvious antagonism, some fraternalists had lost much of their suspicion of interventionist legislation during the Progressive Era. Government laws prohibited certain types of insurance from being sold by fraternal societies, such as endowment insurance7. Legislation ended up mandating business-controlled programs and promoted the commercial insurance trade, and in this way businesses were able to increase their bargaining power in relation to labor by gaining control of the workers' health insurance and social security.
The final step in the decline of fraternal societies came with the state's assumption of social security responsibilities from businesses and private charities. Instead of providing subsidies to private organizations, an increasingly interventionist federal government began to take charge of providing economic security to the people. One of the primary appeals of fraternal societies in the 1930s was their provision of “cradle to the grave” protection to members. Yet by the 1940s, public assistance programs removed the need for private provision of orphanages and retirement homes. There were even examples of the federal government directly taking charge of fraternal facilities, as the government bought fraternal hospitals and often turned them into free clinics for the poor8.
In the end, the poor workers were unable to stand together on the issue of insurance provision. Instead of organizing to lobby for fraternal societies' voluntary provision of sick benefits and social security, some of the poorer labor unions endorsed compulsory, state-provided health insurance9. While this seemed to be a desirable alternative to the instability of employment-based social security, these entitlement programs legitimized the state's use of coercion. This was what allowed the states to legislate the fraternal health insurance orders out of existence by imposing stringent certification and licensing requirements which only the most privileged commercial insurance companies could pass.
Contrary to the opinions of many government officials, fraternal societies were able to deliver an enormous amount of health care and sick benefits without the danger of financial insolvency. While medical societies and members of the commercial insurance industry questioned the quality of the fraternal societies' doctors and accounting methods, these orders were able to survive through the actuarial crisis of the 1890s and 1900s through strict readjustment. Doctors were elected to their positions within fraternal societies, so there was enough competition to guarantee a proficient doctor at a low price. American fraternal societies raised their reserves and adopted the actuarial conventions of British friendly societies, which had been proven to withstand economic downturns. The fraternal societies fared quite well during the Great Depression in comparison to other businesses. Instead of being frustrated by financial difficulties, the fraternal societies' problems began with the antagonism of medical societies such as the American Medical Association. These organized doctors attempted to end the salaried contract service of lodge doctors and establish fee-for-service practice as the only legitimate payment method. This would preserve doctors' incomes and insulate them from listening to the needs and demands of their patients. Medical societies lobbied the government for stricter licensing laws so that there would be less doctors and less cheap competition. Medical societies allied with insurance companies in lobbying the government to compel employers to provide social security such as workmen's compensation and pensions. Businesses had usurped the power of providing social security, and as a result security and health insurance were tied to having employment. This was shown to be inadequate when economic downturns created unemployment and deprived Americans of economic security, and the Federal government began expanding its own role in providing social security. Ultimately, an increasingly difficult certification process as well as compulsory social security led to the decline of fraternal societies' provision of sick benefits. The prosperity and employment in America after World War II would lead people to regard fraternal insurance as superfluous, yet further unemployment as a result of the boom-bust cycle would result in a new search for more stable and diverse forms of social security.
The decline of fraternal societies has coincided with the increased prevalence of paternalistic social security provision in the “mature” economies. Fraternal provision of social security would offer smaller countries an economically sustainable method of providing for the downtrodden. Fraternal membership would be based on paying dues as well as on engaging in activities which instill good values and increase community solidarity. In order to maintain economic viability, exclusion of members who do contribute to the organization would be a necessary prerogative of the fraternal society's membership, but members should not be expelled for their specific political or religious beliefs. Fraternal societies would provide opportunities for constructive activity during people's free time, which would be essential during times of high unemployment. Unrestrained, these societies would be able to replace employers and the government as primary provider of social security. A wise society would remove all legal barriers which discourage or outlaw low-cost competition, which would create more voluntary options for health care and social security. Institutions should merely provide information about the quality of a product to possible consumers, allowing people to choose whether a product is safe or not for them. The government could provide incentives to encourage the proliferation fraternal societies and other cooperative methods of providing social security, but rewards should be systematic and based on efficiency so that subsidies were not based on political favors and privilege.
1“Politics and Insurance: Maryland Fraternal Societies to Oppose Candidate Poe,” New York Times (September 28, 1891), p. 2.
2“40 Years' Insurance Dues Bring Nothing,” New York Times (May 5, 1916), p. 19.
3David Beito, From Mutual Aid to the Welfare State (Chapel Hill: University of North Carolina Press, 200), pp. 132, 134, 136, 139, 224, 175; Jennifer Klein, For All These Rights: Business, Labor, and the Shaping of America's public-private welfare state (Princeton: Princeton University Press, 2003), p. 13.
4David Beito, From Mutual Aid, pp. 116, 119, 120, 124; Jennifer Klein, For All These Rights, pp. 13, 153, 154.
5David Beito, From Mutual Aid, pp. 205, 218; Jennifer Klein, For All These Rights, pp. 12, 13; Andrew Morris, “New Alignments: American Voluntarism and the Expansion of Welfare in the 1920s,” eds. Bernard Harris and Paul Bridgen, Charity and Mutual Aid in Europe and North America Since 1800, p. 206.
6“13 Orders Lose Insurance License,” New York Times (December 4, 1926), p. 7.
7Usually for retirement, endowment insurance would bestow a cash payment for surviving and paying dues for a certain period of time.
8David Beito, From Mutual Aid, pp. 98, 198.
9Jennifer Klein, For All These Rights, pp. 151, 3.
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