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This dissertation examines how governmental policies and other incentives have shaped the health insurance market over the period 1900-1960. The dissertation opens with an examination of the early health insurance market, and identifies key factors that contributed to both the initial development of the health insurance market, as well as to its development over time. While rising medical expenditures are usually posited as the catalyst for the initial development and the later growth of the market, results suggest that the true story of market development is more detailed. Strategic behavior on the part of hospitals affected health insurance markets, as did state-level regulatory policies. In addition to state-level government policies, policies at the federal level also had a fundamental impact on the development of health insurance in the United States. A major portion of the dissertation is devoted to examining the impact of the 1954 tax subsidy of employer-provided health insurance. For the first time, the tax subsidy can be analyzed using data that span the period of its implementation. Analysis conducted with these data indicates that the implementation of the tax subsidy generated an increase in the amount of health insurance coverage purchased by lowering its relative price. Perhaps more importantly, the tax subsidy encouraged the development of group health insurance. This partially tax-induced institutional change made health insurance available to more people, and affirmed the development of employer-based health insurance in the United States. The dissertation also focuses on two aspects of the relationship between health insurance and medical expenditures. First, what affect did the tax subsidy have on medical expenditures? Insured households spent more on medical care than their uninsured counterparts. Since the tax subsidy generated an increase in the number of people with insurance, it also contributed to a corresponding increase in medical expendit