Shift to Employer-Based
Health Insurance in the United
States
Julie Babb, MD
Louisiana State University Health Science Center Shreveport
1940-1960:
Growth in the Health Insurance Market
• Increase in supply of health insurance
– Success of Blue Cross-Blue Shield in the 1930s encouraged
private insurance companies to enter the market
• Increase in demand for health insurance
– Medical technology further advanced
– Government policies encouraged the popularity of health
insurance as a form of employee compensation
Growth in Supply:
Commercial Insurance Companies Enter the
Market
• Private insurance companies were reluctant to offer
health insurance policies
– “Health” and “sickness” are vague terms
– Problem of “adverse selection”
• People in poor health may claim to be healthy and then sign up for
insurance
– Problem of “moral hazard”
• People may change their behavior (perhaps engage in more risky
activities) after they purchase health insurance
Growth in Supply:
Commercial Insurance Companies Enter the
Market
• Private insurance companies were reluctant to offer
health insurance policies
– Difficulty in accurately calculating risks and writing
premiums accordingly
– Difficulty in controlling costs
• Many of the costs of treatment are within the control of the
insured
• Costs are partly controlled by the physician and hospital
– Who may also profit from additional services
• Physician may raise prices as the patient’s ability to pay increases
– A common practice in the early 20th century
Growth in Supply:
Commercial Insurance Companies Enter the
Market
• These concerns gave rise to a new focus on providing
health insurance only to groups of employed
workers
– Workers are relatively young and healthy
• Overcomes “adverse selection”
– Group policies rather than individual policies
• Reduces administrative expenses
– Employers deduct the premium from payrolls
• Reduces collection costs
Growth in Supply:
Commercial Insurance Companies Enter the Market
• Focus on providing health insurance only to groups of employed workers
– Low-risk participants subsidize the health costs for the sick, high-risk
participants
– Market for health insurance exploded in size in the 1940s and continued for
decades
Growth in Supply:
Commercial Insurance Companies Enter the Market
• Community Rating vs Experience Rating
– Community Rating
• Insurance companies charge the same premium to sicker people
as they do to healthy people
• Since Blue Cross and Blue Shield were non-profit institutions, they
were required to use this system
– Experience Rating
• Insurance companies charge sicker people higher premiums and
healthier people lower premiums
• Commercial insurance companies could offer relatively healthy
groups lower premiums than Blue Cross and Blue Shield plans
Growth in Supply:
Commercial Insurance Companies Enter the Market
• Enrollment in Commercial Plans vs Blue Cross / Blue Shield
– By the early 1950s, commercial plans had more subscribers than Blue Cross and
Blue Shield
•Number of persons
enrolled in commercial
plans
•1940: 20.6 million
•1950: 142.3 million
Growth In Demand:
Government Policies that Encouraged Health
Insurance
• Wage and Price Controls during World War II
– To control inflation in the overheated wartime economy
– Prevented employers from using wages to compete for scarce labor
• 1942 Stabilization Act
– Limited the wage increases that could be offered by firms
– Exempted employee insurance plans
– Health benefit packages were offered as a means of securing and
retaining workers
• 1945 War Labor Board ruling
– Employers could not modify or cancel group insurance during the
contract period
Growth In Demand:
Government Policies that Encouraged Health
Insurance
• 1949 National Labor Relations Board ruling
– Dispute between Inland Steel Co and the United
Steelworkers Union
– Term “wages” was ruled to include pension and insurance
benefits
– When negotiating for wages, the union was allowed to
negotiate benefit packages on behalf of workers
– US Supreme Court refused to hear an appeal by Inland
Steel Co
• Upheld the lower court’s ruling
Growth In Demand:
Government Policies that Encouraged Health
Insurance
• Taxes and Employee Health Insurance
– Employers did not have to pay payroll taxes on their
contributions to health plans
– 1943 – Employees did not have to pay income tax on their
employer’s contribution
• Ruling was highly restrictive and limited in its applicability
– 1954 - Internal Revenue Code
• expanded the earlier ruling to all employees
Conclusion
• Employer-based health insurance in the US
has evolved in an unplanned way
– Described by some as an accident of history
• Progressed due to several catalysts
– World War II wage/price controls
– Tax incentives
References
• Blumenthal, David. Employer-Sponsored Health Insurance in the United
States – Origins and Implications. N Engl J Med 2006; 355:82-88.
• Hoffman, Catherine. “National Health Insurance – A Brief History of
Reform Efforts in the U.S.”. KFF.org. March 2009. Web. 11 Oct 2011.
– http://www.kff.org/healthreform/upload/7871.pdf
• Starr, Paul. The Social Transformation of American Medicine. New York:
Basic Books, 1982.
• Thomasson, Melissa. “Health Insurance in the United States”. eh.net, 01
Feb, 2010. Web. 11 Oct 2011.
– http://eh.net/encyclopedia/article/thomasson.insurance.health.us