The ABCs of Healthcare and Reform

Why Do the Majority of People in the U.S. Get Health Insurance through an Employer?

As the nation considers healthcare reform, it may be helpful to know how our current system developed. The U.S. has an “employer-based” system, which had its beginnings in the late 1920s and early 1930s. An employer-based system means that employers offer insurance to their employees. Usually, the employer pays part of the premium and the employee pays the other part.
In 2007, about 62% of non-elderly civilians in the U.S. were covered by employer-based insurance through private companies and civilian government agencies. About 21% of the non-military population is covered by government insurance such as Medicare, Medicaid, and the Veterans Administration. All active-duty members of the military are covered by insurance provided by the federal government.

Early Days of Health Insurance (1798–1900)

Health insurance in the U.S. began in 1798 when the federal government required merchant seamen to contribute from their earnings to hospitalization insurance. In 1850, a Massachusetts insurance company offered the first accidental injury insurance. Other companies developed this further in the 1860s. A typical policy provided a $1,000 death benefit and a $5 weekly disability benefit, but did not pay for the cost of healthcare. In the late 1800s, several companies in industries like mining, lumber, and railroads began to provide medical care at company owned clinics to employees for industrial accidents and common illnesses.

Health Insurance in the Early 20th Century

At the turn of the 1900s, several insurance companies began to sell disability insurance to individual workers to help them when they were too ill to work. This was similar to the accidental injury insurance first offered in the mid-19th century.

In 1910, Montgomery Ward and Co. offered what historians generally consider the nation’s first group health insurance plan to its employees. Like plans offered earlier, this plan did not pay for medical services. Instead, it provided employees with modest incomes if they could not work due to illness or injury, a much bigger problem at the time for most families than the actual cost of healthcare.

In fact, because healthcare costs were quite low, there were virtually no health insurance plans in the U.S. that helped pay for physician or hospital care at the beginning of the 1900s. This was primarily because healthcare was so primitive that it did little to help most patients. In addition, relatively few people went to hospitals for treatment because of the very real danger of getting an infection while being in one. At the time, there were no medicines that could effectively treat infection. Generally, the only people treated in hospitals were the poor who had nowhere else to go for medical care. Most healthcare occurred in the patient’s home, sometimes even including surgery.

In addition to the fact that most people did not need health insurance, insurance companies also refused to sell it because they thought that they could not predict accurately what they might have to pay out. Moreover, they feared that insurance policies would attract those with higher healthcare costs and thus make this product unprofitable – a concept called “adverse selection.” They also worried that a person who was relatively healthy might engage in more risky behavior after buying insurance, a concept known as “moral hazard.”

There were several proposals for mandatory, government-run health insurance in the first two decades of the 20th century. A number of European nations were adopting such plans at the same time. But the American proposals all failed because there was relatively little public demand for health insurance and because of opposition from several groups. Physicians, pharmacists, and insurance companies feared that government-run health insurance plans would regulate how they operated and interfere with their incomes. The American Federation of Labor opposed government-run health insurance during this period because it thought this would weaken unions who attracted members, in part, because the unions often provided health insurance.

During the 1920s, healthcare became more effective, but it also became more expensive. The cost of hospital stays increased even more rapidly than the cost of going to a physician. This resulted in more people seeking insurance to pay for hospital stays and for treatment by physicians while they were in the hospital.

One of the earliest successful hospitalization plans began in 1929 when a group of Dallas, Texas, teachers signed a contract with a local hospital for up to 21 days of hospitalization per person per year at a cost of $6 per person. This was also one of the first employment-based health insurance plans and helped lay the foundation for employer-based insurance as we have come to know it.

Insurance Expansion during the Great Depression

Hospitals increasingly offered prepaid hospitalization plans during the 1930s. They did this, in part, because charitable contributions, which had been their primary source of income, decreased substantially during the Great Depression. Prepaid plans helped them to make up for this lost income. Hospitalization plans also helped protect patients from potentially excessive costs of hospitalization at a time of falling incomes. These plans evolved into the not-for-profit Blue Cross system. Physicians soon followed with the Blue Shield plan, also not-for-profit, which gave customers coverage for certain doctors’ bills, primarily those related to hospital stays and surgery.

Blue Cross and Blue Shield—at this time still separate plans—generally sold policies only through employers because the higher costs to pay for sicker employees were balanced against the lower costs of healthy employees. In other words, when all or most of a firm’s employees were covered, this generally spread the plan’s risk over a large enough pool to protect the insurance company from large financial losses. In contrast, those companies that sold individual plans often found that they lost money on them because people who bought them often did so because they had greater medical needs and costs.

Support for government-run health insurance resumed in the mid-1930s during the Great Depression now with support from union leaders and members of the Roosevelt administration. As a result, Sen. Robert Wagner of New York introduced a national health bill in 1939. Although members of Roosevelt’s administration were pushing this, the president refused to champion the idea because of strong objections from the American Medical Association (AMA) and because he was concentrating his efforts on preparing for the looming war in Europe. 

Spread of Employer-Based Insurance during World War II

During World War II, employer-based health insurance began to grow rapidly. This expansion was aided considerably by the fact that insurance was exempt from government rules that restricted how much employers could increase pay to workers for the duration of the war. In addition, a series of decisions by the federal government made the cost of these employer-based plans exempt from taxation, a factor that helped increase their appeal to both employers and to employees. Insurance, therefore, became a form of compensation employers could use to compete for workers in a labor market made very tight by so many working men entering the armed forces. Union leaders could also take an offer of health insurance back to their members in lieu of increased wages. During collective bargaining, the major unions included the terms of health insurance benefits and the ratio of employer and employee contributions in their negotiations.

As a result, the number of people enrolled in health insurance plans skyrocketed from about 20 million in 1940 to around 70 million in 1950. By the early 1950s, employer-based group health insurance was firmly entrenched in the American health care system thanks to unions, employers, federal tax policy, and demand from consumers.

For-profit commercial insurance companies entered the employer-based health insurance market during the 1940s and soon gained greater enrollment than the non-profit plans. This happened because law governing charitable organizations required the non-profit plans to charge the same rates to all who purchased insurance from them regardless of health, a system called community rating. For-profit companies faced no such restrictions and could charge customers based on the likely costs of insuring that group, a system called experience rating. As a result, for-profit companies could sell policies more cheaply to healthier groups and gain their business. Consequently, the percentage of the market held by for-profit companies expanded rapidly.

Post-war to 1970

Between 1950 and 1960, the percentage of employees with employer-based hospitalization insurance increased from 49% to 69%. By 1970, that had increased to 80%.

The widespread availability of affordable employer-based health insurance, combined with the continued opposition to national health insurance led by the AMA, contributed to the failure of post-war efforts to enact universal coverage legislation. These circumstances provided the basis for the current system in which most working people continue to get health insurance through their employers.

Medicare and Medicaid

Although most working Americans were covered by employer-based insurance in the post-war period, Congress passed legislation in 1965 to create public insurance plans for two sectors of the population who generally had little or no access to employer-based coverage: the elderly and certain very low-income people. Medicare legislation established a federal program that covered people ages 65 and older and some people younger than age 65 with disabilities. Medicaid legislation established a joint federal-state program that provided health insurance to families with children receiving welfare payments as well as for some poor who were elderly or disabled. Both Medicare and Medicaid have expanded and evolved since then.

1970s through today

Comprehensive plans that included coverage for routine care by physicians and other services became more common and began to replace hospitalization-only plans after 1970. At the same time, healthcare costs began to rise significantly and healthcare organizations, insurance companies, and the government began to experiment with ways to control costs. These have included managed care plans like health maintenance organizations (HMOs) and preferred provider organizations (PPOs), and a variety of tax protected ways for people to pay for healthcare costs like flexible savings accounts (FSAs) and health savings accounts (HSAs) paired with high-deductible health insurance plans.

Despite rising costs, until the mid-1980s, participation in employer-based health insurance remained high. In 1984, 69% of civilians in the United States (including employees and their spouses and dependents) under age 65 had employer-based health insurance. After the mid-1980s, increasing premiums and declining employer contributions to them, and increasing out-of-pocket expenses for employees eroded participation in employer-based plans. By 2007, the percentage of non-elderly civilians covered by such plans had dropped to 62%.

At the same time, the percentage of those under age 65 with no health insurance increased. The percentage of uninsured rose from 15% of the civilian population in 1984 to 18% in 1994, and that number has fluctuated around 17% since then. Without recent expansions in publicly funded health insurance programs like Medicaid and the State Child Health Insurance Program (SCHIP), the uninsured rate would have continued to increase.

Sources

Centers for Medicare and Medicaid Services, “History,” http://www.cms.hhs.gov/History/.

Derickson, A. (1994). Health Security for All? Social Unionism and Universal Health Insurance, 1935-1958. The Journal of American History, 80(4), 1333-1356.

Employee Benefits Research Institute, “Issue Briefs,” 1992, 1994, 2008, http://www.ebri.org/pdf/briefspdf/0292ib.pdf,
http://www.ebri.org/pdf/briefspdf/EBRI_IB_09a-2008.pdf,
http://www.ebri.org/pdf/briefspdf/0295ib.pdf

Marmor, T. R. (1996). The Politics of Universal Health Insurance: Lessons from the past? Journal of Interdisciplinary History, 26(4), 671-679.

National Center for Health Statistics. (2009). Health, United States, 2008 with Chartbook. Hyattsville, MD: National Center for Health Statistics, Figure 17, and Tables 137 and 138, http://www.cdc.gov/nchs/data/hus/hus08.pdf

Kaiser Family Foundation, “Number of Nonelderly Americans with Employer Sponsored Insurance, 2000-2007,” http://facts.kff.org/chart.aspx?ch=890

Kolodrubetz, W. W. (1972). Two Decades of Employee-Benefit Plans, 1950-70: A Review. Social Security Bulletin, 35, 11.

Scofea, L. A. (1994). The Development and Growth of Employer-Provided Health Insurance. Monthly Labor Review, 117(3), 8.

ThinkQuest, “History of Antibiotics,” http://library.thinkquest.org/25462/history.html

Thomasson, M. A. (2002). From Sickness to Health: The Twentieth-Century Development of U.S. Health Insurance. Explorations in Economic History, 39(3), 233-253.

Thomasson, M. A. (2003). Health Insurance in the United States. In R. Whaples (Ed.), EH.Net Encyclopedia, http://eh.net/encyclopedia/article/thomasson.insurance.health.us.

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