Shift to Employer-Based Health Insurance in the United States

1. Shift to Employer-Based Health Insurance in the United States Julie Babb, MD Louisiana State University Health Science Center - Shreveport

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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