The employer-health insurance connection an ‘accident of history’

Everyone likes the idea of fair competition. That’s why everyone supported the 2007 investigation of an N.B.A. referee who knowingly influenced the outcome of professional basketball games on which he or his associates had placed bets. There was an outcry by the players, the owners, the league, and the fans — because the idea of picking winners and losers betrays the concept of competition based on effort and value.

Unfortunately, governments have made a regular habit of doing just that — especially in health care.

Most early prepaid medical care programs in this country began in the private sector. In the late 1800s, it became common for employers and unions to sponsor mutual aid programs or provide on-site medical care. After the stock market crash in 1929, people struggled to pay their hospital bills, and hospital occupancy fell. In response, hospitals started prepaid hospitalization plans that spread throughout the country.

This collaboration between hospitals and a company that sold prepaid hospital service plans later became know as Blue Cross. The innovative payment arrangement was instrumental to meeting the rising demand for hospital care amidst an economic downturn.

State-level legislation granted Blue Cross plans tax-exempt status and allowed them to operate as nonprofit corporations, because they were considered charitable organizations. This meant that Blue Cross plans did not have to meet the standard reserve requirements applicable to for-profit insurance companies. And as a result, Blue Cross sold more health care coverage in low-regulation states that implemented these policies.

By 1940, approximately half of the states had passed such legislation and six million people were covered by Blue Cross plans — approximately 4.5 percent of the population. By 1950, 57 percent of Americans had hospital insurance. Blue Cross benefitted significantly from governmental overreach that allowed the company to compete — with a competitive advantage over other private organizations. Thus, Blue Cross became a dominant player in a sector of the economy that doesn’t play by the rules of the free market.

Similarly, employer-based health insurance was not common before World War II. On April 11, 1941, President Franklin D. Roosevelt issued an executive order establishing the Office of Price Administration and Civilian Supply (OPA) “for the purpose of avoiding profiteering and unwarranted price rises, and of facilitating an adequate supply and the equitable distribution of materials and commodities for civilian use, and … the stabilization of prices … in the interest of national defense.”

The order granted the OPA unlimited authority to control the prices of materials and commodities. On Oct. 2, 1942, an amendment to the Emergency Price Control Act was passed, authorizing the president to freeze wages, which he did via executive order on Oct. 3, 1942. The wage freeze, however, did not apply to employer-provided insurance and pension benefits.

Employers were left with no other options but to attract workers by offering competitive benefits packages, including health insurance. Employer-based health insurance was also attractive from a tax perspective. Employer-based health insurance soon outpaced private community programs. By 1953, 63 percent of Americans had employer-based health insurance, compared to only 9 percent in 1940.

The extent to which Americans rely on employers for health coverage sets them apart from people in other countries. One result of this is that researchers now talk about the problem of “job lock,” the phenomenon created by employer-based health insurance, wherein individuals risk losing health insurance when they change or lose their jobs. Consequently, this relationship is what has caused the problem of pre-existing condition exclusions — because insurance is neither portable nor personally owned by the individual.

The problem of job lock begs the question: Why is the connection between employment and health insurance so strong in the U.S.? It seems the union of these two institutions was an unintended consequence of the World War II price controls, which explains why some historians denote it as an “accident” of history.

David Balat is the director of the Right on Healthcare initiative at the Texas Public Policy Foundation. Follow him on Twitter @DavidBalatHC.