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

: 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 20 th 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: 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 – 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: Hoffman, Catherine. “National Health Insurance – A Brief History of Reform Efforts in the U.S.”. KFF.org. March Web. 11 Oct – Starr, Paul. The Social Transformation of American Medicine. New York: Basic Books, Thomasson, Melissa. “Health Insurance in the United States”. eh.net, 01 Feb, Web. 11 Oct –