Wait, Why ARE Employers the Ones Providing Health Insurance?

Sometimes everything happens according to a grand unified plan. When it comes to health insurance in the United States, that is NOT what occurred.

The U.S. Healthcare system is broken. And while many folks might disagree as to exactly why it is broken and exactly how we should go about fixing it—most would agree that the current state of affairs is not ideal.

With insurance premiums rising and costs of medical care seemingly out of control, it’s no wonder that medical costs are the leading cause of bankruptcy in the United States.

Recently, the CEO of GoFundMe was reported to say that one-third of campaigns run on the site are to cover medical costs, and a new report cited medical costs as a leading reason that bankruptcy rates amongst the elderly have risen fivefold since 1991.

Even when people have health insurance, the high price of medical care can all too easily lead them to rely on dangerous short-term no credit check loans like payday loans, cash advances, and title loans to make ends meet.

U.S. health insurance depends on employers.

Because they have to get health insurance through their employer, losing a job can be catastrophic for people who chronic medical issues. But have you ever stopped to wonder why it is that our health insurance system depends on employer-provided care?

Sure, the Affordable Care Act (ACA) has set up exchanges for non-employer insurance, but the vast majority of patients in the U.S. still get insurance through their jobs—a longstanding practice also formed the basis for many of the ACA’s other reforms.

It makes sense that we rely on employers for a paycheck, but why do we rely on them for healthcare too? Well, we did some digging and, thanks to an episode of the fantastic NPR podcast Planet Money, we found the answer.

Here’s how U.S. medical care USED to work.

Medical care is expensive. Even if hospitals didn’t do stuff like charge someone $18,000 for a nap and a bottle of baby formula, the cost of a standard hospital visit is far higher than any one person could afford.

That’s where insurance comes in! By paying a monthly premium to their insurer, people are able to access heavily discounted medical services where the insurance company picks up most of the cost. Because the financial risk is spread over thousands and thousands of patients the subscribe to each plan, the insurance company is able to make money overall on the deal.

But medical care didn’t always work like this. Before the 20th century, health insurance didn’t really exist. People went to the doctor, they got medical, paid the bill, and went home. Granted, healthcare wasn’t as medically advanced back then. So while it was much cheaper it also wasn’t as good. You win some, you lose some.

Hospitals meant more care and higher costs.

And then there were hospitals, which were fairly new at the time, and had overhead costs consider. From the Planet Money episode, Accidents Of History Created U.S. Health System:

Before the birth of modern medicine, hospitals were poorhouses where the indigent went to die. Then came the advent of effective medicines, especially antibiotics, along with a revolution in medical schools.

Suddenly, says economic historian Melissa Thomasson, “hospitals are marketing themselves as places to have babies.” The professor at the Miami University in Ohio says that in the early part of the 20th century, hospitals were able to focus on happy outcomes.

Health care became much more effective and much more expensive. Clean hospitals, educated doctors, and real pharmacological research cost money. People proved willing to pay for care when they were really sick, but it wasn’t yet common to go for checkups or survivable illnesses.

Filling empty hospital beds and doctor’s offices meant incentivizing people to come in for regular treatment. But the rising costs of medicine seemed to dictate that people who weren’t on death’s door would be even less inclined to pay for preventive care than before. Hmm …

Enter: health insurance.

In the late 1920’s an official with the Baylor health system in Dallas, Texas named Justin Ford Kimball introduced a plan to cut down on unpaid bills and to increase use of medical services. He created a health plan that he offered to a group of local public school teachers: They would pay $.50 a month and, in return, they could access a wide range of medical services free of cost.

Kimball understood that spreading out the cost of medical coverage would help people not only seek medical care more freely but prevent them from having to save up for a large medical expense. The model proved exceedingly popular and started to spread, and 1929 saw the official introduction of so-called Blue Cross plans.

The onset of the Great Depression only accelerated the popularity of Blue Cross plans due to their affordability. Just as the original plan at Baylor had been offered to public school teachers, Blue Cross plans were offered to people through their employer. The passage of the National Labor Relations Act (NLRA) strengthened helped enshrine the idea that healthcare was a benefit that workers should expect to receive from their employer.

World War II made employer insurance plans popular. 

Even as employer-based health insurance grew more popular and spread across all 48 states, it still had a ways to go. Then a little thing called World War II came along. From Planet Money:

“The war economy is an entirely different ballgame,” [economic historian Melissa] Thomasson says. The government rationed goods even as factories ramped up production and needed to attract workers. Factory owners needed a way to lure employees. She explains that the owners turned to fringe benefits, offering more and more generous health plans.

The next big step in the evolution of health care was also an accident. In 1943, the Internal Revenue Service ruled that employer-based health care should be tax free. A second law, in 1954, made the tax advantages even more attractive.

Thomasson cites the huge impact of those measures on plan participation. “You start from 9 percent of the population in 1940 to 63 percent in 1953,” she says. “Everybody starts getting in on it. It just grows by gangbusters. By the 1960s, 70 percent [of the population] is covered by some kind of private, voluntary health insurance plan.”

That combination of the World War II hiring crunch and the IRS making employer-based health insurance tax free is pretty much the reason we have the system we have today. Even after Medicare and Medicaid were created in the 1960’s, the foundation of the U.S. health system remained private insurance provided to people through their employer. That system was further cemented with the passage of the ACA.

The future of health insurance requires a plan.

As the Planet Money folks point out in their episode, it’s mostly due to several “accidents of history” that the U.S. system is the way it is. And while that system might have been the best one available when began almost a century ago, it’s clearly no longer cutting it. Regardless of what is done to fix health insurance in the U.S.—and to stop medical debt from crushing people’s financial hopes and dreams—it should rely on something more solid than mere accidents.

Want to learn more about the financial side of history? Check out these related posts and articles from OppLoans:

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