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Part 1: The History of U.S. Employer-Provided Health Insurance - Post-World War II

Written by: PeopleKeep Team
June 5, 2014 at 4:10 PM

The History of US Employer Provided Health Insurance

The employer-provided health insurance industry that exists today is largely the unintended result of a temporary tax break from the early 1940s. This tax break became the basis for U.S. healthcare.

It is important to know the history of the health insurance industry, and the numerous attempts to reform it, to understand why Zane Benefits and others predict that 60% of small businesses will drop group health insurance in the next three years.

Before Employer-Provided Health Insurance

Prior to World War II, most Americans paid for their own medical care, either directly to the provider, or beginning in the 1930s, through the Blue Cross nonprofit health insurance entities which were created to offer guaranteed service for a fixed fee. Back then, health insurance really was insurance - providing coverage only for major items like hospitalizations that people could not afford to pay for themselves. All other expenses were paid out-of-pocket directly to the provider.

The Birth of Employer-Provided Health Insurance

During World War II, the federal government was wary of post-war inflation. The administration saw the terrible devastation hyperinflation wreaked on post-World War I Germany and they were determined to hold it at bay through wage and price controls which they instituted during the war. In reaction to the wage controls, many labor groups planned to go on strike en masse.  In order to avert the strike, in a concession to the labor groups, the War Labor Board exempted employer-paid health benefits from wage controls and income tax.

This historical accident created a tax advantage that drove enormous demand for employer-provided health insurance plans over the previously more common individual health insurance. Employers received a 100% tax deduction while the benefits employees received were exempt from federal, state, and city taxation.

The Result

As early as the 1940s, when the U.S. presidential administration tried to end the tax break and reform healthcare, the employer-provided health industry was already dug-in. In addition, labor groups preferred the employer-provided health insurance model. By the mid-1960s, employer-provided health insurance was almost universal.

The employer model worked well while costs remained low and employees stayed with the same company for their entire career. However, as we will discuss in our next post, as healthcare costs increased and employees began to change employers regularly, the system began to erode - starting in the small employer market.

Next, check out Part 2: The 1980s and 1990s - Employer-Based Health Insurance Begins to Unravel.

Topics: Group Health Insurance, Employer Funded Health Insurance