The complete history of employer-provided health insurance

Employer-provided health insurance has become a staple benefit in many workplaces. It's a system where employers offer health insurance coverage to their employees as part of their overall compensation package. According to KFF¹, employer-sponsored insurance covered almost 159 million nonelderly people in 2022.

From its humble beginnings in the early 20th century to the significant changes brought about by landmark legislation, the complete history of employer-provided health insurance is a chronicle of societal and economic shifts. By exploring its origins, developments, and current state, we can gain a deeper appreciation its role in our lives today.

In this article, we'll go on a journey through the complete history of employment-based health benefits.

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The origins of health insurance in the 19th century

The origins of employer-provided health insurance go back to the late 19th century. Industrialization was in full swing at this time, and workers faced hazardous conditions and increasing health risks. As a result, some employers started offering medical services and coverage to their employees as a way to attract and retain workers. These early forms of health insurance were often limited and provided only basic medical care.

According to the National Academy of Sciences², the Granite Cutters Union established the first national sick benefit program in the U.S. in 1877. Like other plans of the era, it mostly protected loss of income, not medical expenses.

The rise of traditional group health coverage in the 20th century

In 1915, the American Association of Labor Legislation³ (AALL) began advocating for compulsory health insurance⁴ for workers. However, their efforts faced significant opposition, and the AALL's proposals were never implemented nationally.

In 1929, Baylor University Hospital⁵ implemented a pre-paid hospital insurance plan for a group of school teachers, which was the precursor to future nonprofit Blue Cross plans.

It wasn't until the 1940s that employer-based group health insurance began to grow at a rapid pace. During World War II, the federal government imposed wage freezes⁶ to control inflation, hoping to avoid the hyperinflation Germany experienced after World War I. The War Labor Board exempted employer-sponsored health benefits from wage freezes to prevent labor groups from striking. In response, employers offered health insurance benefits to attract and retain employees without violating wage controls. The employer contributions toward health insurance were also exempt from income taxes, making it an attractive option for employers and employees.

The passage of the Internal Revenue Code⁷ in 1954 further solidified the employer-provided health insurance system. This code allowed employers to deduct their contributions toward employee health insurance as a business expense, while employees didn’t have to pay taxes on the value of their health insurance coverage. This tax advantage made employer-provided health insurance even more appealing for both parties.

In the 1960s, the federal government introduced Medicare and Medicaid⁸, which provide affordable healthcare costs for the elderly and low-income individuals, respectively. These programs helped alleviate some of the burden on employers to provide healthcare coverage for their employees. However, employer-provided health insurance remained a significant component of the healthcare system.

Over the years, healthcare costs have continued to rise, leading to changes in the employer-based health insurance landscape. Employers have had to navigate rising premiums and changing regulations to provide adequate employee coverage. This resulted in the introduction of managed care plans⁹, such as health maintenance organizations (HMOs) and preferred provider organizations (PPOs), to control medical costs and provide more options for employees.

In the 1990s, many states adopted new legislation known as the NAIC’s Small Employer Health Insurance Availability Model Act. This allowed specific plans to give guaranteed issues to small employers, making insurance more accessible. However, affordability remained a significant concern for small organizations.

New business models service the growing individual health insurance market at the turn of the century

As traditional group health insurance became more expensive, many small employers couldn’t afford to offer it to their employees. As a result, many employees looked to purchase their own health insurance.

Founded in 1997, eHealthInsurance became one of the first to service the individual health insurance consumer online. In 1999, Paul Zane Pilzer founded ExtendHealth, Inc. (originally Wellness Services, Inc.) to distribute defined contribution healthcare plans and individual health insurance policies through employers. ExtendHealth eventually focused on offering defined contribution healthcare to retirees of large U.S. employers. Towers Watson acquired ExtendHealth in 2012 for $435 million. Paul Zane Pilzer later founded Zane Benefits, now known as PeopleKeep, in 2006.

In 2003, UnitedHealth Group, Inc. began consolidating several individual health insurance companies to expand its reach in the individual health insurance market, including Golden Rule, American Medical Security, Oxford Health Plans, and PacifiCare. UnitedHealth’s individual business unit now operates under the brand UnitedHealthOne.

While individual health insurance plans became increasingly popular, they suffered from a lack of standardization, and existing laws allowed for medical underwriting and denials based on pre-existing conditions. Healthcare reform in the 21st century would change that.

Breakthrough healthcare legislation in the 21st century

Congress passed the Affordable Care Act (ACA) in 2010. The law brought significant changes to the employer-provided and individual health insurance landscape. The ACA mandated that larger employers with 50 or more full-time equivalent employees (FTEs) provide affordable health insurance coverage to their employees or face penalties.

It also introduced new regulations to ensure that health insurance plans provide comprehensive coverage and protect consumers from discrimination based on pre-existing conditions. Along with these changes to employer-sponsored and individual health insurance, the law established the federal Health Insurance Marketplace and state exchanges.

The creation of HRAs, FSAs, AHPs, and HSAs

Today, employer-based insurance remains a vital component of the healthcare system in the United States. It offers employees access to healthcare coverage and provides employers with a tool to attract and retain talented workers. However, the system continues to evolve, and employers must adapt to changing regulations and rising healthcare costs.

Along with these changes came alternative health benefits that can better help your organization save money and meet the needs of your workers.

Let's go over these four health benefits that can help employers save on the cost of care.

Health reimbursement arrangements (HRAs)

From the 1960s to the 1990s, employers implemented arrangements to reimburse employees for qualified medical expenses that their health benefits plan didn’t cover. This happened as deductibles and exclusions became more common in self-insured and fully-insured health benefits plans.

The IRS¹⁰ first acknowledged health reimbursement arrangements (HRAs) in 2002 as an employer-funded health benefit for employees. This form of health coverage allows employers to reimburse employees, tax-free, for their healthcare expenses, including individual health insurance premiums, out-of-pocket medical expenses, or a combination of the two.

After the ACA took effect, many employers weren’t sure if they could still offer an HRA. The IRS issued guidance on HRAs and the ACA in Notice 2013-54¹¹, defining HRAs as group health plans that must comply with healthcare reform. The notice also prohibited HRAs from integrating with individual health insurance plans. After this guidance, large employers could only offer a group coverage HRA (GCHRA), while smaller employers could offer premium-only HRAs.

Congress passed the 21st Century Cures Act in 2016, allowing small employers with fewer than 50 FTEs to offer a qualified small employer HRA (QSEHRA). Then, in 2020, the individual coverage HRA (ICHRA) and the excepted benefit HRA (EBHRA) became available as the result of an executive order.

Employers often choose HRAs instead of group health insurance because of their budget control, tax advantages, and flexibility. HRAs can work alongside group health insurance or as an alternative benefit for certain employees.

Here’s a breakdown of the types of HRAs available:

The QSEHRA: The QSEHRA is for small businesses with fewer than 50 FTEs. It allows employers to reimburse employees for their qualifying medical expenses, including individual insurance premiums.
The ICHRA: The ICRHA works for employers of all sizes. Employers can offer an ICHRA as a standalone benefit or as an alternative health benefit to employees who don't qualify for the current group health insurance plan. With an ICHRA, employers can also offer different allowance amounts to different employee classes.
The GCHRA: The GCHRA, or integrated HRA, is a supplement to group health insurance that covers out-of-pocket expenses not covered by the plan.
The EBHRA: The EBHRA allows employers with a group health plan to reimburse employees for excepted benefits such as dental and vision coverage premiums.

Flexible spending accounts (FSAs)

The Revenue Act of 1978¹² included the creation of flexible spending accounts (FSAs), also called flexible spending arrangements, as a key component. The hope was that the FSA would address issues with the HRA, such as employers benefiting more from tax benefits and employees being unable to contribute, which caused problems for those with chronic health conditions or complex health issues.

An FSA is a type of spending arrangement where employees can use tax-advantaged money for various expenses. The most common type of FSA is a healthcare FSA. This allows employees to use pre-tax dollars to pay for medical care expenses like doctor visits, vision costs, and prescriptions. But it doesn't cover insurance premiums. Anyone who works for a company with an FSA can use the benefit.

Employees contribute to FSAs through payroll deductions, and employers can also contribute. Unlike HSAs, FSA funds that employees don’t use by the end of the plan year disappear. FSAs come with maximum contribution limits that the IRS updates annually.

Association health plans

In the late 1990s¹³, association health plans (AHPs) came out. AHPs enable small businesses in the same industry or area to join together and buy a health plan, which gives them more purchasing power and access to cheaper insurance options.

AHPs help retailers offer better coverage to their employees and also provide the advantages of being part of a larger insured group. They're compatible with HSAs and cover contract and freelance employees, including 1099 employees, self-employed individuals, and sole proprietors.

Health savings accounts (HSAs)

In late 2003, then-President George W. Bush signed the Medicare Prescription Drug, Improvement, and Modernization Act¹⁴ into law. It created health savings accounts (HSAs), which replaced Archer medical savings accounts (MSAs).

HSAs are tax-advantaged savings accounts that allow employees to contribute money on a pre-tax basis for medical care expenses. An employee can open an HSA as an individual or through their employer alongside a high deductible health plan (HDHP). The employee always owns the HSA.

Both employers and employees can contribute to an HSA, but the total contributions must not exceed the annual limit set by the IRS. The IRS updates these limits annually in Publication 969¹⁵.

What health insurance trends mean for your organization

The history of employer-provided health insurance shows us that the healthcare industry is constantly evolving and changing. On top of that, healthcare costs tend to rise each year. According to PwC's Health Research Institute¹⁶, healthcare costs will increase by 7% in 2024, which is higher than the increases of 5.5% in 2022 and 6% in 2023.

An HRA is a popular option for budget-conscious employers who want flexibility and control over their healthcare costs. With an HRA, employers can avoid annual rate hikes and easily budget for healthcare expenses. Employees simply submit their qualified expenses for reimbursement, and employers reimburse them up to their allowance amount.

When managing an HRA, employers can choose to self-administer or use a third-party platform like PeopleKeep. Our software allows you to easily manage your health benefits in just minutes each month. Our experts handle legal documents, verify expenses, and send notices automatically.

Conclusion

The history of employer-provided health insurance goes back to the late 19th century, but it wasn't until the 1940s and 1950s that it became a widespread practice. Over the years, it's undergone changes and adaptations to meet the evolving needs of employees and employers. Decades after their creation, HRAs continue to be cost-effective alternatives to group health insurance for employers who want to make the most of their benefits budgets.

This article was originally published on June 5, 2014. It was last updated on October 19, 2023.

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Holly Bengfort

Holly Bengfort is a content marketing specialist at PeopleKeep, with two years of experience in HRAs and health benefits. Having experienced the QSEHRA firsthand as an employee, Holly provides invaluable insights into how it can benefit small businesses and their workforce. Before joining the team in 2023, Holly worked in television news as a broadcast journalist. With her experience as a news anchor and reporter, Holly has an exceptional ability to break down intricate stories into clear, compelling narratives that resonate with diverse audiences. Her talent for simplifying tricky topics ensures that everyone can fully grasp important information. Outside of work, Holly enjoys spending time outdoors, staying active, and relaxing on the beach.