What if we told you that the creation of health insurance was actually an accident? Or that the way we think about health insurance is changing? Here, we’ll cover the history of health insurance in the U.S., how it’s evolved over the years, and what the future of health insurance might bring for you and your organization.
Before employer-provided health insurance
Let’s start at the very beginning, before employers even offered health insurance benefits. Before 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 that were created to offer guaranteed service for a fixed fee.
Back then, health insurance only provided coverage for major items like hospitalizations that people couldn’t 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 wanted to avoid the hyperinflation Germany experienced after World War I, so they instituted wage and price controls to manage the economy.
However, these wage controls didn’t sit well with many labor groups, and they threatened to go on strike. In response, 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.
Employer-provided health insurance was here to stay
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—costs remained low and employees stayed with the same company for their entire career.
A rocky road for small employers
Fast-forward to the late 1980s and early 1990s—the U.S. saw the employer-based health insurance market begin to unravel because many insurers only wanted to insure the healthiest groups.
By this time, most states had adopted new legislation called—get ready, it’s a mouthful—the National Association of Insurance Commissioners’ (NAIC) Small Employer Health Insurance Availability Model Act in an attempt to address the growing market instability.
The NAIC act made certain plans to give “guarantee issue” (that’s where a policy is offered to any eligible applicant regardless of their health status) to small employers. However, small employers could still be turned down if they didn’t meet minimum participation requirements or minimum employer-contribution-to-premium requirements set by the insurer.
While the NAIC act did make health insurance more accessible to small businesses, it didn’t address affordability. Facing double-digit growth in health insurance premiums, many small employers either redesigned the plans with higher cost-sharing by employees or stopped offering health benefits altogether.
These annual benefit reductions and increased cost-sharing by employees led to an ongoing version of adverse selection—a perpetual process referred to as “the death spiral.”
The effects of the death spiral on small employers
Here’s how the death spiral works—when an employee’s cost to participate in the employer plan gets too expensive, the healthiest employees begin to drop off the employer plan in favor of more affordable individual policies. This causes the remaining small employer risk pool to become “sicker,” resulting in higher insurance premiums on renewal the following year.
Then, the process repeats. Again, the employer reduces benefits to maintain costs, more healthy employees drop off, and the rate goes up the following year.
This death spiral perpetuates until the small business either: (1) cancels the plan; or (2) gets canceled by the insurer because they can’t meet the minimum contribution or participation requirements set by the insurer.
Rise of the individual health insurance market
By the 2000s, the employer-provided health insurance death spiral had begun to run its course. From 1999 to 2020, without accounting for the annual benefit reductions, the cost to cover a single employee rose from $2,196 per year to $7,470 per year. Family coverage increased from $5,791 per year in 1999 to $21,342 per year in 2020.
As a result, the individual market expanded and numerous entities were formed to service the new health insurance consumer.
New business models service the growing individual health insurance market
In 1997, eHealthInsurance.com was founded to service the individual health insurance consumer online. Today, eHealthInsurance.com has enrolled over 5 million people in health insurance coverage and is the leading online marketplace for individual and family health insurance products in the nation.
In 1999, Paul Zane Pilzer founded ExtendHealth, Inc. (originally Wellness Services, Inc.) to distribute Defined Contribution Healthcare and individual health insurance policies through employers. ExtendHealth eventually focused on offering Defined Contribution Healthcare to retirees of large U.S. employers. ExtendHealth was acquired by Towers Watson in 2012 for $435 million.
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.
After ExtendHealth was acquired, Paul Zane Pilzer founded Zane Benefits in 2006 to help small employers take advantage of new Defined Contribution Healthcare via its proprietary SaaS software platform now known as PeopleKeep. Using Zane’s platform, employers offer a custom Defined Contribution Healthcare solution that allows the organization to reimburse employees for their individual health insurance policies.
The case for individual health insurance reform
As demand increased for individual health insurance, limitations in the individual health insurance market were exposed. These limitations included medical underwriting, application denials, and a lack of standardized plans. At the same time, the small business health insurance market was in crisis as employer healthcare costs doubled in the 2000s.
Together, the individual and small employer market challenges led to the creation and ultimate passage of the Affordable Care Act (ACA) on March 23, 2010. Many of the law’s major provisions overhauled the individual health insurance market.
Objectives for individual health insurance reform
The ACA had three primary objectives which directly affected individual health insurance:
- To standardize plans and provide consumer protections
- To provide universal access to health insurance
- To make health insurance more affordable
Let’s go over each in more detail.
1. To standardize plans and provide consumer protections
In order to standardize plans available in the individual market and provide better consumer protections, the ACA required:
Standard plan tiers
- Individual health insurance policies must be organized by "metal" tiers—bronze, silver, gold, and platinum—with the goal of easier and more informed comparison shopping. Each tier requires a certain level of cost-sharing be met.
Unlimited essential health benefits
- Individual health insurance policies must provide a comprehensive package of items and services, known as “Essential Health Benefits” and must be covered on an unlimited (annual and lifetime) basis.
- Individual health insurance policies must also provide unlimited preventive care with the idea that a disease or illness that is prevented or caught early costs less.
2. To provide universal access to health insurance
In order to ensure access to individual health insurance, the ACA required:
- All individual insurance providers must “guarantee issue” policies to all applicants, regardless of health status or other factors.
State health insurance marketplaces
- States must make available a public health insurance marketplace to provide an unbiased location for consumers to comparison shop for individual insurance policies.
3. To make health insurance more affordable
In order to make health insurance more affordable, the ACA included:
Premium tax credits
- Americans with household incomes below 400 percent of the federal poverty line (FPL) qualify for premium tax credits which cap the cost of a qualifying household’s individual health insurance policy as a percentage of the household’s income.
- States have the option of expanding Medicaid eligibility to citizens with household incomes up to 138 percent of FPL.
- The individual mandate, which used to require all U.S. citizens to purchase health insurance or pay a tax penalty, was originally designed to diversify the risk pool with healthy participants in order to lower costs. This mandate has since been repealed, and today only certain states still enforce a penalty.
The ebb and flow of the individual market
While plan standardization and guaranteed access readied the individual market for mass adoption, the ACA’s effort to make health insurance more affordable drove an initial shift to individual health plans. Kaiser Family Foundation reports that total individual market enrollment increased from 10.6 million in 2013 to a peak of 17.4 million in 2015 before declining again to 13.7 million in 2019.
This drop could have been caused by a variety of factors, including reductions in outreach and consumer assistance, the individual mandate penalty being repealed, or broader economic factors.
In 2020, as the COVID-19 pandemic caused millions of Americans to lose their jobs, and in turn, their employer-sponsored health benefits, the individual market again rose in popularity. Centers for Medicare & Medicaid Services reports that in 2020 alone, 8.3 million people selected health plans on the Affordable Care Act federal exchange, and nearly 50,000 licensed agents and brokers registered with the exchange to support consumer enrollment.
What health insurance trends mean for your organization
If 2020 has taught us anything, it’s that predicting the future is practically impossible. As interest in employer-provided health benefits versus the individual market continues to ebb and flow, the flexibility offered through health reimbursement arrangements (HRAs) can offer your employees the freedom of choice to meet their unique and ever-changing needs.
With an HRA, your employees can get their medical expenses and insurance premiums reimbursed 100% tax-free. PeopleKeep provides three unique HRAs to give employers the option to offer their employees an HRA: as a stand-alone benefit; combined with individual coverage; or even in conjunction with group coverage.
Through war, recession, and even a global pandemic, health insurance in the U.S. has had to evolve in countless ways, and will no doubt continue to change as the years progress. Looking to the future, organizations must be flexible to meet the evolving needs of their employees.
This article was originally published on June 5, 2014. It was last updated March 5, 2021.