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Why Do Employers Sponsor Health Insurance
Something unique about healthcare in America is how a lot of people get their insurance through employers. In 2021, 155 million non-elderly Americans were covered by employer-sponsored benefits, a pretty large portion of the total (elderly and nonelderly) American population of just over 330 million.
But why is this such a common thing in America, and how has this changed over time?
Origins in Workers' Compensation
Health insurance is a relatively new concept, originating in the early 1900s. A precursor to health insurance plans focused on ensuring families did not lose out on wages when the employee earning income was sick or recovering from injury.
Early attempts at a standardized model for health insurance started with workers' compensation. At the time, if an employee was injured on the job, the employer could be held liable for negligence. The cost of mounting a legal defense against negligence claims thus proved to be a noticeable cost in business operations.
From 1910-1915, 32 states passed workers' compensation insurance programs that held all employers liable for workplace injury, but if they had insurance for the workers, the employers could hold defense against negligence claims from employees.
This early model served as a way for employers to compensate workers more while reducing overall legal costs. (Source)
The workers' compensation model was used to design a similar means of encouraging compulsory health insurance to be paid for employees around the end of the First World War, however, these measures had less legislative success. Mixed support from labor unions, opposition from employers seeing no immediate offset in operating costs, and lack of physician support meant none of the proposed state bills passed.
Early variants of modern health insurance came about in the form of plans like the original Blue Cross and Blue Shield plans which covered hospital and physician care, respectively. These plans were created in the face of rising costs from medical technology innovations, higher training requirements for clinicians, and increasing demand for medical services.
However, probably the greatest boost to the adoption of health insurance in the US came during the Second World War.
The wartime economy saw many workers go into military service, inducing a labor shortage in the US. Economists were concerned that businesses would keep raising wages to attract workers to an extent that it would trigger spiraling inflation as the country recovered from the Great Depression.
The Stabilization Act of 1942 and the accompanying Executive Order 9250 signed by Franklin Roosevelt created an Office of Economic Stabilization that froze wages.
However, businesses managed to devise a workaround that many attribute to the growth of employer-sponsored health insurance. Instead of higher wages, employers could use better health insurance plans as incentives to attract workers. An IRS rule that ruled employer-sponsored health insurance tax-exempt made it even more affordable for employers and employees to use this incentive system.
This led to an explosion in the number of companies offering health coverage, and eventually it became a dominant mode of private insurance coverage.
How Obamacare is Related
Rising healthcare costs in the early 2000's led to many employers dropping coverage. This was among a host of other concerns about the ubiquity of employer-sponsored coverage.
For one, private health insurance purchased individually was quite expensive, and often, it was difficult to shop and compare plans. If your employer dropped coverage or never provided it, your health coverage was probably more expensive and not as good as what many employer plans could offer.
One way to think of this is to understand that employer-sponsored health coverage is afforded by the employee and the employer contributing funds to the plan. Two parties paying for the same plan can mean a lower average cost for more services on the part of the employee than if the full burden is faced by just the individual.
This poorer private plan quality coupled with higher expenses also meant that for some, changing jobs becomes a higher-cost experience. Why would you take the risk of quitting your job to get a better one if you may be left with worse or no health insurance during the job search?
As part of an attempt to address affordability in healthcare, the Affordable Care Act (ACA or Obamacare) sought to expand access to health insurance coverage, so that at least Americans would not be subject to the full brunt of out-of-pocket health expenses.
One method of tackling this was requiring all employers with more than 50 employees to sponsor health coverage or pay a penalty to the government. This encouraged many large companies to adopt health insurance benefits for their employees.
While expanding Medicaid to help the low-income population, the ACA also gave additional subsidies to middle class Americans to purchase private health insurance from designated government-overseen marketplaces. The point of these marketplaces was to serve as a central place for individuals to shop and compare plans. The marketplace also required health plans to cover specific benefits to be considered a qualified health plan, a status required to be listed on the marketplace.
In the end, the ACA has led to the rate of uninsured Americans to drop, but some problems still persist, especially with regards to employer-sponsored health insurance.
Some Big Trends
For one thing, employer-sponsored health insurance is not immune to ballooning healthcare costs. Higher healthcare costs make these plans more expensive to run, and there's only so much that employers can take on in costs. To pay for these plans, employees start seeing that their health plans require higher monthly premiums to pay.
As some may have noticed, the rising cost of healthcare may be outdoing growth in wages, taking up a greater share of an individual's budget.
From another view, quality controls and cost controls on private health plans have improved their quality, but still, employer-sponsored coverage may be seen as easier to afford or more flexible with coverage it offers. Other considerations are how this affects part-time, gig, and freelance workers.
The employer mandate requiring large companies to give health benefits uses guidelines of 50 "full-time" employees. Policies to accommodate a significant share of the workforce in contract, gig, and part-time labor are necessary to protect them from higher costs and barriers to affordable health care.
Maybe, in fact, the solution could be to move away from a dependence on employer benefits as a way to put a focus on improving individually purchased private insurance, freeing employers from expensive costs, and giving smaller businesses a better chance in competing with large employers for workers.
Alternatively, the presence of employer-sponsored coverage could be used to wield the power of large employers to push for comprehensive reforms and strategies to address overall increases in healthcare costs.