A system that developed almost by accident during wartime has taken firm hold in the United States. But at what cost?
January 2023
How did we get here?
“Unless you grew up in this system, it doesn’t make a lot of sense. Health insurance is important and impacts people’s ability to access the care that they need for their specific family and health situations. Why should something so personal and important be tied to where you happen to work?”
The United States is unique among wealthy nations in having a large portion of residents covered by health insurance connected with employment. In fact, more people in the U.S. get their health insurance through employer-sponsored health insurance (ESHI) than through any other means: more than 70 percent of workers, 53 percent of children, and 36 percent of nonworking adults, according to a recent Commonwealth Fund report.
A century ago the U.S. health care system, if you could call it that, looked very different. Not many people had health insurance, or wanted it. But as medical care improved, health insurance became more appealing.
During World War II, as many workers went off to war, companies began raising wages to attract workers. This led to concerns about inflation, and the government capped wage growth. With wages frozen, companies turned to offering health insurance as an enticement to workers.
As European countries began to rebuild after the war, many chose to institute health care systems that covered everyone and relied on government involvement in various ways, from public financing to regulated private insurance to government-provided health care. There was a strong sense of banding together and pooling resources for the common good.
In contrast, the U.S. didn’t experience the devastation that World War II brought to Europe, and in the postwar period American businesses and the economy were booming. The American ideals of capitalism and individualism were powerful cultural forces.
Offering health insurance in connection with employment, which began as a strategy to attract workers during wartime, had found fertile ground in the U.S. It took root further when employer contributions to health insurance were made exempt from federal taxes. When Congress, at the urging of President Eisenhower, made this tax-exempt status permanent, the new practice had fully taken hold.
During the same time period, there were also efforts to create a national public health insurance system in the U.S. by Presidents Roosevelt, Truman, and Kennedy. These efforts were fought by organizations including the U.S. Chamber of Commerce, the American Medical Association, and the American Hospital Association for various reasons.
We’re still in this tug of war today.
What are the effects of linking health care and employment?
The U.S. Chamber of Commerce released a survey in December 2022 and highlighted results that indicate that employees have a strong allegiance to receiving health insurance through an employer. The survey was commissioned by the Protecting American’s Coverage Together (PACT) campaign, a coalition “focused on strengthening the ESI system and protecting the coverage and benefits that American families depend on for their health.”
But the Chamber of Commerce report has some serious flaws. A report from the Commonwealth Fund in January 2022 paints a different picture: “The key issue for many workers and their families is the affordability of their premium contributions and the cost protections provided by their employer health plan, including the size of their deductibles.”
This report notes that “spending per person in employer plans grew by nearly 22 percent over the period 2015 to 2019, outpacing both inflation and economic growth,” citing data from the Health Care Cost Institute.
As health care prices continue to rise at a faster rate than incomes, health insurance costs take up more of household budgets. “To make matters worse, workers are making wage concessions for company benefits that often cover less of their health care costs,” according to the report.
ESHI also increases the “fragmentation of health care finance inherent in a system administered by thousands of separate employers,” according to an article by the Niskanen Center. And the tax-exempt status of employer-sponsored health benefits drains the public coffers.
“The single largest tax expenditure in the United States is for employer-based health insurance. It’s even more than the mortgage interest deduction. In 2017, this exclusion cost the federal government about $260 billion in lost income and payroll taxes.”
For workers
Health insurance affects 40 percent of the employment decisions Americans make, according to the Urban Institute’s Health Reform Monitoring Survey.
Our current system, with its emphasis on employer-sponsored health insurance, still leaves millions uninsured, but even people with insurance may not be able to afford care due to the cost of premiums, deductibles, and cost-sharing. Twenty-nine percent of people covered by ESHI in 2022 were uninsured according to analysis by The Commonwealth Fund.
“A 2019 survey conducted by the Kaiser Family Foundation and the Los Angeles Timesfound that 33 percent of people with ESI ‘put off or postponed’ needed care due to cost, and 18 percent did not fill prescriptions, rationed doses, or skipped doses of medicine. More than one-quarter (27 percent) of respondents also reported problems with paying medical bills, and those who reported problems with the affordability of care or coverage had taken measures such as cutting back on other spending, taking on more credit card debt, using up savings, borrowing from friends or family, or taking out loans.”
Another major strain associated with ESHI is called “job lock,” where workers stay in jobs to keep their health insurance instead of pursuing other opportunities or starting businesses.
“The phenomenon known as ‘job lock’ suppresses innovation and economic growth, but portable benefits—benefits tied to an individual, not to an employer—could free people to work the best jobs for themselves and for the economy as a whole.”
Then there are the stories of people like Kurt Eichenwald, a reporter whose career path has in large part been dictated by health insurance because he has severe epilepsy. When the Affordable Care Act was threatened in 2018, he wrote that he and his family may have to move thousands of miles away from loved ones to another country, to be able to have health care. “Health insurance rules my life. It decides my jobs, my aspirations, my retirement plans and, potentially, my citizenship.”
It helps to think about employer contributions to health insurance as part of an overall compensation package, which is understandably valued by many workers. But is this the best way to attract, retain, and fairly compensate workers? The funds that employers now put toward health insurance for workers are in effect lost wages. And as both workers and employers struggle to keep up with rapidly rising health care and insurance costs, the burden increasingly falls on workers through increased premiums, cost-sharing, and high-deductible plans.
For employers
As the cost of health care and health insurance keep rising, outpacing inflation and wage growth, employers may not even find it possible to keep offering health insurance to their employees.
A 2021 poll by the Kaiser Family Foundation and Purchaser Business Group on Health found that about only about four percent of business leaders disagreed that “employer costs for health benefits are excessive.” Almost 90 percent said that they believed the costs of providing health benefits would become “unsustainable” in the next five to 10 years. In addition, 85 percent thought a greater government role would be necessary.
And in the 2022 McKinsey Healthcare Stakeholder survey, more than 70 percent of employers saw health insurance premium increases of more than four percent as unsustainable.
The McKinsey report projects that larger impacts of inflation and rising health care costs will be felt most acutely in the 2024–2026 bidding cycles for health insurance, leaving employers with the choice to either absorb the increased costs or “more likely,” to reduce coverage or pass a larger portion of costs on to employees.
“Employers are worried about the long-term sustainability of ESI, and there is reason to believe that ESI cost growth is approaching a tipping point. Without policies to keep in check health care prices for private insurance, high ESI premiums and cost sharing; affordability problems; and income-based inequities among workers will continue to worsen.”
Equity and justice
White supremacy and racial injustice are woven into the development of the U.S. health care system, and its reliance on employer-sponsored health insurance. As noted in an article in the American Bar Association’s Human Rights Magazine, “while other nations focused on access and equality, our deep-seated attachment to America’s racial hierarchy tied us to a health care system encompassing racial disparities by design.”
“The fight for universal health coverage is a commonly overlooked pursuit in the civil rights movement. Our employer-sponsored health coverage system was an accident of its era that dovetailed with the white supremacy found in other institutions and should be relegated to the history books. As one of many contributors to racial disparities in health coverage, it is long past its expiration date.”
ESHI also leads to greater financial benefits for higher income earners than workers at the lower end of the scale, increasing injustice in a system that’s rife with inequity. The McKinsey report mentioned above notes “…if cost pressures are unmanaged, the most vulnerable employees could end up spending 70 to 75 percent of their discretionary income on medical expenses.”
There is a better way
Presidents Roosevelt, Truman, and Kennedy all tried to institute some form of national health insurance, social insurance, or universal health care. Their efforts led to the creation of Social Security and Medicare but fell far short of a national health care system.
In 2007, a bill was proposed by Democratic Senator Ron Wyden and Republican Senator Richard Bennett, the Healthy Americans Act, that would have shifted people with ESHI to a program similar to the Federal Employees Health Benefits Program. The bill had bipartisan support but went nowhere.
A publicly funded, simplified health care system, such as Improved Medicare for All, could cover everyone, save money, and reduce inequities, and greatly improve or even eliminate many of the problems associated with ESHI. The obstacles to getting there aren’t medical or economic—we have plenty of evidence that such a system could improve care and be financially feasible. The obstacles are political and cultural.
“So many people are very anxious about health care. And whenever the issue comes up politically, that anxiety makes people very reluctant to endorse big changes. [But]… this pandemic is … bringing out such serious problems with the way health care and public health work in this country. … Maybe something bigger is possible. We could make different choices now.”
—Paul Starr, professor of sociology and public affairs at Princeton
Additional Sources:
The Everlasting Problem, NPR’s Throughline, October 2020
What’s Wrong with Employer-Sponsored Health Insurance, Niskanen Center, November 2018
Kurt Eichenwald on Navigating the Healthcare System, PBS, 2018