Employment-Based Health Insurance

The Beginning of Employment-Based Health Insurance

Have you ever wondered why the United States has an insurance system that involves employers? Most other countries do not have employers involved in individual health insurance to the extent that the United States does. Most countries keep employers completely out of insurance and instead finance the health care system with taxes and/or individual premiums.

The simplified reason that the United States has employment based health insurance is a result of the wage and price controls on American employers during World War II. Since employers could not offer higher wages to entice the best employees, employers offered health benefits. (Source) An additional incentive for employers is that employer payments for health insurance are exempt from the employee’s taxable income. Therefore it is ‘cheaper’ for businesses to offer health insurance to employees (not taxed) than to increase wages (taxed).

Historical Trends in Employment-Based Health Insurance

Prior to the Affordable Care Act, it was not the law that employers had to offer health insurance. The peak of employer-based health insurance was in 1980 and has been declining since. According to the Employee Benefit Research Institute, between 1999 and 2004 the percent of workers with employer-based health insurance decreased 3.5 percent. However, with the Affordable Care Act, most employed individuals will have the opportunity for employer-based health insurance. In 2005, the Commonwealth Fund found that 35.9 million employed workers do not have coverage from their own employers.

The Affordable Care Act (ACA) and Employment-Based Health Insurance

The Congressional Budget Office (CBO) projects that the ACA will reduce employment-based health insurance. This is different than what I expected given the financial incentives businesses will have under the ACA to offer insurance. The CBO predicts that 3 million fewer people will have employer based coverage in 2016 through 2019. The CBO based the decline on the increased number of people eligible for Medicaid, assuming that a state expands Medicaid. It is difficult to predict how businesses will act under the ACA. Some analysts believe that businesses will cut back hours (and not offer health insurance to part time employees therefore shifting those employees to Medicaid or the marketplace) or opt to pay a penalty because it is cheaper than offering health insurance. An Urban Institute study shows no drop in employment-based coverage.  

Employment-Based Health Insurance and Health Equity

An insurance system based solely on employers offering health insurance can not be equitable and widens health disparities for three reasons.

1) People unemployed, working part-time or in the lowest paying jobs do not receive employer based health insurance. This is the same group of people that has little if any disposable income to purchase health insurance. Thus it is a double-whammy - no job AND no health insurance.

2) Individuals who are low income (or no income) are more likely to have chronic diseases, acute illnesses, and have poor overall health.

3) An extreme illness can decrease a person’s ability to seek and retain employment and thus makes it difficult to have long term health insurance.

In addition to the three reasons above, there are entire populations that cannot work such as the elderly, children, and the people with disabilities.

Other Health Insurance Options

In an attempt to alleviate the harsh reality for many that no job = no health insurance, the federal government helps out in various ways. One of the biggest unemployed populations are retirees.  Individuals 65 and older receive Medicare. Children are another group that obviously cannot seek employment. Children are either covered by a parent’s employment-based health insurance or through CHIP, the federal program for uninsured children. In many states the Medicaid expansion will help more low income people receive care. Tax credits and subsidies are now available to help people with incomes between 100% and 400% of the federal poverty level purchase health insurance on the exchanges.

More options for families that do not have access to employment-based health insurance is not the magic solution to decrease health disparities. Health insurance alone does not create good health. The reality is that access to affordable and quality health insurance is only one factor in creating good health. However, the Affordable Care Act is a step in the right direction. Since employment-based health insurance is here to stay in the United States, all employers should consider offering health insurance to all employees at affordable prices. Health insurance can help keep the employees health and boost moral.