The History of Employer Sponsored Health Insurance

The United States has an unusual degree of reliance upon what some have called "four party" health care. When a patient receives care from a doctor, the parties involved in the financial transaction include (1) the doctor, (2) the private insurance company that is paying the doctor, (3) the patient, and (4) the patient's employer. The employer has often acted as a mediator between insurance and employee.

Wage and Price Controls

• A foreign war can leave a labor shortage at home.

  The history by which this four-party system became the norm is itself part of the jigsaw puzzle faced by policy makers in the 21st century who struggle with questions of reform in the field of health care.

  This practice came into existence during World War ll. The government imposed sweeping wage and price controls. Nonetheless, there was soon a shortage of labor for domestic/private jobs, as so many young men had signed up as soldiers and sailors. It was natural for employers to look for a way in which they could compete with one another for scarce labor.

  The Stabilization Act of 1942 explicitly exempted fringe benefits from caps on salaries and wages, so the employers' competition for laborers channeled itself in that direction, and health insurance became a common feature of employment contracts.

National Labor Relations Act

• The law puts the parties at the table and orders them to talk.

  After the war, the trend toward employer sponsorship was preserved by another development. The National Labor Relations Act of 1935 (NLRA) had required employers to negotiate with labor unions on "wages, hours, and conditions of employment."

  The question arose, whether employers were required to negotiate (in the language of the law, required to "meet at reasonable times and confer in good faith") about fringe benefits, including health insurance.

The NLRB and the Courts

• The NLRB oversees the practice of collective bargaining.

  The NLRA had also created an administrative agency, the National Labor Relations Board (NLRB), to oversee the statutory system. In 1949, the NLRB held that health insurance is part of "wages" in the sense of the law, and thus employers since have had to negotiate on the subject, a decision upheld by the federal courts on appeal.

Favorable Tax Treatment

• Perhaps the most important single factor in the broad acceptance of employer sanctioned health insurance as the norm in the United States has been its favorable tax treatment. Early on, by administrative rulings, and since 1954 by explicit statutory provision, an employer's contributions to employee health plans have been exempt from employee taxable income. So, whether there is a union involved or not, whether there are wage controls in place or not, an employer can always get a better bang for its buck in terms of hiring power by channeling some of the compensation package into health insurance.

COBRA Plans

• Much later, the U.S. Congress passed and President Ronald Reagan signed the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA). Title X of this Act confirmed the four-party payment system as the norm, because it required many employers to allow an employee and that employee's immediate family members to retain coverage for up to 18 months after voluntary or most involuntary departures from employment.