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The History of Employer-Based Health Insurance

The U.S. employer-based health insurance system ties medical coverage for the majority of Americans directly to their place of employment. In this system of work-based risk pools, healthy members subsidize the health costs of participants more likely to become ill, while employers appear to pay the bulk of expenses. The benevolence of American business isn't responsible for creating this system. Rather, advances in medicine, the Great Depression, World War II, the rise of unions and federal tax and labor laws shaped the emergence of employer-based health coverage.

  1. Advances in Medicine

    • At the beginning of the 20th century cleaner hospitals, advances in surgical procedures and the use of antiseptics boosted the profile of American hospitals. Even as the practice of medicine improved, hospitals found it difficult to fill beds. To solve this problem, Baylor University Hospital created the first business deal linking fixed payments for health coverage to workers. In exchange for 50 cents each month, Baylor began covering inpatient services for a group of 1,300 Dallas school teachers. That idea led to creation of the Blue Cross and Blue Shield Association, the oldest and largest family of health benefits companies in the United States.

    Great Depression

    • By the 1930s, policymakers began discussions on creating a universal health care system to address the increasing cost of medical care. But the aftermath of the Great Depression changed their priorities. Instead of pressing for a health care plan that would cover all Americans, President Franklin D. Roosevelt supported legislation to provide unemployment benefits and financial support for retirees. His efforts resulted in passage of the Social Security Act of 1935.

    World War II

    • To control inflation during World War II, the U.S. National Labor Relations Board (NLRB) limited the wages that employers could offer workers. This threatened the ability of American businesses to attract and retain employees from a scarce labor pool. When NLRB ruled that the price controls wouldn't apply to fringe benefits, including health insurance, companies began offering health care packages to lure workers.

    Union Influence

    • In the 1930s and 1940s, collective bargaining led to continued expansion of employer-based coverage. Unions pushed firms to share profits with workers in the form of high wages and generous health insurance benefits. In 1945, NLRB ruled that employers couldn't change benefits programs until a labor contract expired. Four years later--in 1949, the agency ruled health benefits part of the employee wage package subject to contract negotiation between workers and their employers.

    Tax Laws

    • In employer-sponsored health insurance, the employer pays about 80 percent of worker health premiums. When the Internal Revenue Service, in 1954, ruled the health insurance premiums employers pay tax-deductible business expenses, employer-based health insurance became a fixture in American society. By the mid-1960s, about three-quarters of Americans were covered by an employer-sponsored health insurance program.

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