Employer-Paid Health Insurance

She had two babies
One was six months, one was three
In the War of '44
Every telephone ringing
Every heartbeat stinging
When she thought it was God calling her
Oh, would her son grow to know his father?
--Paula Cole

Picking up on our previous thread on the history of US health insurance, World War II pulled 12 million working age men from an economy that was operating in overdrive to make wartime goods. Supply of labor was consequently low while demand was high.

Unfortunately, wartime wage and price controls prevented producers from competing for talent by offering higher pay. Instead, they competed using fringe benefits. Free health insurance became a popular fringe to attract wartime workers.

Subsequently the IRS ruled that the cost of employee health insurance was a tax-deductible expense. In addition, the National Labor Relations Board ruled that health benefits were subject to collective bargaining. Employer-paid health insurance was becoming institutionalized.

Company-paid health benefits further distanced consumers of medical care from purchasers of care. In unhampered markets, individuals who have to pay their own health insurance are incentivized to shop for the most cost-effective plan available. With the onset of employer-paid insurance in the 1940s, an increasing number of Americans had no motivation to comparison shop. They simply took the plans that their employers chose to provide.

Worsening the situation still was the fact that insurers could pick and choose among the most attractive employee pools for which to write policies. Employers with the highest community ratings got the best policies. To balance their risk, insurers raised the cost of insurance for everyone else.

The effects of this practice are clear today. Sixty five percent of workers without health insurance work for companies with 25 or fewer employees.

A final round of problems began to surface in the 1960s. We'll cover those in a future post.