HCS/455 Week 1: Origins of U.S. Health Care Policy, sample paper

Why an American Worker's Health Insurance Comes From the Employer: Hospital Prepayment Plans, Wartime Wage Controls and the Tax Exclusion That Locked the System In

[Student Name]

University of Phoenix

HCS/455: Health Care Policy: The Past and the Future

Week 1 Assignment

[Instructor Name]

[Date]

The worker described in the introduction is a composite written for a model paper.

A composite 45-year-old machinist in Ohio has health insurance through his employer, as do about half of all Americans. When he changed jobs last year, he had to choose a new plan and a new network, and his family's doctor was no longer covered. When he thought about starting his own business, the cost of buying insurance on his own nearly stopped him. None of this was planned; the link between his job and his health insurance is the product of choices made for other reasons during the Depression and a world war. This paper traces how that link formed.

Before Insurance

In the early twentieth century, most Americans paid for medical care out of pocket. Care was relatively cheap and could do less. Proposals for compulsory national health insurance, backed by reformers in the 1910s, were defeated, opposed by physicians, commercial insurers and some labor leaders who preferred to win benefits through bargaining (Starr, 1982). By the 1920s, rising hospital costs, as hospitals became centers of surgery and scientific medicine, were making illness a financial risk for middle-class families.

Prepayment Plans and Employee Groups

The first step toward employer coverage came from hospitals. In 1929, Baylor University Hospital in Dallas offered local schoolteachers a plan: for a small monthly payment, each teacher was entitled to a set number of days of hospital care. The idea spread during the Depression, when hospitals struggled to collect from patients. Plans under the Blue Cross name, sponsored by hospitals, offered prepaid hospital care, and similar Blue Shield plans later covered physician services (Starr, 1982).

These plans were sold to groups, often groups of employees, for a practical reason. Insuring a group formed for a purpose other than buying insurance reduces adverse selection, the tendency of people who expect to need care to buy coverage while healthy people do not. Employers were a convenient way to gather people into such groups and collect premiums (Thomasson, 2003).

World War II and Wage Controls

The decisive expansion came during World War II. To control inflation, the federal government limited wage increases through the Stabilization Act of 1942 and the National War Labor Board. With workers scarce and wages frozen, employers needed another way to attract them. In 1943, the War Labor Board ruled that contributions to insurance and pension plans did not count as wages under the controls. Health benefits became a legal way to compete for workers (Blumenthal, 2006).

After the war, labor unions made health benefits a subject of collective bargaining, and a 1949 decision by the National Labor Relations Board, upheld by the courts, confirmed that employers must bargain over them. Employer coverage grew rapidly.

The Tax Exclusion

The final piece was tax policy. Employer payments for health insurance had not been treated as taxable income for employees, but the rules were uncertain. The Internal Revenue Code of 1954 made the exclusion explicit: employer contributions to employee health plans were excluded from employees' taxable income. Thomasson (2003) found that this tax change increased the purchase of group health insurance and the generosity of coverage.

The exclusion's effect is large. Because a dollar of health benefits is not taxed while a dollar of wages is, a worker in a combined 30% tax bracket receives about $1.43 of wages' worth of value for each dollar the employer spends on health insurance instead of pay. Coverage through a job became much cheaper than coverage bought individually with after-tax dollars.

What the Path Produced

By the 1960s, most working Americans and their families had employer coverage. But the system left out people without stable employment: older adults who had retired, poor people and those who worked for small employers or in jobs without benefits. Medicare and Medicaid, created in 1965, filled the largest gaps for older and low-income Americans, building public programs around the employer-based core rather than replacing it (Starr, 1982).

The path also created lasting consequences. Blumenthal (2006) describes several. Coverage is tied to jobs, so losing or changing a job can mean losing or changing insurance, a problem sometimes called job lock. Workers see only part of the cost of their coverage, since employers pay most premiums, which may encourage more generous plans and higher spending. The tax exclusion is one of the largest federal tax expenditures, and it benefits higher-income workers most, since their tax rates are higher. And small employers, who cannot spread risk across large groups, find coverage more expensive, leaving many of their workers uninsured.

Attempts to Change Course

Several presidents tried to change the path. President Truman proposed national health insurance in the late 1940s, and the American Medical Association led a costly campaign that defeated it. President Nixon proposed in the early 1970s to require employers to offer coverage, which would have built on the employer system, but the plan failed amid disagreement with Democrats who wanted a broader public program (Starr, 1982). President Clinton's 1993 plan, which also relied on an employer mandate, collapsed the following year. Each failure left the employer system in place and more deeply rooted.

Why History Matters for Policy

Understanding these origins explains why U.S. health reform has so often built around the employer system rather than replacing it. The Affordable Care Act of 2010, for example, kept employer coverage at its center while adding marketplaces and expanding Medicaid for people outside it. Millions of Americans are satisfied with their employer coverage, employers have built benefits into how they compete for workers and the tax exclusion is politically popular. Each step in the history made the next one more likely and the alternatives harder to adopt, a pattern political scientists call path dependence.

Conclusion

Employer-based health insurance was not designed as a national policy. It grew from hospital prepayment plans sold to employee groups in the Depression, from wartime wage controls that made benefits a way to compete for workers and from a tax exclusion that made coverage through a job cheaper than any alternative. That history explains why the machinist's insurance depends on his job, and why changing that link has proven so difficult.

References

Blumenthal, D. (2006). Employer-sponsored health insurance in the United States: Origins and implications. New England Journal of Medicine, 355(1), 82-88. https://doi.org/10.1056/NEJMhpr060703

Starr, P. (1982). The social transformation of American medicine. Basic Books.

Thomasson, M. A. (2003). The importance of group coverage: How tax policy shaped U.S. health insurance. American Economic Review, 93(4), 1373-1384. https://doi.org/10.1257/000282803769206359