Employer-sponsored insurance is a cornerstone of the U.S. healthcare system, in some ways as vital as the drugs, devices, and medical services that the insurance covers. Employer-sponsored insurance has been described as the equivalent of “private social security” and remains the most prominent form of health insurance in the United States, at 62.9% of the under-65 population, according the Kaiser Family Foundation.
America’s heavy reliance on employer-sponsored insurance is, by many accounts, an accident of history that evolved in an unplanned way and, as some see it, without the benefit of intelligent design. It now faces challenges that are unparalleled in its roughly 70-year history – including apparently unsustainable cost increases – and the system’s ability to cope with these challenges over the long term is far from certain.
Two historic events prepared the way for the emergence of employer-sponsored health insurance. The first was the decision by President Franklin D. Roosevelt after his election in 1932 not to pursue universal health care coverage. The second was a series of federal rules enacted in the 1940s and 1950s on how employer-sponsored insurance should be treated with respect to federal taxes and labor negotiations.
Employer-sponsored insurance arose mainly after 1942, when the federal government, in order to control inflation in the overheated wartime economy, limited employers’ freedom to raise wages and thus to compete on the basis of pay for scarce workers. The government did, however, allow employers to expand benefits for workers, such as health insurance, which resulted in a rapid increase in employer-sponsored insurance. Several additional federal rulings followed that made employer-sponsored insurance increasingly attractive for workers and their unions. In 1945, the government said that employers could not unilaterally change benefits programs until the expiration of a labor contract, and in 1949, it ruled that benefits should be considered part of the wage package of employees so that unions could negotiate health insurance as part of contract talks.
Finally, in 1954, the Internal Revenue Service decided that the contributions that employers made to the purchase of health insurance for their employees were not taxable as income to workers. By 2004, the annual tax benefit for employees had grown to $188.5 billion, or about $1,180 for each American with employer-sponsored insurance.
Today, employer-sponsored insurance is the leading source of health insurance, covering about 158 million non-elderly people in America, according to the Kaiser Family Foundation. However, the rate of this coverage has fallen every year since 2000, when 68.3% had employer-sponsored health insurance. Studies from the Economic Policy Institute show that by 2007, the figure had fallen 5.4 percentage points, meaning that over 3 million fewer people under the age of 65 had employment-based insurance in 2007 than in 2000. Because of these large declines in employer-provided health insurance, workers and their families have become uninsured at alarming rates.
Research conducted by the Economic Policy Institute in October 2008 show that while there was a small gain in overall coverage for workers from 2006 to 2007, there were over 4 million more uninsured workers in 2007 than in 2000. Uninsured workers are disproportionately young, non-white, less educated, and low wage, however, workers across the socio-economic spectrum experienced losses in coverage over the 2000-2007 period. Even the most highly educated and highest wage workers had lower rates of insurance coverage in 2007 than in 2000. As with workers, the downward trend in employer-sponsored coverage for children (through their parents’ employers) continued into 2007: 3.4 million fewer children had employment-based coverage in 2007 than in 2000, cutting across all race and income groups.
According to a study conducted in 2009 by Kaiser Family Foundation and the Health Research and Education Trust, the average annual premiums in 2009 for employer-sponsored health insurance are $4,824 for single coverage and $13,375 for family coverage, up over 7% and 10%, respectively, from the 2007 average premiums. Since 1999, average premiums for family coverage have increased 131%.
The Obama administration has recently signaled to Congress that the president could support taxing some employee health benefits, as several influential lawmakers and many economists favor, to help pay for overhauling the health care system. The proposal could prove politically problematic, however, since it is similar to one he denounced during the presidential campaign as “the largest middle-class tax increase in history.” In television advertisements last fall, Mr. Obama criticized his Republican rival for the presidency for proposing to tax all employer-provided health benefits.
Reports from the Congressional Budget Office show that including health benefits in taxable income could mean $246 billion in additional revenue for a single year. The latest government figures, for 2007, show that 70 percent of the 253 million people with health insurance received at least some of their coverage through employers. Key economic players in the Obama administration such as Peter Orszag and Jason Furman cite evidence that tax-free benefits encourage what Mr. McCain called “gold-plated” policies, resulting in inefficient and costly demands for health care and pressure on employers to hold down workers’ pay as insurance expenses rise. And, they say, the policy discriminates against those – many of whom are low-income workers – who do not have employer-provided coverage.
Those who want to tax benefits in whole or in part make two main arguments. They say the tax exclusion is a generous subsidy that insulates employees from the true costs of health care, leading them to demand more of it and driving up overall costs. Critics also say the policy is unfair because it favors higher-income people.