Root Causes of Health Insurance Problems, an Odd Historical Sequence

Have you ever wondered why it is so common for private health insurance to be tied to an employer? Most of us grew up in such a system and are used to it. But, when you think about it, why is there always a special link between the two? Why do so many of us purchase health insurance from our employer as if they are our parents? We don’t buy our food from our employer, or our shoes. It actually turns out that the employer-sponsored health insurance model (even though still technically “private”) is one of the major causes of a lot of our health care problems and rising costs. Below I will describe the historical root causes that led to the mess we’ve been in for the last half century (you will see a trend of: state causes problem, then state tries to solve that problem with more state, and this creates still more problems, just as discussed here more generally):

1. We enter World War II, so government spending and printing, industrial production, and inflation skyrocket.

2. To attempt to curb government-induced inflation, the government foolishly imposed price and wage controls across the economy through the Office of Price Administration. The wage controls outlawed employers from paying their laborers MORE money. Employers actually wanted to pay their workers more, but the government wouldn’t allow this, which, by the way, hurts the worker. (Interesting side note for all you who like the minimum wage law: if you give government enough power to artificially increase a wage, it also has enough power to artificially decrease a wage).

3. Because many people became soldiers for the war, the supply of workers at home decreased. Also, the demand for war effort goods increased. This would usually cause wages to increase (basic supply and demand here), but the wage controls were in place to stop this. So, many employers were having a hard time attracting workers because they weren’t able to offer an attractive higher wage to competitively hire the workers they wanted. So, employers lobbied and got the government (War Labor Board) to agree to allow them to offer fringe benefits, especially health insurance, as additional effective compensation to workers and it wouldn’t technically count as “wages” that are subject to the federal wage cap. This was the employers’ way of still attracting the workers they wanted without violating the wage cap rule. And, they did exactly that, and such fringe benefits grew rapidly in place of normal wages. This loophole in itself is not a bad thing. I’m glad that employers were able compensate workers more during this temporary wartime wage cap, even if it wasn’t in cash form. But, here’s what happened next…

4. Then the IRS got involved. Employers got the IRS to make a rule that health insurance benefits would not count as “taxable compensation” (as is normal compensation). Remember that both employer and employee pay a shared tax on the workers income. So employers then had a tax preference incentive to compensate workers with these health insurance benefits instead of cash “wages”, and the practice grew rapidly. And, a constituency built up around this regulation to maintain it.

5. When the IRS tried to take away this tax preference for fringe benefits in the 50’s after the war was long over, employers successfully lobbied Congress to permanently codify it into law.

6. And, ever since, there has been a tax preference for employer sponsored health insurance. Unfortunately, the same tax preference does NOT exist for everyone else in the individual market who wishes to individually buy health insurance that’s not attached to an employer.

7. Therefore, ever since WWII, there has been a market distortion created by government that favors employer-sponsored health insurance over individualized health insurance, making it cheaper (in the short term) to get insurance through an employer. This is why people are incentivized to get insurance through their employer (where someone else is controlling a huge chunk of your compensation and choosing your plan for you) and penalized for getting insurance on the individual market.

It would be better if people simply received the cash equivalent of the benefit instead of the “benefit” itself so that they have control over that money. This is what would happen in a free market without government intervention. A fringe benefit is practically similar to a tax levied by an employer. Instead of controlling a portion of your compensation, someone else controls it and buys something of poor quality for you as you have little consumer choice, and usually there’s only one or a couple plans that are the same for everyone in the company. Because the consumer is not in charge of this money, the usual efficient market mechanisms that rely on consumer power and choice and market accountability break down, and this accounts for much of the reason why both the health care insurance and provider markets are so inefficient, poor in quality, expensive, and unresponsive to the patients and consumers. Of course, there are many other reasons for these problems, also caused by government, but I’ll write on those later.

8. And, recently the government passed Obama’s Affordable Care Act to try to solve the earlier problems that government created (I skipped some other bad health care laws, but I’ll eventually write about those as well). Sadly, the ACA only reinforces employer-sponsored health insurance by forcing large employers to provide it. I don’t mean to suggest that this is the only bad part of the law, as the ACA is ridden with rights violations and rules that will continue to cause even more practical problems, but I’m just focusing on employer-sponsored health insurance right now.

This post is long enough for now, so I will go in detail about why employer-sponsored health insurance is so damaging to the health care system at a later date.
Many people think that, before Obamacare, we had a free market system in health care. WRONG. Obamacare is just the most recent bad law out of many. Government has been causing problems and increasing costs for nearly a century. A common trend in history is that the government does something, and this causes problems, then it tries to fix those problems with more government, and that just creates more problems, and the spiral continues to this very day. The only solution is to attack the root cause of the problem and repeal every single law and entitlement about health care that has ever been passed over our whole history.

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