On Employer-Sponsored Health Insurance

Decisions in times of crisis can have long-lasting effects on an entire system, and be hard to change when incentives created by short-term decisions then become deeply entrenched. One perfect example of this phenomena is the health insurance system in the United States. Why does your employer pay for your health insurance? Is this a good thing?

In the first half of the 20th Century, there was no real need for health insurance as there was not much health care to buy. Most surgery would happen in people’s homes, and the concern was more about the loss of wages than the cost of procedure. With technological advances and medical progress, health care became more of a product and, in 1929, a group of Texas hospitals joined forces to offer the first insurance plan — Blue Cross —  to its financially struggling patients to help them pay for their services. A decade later, to regain some financial control from the hospitals, doctors from California created their own plan — Blue Shield. People could then access hospital services through their Blue Cross plan and physicians’ services through Blue Shield. These plans were bought privately and coverage was low — fewer than 10% of Americans had such a plan before 1940. The Blues, as they came to be known, eventually merged in 1982.

In 1942, the US faced a labor shortage, with many workers being shipped overseas or re-purposed at home to the war effort. Businesses needed to compete to attract workers, while preventing unbridled inflation due to wage increases. Congress passed the Stabilization Act of 1942 to address the inflation issue by capping wages and salaries. Unable to increase pay, employers turned to non-wage benefits including health insurance to compete for the short supply of workers. Shortly after, the Internal Revenue Service (IRS) ruled that employer-based health insurance should be exempt from taxation, even though this insurance was a form of income. This was a profoundly consequential step taken by the IRS as it locked the incentive system in place: it was cheaper for employees to get health insurance through a job than any other means, and employers didn’t have to pay higher wages and essentially got a tax cut on wages they did pay. This made employer-sponsored health insurance an immense success. Consequently, the rate of insured people skyrocketed from 9% in 1940 to 68% in 1960.
 Is this idiosyncratic system good financially and in terms of quality of care, or is the US stuck in some disequilibrium due to an historical accident?

The United States combines unique features when it comes to health coverage. It is the only industrialized country that does not have a universal health coverage system for all citizens, and it is also the only industrialized country where a person’s employment can determine whether they have insurance and what insurance they have. There is a consensus that an employer-sponsored health insurance system such as the one we have in the US has some adverse effects:

- “Job lock”. When people are dependent on their employment for their health insurance, the bar to jumping to another job is high, even when the new position might fit their needs better. The fear of lesser options on the market exchange is mainly supported and retiring early could also mean lesser coverage.

– Expensive (for the government). The exclusion from workers’ taxable income of employers’ contributions for health care is the federal government’s single most significant tax expenditure. This exclusion cost about $352 billion in 2022 according to the Congressional Budget Office.

– Regressive. The tax break for the health insurance paid by one’s employer is worth more to people earning more money.

– Confusing. Employer-sponsored health care insurance comes with a choice between several plans. A large-scale study recently showed that nearly a quarter of employees faced with choosing between two plans picked the one that left them worse off financially.

It is also believed that the continued sharp increases in health care costs over time have made premiums more expensive both for employers and employees, and contributed to a large extent to wage stagnation.

Despite the agreement among economists that the tax exclusion for employer plans distorts the health system, it has proven incredibly difficult to change the structure of government subsidies or enact alternative models as it dramatically benefits many workers. In 2021, the Department of Commerce and the Census Bureau reported that of the 91.7% of Americans with health insurance, 54.3% received coverage through their employer (10.2% through direct purchase, 18.4% through Medicare, 18.9% through Medicaid, and 3.5% through the military).

The US could have adopted a different payment and insurance system for health care. And while successful government actions to reform the existing system have been few and far between, many entrepreneurial organizations are trying to innovate within the current incentive structure to deliver value to patients and make the system more accessible and fair. How big the impact of these efforts can be is a question we are watching with great interest.


– Jonathan Friedlander, PhD & Geoffrey W. Smith

First Five
First Five is our curated list of articles, studies, and publications for the month. For our full list of interesting media in health, science, and technology, updated regularly, follow us on Twitter or Instagram.

1/ One paper to rule them all
If you are pressed for time and only have one paper you can read this month, perhaps it should be this study published in Nature by the Chouchani Lab. The findings change the paradigm on the role of lactate in the cell cycle. While it was believed to be a by-product of cell division, it now appeares to be the opposite — a master regulator of it. Even tumor cells with erratic cell cycles are dependent on this mechanism. This impressive piece of research shows once again the ever-expanding understanding of the central importance of metabolism in all aspects of biology.

2/ A universal protection against viruses ... for cells
Through an unbelievably clever process published in Nature , a group of scientists from the Church Lab made some cells resistant to viral infection. By developing cells that automatically swap some amino acids with others, they forced viral proteomes to be mistranslated and unable to replicate.

3/ All neurons all at once everywhere
A team from the University of Cambridge mapped ALL the synapses from ALL the neurons in a larval fruit fly brain. By publishing in Science the connectome in a three-dimensional electron microscopy-based reconstruction, they hope to help understand how information is processed through a complex network of neurons.

4/ A shot to sober up
A publication in Cell Metabolism showed that in mice, an injection of a hormone, FGF21, not only counteracts the loss of consciousness and coordination due to the consumption of alcohol but it accelerates the recovery from the intoxication. FGF21 does so by activating noradrenergic neurons in the brain regions responsible for arousal and alertness.

5/ Machines take on medicine
Microsoft and OpenAI put out a joint paper showing off the capabilities of GPT-4 on medical challenge problems. Without any specific training, the new iteration of the large language model passed medical exams and significantly outperformed its predecessor GPT-3.5. One impressive aspect is its ability to explain some of the medical reasoning behind its answers.

Digitalis Commons
Public-Interest Technologies for Better Health

Digitalis Commons is a non-profit that partners with groups and individuals striving to address complex health problems by building public-interest technology solutions that are frontier-advancing, open-access, and scalable.

The Digital Medicine (DiMe) Society is partnering with the Moffitt Cancer Center to co-host CancerX – a new public-private partnership effort developed by the White House to rapidly accelerate the pace of cancer innovation in the U.S. – alongside the Office for the National Coordinator for Health Information Technology (ONC) and Office of the Assistant Secretary for Health (OASH).

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