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Health Policy
May 9, 2019

Does Employment-Based Insurance Make the US Medical Care System Unfair and Inefficient?

Author Affiliations
  • 1Stanford Institute for Economic Policy Research, Stanford University, Stanford, California
JAMA. 2019;321(21):2069-2070. doi:10.1001/jama.2019.4812

In the United States, the interests of high-income individuals dominate decisions about what medical care is offered and how it is financed. The result is a less efficient and less equitable medical care system than in other high-income countries. Employment-based insurance plays a key role in determining the production and financing of US medical care.

Employment-based insurance started during World War II as a way for employers to attract needed employees without violating wartime wage controls. After World War II, employment-based insurance spread quickly because group insurance is less costly to administer than individual insurance, and it is less vulnerable to adverse selection of unhealthy patients. Employment-based insurance is particularly popular with high-income employees because the contribution made by employers to the premium is exempt from the employees’ taxable income. This exemption cost the US Treasury an estimated $300 billion in 2018.1

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    3 Comments for this article
    Very interesting article
    Nathan Watson, DO |
    A very interesting and well written article by Dr. Fuchs that dives deep into the origins of the story of American Healthcare and offers a somewhat even handed approach on the topic. Like all stories, we see a beginning, a middle, and an end:

    The Beginning: "Employment-based insurance started during World War II as a way for employers to attract needed employees without violating wartime wage controls...After World War II, employment-based insurance spread quickly because group insurance is less costly to administer than individual insurance, and it is less vulnerable to adverse selection of unhealthy patients."

    origins of the problem we see today with healthcare in the United States, predictably, began with government-imposed controls on private business that, at the time, were well intended and aimed at protecting preconceived notions on fair wages for workers, but, as usually is the case, over time resulted in numerous unintended consequences. In this case Dr. Fuchs clearly outlines the cause and effect connection with federal government-imposed wage controls imposed on private business resulting in the birth and evolution of employment-based health insurance. And predictably, we see that this in turn resulted in the sickest patients being the ones who suffered under such a system: "...and it is less vulnerable to adverse selection of unhealthy patients." He also clearly outlines that various modes of attempting to finance healthcare and other commodities via taxation is, as always, ultimately trickled down to the end consumer.

    The Middle (where we lie today): "The present system, which is a mix of employment-based insurance, other private insurance, numerous government programs, including Medicaid and Medicare, each with its own eligibility rules and payment schemes, and out-of-pocket payments, is extremely costly to administer." Few would call our present system anything less than madness. As Dr. Fuchs points out, market inefficiencies abound while costs have skyrocketed.

    The End (and a brighter future?): "Changing the product mix (as illustrated in the comparison with product availability at Whole Foods vs Walmart) would be an even more complex proposition, and would require removal of government regulation and professional strictures that prevent emergence of a lower-cost alternative." Dr. Fuchs presents a solution that I hope many more will come to embrace: 1) first recognizing the harms both acute and chronic from government interference in private business and its unintended consequences both on business and individual Americans and 2) the obvious prescription of repealing the same government regulations and professional strictures which created the present state of affairs in American Healthcare and which continue to inhibit organic, free market competition in the market place. In other words, repealing government regulations and interference to allow organic, free market solutions and liberty to birth lower cost, competitive solutions where everyone involved wins.
    Health Spending Analysis, revisited
    Paul Nelson, M.D., M.S. | Family Health Care, P.C.
    Amidst the dimensions and correlations that characterize our nation's health spending, two phenomena may augment the insights of Professor Fuchs. First, there is Parkinson's Law, described by C. Northcote Parkinson in 1957 in a smallish book that represented his findings as an accountant during WWII for the British admiralty. Through several transformations, the law is most commonly cited as: "Work expands to use the resources available." In short, he noted that the number of ships commanded by the British Admiralty during the two World Wars was nearly the same, with no real change in technology: big steel ships with a powerful steam engine. The number of administrative persons employed by the Admiralty after WWI was 372. After WWII, it was 1139. Remember also, that health spending represented 5% of our nation's economy in 1960. In 2018, it was 17.9%. By comparison, the other 34 OECD nations have health spending that clusters around 12% (or less).

    Second, Victor Dzau, M.D. along with multiple associates authored a Special Communication published in the March 21, 2017 edition of JAMA. It summarized a substantial effort by the National Academy of Medicine to assess the current status of our nation's healthcare. Figure 5 of that article represents an analysis of cumulative health spending by various groupings of citizens from lowest to highest. It represents the traditional pattern of a Power Law Distribution Curve. The basics are as follows: 50% of our citizens consume 2.8% of our nation's health spending and 5% of our citizens use 50.4% of our nation's health spending. The data originated from the Medical Expenditure Panel Survey performed in 2014 by the Agency for Healthcare Research and Quality.

    In the midst of uncertainty within the world's market-place arenas for its resources, knowledge and human dignity, our world-wide population has grown by @5 billion in the last 50 years. Another 2 billion will be added within the next 30 years. The near horizon for this scenario is our nation's current measles epidemic. The most significant factor for immunization practices requires a trustworthy relationship between a primary physician and each of their citizen-patients.

    It is likely that the future of our nation's healthcare industry is now within the aiming scope of our nation's political turmoil. To build out the future of our nation's healthcare, I suggest that no strategy for healthcare reform is currently more important than a "shoot the moon" strategy to assure that every citizen has access to equitably available, enhanced primary healthcare, community by community.

    Eleanor Roosevelt said it best: "It's better for everybody when it gets better for everybody."


    Dzau VJ, McClellan MB, McGinnis JM, et al. Vital Directions for Health and Health Care. Priorities From a National Academy of Medicine Initiative. JAMA. 2017;317(14):1461-1470. doi:10.1001/jama.2017.1964
    A Novel Perspective
    James Lee, MD, MPH | Thomas Jefferson University Hospital
    I agree that employment-based insurance came about from a very specific historical circumstance and has simply stuck, with not so great consequences. It's what we got.

    The most interesting point Dr. Fuchs makes, for me, is how viewing/improving our healthcare system from the perspective of those with employment-based insurance (which is a large number of people -- 60% of the total insured population) may lead providers and payers to value certain things more than others and lead to a system that further perpetuates disparities in access and outcomes, since those with employment-based insurance are mostly of high income.

    There are lots of problems with employment-based insurance, but his comment about how the demographic difference of this population vs. others and how the predominance of employer-based insurance in American healthcare may drive the system to a specific place with higher cost and potentially more unnecessary utilization is a novel one.