Employer-Sponsored Health Insurance and the Promise of Health Insurance Reform

By Buchmueller, Thomas C.; Monheit, Alan C. | Inquiry, Summer 2009 | Go to article overview

Employer-Sponsored Health Insurance and the Promise of Health Insurance Reform


Buchmueller, Thomas C., Monheit, Alan C., Inquiry


The central role that employers play in financing health care is a distinctive feature of the U.S. health care system, and the provision of health insurance through the workplace has important implications well beyond its role as a source of health care financing. In this paper, we consider the "goodness of fit" of employer-sponsored health insurance ( ESI) in the current economic and health insurance environments and in light of prospects for a vigorous national debate over the shape of health care reform. The main issue that we explore is whether ESI can have a viable role in health system reform efforts or whether such coverage will need to be significantly modified or even abandoned as reform seeks to address important issues in the efficient provision and equitable distribution o f health insurance coverage.

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The central role that employers play in financing health care remains a distinctive feature of the U.S. health care system, and the provision of health insurance through the workplace has important implications well beyond its role as a source of health care financing. Currently, as has been the case for the last half century, employer-sponsored insurance (ESI) dominates the U.S. health insurance landscape. For example, in 2007, over 60% of the nonelderly population was covered by ESI, representing 90.1% of all private coverage (Fronstin 2007). Most employers provide health insurance to their workers, and approximately 90% of full-time private sector employees work at establishments that offer coverage. (1)

Apart from its importance in financing health care--private health insurance, dominated by ESI, accounts for two-fifths of personal health care spending--ESI significantly affects a variety of labor market outcomes. Health insurance contributes to individual and household decisions to participate in the labor market, to work full or part time, to obtain particular types of jobs, and to engage in self-employed entrepreneurial activities. ESI obtained by retired employees remains a valued post-employment benefit that influences retirement decisions. For employers, ESI remains an important inducement to attract workers in highly competitive labor markets.

Despite its prominence in health insurance markets and partly because of its importance

in household coverage and employment decisions, long-standing concerns and recent developments have once again made the employment-based health insurance system the subject of intense scrutiny and debate. At issue is whether ESI can retain its primacy in an era of striking changes in labor markets and employment relationships, growing international competition and globalization, stagnant employee earnings, fiscal uncertainty for national and state economies, and above all, the continuing rise in health care costs.

In this paper, we consider the "goodness of fit" of ESI in the current economic and health insurance environments, and in light of prospects for a vigorous national debate over the shape of health care reform. The issue that we explore is whether ESI can have a viable role in health system reform efforts or whether such coverage will need to be significantly modified or even abandoned as reform seeks to address important issues in the efficient provision and equitable distribution of health insurance coverage.

Setting the Stage

Key Historical Developments

In the late 19th century, employers in a few industries (notably railroad and mining) provided direct health services to their employees through payroll deductions, and several other employers and labor unions provided sick benefits to their employees and members. However, the link between health insurance and the workplace most appropriately dates to the origins of group health insurance in the late 1920s. In 1929, what would become the nation's first "Blue Cross" plan was formed when a group of Dallas school teachers contracted with the Baylor University hospital to provide up to 21 days of inpatient care for a fixed annual payment of $6. …

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