How Did Employers Ever Enter the Health Insurance Game?
Gravie co-founder Marek Ciolko gives us a history lesson on how employers ever got involved with offering health insurance to employees in the first place, and why it doesn’t make sense now.
If you asked a group of employers you’d probably find very few today who are happy with the concept of employer-sponsored health insurance. Most plans are one-size-fits-all to accommodate the “average” employee, they’re expensive, and they require people resources in order to manage them. The drawbacks of this approach begs the question, “How and why did employer-sponsored health insurance get in the shape it is today…and are there better alternatives available that satisfy both employers and employees?”
A Little History
The Great Depression was a major motivation for the creation of health insurance. Communities and universities were building hospitals in the 1920s so they could practice modern medicine. They quickly noticed as the economy crashed that people couldn’t afford the unplanned expense of a hospital stay, so their beds were empty more than they were filled. A manager at Baylor University Hospital thought that if a person would pay a dollar per month for cosmetics, they may be interested in paying money each month to protect themselves in case of a medical emergency. As the depression deepened this model was copied by hundreds of hospitals, and became known as the Blue Cross plan.
Despite the emergence of Blue Cross plans, very few people actually had health insurance prior to WWII, but economic conditions during and after the war were soon going to change that. Concerned about inflation, the federal government essentially implemented a wage freeze (via the 1942 Stabilization Act) but excluded fringe benefits like health insurance, since few businesses offered them. Businesses seized on this unintended loophole; offering health insurance helped employers get around the wage control and attract the workers they needed.
In the 1950s the IRS ruled that the value of benefits provided by employers must be excluded from employees’ income for tax purposes, and allowed employers to deduct it from reported income. This gave employers a double benefit: the money they gave to employees did not create a tax liability for the employee, and the employer could deduct it from the company’s income; no one would pay taxes on money going to health insurance. For employers it was an easy way of providing more “income” to their employees on a tax-free basis, and as a result it landed employers squarely in the middle of the U.S. healthcare system.
Evolution of the Health Insurance Market Over the Years
Since the 1950s, we’ve seen the law of unintended consequences take over, as the market reacted to the new reality and the health insurance industry evolved in ways that got us where we are today – expensive plans that don’t satisfy employees:
- Provider Restrictions. Insurance companies began offering preferential rates to people coming from the employer market (and “penalizing” those coming from the individual market); they believed those who were employed were better risks. As a result, plans available in the individual market became more restrictive by denying coverage or charging higher rates to people with pre-existing medical conditions, excluding certain services such as pregnancy and delivery expenses and imposing annual and lifetime maximums.
- Cost Blindness. At the same time, workforce competition and union contract negotiations led employers to beef up their group plans, covering more care and services (and thus increasing the cost of plans). As group health plans became more comprehensive, employees became increasingly shielded from the real costs of healthcare and health insurance (and, consequently, “overused” both).
- Higher Costs or Narrower Networks. Faced with the increasing cost of healthcare, employers started demanding better deals from the insurance companies, and in turn the insurance companies had to evolve the design of their plans and push for better and better deals with healthcare providers. The best way to deliver better pricing was to (1) shift financial responsibility to employees through plan changes (e.g. covered service exclusions and higher deductibles); and (2) restrict the list of healthcare providers employees were allowed to use. Restricting which doctors employees could see resulted in lower pricing for medical services charged by the doctors in return for the higher volume of business.
Unfortunately higher deductibles and narrow provider networks are difficult to balance across the entire employee population, which leaves employers with a difficult choice between providing comprehensive yet very expensive coverage or more restrictive plans that will not meet the needs of many of their employees. Many end up picking a “middle of the road” plan that is average for many, but satisfies no one.
How Has the ACA Changed Things?
Employer-sponsored health insurance hasn’t been working for a while; group plans are expensive and they don’t address most employees’ needs or fit most budgets. Employees have come to expect employers to offer health insurance plans with comprehensive coverage, and to cover a majority of the premium cost. This has led to people being “over-insured” and shielded from the real cost of healthcare services they were increasingly using, which in turn resulted in sharp increases in healthcare spending.
The ACA changed these plans in a few ways (such as setting a minimum standard of care and a maximum percent of income that employees and individuals pay, as well as eliminating exclusions for pre-existing conditions), but the biggest change was to the landscape of alternatives and the impact on consumer choice.
In the individual market today, there’s far more choice and a greater likelihood of significant savings. This is a far cry from the pre-ACA individual market when policies were hard to get and offered limited benefits. Catastrophic events often took people beyond maximums imposed by their plans and left them on the hook for large sums to pay out of their own pockets. There were many cases of individuals going bankrupt even though they were technically insured.
Today, individual plans are required to include a mandated level of benefits, and cannot restrict the total amount that is paid out by the insurance company. Plus, depending on factors like income and family size, some people qualify for government tax credits, which reduce the monthly cost of health insurance for millions of Americans.
Employers can take advantage of these changes by dropping their group plans and sending employees to the individual market. With Gravie, employers give their employees a chunk of additional compensation that can be used to shop from hundreds of plans in the individual market, and Gravie takes care of the rest. Employees have year-round access to Gravie advisors, who help employees choose the right plan for them and who answer questions about confusing bills, figuring out how much a prescription will cost, how to find a new doctor, and more.
It didn’t make sense for employers to be involved in health insurance to begin with, and it makes even less sense now. Get out of the health insurance game and give your employees more choice. To learn more call us at 844.540.8701, fill out our contact form, or tweet us @gogravie.
About Marek Ciolko
Marek is co-founder and head of operations at Gravie. In a nutshell, Marek is responsible for making sure that Gravie runs well as a company, and that our employees are able to deliver exceptional products and services to our members and employer clients. This includes developing and deploying operational strategies and technology frameworks, but also overseeing the finance, legal, and compliance functions of the company.
Prior to founding Gravie, Marek was co-founder and head of operations at Bloom Health where he was in charge of all operations including technology, the call center, account services, legal, and compliance. Prior to founding Bloom Health, Marek worked at Best Buy Mobile where he managed the implementation of a new e-commerce platform for selling mobile phones online. Prior to working for Best Buy Mobile, Marek was the director of operations and one of the earliest employees at RedBrick Health. Marek started his career at Deloitte where he spent 10 years working with Fortune 500 companies on developing and implementing their enterprise application strategies.