Origins and Evolution of Employment-Based Health Benefits

History is a record of ''effects" the vast majority of which nobody intended to produce.

Joseph Schumpeter, 1938

The current U.S. system of voluntary employment-based health benefits is not the consequence of an overarching and deliberate plan or policy. Rather, it reflects a gradual accumulation of factors: innovations in health care finance and organization, conflicting political and social principles, coincidences of timing, market dynamics, programs stimulated by the findings of health services research, and spillover effects of tax and other policies aimed at different targets.

The major innovation, as described below, was the creation of alliances and mechanisms that made the employee group a workable vehicle for insuring a large proportion of workers and their families. That the employee group existed for purposes other than the provision of insurance (that is, to produce a product or service) was an important although not sufficient condition for dealing with biased risk selection and some of the other problems described in Chapter 1 and discussed further in Chapter 5.

This chapter provides a rather detailed overview of some important bases for present public and private arrangements for insuring health care. From this overview, five broad points emerge:

1.Insuring medical care expenses is difficult for several reasons, and making private insurance workable for large numbers of workers and their families has taken considerable creativity, leadership, and some luck.

2.A constituency for broad access to health coverage has existed for nearly a century, pressuring both public and private sectors to find new and better ways of extending that access.

3.The path taken by the United States has diverged from that of other developed nations, particularly since the end of World War II.

4.The debate about private versus public strategies for medical expense protection is longstanding and has, with the exception of programs for special populations, repeatedly been resolved in the United States in favor of private approaches.

5.The central role of employment-based health benefits and the very substantial discretion accorded employers rest, in considerable measure, on federal laws and regulations (in particular, the Employee Retirement Income Security Act of 1974) that did not explicitly plan or envision that structure.

Many of the values, pressures, and conflicts that have shaped the evolution of employment-based health benefits persist and should be factored into evaluations of this system and proposals for restructuring it. Moreover, it is important to recognize the forces that have led people in this country and elsewhere to expect both more medical care and more protection against its rising cost. These forces, which affect both public and private provision of health coverage, include

an ever-accelerating pace of scientific and technological discovery that has offered new relief from pain and suffering and heightened expectations about the value of new medical technologies, products, and practices;
a century's worth of professional and institutional development in health care that has made possible the delivery of biomedicine's new achievements;
an increase in medical care costs that has been fueled both by economic growth and by advances in clinical capabilities and organizational resources; and
a system of private and public health coverage that has for most of the last 50 years increased financial access to these advances but placed few controls on medical price inflation or overuse of medical services.
On almost every front, the thrust in the United States is still expansionist—the uninsured want basic protection, the insured want restrictions on coverage eased, and researchers, providers, and entrepreneurs devise new technologies and services that further stimulate demand for care. Hence, health care consumes a greater share of national resources each year.

The expansionary thrust has, however, stalled in some areas. In particular, the proportion of the U.S. population covered by private health benefits has leveled off and even shown signs of decline in the employment-based sector. Furthermore, many now question whether current medical practices and technological advances produce improvements in health and well-being commensurate with their cost. These questions reinforce policymakers' wariness about new initiatives to improve equity and access given two decades of unsuccessful efforts to moderate the flow of resources to the health sector.

Although this chapter is lengthy, it is not intended to be comprehensive. 1 Rather, the object is to provide sufficient detail to make clear that current arrangements, problems, and controversies have deep roots. By way of brief overview, Table 2.1 highlights key dates in the evolution of employment-based health benefits in the United States and in the environment that shaped its development.

TABLE 2.1. Key Dates in the Development of Employment-Based Health Benefits and Its Environment.
TABLE 2.1
Key Dates in the Development of Employment-Based Health Benefits and Its Environment.

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THE BIRTH OF INSURANCE FOR MEDICAL CARE EXPENSES
In Europe and the United States, modern insurance for medical care expenses has its origins in diverse actions undertaken by unions, fraternal organizations, employee associations, employers, commercial insurers, governments, and other less easily categorized entities. The primary objective of most of these initiatives was not reimbursement for medical expenses but protection against the loss of income due to illness or injury.

Early Voluntary Initiatives
By the beginning of the nineteenth century in Europe, guilds, unions, mutual aid societies that crossed occupational lines, fraternal associations, and other private groups had already developed various forms of collective action to protect group members and members' families against such economic catastrophes as death of the breadwinner (Anderson, 1972; Glaser, 1991). Such efforts became more widespread as the Industrial Revolution took hold and the hazards of workplace injury and related wage loss became a major concern.

Although these efforts were often described as sickness insurance, sick benefits, or health insurance, they usually did not cover medical care expenses (Faulkner, 1940; Glaser, 1991). In the latter part of the nineteenth century, however, some European mutual aid societies and other groups did offer limited medical expense coverage, and several employed or contracted with physicians and created clinics or hospitals to serve their members. In general, the voluntary nature of the programs and the often meager financial resources of their participants limited their scope. In England, where mutual aid societies were particularly strong, voluntary sickness insurance covered less than one-seventh of the population in the period just before the country adopted its first social insurance measures in 1911 (Starr, 1982).

The early lack of emphasis on medical expense insurance is not surprising. Truly effective medical services were limited—and sometimes even suspect—well into the nineteenth century (Somers and Somers, 1961; Anderson, 1968; Poynter, 1971; Ebert, 1973; Knowles, 1973; Starr, 1982; Stevens, 1989). Hospitals were, to a considerable extent, sick houses for the poor and those infected with contagious diseases. Medical practices had little capacity to prevent or alter the course of disease. At best, the goal or reality of medical care was "to cure seldom, to help sometimes, and to comfort always."

By the turn of the century, advances in public health and, to a lesser extent, biomedical science had brought significant changes in what medical care could accomplish. For example, developments in bacteriology and anesthesiology were making safer and less painful surgery a reality. As modern medicine helped transform hospitals into places where the sick could be effectively treated, numbers of hospitals and capital investments in them multiplied. Their growing stature and value were suggested by the fact that some hospitals began to advertise, establish prices, and actually charge fees to those patients who could afford it.

Still, in 1900, physicians remained limited in what they could actually do for many patients. In a telling statement made that year, one physician argued to his colleagues that the practice of medicine is "'not only diagnosis and autopsy but the treatment and care of patients"' (Jacobi, 1900, quoted in Hill and Anderson, 1991, p. 52). Although hospital costs were on the verge of becoming an important concern for workers and their families, protection against income lost due to illness and injury remained a more significant objective than medical expense protection.2

As European ideas and institutional forms diffused to the United States, often through immigrants, various kinds of mutual aid or benevolent associations, fraternal organizations, workers clubs, unions, and other similar concepts and structures were adapted to this country's circumstances and culture (Munts, 1967; Anderson, 1968, 1972; Brandes, 1976; Weir et al., 1988). Quite early in this process, in 1853, La Société Française de Bienfaisance Mutuelle established the first prepaid hospital care arrangement, which was linked to the hospital it founded. A German association started a year later and began to offer hospital services in 1855. Patients with lifetime care contracts purchased during the 1930s from the latter plan were still being cared for in the 1960s by the restructured, surviving hospital (Trauner, 1977).

Notwithstanding some exceptions, most American benevolent societies and similar organizations, like their European counterparts, focused on income, not medical expense, protection. For example, the 179 national fraternal organizations in the United States paid out $97 million for benefits in 1917, but only 1 percent of this amount went for medical expenses (Starr, 1982).

Among unions, the Granite Cutters Union is cited as establishing in 1877 the first national sick benefit program. It was probably, like most early efforts, more an income protection than a medical expense plan. The International Ladies Garment Workers Union followed a different approach, creating the first union medical services program in 1913 and incorporating the first union health center four years later. (Later, in 1940, the garment workers began the first multiemployer welfare funds to avoid lost benefits due to job changes or company failures.) Important as such union initiatives were, the main focus of union activities and concerns tended to be on organizing members and on surviving employer resistance to a restructuring of the fundamental relationship between workers and management.

Early employer programs include frequently cited examples from the mining and lumbering industries and the railroads (Somers and Somers, 1961; Munts, 1967; Anderson, 1968; Brandes, 1976; Starr, 1982). These employers had a practical interest in the provision of medical services to injured or ill employees who often worked in isolated geographic areas. The scope of some of these efforts is suggested by the fact that, by the turn of the century, there were an estimated 6,000 railway surgeons (Starr, 1982). In some—perhaps most—situations, employers arranged for the services, but workers paid for them through an innovative wage "checkoff" system. Another innovation was the development of contracts between employers and closed physician panels or prepaid plans allowing free choice of physician.3

Although these early programs represented advances in some respects, they were also criticized for using unqualified, overworked "contract" physicians and providing dismal physical facilities in some areas (Somers and Somers, 1961; Munts, 1967). After the passage of workers' compensation legislation, "industrial medicine" became more prominent and focused because companies had stronger financial incentives to identify and reduc