health policy reportThe new england journal of medicinen engl j med 355;1 www.nejm.org july 6, 200682Employer-Sponsored Health Insurance in the United States — Origins and ImplicationsDavid Blumenthal, M.D., M.P.P.Varied as they may be, most U.S. readers of the Journal probably share at least one thing: employer-sponsored health insurance is vital to their well-being. For their part, most physicians, regardless of their field of medicine or where they practice, depend heavily on employer-sponsored insurance for their paychecks. Since increasing numbers of physicians today are employees of health care organizations, many acquire their own and their family’s health insurance in their workplace.1 In this regard, they have much in common with their patients. More than 159 million Americans — 62.4 percent of the nonelderly population — had health care coverage through employer-sponsored insurance in 2004.2In other words, employer-sponsored insurance is a cornerstone of the U.S. health care system, as vital in some ways to the health care of Am-ericans as the drugs, devices, and medical services that the insurance covers. Employer-sponsored insurance has been described as the equivalent of “private social security,”3 and if it were sudden-ly to disappear, chaos would certainly result: the health of patients throughout the United States would be jeopardized, and physicians’ income would plummet.This development is not, of course, imminent. But neither is the system of employer-sponsored insurance healthy and secure. It faces challenges that are unparalleled in its roughly 70-year his-tory — including apparently unsustainable cost increases — and the ability of the system to cope with these challenges over the long term is far from certain. Understanding employer-sponsored insurance is therefore central to understanding the U.S. health care system and its evolution. In this first part of a two-part report, I attempt to further this understanding by exploring how the United States came to have an employer-based system of health insurance and how reliance on employer-based insurance affects the U.S. health care system generally. The second part of this report will discuss recent trends in employer-sponsored insurance, approaches that the pro-viders of such insurance are taking to the prob-lems they confront, and the probable future of this vital American institution.the history of employer-sponsored health insuranceThe heavy reliance on employer-sponsored insur-ance in the United States is, by many accounts, an accident of history that evolved in an un-planned way and, in the view of some, without the benefit of intelligent design. “If we had to do it over again,” says economist Uwe Reinhardt, “no policy analyst would recommend this model.” The story of the emergence of employer-sponsored insurance has already been told, but key elements are worth repeating to provide a perspective on the current state of this uniquely American in-stitution.3-5Two historic events prepared the way for the emergence of this system of insurance. The first was the decision by President Franklin D. Roosevelt after his election in 1932 not to pursue universal health care coverage. The second was a series of federal rules enacted in the 1940s and 1950s on how employer-sponsored insurance should be treated with respect to federal taxes and in labor negotiations.The late Wilbur Cohen, who served in the Roosevelt administration and later wrote the Med-icare legislation,5 thought that President Roosevelt could have enacted a universal health insurance program as part of Social Security during his first term. Because of the extremity of the Great Depression, Cohen said, “Roosevelt in 1933 could have federalized or nationalized anything he wanted . . . at the bottom of the depression if [he] wanted to create all national banks . . . a Copyright © 2006 Massachusetts Medical Society. All rights reserved. Downloaded from www.nejm.org at UNIVERSITY MASS MEDICAL SCHOOL on July 6, 2006 .n engl j med 355;1 www.nejm.org july 6, 200683national system of Social Security and health in-surance, he could have gotten it.” 6 Whether Cohen was correct we will never know, but it is clear that President Roosevelt decided he did not want to enact a universal entitlement to health care coverage at that time. The standard explanation for his view is that fierce opposition from the American Medical Association, a much more po-tent lobby then than it is now, would have doomed the passage of the Social Security Act in 1935 (the vehicle to which the passage of health insur-ance was linked), and that Roosevelt chose Social Security over health care.5 It probably did not help that the three physicians to whom Roosevelt was closest, including his son’s father-in-law, the renowned neurosurgeon Harvey Cushing, also op-posed the enactment of federal health insurance on its merits. Roosevelt discussed health care over lunch with Cushing the day before he signaled his decision not to push for the immediate pas-sage of a health insurance component of Social Security.7President Roosevelt’s decision left a pressing need for alternative forms of protection against the growing costs of illness. Private insurance emerged to fill this gap in the early 1930s in the form of the nonprofit Blue Cross and Blue Shield plans. Commercial insurers subsequently entered the business, once they saw that the Blues were successful.4 The resultant private insurance in-dustry was therefore ready to sell insurance to employers when the opportunity to do so emerged during World War II.This opportunity arose because, to control in-flation in the overheated wartime economy, the federal government in 1942 limited employers’ freedom to raise wages and thus to compete on the basis of pay for scarce workers.4 However, the federal government allowed employers to expand benefits for workers, such as health insurance, which resulted in a rapid increase in employer-sponsored insurance. Several additional federal rulings followed that increased the attractiveness of the provision of employer-sponsored insurance to workers and their unions. In 1945, the govern-ment said that employers could not unilaterally change benefits programs until the expiration of a labor contract, and in 1949, it ruled that benefits should be considered part of the wage package of employees so that unions could ne-gotiate health insurance as part of contract talks.