Health Insurance History: How Employers Got in the Middle (Part 2)

Some U.S. history in how businesses got into the (weird) business of health insurance coverage and an alternative that’s changing it.

Once upon a time, in the not-so-distant past, the landscape of healthcare in the United States was a wild, uncharted territory. Families faced the unpredictable terrain of medical expenses with trepidation, often fearing the financial toll that unexpected illnesses could take. It was in this challenging environment that employer health insurance emerged as a beacon of stability, providing a safety net for both employees and their families.

Well...sort of. That's the dramatic movie version produced by the health insurance carriers themselves.

In the United States, unlike nearly every country worldwide, 54% Americans get their health insurance through their employer. To put it this way, it means that almost half of the population relies on their employers to provide them with access to healthcare services.

Until recent decades, it may have seemed weird to have your employer be in the middle of your doctors and your health care. Yet, health insurance costs were much better when accessing health insurance as a group versus as an individual, and for many decades, companies were willing to pay for most of the cost.

But, health insurance costs have soared in the last two decades (as in +400%). Employers are passing along costs to employees, and group health plans aren’t the better deal, especially for small businesses. Sometimes, they are even more expensive. It’s why employers, big and small, are on the lookout for alternatives that make sense.

One rising star alternative is the ICHRA group policy, or individual health reimbursement arrangement, especially for small businesses with under ten employees who have trouble accessing anything at all for their team.

But before we dive into the nitty-gritty of this alternative group health benefit, let's hit the rewind button and dig into how we got here.

Chapter 1: The origin of employer-sponsored healthcare

The roots of employer-sponsored healthcare can be traced back to the 1920s, originating from voluntary insurance programs intended for specific groups, such as teachers, railroad workers, and postal employees. (Read Part 1: Health insurance history: Where this messy system began.)

These programs laid the groundwork for what would evolve into employer-sponsored health insurance as we know it today. However, it wasn’t until the 1940s that employer health insurance truly gained momentum.

During World War II, due to wage freezes imposed by the government to fight inflation, employers began offering health insurance to attract and retain workers.

Then, in the 1950s, the government threw in tax benefits. Boom! The tax move seals the deal, making employer-sponsored insurance a regular part of the job package. Employers in America were now in the health insurance biz (whether they wanted to be or not.)

Chapter 2: Changing times — containing rising costs (or at least trying to)

The healthcare landscape saw a big shift in the 1970s and 1980s, thanks to managed care. Employers started using HMOs and PPOs instead of traditional fee-for-service plans to control costs. These managed care options offered more coverage at a lower cost, which made them popular.

Yet, even these cost containment strategies could not stifle the persistent increase in healthcare prices. In 1999, health insurance premiums for a family were about $5800. By 2022, that number jumped to $22,000.

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Chapter 3: The emergence of a health insurance marketplace

In the early 2000s, the issue with the existing health coverage system became increasingly evident. (Did you see the graph above?) Spiraling healthcare costs began to put a significant burden on employers and employees alike. The rate of uninsured Americans hovered between 15-16% for the first decade of 2000.

Meanwhile, the quality of care and health outcomes also remained inconsistent. Pay more for less — felt like the mantra for the state of healthcare.

These mounting issues caught the attention of politicians who sought to reform the system and led to the introduction of the Affordable Care Act (ACA). Enacted in 2010, the ACA aimed to increase the quality and affordability of health insurance, lower the rate of uninsured people, and reduce healthcare costs.

One of the most notable changes brought was the introduction of health insurance marketplaces, where individuals can shop for coverage and potentially receive subsidies based on their income.

This opened up options beyond traditional employer-sponsored plans, giving individuals more control over their coverage.

Was the ACA controversial? Heck, yes. And it still is more than a decade after it passed. But all sides of the political spectrum are unlikely to touch the marketplace for several reasons, including the emergence of an alternative group plan. This option, called ICHRA, or individual health reimbursement arrangement, has become increasingly popular for an important community of the American economy — the small business and startup sector.

What is an ICHRA? And how do you pronounce it?

In 2019, lawmakers passed a new pre-tax arrangement called ICHRA to provide more access to employers to offer health insurance, especially small employers who have a tough time accessing any health benefit at all. (The Death Spiral of Group Health Insurance delves more into the why.) With an ICHRA health benefits policy such as StretchDollar's, employers can select an amount of pre-tax funds to give employees to be used to reimburse for a health plan they choose and own.

The future of employer-sponsored health insurance — fixed, pre-tax health benefit

American companies will be in the insurance business for the foreseeable future. (Untangling employer-sponsored health insurance will be messy, if it ever happens.) But, we expect to see interest in ICHRAs explode among small businesses and startups with under 50 employees as more and more are attracted to the ease of use, cost savings, and flexibility that ICHRA offers compared to traditional group plans.

Businesses didn’t get into the business of healthcare coverage. For companies that choose an ICHRA, well, now they can get out of that weird middle.