As a Republican-controlled Congress struggles to make good on its promise to repeal the Affordable Care Act, House Speaker Paul Ryan is quietly pushing a revolutionary change in the way that health care works in the United States.
At the present time, employers who provide health care benefits to employees get a tax break; workers, on the other hand, don’t pay taxes on the benefits they receive. Ryan and his allies want to limit these tax breaks on the grounds that they encourage companies and their employees to spend more on health care than is necessary.
Ryan is on to something here: the tax breaks he’s targeting are arguably the basis of the rather peculiar — and deeply flawed — system of health care that sets the United States apart from most industrialized nations. But he should beware: its creation resulted in one of the best lessons on the law of unintended consequences. Its destruction seems destined to follow suit.
The idea that employers should provide health care benefits has a long, if checkered, history. Railroads and other rough-and-tumble firms experimented with “industrial clinics” in the late nineteenth century, and Montgomery Ward, the mail order giant, rolled out the first group health insurance early in the next one. But there was almost no indication for decades that employer-sponsored health insurance would spread from sea to shining sea .
World War II disrupted those trends. As demand for everything — particularly labor — climbed, Congress passed the Stabilization Act of 1942, which allowed the president to freeze wages and salaries for all the nation’s workers. A day after its passage, President Roosevelt issued an executive order invoking these powers, which applied to “all forms of direct or indirect remuneration to an employee”, including but not limited to salaries, wages, as well as “bonuses, additional compensation, gifts, commissions, fees.”
But there was an exemption of massive proportions slipped into a fateful clause: “insurance and pension benefits” could grow “in a reasonable amount” during the freeze.
As companies struggled to deal with wartime labor shortages, the wage freeze left them in a serious bind: How could they retain workers if they couldn’t give raises? If they didn’t soon realize the allure of fringe benefits, insurance companies pressed that case through marketing campaigns, as historian Jennifer Klein has observed.
The Revenue Act of 1942 triggered another rush to enroll employees in health plans. By slapping corporations with tax rates of 80 or even up to 90 percent on any profits in excess of prewar revenue, Congress all but guaranteed a frenzied search for loopholes. Employee benefits, according to the new law, could be deducted from profits. As an anonymous employer observed in a study published on trends in health insurance, “it was a case of paying the money for insurance for their employees or to Uncle Sam in taxes.”
In 1943, two rulings helped accelerate the movement toward employer-sponsored health insurance. The first was a directive by the Internal Revenue Service that employees did not have to pay taxes on premiums paid by their employers. The second was a decision by the National War Labor Board reafirming the exemption of fringe benefits from the wage freeze.
After the war, a series of administrative and legal rulings kept these incentives in place, despite several attempts to reverse them. Meanwhile, the number of people enrolled in health insurance plans skyrocketed, with most of the growth driven by corporate group policies. In 1940, only 9.8 percent of Americans had some kind of medical insurance; by 1946, the number had grown to just under 30 percent.
Increasingly, labor unions and corporations alike had a vested interest in the new system. While union representatives might have preferred universal health care, they accepted political reality. As noted by historian Christy Ford Chapin, they lobbied for preservation of a tax code that “rewarded businesses for purchasing employee benefits and that allowed workers to receive insurance tax free.”
When Congress rewrote the tax code in 1954, it preserved the tax subsidies for third party insurance rather than engage in a battle with employees and employers alike. A decade later, almost 80 percent of the population had some form of health insurance.
Employer-sponsored insurance has since fallen on hard times thanks to spiraling costs and declining coverage. Today, just over 50 percent of Americans enjoy some kind of employer-sponsored medical insurance, though employees now contribute far more toward annual premiums, and may have significant co-payments, high deductibles, and other features that limit the value of the coverage. In some ways, the Affordable Care Act has only accelerated these trends. Little wonder that some in Congress believe the time is ripe for a system-wide overhaul.
But history offers a wealth of reasons for reformers to tread cautiously. While Ryan may have a plan for untangling the policy knot created decades ago by a series of uncoordinated decisions, so did the lawmakers and regulators who came before him. It was impossible during the 1940’s to grasp the staggering impact of their interventions until it was too late to reverse course. So go ahead: repeal those tax breaks. Just don’t complain if doing so inexplicably leads to universal health insurance.
Mihm, an associate professor of history at the University of Georgia, is a contributor to the Bloomberg View.