How We Got the Worst Health Care System Mountains of Money Can Buy

As Americans respond to President-elect Barack Obama's call for town hall meetings on reform of the American health care system, an understanding of how that system came to be the way it is can be crucial for figuring out how to fix it. The American health care system is unique because, for most of us, it is tied to our jobs rather than to our government. For many Americans, the system seems natural, but few know that it originated not as a well-thought-out plan to provide for Americans' health, but as a way to circumvent a quirk in wartime wage regulations that had nothing to do with health.

As far back as the 1920s, a few big employers had offered health insurance plans to some of their workers. But only a few: By 1935, only about 2 million people were covered by private health insurance, and on the eve of World War II, there were only 48 job-based health plans in the entire country.

The rise of unions in the 1930s and 1940s led to the first great expansion of health care for Americans. But ironically, it did not produce a national plan providing health care to all, like those in virtually all other developed countries. Instead, the special conditions of World War II produced the system of job-based health benefits we know today.

In 1942, the United States set up a National War Labor Board. It had the power to set a cap on all wage increases. But it let employers circumvent the cap by offering "fringe benefits" -- notably, health insurance. The fringe benefits created a huge tax subsidy; they were treated as tax-deductible expenses for corporations, but not as taxable income for workers.

The result was revolutionary. Companies and unions quickly negotiated new health insurance plans. Some were run by Blue Cross, Blue Shield and private insurance companies. Others were "Taft-Hartley funds," run jointly by management and unions. By 1950, half of all companies with fewer than 250 workers and two-thirds of all companies with more than 250 workers offered health insurance of one kind or another. By 1965, nearly three-quarters of the population was covered by some kind of private health insurance.

This private, job-based insurance covered millions of workers who had never had health care insurance before. But this victory also set patterns that are responsible for many of the problems the health care system faces today.

Because this private system was tied to employment, millions of people outside the workforce were without coverage. Those most likely to be covered were salaried or unionized white men in Northern industrial states. Two-thirds of those with incomes under $2,000 a year were not covered, nor were nearly half of nonwhites and those over 65 years old.

Employer-based plans tied workers to their jobs -- something that benefited employers but not workers or the economy as a whole. The quality of the coverage was spotty -- some plans were excellent, others completely inadequate. Doctors accepted this revolution because it didn't challenge their power; but, as a result, the system provided no public control over medical costs.

This revolution had a subtle political effect as well. By giving much of the workforce health benefits, it reduced the incentive for them to pursue a system of universal care. And it gave unions a stake in the private, employer-based health care system. One opponent of publicly financed health care said the greatest bulwark against the socialization of medicine was furthering the progress already made by voluntary health insurance plans.

Since then, many layers have been laid on top of employer-based health care. Medicare and Medicaid provided government-funded health insurance for the elderly and impoverished. The "managed care revolution" led to the takeover of 90 percent of employer-based health care by HMOs, most of them driven by profit rather than health concerns. But most people continue to get their health care through their employer.