Health insurance in this country is unique in two ways. First, unlike most other developed countries, the United States relies on the private sector rather than the public sector to provide health insurance for most of the population. Second, health insurance is unlike most other forms of insurance because it is provided through a person's employer rather than being purchased directly by an individual, as is commonly the case with casualty, automobile, and life insurance. This unique development is primarily the result of unintended employment and tax policies that had their origin during World War II.

In an effort to control wartime inflation and reduce the cost to the government for war materials and services, the government established a system of wage and price controls during the early 1940s. Unable to compete for scarce labor by raising wages, employers began to expand their use of fringe benefits as a way to attract and hold employees. The value of these benefits, including employer-based health insurance, was not considered by the IRS to be part of taxable income. This principle of excluding the value of employer-based health insurance from taxable income became part of established tax law following the war. The economic effect of this policy was to give a preference for health insurance obtained through an employer rather than purchased individually with after-tax dollars. This part of tax law was established at a time when marginal tax rates were relatively low and the cost of health insurance was a relatively small part of the total cost of compensation. This situation was not to last. ⁶

In addition to the growth of modern scientific medicine, the 20 years following World War II were a period of unusually rapid growth of population and personal income. These factors combined to increase the demand for health insurance to protect against the cost of expensive medical events. This had two effects: the growth of employer-based health insurance relative to individually-purchased insurance and an expansion in types of coverage offered.

To contrast the period before and after World War II, Somers and Somers point out that in 1930 only two percent of the labor force ( 1.2 million workers and about 2 million of their dependents) had any form of health coverage⁷ although in 1958, 123 million Americans had hospital insurance and 75 percent of these individuals obtained this coverage through their employer.⁸

The tax treatment of health insurance created strong incentives for unions and employees to bargain for tax-free health insurance relative to taxable wages and to expand both the completeness of insurance (reduced cost sharing) and the range of medical coverage to be included in the employer's plan. In addition, tax policy may also be partially responsible for extending coverage to dependents, because providing coverage for an employee's family was an additional way to purchase insurance with tax-free dollars.

The private sector health insurance industry has grown to become a major sector of our economy. The latest figures indicate that there are approximately 2,900 insurance companies providing individual

Front Matter (R1-R18)

Summary (1-8)

1 Introduction and Overview (9-22)

2 Health Insurance and Children in America (23-43)

3 Health Insurance and Access to Care (44-64)

4 Safety Net Providers (65-80)

5 Medicaid (81-101)

6 State and Private Insurance Initiatives (102-119)

7 Children's Health Care Needs (120-140)

Appendix A Market-Based Approaches to Insurance Reform (141-154)

Appendix B Information for Accountability (155-169)

Appendix C Public Workshop Agenda and Participants (170-176)

Appendix D Members of Liaison Panel (177-184)

Appendix E Committee and Staff Biographies (185-188)

Index (189-198)