This paper--delivered on February 29, 2008, at a conference sponsored the the Tax Policy Center and the American Tax Policy Institute--provides a brief sketch of the historical development of the health insurance industry as we know it today. Using World War II as a convenient dividing line, it explores economic, medical, and policy developments before, during, and after the war with special emphasis placed on the role of tax policy. The paper also reviews some key economic studies that have attempted to measure the effects of tax policy and the conclusions the authors reach. After a discussion of economic, legal, and medical definitions of inefficiency, the main conclusion offered is that reform of tax policy is a necessary condition for the efficient reform of our health care system. A version of this paper was published as a chapter in Henry J. Aaron and Leonard E. Burman, eds., Using Taxes to Reform Health Insurance: Pitfalls and Promises (Washington, DC: Brookings Institution Press, 2008).
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For the last six decades insurance coverage for health-related expenditures has been provided primarily by policies offered through one's place of employment. In 2006, employer-based insurance covered 161.7 million people, approximately 62.2 percent of the nonelderly population. Individually purchased policies covered an additional 6.8 percent of the nonelderly while public programs covered 17.5 percent. This left approximately 18 percent without any health coverage. By contrast, in 1940, before World War II, only 9 percent (12.3 million) of the population had any form of coverage for medical expenses. By any definition, the dominance of employer-based health insurance coverage means that it has played an important role in the economic performance of the health care sector with major influences on both the demand and supply of medical services and products. As a consequence, the role of private health insurance must be a central part of any serious discussion of health care reform, the kind of reform that the country now seems ready to discuss.
The purpose of this chapter is to explore the historical development of the private health insurance industry with special emphasis on the role of tax policy in affecting the economic performance of the industry and the health delivery system. While our approach is historical, our main objective is to consider the future role that tax policy might play in bringing about effective and efficient reform. We will explore the historical development of the health insurance industry, review some of the economic literature explaining this development, and consider the implications of changes in tax policy on the future of the health reform debate. . . .
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Robert B. Helms is a resident scholar at AEI.
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