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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.