Role of Employers in US Health Care System - Key Milestones in Reform History

Health Care Reform: Key Milestones in an American Saga

How did we get here?

As the debate over the ACA and the future of health care reform continues, it's becoming increasingly apparent that, regardless of the outcome of that reform, responsibility for health care will increasingly fall on the shoulders of the individual.

We're already seeing a significant shift take place in employer-sponsored health care from paternalistic to consumer-driven. With the proliferation of high-deductible health plans (HDHPs), health savings accounts (HSAs) and voluntary benefits, individual employees are being asked to take more control over their health care costs - and consequently, take on more financial risk.

We're essentially witnessing a rewrite of the employer-employee contract, which could dramatically change the dynamic of the American workplace as we know it.

To understand how we got here, let’s look back at some of the key milestones in the history of American employer-sponsored health care.

1929 – The Baylor Plan

The concept of employer-sponsored health care in the U.S. can be traced back to 1929 in Dallas, Texas. After the stock market crash that started the Great Depression, local school teachers couldn't afford to go to the hospital when they were sick, so Baylor Hospital introduced a plan that charged teachers 50 cents per month to cover up to 21 days of care. The "Baylor Plan" was effectively the nation's first group insurance plan, and would eventually grow into Blue Cross.

1943 – War Labor Board rules on fringe benefits

When World War II began, the U.S. government put emergency price controls on everything, including labor. Business owners needed a way to attract workers besides offering higher pay, so petitioned the National War Labor Board for permission to offer fringe benefits, such as health insurance, as an exception to the wage freeze. The Board gave the okay, and when the war ended, the concept of health insurance as a workplace perk stuck.

1974 – Employee Retirement Income Security Act (ERISA)

In the early '60s, struggling automobile maker Studebaker closed its plant in South Bend, Indiana, leaving thousands of people in the area without work. Even more unfortunate was that the company’s pension plan had been so poorly funded that they could not afford to provide all employees with their pensions.

This kick-started a decade of investigations, legislative activity and public hearings on pension reform that ultimately led to the 1974 passage of ERISA, which not only established minimum standards for pensions, but also set the standard for how employers administer health care benefits. Ultimately, the law was meant to protect workers and their families by:

  • Requiring the disclosure of financial and other information concerning benefit plans to beneficiaries
  • Establishing standards of conduct for plan fiduciaries
  • Providing for appropriate remedies and access to the federal courts

1978 – Section 125

Meanwhile, American corporations and households were becoming increasingly dynamic and diverse, and legislators realized that workers needed greater flexibility with respect to their compensation, including greater affordability for their benefits.

So, in 1978, Section 125 was added to the Internal Revenue Code to regulate cafeteria plans, which essentially allowed employers to let employees split their compensation between taxable benefits (aka salary) and non-taxable benefits, like health insurance. Because of the tax advantages Section 125 created for both employers and employees, cafeteria plans have become the compensation structure of choice – and a key tool for companies to attract and retain talent.

1985 – The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)

COBRA was signed into law in 1985 and enacted in 1986, and was another way to keep Americans insured. The law introduced “continuation coverage,” which employers with more than 20 employees are required to offer employees, and their dependents, who lose eligibility (except by termination of gross misconduct), access to coverage for a specified period of time. COBRA is also laden with specific communication and reporting requirements, leading to a majority of employers outsourcing much of the administration.

1996 – The Health Insurance Portability and Accountability Act (HIPAA)

While HIPAA is primarily known for setting the standard for protecting medical information, it was also the first federal legislation to limit health plans’ use of pre-existing condition exclusions, provide creditable coverage when moving from one plan to another, require health plans to permit enrollment periods due to life events such as birth or adoption of a baby, and prohibit discrimination on the basis of health.

2003 – Medicare Prescription Drug and Modernization Act (MMA)

Since the creation of Medicare in 1965, there have been significant improvements in the types of available treatments, specifically prescription drugs. But these new drugs come at a high cost. The Medicare Modernization Act introduced what we know as Medicare Part D – signed into law by President George W. Bush in 2003 to provide coverage for prescription drugs through private insurance plans for the first time in history. It also allows employers to receive a subsidy for offering drug coverage to their Medicare-eligible retirees, which led a lot of companies to re-think their retiree health benefits.

MMA also established HSAs, which were meant to replace the Medical Savings Accounts launched in over 20 states and in a federal pilot program in the mid-90s. With higher contribution limits and more generous tax treatment than MSAs, HSAs have become extremely popular in their short existence. At the end of 2016, the number of HSA accounts exceeded 20 million.

2010-Present – Affordable Care Act (ACA)

In response to a decades-long growth trend in premium costs for health insurance, the rising rate of uninsured Americans and general inefficiencies among providers, the Affordable Care Act was enacted in 2010 to, as its name implies, make coverage more affordable.

While ACA primarily targeted health insurance carriers, providers and individuals, part of the law’s effort to get more Americans insured while lowering costs has involved employers having to expand their health care coverage offerings (i.e., the Employer Mandate) and contain the cost of those offerings (i.e., the Cadillac tax) – with the result being a shift to a more consumer-driven model, where employees take on a greater share of the risk. Hence the growth in HSAs and the proliferation of voluntary benefits to help employees manage their higher personal costs.

What's next?

Now, with the new Republican administration, while much of the ACA could be heavily altered (e.g., swapping age-based tax credits for income-based subsidies) or even eliminated (e.g., Obamacare taxes), the emphasis on consumer-driven health care should remain and intensify, with HSAs likely to expand.

Employers have indicated no interest in exiting the health care sponsorship game, as these benefits are vital to talent attraction and retention, so they’ll continue to rely on technology that can help them 1) maximize that investment and communicate value to employees, and 2) stay current with the evolving regulatory landscape.

For more on the ongoing saga of American health care, join Benefitfocus, along with health care policy expert Chris Condeluci, as we discuss the current status of ACA "repeal and replace" efforts, and what employers can expect to see in the coming months. Click here to download the on-demand webinar!