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Is your health insurance subsidized by the government? Asked that question, most Americans say no. But, as reported in recent story for Vox, most Americans are wrong. Beyond seniors receiving Medicare and low-income people getting Medicare or covered through the Affordable Care Act, the entire American employer-based health insurance system is based on massive government funding in the form of federal tax breaks.

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In a 2003 paper for The American Economic Review, Melissa A. Thomasson looked into how federal money created the insurance landscape as we know it.

The development of employer-based insurance began in the 1940s with a loophole in wartime wage controls that let businesses attract workers by providing fringe benefits. But it really took off with a 1954 tax code that exempted employer spending on insurance from income taxes. To see what happened next, Thomasson looked at survey data from 1952 and 1957.

Thomasson found that the percentage of families with insurance jumped from 63 percent to 76 percent. Among those with insurance, 10 percent said their employer paid the entire premium, and 26 percent said it paid some of the cost in 1952. That rose to 23 percent and 33 percent respectively in 1957.

The subsidy also encouraged people to buy more insurance than they used to. Using archival premium schedules, Thomasson calculates that the average value of insurance for those who had it rose more than 60 percent. Between more people being insured and higher levels of coverage, the average value of insurance for every American—including both the insured and uninsured—rose from $18.19 in 1953 to $48.91 in 1958. Households with high marginal tax rates were particularly likely to end up with more insurance after the new tax rules took effect.

By the time Thomasson wrote her paper, 70 percent of Americans under age 65 had private health insurance, with the vast majority getting it through their employers. And the subsidies for employer-based health insurance handed out through the tax code had risen to $90 billion.

These days, there’s a lot of talk about whether the Affordable Care Act will break down the employer-based insurance system. But the question shouldn’t be whether it will let the federal government shape the way insurance is provided. It’s already been doing that for 60 years.



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The American Economic Review, Vol. 93, No. 4 (Sep., 2003), pp. 1373-1384

American Economic Association