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Assessing Employment-Based Insurance and its Alternatives

Henry J. Aaron

Introduction

To no ones’ surprise, Stuart Butler has done about as good a job as can be done presenting the
case that a system of individual tax credits could be fashioned to replace the current employment-based
health insurance system. Unfortunately, as good a job as can be done is not good enough.

To begin, I want to stress that the current system of employment-based health insurance
is not one any of us would have designed and recommended. It arose initially as an accidental by-product
of wage controls during World War II. Those controls prohibited wage increases but permitted new or
expanded fringe benefits. Under super-intense demand for labor, employers competed with the only coin
they could freely spend and attracted workers by offering health insurance and other fringe benefits. Tax
law excluded the value of such benefits from taxable compensation, and we were off to the races. The
combination of the tax advantages — less important during the war and in the years immediately thereafter
than they are today — and the economies of group administration and pooling gave work-based insurance
an enormous advantages over other methods of buying health insurance.

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