# The Original Sin of U.S. Health Policy 

July 24, 2023 • Visual Feature 

By [Michael F. Cannon](https://www.cato.org/people/michael-f-cannon) 

# The Original Sin of U.S. Health Policy 

July 24, 2023 • Visual Feature 

By [Michael F. Cannon](https://www.cato.org/people/michael-f-cannon) 

*“Imagine yourself in a bar…*

…where a pickpocket takes money out of your wallet, and with it buys you a glass of chardonnay. Although you would have preferred a pinot noir, you decide not to look that gift horse in the mouth and *thank the stranger profusely for the kindness, assuming he paid for it.*

Most economists believe that employer‐​based health insurance is an analogue of this bar scene.”

—Uwe Reinhardt

![A doctor placing an apple into the hands of a patient.](/sites/cato.org/files/styles/aside_3x/public/2023-04/Apple-Doctor-BG.jpg?itok=Xd5y_11T) 

*Employers pay for employee health benefits*

by taking money—in total $1 trillion per year—from workers’ cash wages and other compensation.

Workers earned that money. It belongs to them. *But they don’t control it.*

Employers do.

Why? For 100 years, Congress has taxed cash wages but excluded health benefits from taxation. In effect, the tax code penalizes workers who want to control their earnings and their health insurance.

This original sin has been the cause of nearly every problem with the U.S. health sector, from unfair discrimination to inadequate coverage to excessive prices.

![A hand holding a US health insurance card (Individual PPO Plan).](/sites/cato.org/files/styles/aside_3x/public/2023-04/Insurance-Card-BG_3.jpg?itok=IY_9CawE) 

The OECD says the United States makes employer‐​sponsored health insurance compulsory.

In the aggregate, the U.S. tax code threatens workers with $352 billion in additional taxes if they do not let employers control that $1 trillion.

Workers have a fundamental right to control their earnings and to make their own health decisions.

Tax-free health savings accounts (HSAs) are a progressive reform that can restore workers’ rights and fill gaps in health care.

![A collage of newspapers circa 1900.](/sites/cato.org/files/styles/aside_3x/public/2023-04/newspaperbg-light_1.jpg?itok=aLNUFnG_) 

*How did employer-sponsored health insurance dominate the U.S. market?*

*1913*

When Congress created the second federal income tax in 1913, modern health insurance did not yet exist. Congress gave no apparent thought to health insurance or employee health benefits, which were rare. But Treasury Department officials had to decide whether to include health benefits as taxable income.

![U.S Congress. - Counting The Electoral Vote, Washington DC, 1913.](/sites/cato.org/files/styles/pubs_2x/public/2023-04/congress-1913-rounded.png?itok=tl9LJsSA) 

*1920s*

Health benefits were still rare in the 1920s, when Treasury officials decided to exclude group insurance from the income‐​tax base. From that moment, the federal government effectively penalized workers unless they let an employer control their health insurance.

![A Treasury Department official, surrounded by packages of newly minted currency, counts and wraps dollar bills. ](/sites/cato.org/files/styles/pubs_2x/public/2023-04/treasury-rounded.png?itok=kMZIMRhv) 

*1942*

In 1942, as health insurance grew, another government distortion favored employer-sponsored health insurance. Wartime wage controls froze cash wages but allowed employers to attract scarce workers by offering and expanding health benefits.

![Two female factory workers reconditioning used spark plugs at Buick Plant July 1942.](/sites/cato.org/files/styles/pubs_2x/public/2023-04/wwii-rounded-2.png?itok=6dzUq2AN) 

*1950s*

Employer purchasing of health benefits began robust growth only after wage ceilings disappeared in 1953 and Congress codified the exclusion in 1954.

![A couple looking worried as they plan their finances at a desk. ](/sites/cato.org/files/styles/pubs_2x/public/2023-04/couple-budget-rounded.png?itok=vNXDzgWo) 

Employer-sponsored health insurance is the largest category of compulsory health spending in the United States.

![Figure 6 [earthquake]: Employee health benefits are the largest source of compulsory health spending in the United States, 2022](https://infogram-thumbs-1024.s3-eu-west-1.amazonaws.com/976b2ff9-9580-418a-9820-749b0397ee01.jpg) 

The tax exclusion is the main reason why, as a share of GDP, compulsory health spending in the United States exceeds total health spending in *all* other advanced nations.

![Figure 10.2 [earthquake]: Government compels U.S. residents to spend a larger share of GDP on health care than other OECD nations, 2020](https://infogram-thumbs-1024.s3-eu-west-1.amazonaws.com/5f83754d-9dc4-4b7d-ad78-8970d106e48b.jpg) 

![Figure 7 [earthquake]: Employers controlled more job-based health insurance and increasing amounts of employees' earnings from 1999 to 2021](https://infogram-thumbs-1024.s3-eu-west-1.amazonaws.com/12301b9c-3719-4ca7-89d7-b6ac6c0a4ced.jpg) 

The exclusion is squeezing workers, leaving them with increasingly less control over their earnings.

![Figure 10 [earthquake]: Employer-sponsored health insurance is crowding out cash wages](https://infogram-thumbs-1024.s3-eu-west-1.amazonaws.com/e0918fe8-8e90-49a7-a658-4e3d00a4b523.jpg) 

The tax exclusion distorts the economy and *discriminates* against the vulnerable.

*It discriminates against…*

…low-wage workers and others without employer coverage by penalizing them with higher taxes.

…women, obese workers, older workers, and others with above-average medical needs by increasing medical prices and denying them control of *more* of their earnings than other workers.

…workers with expensive medical conditions by stripping them of their health insurance when free markets would have provided them continuous, secure coverage.

The tax code *compels* workers to purchase coverage that is more likely to drop them when they are sick than coverage workers purchase themselves.

![Figure 12 [earthquake]: Probability of uninsurance after one year of continuous coverage, by type of coverage, 2000–2004](https://infogram-thumbs-1024.s3-eu-west-1.amazonaws.com/3c5dd022-bd77-4676-a034-ed355f8647ba.jpg) 

*It distorts…*

…the financial sector by diverting $1.3 trillion annually away from workers to employers and insurance companies—preventing savings institutions from competing to manage those funds.

…labor markets by diverting compensation away from cash wages to health benefits; obscuring total compensation; and trapping workers in bad jobs.

…the health sector by penalizing continuous, life‐​long health insurance, leaving millions with uninsurable preexisting conditions, and increasing prices for medical care and health insurance.

![Female hand holding a fistful of U.S. currency.](/sites/cato.org/files/styles/aside_3x/public/2023-04/HandGrabbingMoney.jpg?itok=buvPxZJd) 

Congress needs to stop throwing money at the problem of excessive prices and insecure coverage.

To restore workers’ rights and make health care more universal, Congress must give workers immediate control of the $1.3 trillion of their earnings the tax code lets employers control.

“Large” HSAs would make health care more affordable, fill gaps in coverage, and give all workers—especially low-wage and vulnerable workers—more control over their earnings and health decisions.