There's a wide variety of folks who claim that employer-paid health insurance was a side-effect of wage freezes during WW2. The claim is that employers couldn't raise their employees' pay due to the Federally-mandated wage freezes, so they instead started providing health insurance.
The thing is, this is unadulterated balderdash. If it had been a response to the wage and price controls, then employers would have immediately dropped the health insurance plans once wage and price controls were lifted after the end of the war and instead raised wages by that amount. But the reality is group health insurance is cheaper than individual health insurance, and that's why it became standard even for employers where 100% of the cost was paid by employees. The tax break is one reason, but by far not the only reason -- until recently, the cost of health insurance simply wasn't big enough to make the tax deduction a big deal, I paid something like $40/month for health insurance when I was a young adult for example, back when dinosaurs roamed the Earth and penguins lived in Antarctica rather than in the Silly Cone Valley.
So anyhow, why do I say that group health insurance will invariably win out over individual health insurance in a free market for health insurance? Let us list the reasons why:
- Reduced marketing costs. There are 10 million businesses in the USA. There are 115 million households in the USA. You do the math -- group plans have 1/10th the marketing costs.
- Reduced billing and collection costs. Again, 10 million bills, 10 million checks to process, rather than 115 million bills and 115 million checks to process.
- Increased reliability of collections. Businesses tend to pay their bills on time due to having automated processes for collecting the money out of people's paychecks then cutting a check to the insurance company (or e-paying them). Individuals pay when they pay, and you have to deal with late pays, missing pays, and all sorts of other billing issues if you're billing individuals.
- Homogenization of product. Individuals would want all sorts of different insurance policies and you'd need to provide all of them or your competitors would win the business for the ones you want to provide. But by selling to businesses, you can sell one of a very few insurance products, which greatly reduces your cost of selling and administering insurance plans, because businesses are primarily interested in getting the cheapest insurance acceptable to their employees.
In short, in virtually every country that doesn't have centralized socialist healthcare where everybody is automatically insured and automatically gets the money taken out of their paychecks as taxes, you'll find employers directly involved in the enrollment and provision of insurance, because it's simply cheaper. There is only one Switzerland (where insurance is provided on an individual basis rather than group basis), and even Switzerland has been Switzerland for less than twenty years (before that the primary funders of healthcare were employer-based group plans like the USA) and individual insurers haven't been driven out of business by cheaper group plans there only because group plans have been banned by government fiat. When you have group plans and individual insurers in the same system, people buy individual insurance only when they're self-employed... because otherwise, it's simply cheaper to buy it through your employer, even if you're paying 100% of the cost out of pocket.
-- Badtux the Healthcare Economics Penguin