How Tying Health Care to Jobs Hurts the Free Market
What confuses me about U.S healthcare
One out of every six adult workers (16%) in the United States is staying in a job they might otherwise leave out of fear of losing their employer-sponsored health insurance.
I remember the first time I realized that quitting a job also meant losing my health insurance. I wasn’t married, I didn’t have kids, and I didn’t need much medical care, but the idea that my ability to see a doctor was dependent on my employer struck me as… odd.
So I did what I do when something doesn’t make sense to me: I researched it. What I found only reinforced my conviction that healthcare should not be tied to employment. The recent changes in tax policy will likely make employer-based healthcare even more prevalent.
Let me walk you through how we arrived at this point and why it’s holding back free markets.
How We Got Employer-Based Health Care
1. World War II and Wage Controls
During World War II, the government imposed wage and price controls to prevent inflation. Employers couldn’t attract workers with higher pay, so they got creative: they started offering health insurance as a fringe benefit. Because it wasn’t considered taxable income, it gave them an edge.
2. The Tax Code Cemented It
In the 1950s, the IRS made it official. The 1954 Internal Revenue Code formalized what had been an unclear 1943 administrative ruling, making employer-sponsored health benefits officially tax-exempt. This created a massive incentive for businesses to offer health insurance instead of higher wages.
The impact was dramatic: research by economist Melissa Thomasson shows that household insurance coverage increased from 63% in 1952 to 76% by 1957, just three years after the tax change was implemented. More importantly, the share of households with group insurance rose from 47% to 66%. The tax subsidy increased coverage, and it fundamentally shifted Americans from individual insurance plans to the employer-based system we know today.
Households in higher tax brackets responded most strongly to these incentives, and the research suggests that this single policy change increased insurance coverage by nearly 10%, while creating the “job lock” problem that we still face today.
3. Labor Unions Pushed It Too
Unions also had a hand in it. Since direct wage increases were restricted, union leaders bargained for better benefits, including health coverage, as part of compensation packages.
Where That Leaves Us Today
Big Firms Have the Upper Hand- large employers can negotiate better rates and provide more attractive benefits, which helps them attract and retain top talent. This is a concern because smaller firms struggle to compete in attracting top talent. It is one reason why innovation and competition can stall: a lack of employees willing to work for smaller, incoming firms.
It’s Cost-Efficient for Employers. Offering health insurance can be more cost-effective for companies than offering higher wages, thanks to tax breaks and risk pooling across large employee groups. This is why it is important to discuss total compensation, not just wages, when negotiating job offers.
Employees Are Vulnerable - Most Americans obtain health insurance through their job, so losing a job often means losing coverage. That’s a scary place to be. When considering work, people are also considering healthcare options, which shouldn’t be the case. Those should be two different economic decisions.
The Unemployed Are Often Uninsured - For those without a job, the situation is even more unreliable. Losing employment frequently means losing access to affordable health insurance altogether. While options like COBRA or ACA exchanges exist, they can be expensive, confusing, or challenging to navigate, particularly during a time of financial stress. This creates a gap where the people most in need of care, those under financial strain or in career transition, are least likely to have consistent access to it. That’s not just a health issue; it’s a labor market inefficiency.
The Economic Consequences
Job Lock- People stay in jobs they don’t like, or that don’t suit them, just to keep their insurance. That reduces labor mobility, innovation, and overall economic efficiency. One out of every six adult workers (16%) in the United States is staying in a job they might otherwise leave out of fear of losing their employer-sponsored health insurance, according to a West Health-Gallup survey.
Uneven Coverage - If you work for a small business or are self-employed, you may face higher costs or fewer options. Our system fragments access based on employment status rather than health needs.
Shifting Costs - More employers are passing rising premiums and deductibles on to their workers. Even if you have insurance through your work, you may still be underinsured.
Entrepreneurship lock - The potential financial burden of health insurance premiums and out-of-pocket costs can make individuals hesitant to leave a stable job with benefits and venture into the uncertainty of entrepreneurship. This studyfinds that the Affordable Care Act increased self-employment opportunities.They estimate that a decrease of $50 per month (the average is about $420) in premiums would increase the annual entry rate into self-employment by about 9%
The Takeaway
Government intervention is what got us in this system, price controls and tax incentives tied employment and healthcare together. The government will have to break that relationship or provide an alternative.
The Affordable Care Act helped by creating marketplaces and expanding Medicaid, but employer-sponsored insurance still dominates. And it keeps millions of Americans tied to jobs they’d rather leave. The recent changes introduced by the Big Beautiful Bill will create a shift back to the older system.
Untethering health insurance from employment would unlock entrepreneurship, improve job matching, and reduce the stress that comes from tying your family’s health care to your employer’s decisions. One reason people hold back from entrepreneurship is due to the high costs of healthcare.
A good economy is one where people can move freely, take risks, and find work that suits their skills and values, rather than being stuck in a job they dislike.
What do you think? Should we reconsider the structure of healthcare in America? Drop a comment. I’d love to hear your take.
Great breakdown of how a wartime accident became permanent economic infrastructure. The 16% job lock stat is wild, but even more interesting is how it tilts the playing field toward big companies that can offer better plans. I saw this firsthand when a friend with chronic health issues turned down a startup offe that would've doubled her equity upside because she couldn't risk losing stable coverage. The entrpreneurship angle matters too, ACA helped but we're still way behind other developed economies in untethering health from employment.