Employers get a tax break for providing health insurance to their workers, and the health benefits employees receive don’t count as taxable income. This tax benefit is the main reason why the majority Americans have employer-provided health insurance. But what started this trend? And are the unemployed left out?

During World War II, federally mandated wage caps prevented companies from offering higher salaries to attract new employees. As a work around, companies started providing health insurance as a fringe benefit. And in 1943 the IRS deemed those benefits non-taxable for both the employer and employee.

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Was their move successful in expanding American health coverage? Well, more than 158 million Americans now rely upon their employer for their health coverage. Employer provided health insurance does a great job of providing coverage for the employed, but not everyone keeps their job forever.

Is your employer downsizing? Need to go back to school? Want to quit and start your own company? You’ll have to try your luck in the individual insurance market. And switching to a plan in the nongroup market means giving up the tax benefits that employer based coverage provided.

Yes, people who have nongroup insurance plans have to pay income tax on the money they used to pay for their plan (about $750 per anum for a family in the 15% tax bracket). The premiums for nongroup insurance plans are also nearly double the dollar amount that the average employee contributes towards their health plan. (For a family, the average nongroup insurance plan was $5,800 in 2007. The average contributions for employee and employer in 2008 towards employer-provided coverage were $3,350 and $9,325 respectivly)

If companies can tend to be overly generous with their non-taxable health plans, providing plentiful and luxurious ‘Cadillac’ benefits, then those using nongroup insurance can tend be overly frugal. With all the added economic burden for the individual outside of the realm of employer-provided coverage, it’s not surprising that nongroup policy holders tend to be extremely price sensitive.

Underinsurance is common for nongroup policy holders — high deductible plans with low lifetime benefit limits are all but ubiquitous in the nongroup market. Why? While they offer only bare bones benefits and leave their benefactors uncovered for many catastrophic health problems, they still manage to satiate the price sensitivity of the consumer by offering relatively low premiums. Even though they offer very little in terms of protection risk, the consumer leaves feels protected.

Our system is stretching to cover everyone and failing miserably at it. Much of the population still uninsured, unemployed, or both. There are huge deficits in health coverage when it comes to these groups.

Why should a tax break that has evolved to become the primary stimulus for providing health care to Americans only apply to the employed? Max Baucus, chairman of the Senate Finance Committee, has already call the tax break “too regressive” and stated that it “skews the system”.

The health system has a multitude of problems, and America’s 45 million uninsured are evidence of the system’s dysfunction. One of the first steps towards reform needs to involve making coverage more available to these individuals. In order to level the playing field, Congress needs to rework the tax break for employer-provided insurance. Employed or not, everyone should have the the same economic incentive for purchasing health insurance.