During World War II, the federal government limited wage increases employers could offer, but it permitted them to offer employee insurance plans. This led to an increase in employer-provided health plans.
Employers were not required to pay payroll taxes on their contributions to health plans. Then, in 1943, a court ruling held that employees did not have to pay tax on employer health insurance contributions, either. This significantly increased demand for employer-provided health insurance. In 1940, just 1.3 million people carried health insurance. By 1945, 32 million people had health coverage.
The first employment-based health insurance plan predated World War II, however. In 1929, a group of public school teachers in Dallas, Texas, contracted with a hospital to provide inpatient services for a fixed annual premium.
In the early 1930s, the country was deep in the midst of the Great Depression, and many people who showed up for care at hospitals could not pay for it. This led hospitals to create prepayment plans, known as Blue Cross plans. They sold these plans to job-based groups, like teachers and newspaper workers. The plans did not cover dependents. Trouble came when hospitals tried to sell these plans to individuals. The people who signed up for the plans were people who had illnesses, which sent costs soaring. This nearly bankrupted many Blue Cross plans.
The first employer to offer coverage for medical care was Montgomery Ward. It was actually a disability policy to help replace income when an employee experienced a sickness that prevented him from working. The policy also covered medical care. Paid sick leave and short-term disability plans that many of today's workers receive stem directly from these early plans.