In the ever-changing world of health care, one thing remains the same. Low-income workers continue to be shortchanged by America’s steadfast reliance on an employment-based health insurance system.

Employment-based health insurance, or EBHI, took hold during World War II when workers’ wages were frozen, but the IRS ruled that employers could offer increased health insurance benefits. Due to this unplanned turn of events, EBHI is often referred to as the “accidental system.”

A recent Kaiser/HRET survey of employer health benefits in California found that, among firms with fewer than 200 employees, only 35 percent of low-wage firms offer their employees health insurance, compared with 75 percent of high-wage firms. A firm was considered low-wage if at least 35 percent of its workers earned less than $20,000 per year. Moreover, the situation for low-income workers has deteriorated over time.

Using education level as a proxy for income, the percentage of college graduates covered by EBHI increased from 79 percent in 1977 to 80 percent in 1996. Over the same period, however, high school graduates covered by EBHI dropped from 68 percent to 63 percent, and high school dropouts with EBHI fell from 52 percent to 34 percent. There are many factors that explain this decline.

In California, where the minimum wage is $6.75 per hour, an employer might wish to pay his minimum-wage employees $6 an hour and use $0.75 an hour toward the purchase of health insurance for the employees. But the minimum-wage law requires that the entire $6.75 be paid as wages.

The minimum wage guarantees that workers affected by it will not get health insurance from their employer. A full-time, minimum-wage worker in California will earn $13,500, or 152 percent of the federal poverty level in 2002, but if he wants health insurance, he will have to pay for it with after-tax dollars.

Even when it is available, EBHI is a bad deal for low-income workers, compared to their high-income counterparts. Health insurance is part of a worker’s total compensation, and its cost to the worker is determined by the after-tax wages that are sacrificed to obtain it. After subtracting federal and state income taxes and payroll taxes, high-income workers generally forgo about 50 cents in after-tax wages for each dollar of health insurance premium. Because they face lower marginal tax rates, low-income workers give up more like 75 cents in after-tax wages for each dollar of insurance.

Imagine if a supermarket charged high-income individuals 50 cents for a dozen eggs, charged lower-income individuals 75 cents for the same eggs, and charged minimum-wage earners one dollar for the eggs. Is that a fair marketplace?

Another factor working against low-income workers is the growth of health insurance costs relative to wages. In most years, insurance premiums grow at a rate far greater than wages. For low-income workers who have it, health insurance represents a larger portion of their total compensation. This means that rising premiums cause total compensation to grow at a faster rate for low-income workers than for high-income workers. Employers who can’t afford this rapid growth often drop health coverage altogether. Paying their employees with wages is a more controllable expense.

The employer-based system serves the cause of those who promote government-run health care as the solution. Not only are low-income citizens left out of the system, but those who receive coverage must change their insurance every time they change jobs and whether they receive coverage at all is determined by their boss. Princeton University professor Uwe Reinhardt correctly notes that Americans who are covered by employment-based health insurance cannot really be considered insured. They are “temporarily insured.”

It’s no surprise that the idea of providing tax credits for individuals to buy their own health insurance has gained momentum. President Bush has proposed tax credits for low-income Americans that will give a $1,000 credit to individuals earning up to $15,000 per year and a $3,000 credit to families earning up to $25,000 per year. These tax credits would be reduced for those with higher incomes, eventually phasing out at incomes of $30,000 for individuals and $60,000 for families.

Proponents of government health care charge that the Bush proposal will undermine employment-based health insurance. But how could it undermine the employer-based system when the low-income Americans who would receive the tax credit are already left out of the system?

Better yet, the next time you hear someone say that tax credits will undermine the employment-based health insurance system, ask them why the system is worth saving.

Chris Middleton is the Senior Health and Tax Policy Analyst for the Center For Entrepeneurship of the Pacific Research Institute in San Francisco. He can be reached via email at cmiddleton@pacificresearch.org.