In the words of Milton Friedman (in a wonderful article entitled How to Cure Health Care), here's how employer-provided health insurance came to be:
The revival of the company store for medicine has less to do with logic than pure chance. It is a wonderful example of how one bad government policy leads to another. During World War II, the government financed much wartime spending by printing money while, at the same time, imposing wage and price controls. The resulting repressed inflation produced shortages of many goods and services, including labor. Firms competing to acquire labor at government-controlled wages started to offer medical care as a fringe benefit. That benefit proved particularly attractive to workers and spread rapidly.So, employers provide health insurance benefits because of a historical fluke. What are the consequences of this fluke?
Initially, employers did not report the value of the fringe benefit to the Internal Revenue Service as part of their workers’ wages. It took some time before the IRS realized what was going on. When it did, it issued regulations requiring employers to include the value of medical care as part of reported employees’ wages. By this time, workers had become accustomed to the tax exemption of that particular fringe benefit and made a big fuss. Congress responded by legislating that medical care provided by employers should be tax-exempt.
First, individuals rarely shop for health insurance, comparing plans to one another. They even less frequently shop for specific health care services. Employers do this work for individuals by selecting an insurance plan (or set of plans) to provide as a fringe benefit. Because these plans are untaxed, employers can be more generous than if they were paying salary.
Notice that generosity (not cost-saving) is the virtue in this transaction: more comprehensive plans are praised as "wonderful benefits," rather than criticised as excessive spending. I suspect that change in tone is responsible for some of the overspending on health insurance plans.
For a discussion of some of the consequences of this system, see this video.
As Stossel reports in the video, when people pay for their own health care (or at least profit from cutting back on expenses), they shop around and at great cost savings.
Second, employer-provided health insurance means that when a worker loses his job, he loses the subsidy to his health insurance as well. With the outrageous price of health insurance, individuals who lose their jobs are stuck paying premiums so high that many choose to go uninsured.
In the United States, if you lose your job, you lose health insurance. That's the greatest injustice of our current health care system. If health reform is to fix one problem, it should break the link between unemployment and health care. In a recession, it's tough enough to be out of a job, but when losing your job excludes you from proper health care, that's a tragedy.