The following are paraphrased excerpts or direct quotes from an article by Milton Friedman with the headline "A Way Out of Soviet-Style Health Care." The article was published in the WSJ on April 17, 1996.
1) Prior to WWII, individuals were responsible for their own medical care. They could pay for it out of pocket or they could buy insurance. "Sliding scale" fees plus porofessional ethics assured that the poor got care. On entry to a hospital, the first question was "What's wrong?" not "What is your insurance?"
2) First major change to this arrangement was a byproduct of wage and price controls imposed during WWII. Employers could not offer high wages to potential and current employees so they began offering benefits packages. These included employer provided health insurance which was a new phenomenon and was not regulated by current tax regulations. So employers treated it as exempt from withholding tax.
3) The IRS eventually caught on and issued regulations requiring employer-provided medicare costs to be included in taxable wages. This sparked a storm of protest from employees and Congress eventually passed legislation exempting employer-provided healthcare from both the personal and the corporate income tax. This removed the employee from the medical care decision process.
4) Second major change was the enactment of Medicare and Medicaid in 1965. "These added another large slice of the population to those for whom medical care, though not completely "free," thanks to deductibles and co[payments, was mostly paid by a third party, providing little incentive to economize on medical care. The resulting dramatic rise in expenditures on medical care led to the imposition of controls on both patients and suppliers of medical care in a futile attempt to hold down costs."
5) "The best way to restore freedom of choice to both patient and physician and to control costs would be to eliminate the tax exemption of employer-provided medical care. However, that is clearly not feasible politically. The best alternative available tis to extend the tax exemption to all expenditures on medical care, whether made by the patient directly or by employers, to establish a level playing field.