Employer Based Health Insurance – How It Began, Why It’s Bad For The Economy, And Why Employers Want Out.
Posted on | November 15, 2012 | 2 Comments
Business leaders came to Washington this week to meet with the President to discuss the state of our economy and the “fiscal cliff”. They also had a few questions about “Obamacare” – and while they may not have said it out loud – they’re dreaming of getting out of the health insurance business for good. And we ought to let them go.
The United States is the only developed nation in the world that relies on businesses to provide health insurance. At its peak in 2000, employer-sponsored insurance covered nearly 67% of non-elderly Americans.(1) But the truth is, this system is breaking down, and it probably should never have been started at all. In fact, according to Princeton health economist Uwe Reinhardt, “If we had to do it over again, no policy analyst would recommend this model.”(2)
Employers have been doing their best to get out of the health insurance business for the past decade.(3) Some have dropped it completely. Many more have degraded their own plans incentivising employees to move into cheaper, high-deductible plans with minimum deductibles now pegged at $2500 a year.(4)
A report out this week noted that 36% of large employers were now offering these cheaper plans, up from 14% five years ago. 16% of all covered employees, in an effort to control their own costs, are now choosing high deductible plans compared with 5% in 2007. On average these plans are 20% cheaper than the typical PPO. The cost? An average $7,833 annually per employee compared with $10,007 for a PPO plan.(4)
Employers spin the move as a success story all around. Health care costs escalated by only 4.1% this year, the lowest rise in a long time. And advocates for these plans say the high deductible makes employees think twice about seeking services they don’t really need.(4) Maybe so. But the bottom line is that employers should have never gotten into the health insurance business to begin with, and if we get them out of it our economy and our citizens will be a lot more secure.
So how did we get here? A couple of events in history paved the way for employer-based health insurance in the United States. The wheels were first put in motion when, in 1932, President Franklin D. Roosevelt chose to focus on Social Security instead of universal health care. And a series of government actions – some with unintended consequences – in the decades to follow further solidified our dependence on this type of system.
The country was in a desperate state in the early 1930s. As Wilbur Cohen, who served in the Roosevelt administration, would later reflect, “Roosevelt in 1933 could have federalized or nationalized anything he wanted … at the bottom of the depression if (he) wanted to create all national banks … a national system of Social Security and health insurance, he could have gotten it.”(2)
Roosevelt chose, rather, to focus on Social Security. Why he dropped health is debated. One theory points to the fierce opposition of the American Medical Association at the time. Another places the spotlight on famous neurosurgeon Harvey Cushing, Roosevelt’s son’s father-in-law, who had lunch with him the day before his announced decision. Whatever the reason, health insurance on a national scale was abandoned.(2)
Into the resultant void came non-profit Blue Cross and Blue Shield plans. For-profit companies watched from afar through the 1930s. Once profitability was clear, they streamed in behind the Blues, so that by the time the country was prepared for post World War II expansion, private insurance infrastructure was in place.
It had a little help along the way. In the early years of the war, the economy super-heated and caps were placed on employee salaries to prevent inflation. Employers, competing for scarce workers, began to layer on benefits, including health insurance. By 1949, the government ruled that benefits were part of the negotiated wage package, and five years later, the IRS exempted employer-provided health benefits from income tax.(5)
Coincident with this, labor and management dueled over the issue. In 1949, the United Auto Workers Toledo local began a drive to create a regional pension plan that would spread risk across many auto industry suppliers. The reasoning was that even if your particular company went bankrupt, your benefits would be safe because they came from a regional pool, not directly from your employer.
Business owners and large employers disagreed with the concept. They felt that collectivization threatened the free market and business owners’ autonomy. In the United States a year later, Charlie Wilson, then president of General Motors, began offering GM workers health care benefits and a pension.
The offer was more defensive than beneficent. Before this decision, Wilson had been in contract talks with Walter Reuther, the national president of the UAW. Reuther disagreed with Wilson’s move, but it didn’t really matter. In the single decade between 1940 and 1950, the number of Americans covered by employer-sponsored health care increased from 20 million to 142 million. By 2006, the number peaked at 159 million, or 62.5% of our non-elderly population.(2)
In the decades following these events, it became obvious to both employer and employee alike that tying one’s health insurance to one’s employment could be problematic.(6) For the employee, the insurance was not portable and this meant that losing your job would be a double hit – loss of income and loss of health insurance. For employers, careful introspection has come at a more gradual pace.
Lee Iacocca in the 1980s, pleading Chryslers’ case for a government bailout, was the first to identify a dollar figure subtracted from each automobile’s profits based on health care.(5) Today, of course, it’s more obvious. Financier Wilbur Ross says it this way: “Every country against which we compete has universal health care. That means we probably face a 15% cost disadvantage versus foreigners for no other reason than historical accident … the randomness of our system is just not going to work.”(3)
Changes in federal accounting rules in 1990 and in 2005 forced companies to reflect long-term liabilities on their balance sheet and predict total pension and health benefit costs into the future. The shock of what this would actually cost – a shock that was reinforced by Wall Street and bond raters — caused employers to more aggressively explore strategies to eliminate long-term coverage and shift financial risk to their employees.(7,8,9)
By 2005, an average family coverage premium had reached $10,000 per year, the annual cost of wages for one minimum wage worker.(2) That cost didn’t even begin to expose the size and scope of the problem. The real culprit was the dependency ratio — the relation between the number of people working in a population and the number who aren’t — and its tie to the employer-based insurance approach.
Long before the financial crisis, GM was in trouble. In 2006, it had an estimated $62 billion in health care liabilities and was under-funded for its long-term commitments to the tune of some $50 billion dollars. In 1962, the company had 464,000 U.S. employees and 40,000 retired beneficiaries. That’s a dependency ratio of 1 to 12, which is 12 employees contributing to the pension of each retiree.(6)
In 2005, GM had 140,000 workers and 453,000 retirees. That’s one-third of a worker to support each current retiree. Add to this the impact of layoffs and downsizing, which tend to preserve older workers, decrease workforce, and increase the number of pension-dependent retirees, and you can see why our auto industry almost went down.(3)
The auto industry, and other major U.S. employers have paid a very dear price for their mistake 60 years ago. Today, innovations that increase efficiency and quality also increase the dependency ratio. Today, our most successful corporations are many billions of dollars behind in their health care obligations. Their choice? Declare bankruptcy to escape their own employees and to abandon the social contracts that they voluntarily embraced, or spin lower value, high deductible plans as “good as gold”.
The reality is — in a global environment where business survival is a function of rapid innovation, age-independent knowledge management, real-time adjustments in role delineation, and rapidly changing value propositions, providing health insurance to an increasingly privileged few is an enormous distraction. GM’s Charlie Wilson got the whole thing wrong. For markets, especially global markets, to function optimally, benefits and risks, most especially when it comes to health, must be broadly shared.
For Health Commentary, I’m Mike Magee.
1. Fronstin P. Sources of health insurance and characteristics of the uninsured: analysis of the March 2005 current population survey. Issue brief. No. 287. Washington, D.C.: Employee Benefits Research Institute, 2005. http://www.ebri.org/publications/ib/index.cfm?fa=ibDisp&content_id=3597
2. Blumenthal, D. Employer-Sponsored Health Insurance in the United States—Origins and Implications. New England Journal of Medicine, 355:1. July 6, 2006. http://people.umass.edu/econ340/nejm-ebhi.pdf
3. Gladwell, M. The Risk Pool. The New Yorker. August 28, 2006. http://www.newyorker.com/printables/fact/060828fa_fact
4. Wilhite J. Companies Slow Health Cost Growth On Obamacare Concerns. Costs. WSJ.11/14/12. CFOJournal. http://blogs.wsj.com/cfo/2012/11/14/companies-slow-health-cost-growth-on-obamacare-concerns/
5. Thomasson M. From sickness to health: the twentieth century development of U.S. health insurance. Explorations in Economic History, 2000. 60:2, 504-508. http://journals.cambridge.org/action/displayAbstract?fromPage=online&aid=351424
6. Appleby J, Silke Carty S. Ailing GM looks to scale back generous health benefits. USA Today. June 23, 2005:B1.
7. The impact of the erosion of retiree health benefits on workers and retirees. Issue brief. No. 279. Washington, D.C.: Employee Benefits Research Institute, March 2005. http://www.ebri.org/publications/ib/index.cfm?fa=ibDisp&content_id=3497.
8. Harris RO. A Sacred Trust. New York: New American Library, 1966. http://www.columbia.edu/itc/hs/pubhealth/rosner/g8965/client_edit/readings/week_2/harris.pdf
9. Freudenheim M. A new worry for investors: retirees’ medical benefits. New York Times. July 25, 2005: C3. http://www.nytimes.com/2005/07/25/business/25place.html