Health care and its drag on the economy helped sink George Bush,
Sr., in 1992. Now it looks like it might do the same for George Jr.
in 2004. Is there a solution to this problem? Yes, but it won’t be
easy.
First the bad news. Official job growth was only 21,000 in the
month of February and isn’t showing any signs of improving. It
isn’t that tax cuts aren’t working. The economy grew at a
blistering 6.8 percent last quarter. It’s that companies still
aren’t hiring. Nor are they likely to any time soon. Instead, they
are likely to rely on Manpower, Inc. (now the largest employer in
the country) and other middlemen for temporary or part-time
employment. The reason? Hiring people means taking on the burden of
providing them benefits, mainly health care.
Were it a simple matter of buying employees health insurance,
that wouldn’t be so bad. But employer-provided health benefits have
become a labyrinth of dodges and exceptions that create vast
inequalities. Labor unions are the main beneficiaries. Those most
hurt are small businesses, independent contractors, and the
self-employed. Since 80 percent of job growth occurs in these
sectors, it isn’t just who-benefits-and-who-doesn’t that’s at
issue. What’s at stake is the growth of the whole economy.
THE DEFINITIVE ANALYSIS OF the problem was written ten years ago in
Patient Power (1992) by John Goodman and Gerald Musgrave.
Since things haven’t change a bit — and since the lesson of
Goodman and Musgrave’s analysis hasn’t yet had much impact — let’s
do a brief review:
(1) The fundamental problem is that health insurance has become
a tax-free gift from employers. Critics trace it back to wage
controls in World War II, but it probably would have happened
anyway. The advantages to both parties are too obvious. With
marginal income tax rates now around 30 percent, health-care
benefits allow both employers and employees to pass money under the
table. This has encouraged both to load up as much as possible. As
a result, what employers provide is no longer health “insurance”
but prepaid health care. At their peak, the most
extravagant union-employee plans offered complete medical and
dental coverage with no deductibles to all family members. This
encouraged people to use doctors and hospitals
indiscriminately.
(2) At the same time unions and employers were dodging taxes,
the state governments were pursuing an equally disruptive strategy
by mandating health-care benefits. This comes from an unholy
alliance between pin-brained legislators and aggressive
practitioners of fringe services. Chiropractors are the classic
example. Most people don’t visit chiropractors and even more won’t
go unless their insurance covers it. That makes it imperative to
chiropractors that they be included in insurance policies. To most
people this is a frivolous extra. So the Chiropractors Association
lobbies the state legislature (in New York they gave Governor
George Pataki a special dinner) to persuade it to mandate coverage
for all policies. Some mandates are promoted by naïve
do-gooders (remember Tipper Gore and mental health?). But most are
engineered by the practitioners themselves. Soon everything from
liposuction and bariatric surgery or to massage therapy and
acupuncture are loaded on so that people must buy it whether they
want to or not. This takes the power out of the hands of consumers
and makes insurance unnecessarily expensive.
(3) Now the major employers providing health benefits face a
dilemma. They don’t want all the bells and whistles required by the
state legislature. How do they escape these mandates? The answer is
one simple acronym — ERISA (which stands for the Employee
Retirement Income Security Act of 1974). ERISA has become the most
bizarre instrument of government power in the last fifty years,
used endlessly to help the employees of major corporations to
escape the storms of the health insurance market for the safe
harbor of employee benefit plans. Yet the benefiting constituencies
are so powerful (more than half the country now gets its health
insurance through ERISA plans) nobody ever says a word. Here is how
it all evolved.
IN THE EARLY 1970S, A COUPLE of major employee pension funds went
bankrupt. As usual, Congress bailed them out, promising in the
Employee Retirement Income Security Act of 1974 to cover all future
shortfalls. Now that Congress was on the hook, however, it had to
make sure these pension plans remained solvent. So it included a
clause that said, in effect, “no act by the trustees of a pension
fund protected by ERISA shall in any way diminish the benefits to
its members.” In numerous instances the same union-and-management
trustees who were running the pension plans were also running
health-benefits plans. In many cases, the two were
indistinguishable. So Congress threw in a clause saying the same
rule applied to employee health-benefit packages. Wielding this one
simple clause, the trustees of employee health plans found they
could run insurance programs in a way no commercial insurance
company would ever dare.
In order to free themselves from state mandates and regulations,
large companies would first have to self-insure. This is fairly
easy if you have 500 or more employees. Major corporations largely
employ sizable pools of healthy people. It is fairly easy to spread
risks among such pools. Self-insurance, the companies argued, now
exempted them from state mandates, making them responsible only to
the Department of Labor, which supervises ERISA in a haphazard way.
Wielding ERISA, self-insured companies found they could take
ruthless measures in protecting themselves from large claims. The
courts backed them up every time — under the principle that “no
one can come between ERISA beneficiaries and their health-care
benefits,” ERISA plans were soon exempt from state regulations.
One common law among the states, for example, says you can’t cut
off someone’s health insurance simply because they contract a
serious disease. Commercial insurance companies could never dream
of doing such a thing. But ERISA plans, exempted from state
regulations, did it all the time. You may recall during the
health-care debates of 1993 Hillary Clinton telling horror stories
about AIDS victims who had been dropped by their insurance carriers
as soon as they contracted the disease. What Mrs. Clinton never
mentioned — and probably never understood — was that all these
instances involved company-based ERISA plans. No commercial
insurance company could get away with this. But for the courts,
ERISA became a kind of magic wand, solving all health-care
inequities. No one could come between ERISA beneficiaries and their
health-care plans. (The law, it should be noted, is interpreted to
protect ERISA employees a group. The financial solvency of
the plan cannot be endangered by the excessive claims of any
individual.)
AS A RESULT OF THESE early-1990s horror stories, the states piled
even more regulation on private insurance carriers. States now
started mandating “community ratings,” which say everyone must be
charged the same premium, and “guaranteed issue,” which says people
can wait until they are sick before applying. An overweight
50-year-old who smokes three packs of cigarettes a day pays and has
just discovered he has heart problems must pay the same premium as
a healthy 21-year-old who runs marathons. Naturally, the
21-year-old will soon decide he doesn’t need health insurance. Let
someone else subsidize the overweight smoker. This is why the
percentage of uninsured people has actually risen since
the health-care reforms of the Clinton Administration.
Eventually, even the major corporations themselves found they
had given away too much. Paying first-dollar coverage for their
employees’ medical bills eventually became too expensive, even with
the protections of ERISA. For the last decade, employers have been
raising deductibles, asking for co-payments, and cutting back on
benefits.
The best way to control costs is to contract with an HMO. That
soon raised the question, “Can HMOs be sued for creating an adverse
outcome by denying care?” Once again, the courts ruled that ERISA
was trumps. Since paying damage claims might endanger the financial
health of the ERISA plan, HMOs could not be sued.
At the time the Clinton Administration was “reforming” health
care, about 60 percent of the major employers in the country
self-insured under ERISA. The figure is now above 90 percent.
“We’re basically the Fortune 500,” says the ERISA Industry
Committee, which (according to its website) is “the only
organization in Washington exclusively committed to the employee
benefits interests of America’s major employers.”
Since challenging the benefits of ERISA would mean taking on the
Fortune 500 and the country’s major unions, a more sensible
strategy has been to try to expand ERISA to smaller and smaller
companies. This is not as easy. To self-insure, companies must have
sizable work forces across which to spread the risks. One hundred
is usually regarded as a minimum. Otherwise, one major illness can
drain everybody’s pocketbook. (There are now federal laws saying
ERISA plans can’t cut people off abruptly.)
Nonetheless, federal legislators and entrepreneurs are making
the effort. Self-insured companies can now buy “stop-loss”
insurance to cover major payouts without losing their ERISA status.
Doctors, lawyers, and other sole practitioners have been allowed to
form professional associations that can collectively form ERISA
plans. Still out in the cold, however, are small businesses,
independent contractors, the self-employed, and the unemployed.
More than half of all Americans now get their health insurance
through employers, nearly all through ERISA plans. Another 20
percent are covered by Medicaid and Medicare. That leaves another
30 percent with the option of buying impossibly expensive insurance
in the regulated commercial market. These people are the nation’s
“health-care problem.”
INDIVIDUAL MEDICAL SAVINGS accounts (MSA’s) are the answer. MSA’s
allow individuals to set up tax-free savings accounts to cover
their medical expenses - the same advantage that large-company
employees receive. Individuals are required to buy
catastrophic coverage (the real “health insurance”) to
cover major expenses. They then pay routine expenses out of their
tax-free account. The system, of course, is completely portable. It
offers no benefits that ERISA employees don’t already have.
But of course it smacks too much of free enterprise and
individual responsibility to please some people. Ridiculously,
critics argue MSA’s will “allow healthy young people to opt out of
commercial insurance pools” — as if half the country hadn’t opted
out through ERISA already. Less than 5 percent of the population
now buys its health insurance directly from a commercial
carrier.
The political disadvantage of the idea is that it only concerns
a minority of the electorate — self-employed professionals,
employees of small businesses, and all others who haven’t already
climbed aboard ERISA. For the satisfied majority, it offers
nothing.
The problem for the country is that the messy business of tying
health insurance to employment is now playing serious havoc with
economic growth. Coupling health insurance with employment only
works for large companies. For smaller growth companies, it adds an
impossible burden — or, alternately, makes people reluctant to
work for them. The Bush Administration has talked occasionally
about a grand vision of making health care and retirement benefits
portable, so that people don’t become trapped by their benefits,
unwilling to change jobs or work for small companies.
The time to put that proposal on the table is now.
