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.