*By Jack Rasmus
Z Magazine Online October 2007 Volume 20 Number 10
The current system for financing health care, which originated in the immediate post-World War II period, is today approaching collapse. Its decline began in the 1980s and 1990s under Presidents Ronald Reagan and Bill Clinton. The dismantling of that system is now accelerating under George W. Bush.
Prior to 1947, with a few exceptions, the position of U.S. Labor was to advocate the adoption of single payer universal health care financed and administered through the Social Security system. That approach recognized that health care was not only a personal right but a public good that benefited all society and was therefore a justified public investment.
However, that strategic focus was sidetracked in the late 1940s and replaced with a quite different post-World War II arrangement and new rules of the game for financing and delivering health benefits.
Immediately following World War II several of the most strategically powerful unions broke ranks with Labor's historic position demanding single payer universal health care as part of the Social Security system. During the period 1946-1949 the Mineworkers, Steelworkers, Autoworkers and other major unions shifted from advocating single payer health care as their primary policy focus to providing health benefits by directly negotiating health benefit plans with employers. The goal of single payer health care was not rejected outright. It was still there. But it now became a secondary objective at best.
Despite Labor's strategic shift and willingness circa 1946-49 to press for health benefits for no more than one-third the national workforce (organized Labor's membership at that time being about one-third of that workforce)--employer resistance to the idea of negotiating health benefit plans was strong at first. The idea of a system of health benefits based on union-employer negotiated health plans, with the insurance industry as broker, was not immediately embraced by corporate America. After all, business had just successfully convinced Congress to pass the Taft-Hartley Act in 1947 which essentially de-fanged the trade union movement, depriving it of the use of those solidarity tactics (i.e. sympathy strikes, plant occupations, closed shop-hiring halls, the secondary boycott, the right to strike for union recognition, etc.) that were the basis of much of Labor's success in the preceding decade. Why should employers concede and agree to negotiate health benefit plans that would only raise costs and cut into profits?
But corporate resistance was significantly softened by the close of the decade as a result of direct U.S. government-provided incentives and various new rules encouraging employers to negotiate such plans.
Among the various new rules of the game introduced at the time, corporations were now allowed to deduct all their health care costs from their annual tax liability, thereby boosting company profits, stock prices, and senior management bonuses. There was a beneficial secondary effect to this as well: employer health benefit contributions reduced hourly wage increases and direct labor costs. Unlike health benefit contributions, wages could not be deducted from corporate taxes. But by substituting health benefit contributions for wage raises, the cost of those wage raises diverted into health benefit plan contributions were also in effect tax deductible and thus amortized across the general taxpayer base.
Another set of incentives allowed businesses to boost corporate balance sheets as well as corporate income statements. Health benefit contributions often went into a health care fund. As the fund grew, it became an ever-growing asset on the corporate balance sheet as well as a positive entry on the company annual income statement. The company could thus appear even more profitable than it was, providing a further boost to its stock price. With a relatively young and healthy workforce at the time, the costs of health care were not likely to exceed the revenues in the form of workers' deferred wages and company contributions reflecting those deferred wages. The funds themselves would therefore provide an alternative source of investment revenue. Later, additional new rules would allow corporations to divert surpluses earned from their pension funds to their health care benefit funds.
For the rapidly expanding insurance industry circa 1947-52 the potential benefits were even more direct and lucrative. The relatively youthful average age of the U.S. workforce at the time made certain that insurance costs would not exceed insurance revenues for decades to come.
For the above material reasons employer resistance evaporated quickly around 1950, led by the insurance industry, banks, and the large manufacturing-mining-transport based companies. Medium and smaller businesses soon followed, as employer-provided health care plans became a standard benefit offering to employees to avoid unionization. Tens of thousands of union-negotiated and employer-only insured health benefit plans were quickly established during the period 1949-1952, and spread rapidly thereafter. Employer provided health plans and contributions became widespread throughout the U.S. economy. The postwar system of employer-provided health benefit plans became the accepted rules of the game and the norm.
By the early 1980s, more than 80 percent of all health care coverage was provided through employer-provided health plans. (The remainder by the Medicare and Medi- caid programs, the former for the retired and the latter for the most impoverished.) There was as yet virtually no personal-private health insurance or plans at that time.
Not all the rules of the game associated with the postwar employer-provided benefit plan system were advantageous to employers. In exchange for the incentives and advantages to corporate profit/loss and balance sheets, companies were still responsible and liable for providing and financing health care benefits. Union negotiated and employer-only provided plans spelled out a certain level of benefits the company was required to provide employees and dependents. If funds were insufficient for any reason, the increase in cost had to be diverted from corporate net income.
That responsibility was tolerable for employers so long as government rules still subsidized corporate contributions to health benefit plans, so long as unions were willing to forego wage increases to help fund health benefits and so long as insurance companies and others did not seek to dramatically increase their relative share of profits in the industry.
But once insurance companies got overly greedy, once corporate America and its government allies envisioned a health care benefits alternative offering the same corporate subsidies, but in an even more profitable alternative arrangement, the liability inherent in the old rules became increasingly unacceptable. That alternative began to take shape in the 1980s and 1990s. It emerged full blown under George W. Bush.
Reagan Establishes the Pre-Conditions
Two developments in particular during the Reagan years pointed to the eventual breakdown of the old system and the development of new rules and a new arrangement for financing health benefits. The first was the widespread de-unionization that occurred during the Reagan years and the break up of collective bargaining that accompanied that de-unionization. The second was the new model for privatizing employee benefits through the creation of 401k personal pension plans.
Both the de-unionization and the balkanization of bargaining reflected the intent of business and government, after 1980, to discontinue the broader agreements, tacit understandings, and compromises with Labor that had been established in the late 1940s. The postwar social compact between business-government-labor was finished. Corporations knew it. The Reagan administration knew it. Only the junior partner, Labor, would not believe or accept the fact it was no longer welcome at the table. And if Labor was no longer needed, a health benefits financing system was also unneeded.
This cleared the way for the emergence, later, of two-tiered negotiated benefits that provided significantly less health benefits coverage for newly hired employees. It thus created great dissatisfaction among a significant percentage of younger workers with the old rules that provided far less for them and often at an additional cost.
The second critical development during the Reagan period was the emergence of 401K pension plans, first introduced in 1983 and then expanded rapidly. 401Ks provided a new model of how corporations and employers could extricate themselves from liability for, and contributions to, traditional defined benefit pension plans.
Like the current health care benefits system, the defined benefit pension plan system also originated in the immediate post World War II period. It, too, expanded in the late 1940s through 1950s and grew to become the dominant pension delivery system in the 1960s-1970s. By 1980 more than 80 percent of private sector employees were covered under defined benefit plans. After the introduction of 401Ks in the 1980s, however, defined benefit plans have been progressively dismantled and replaced with personal 401K private pension plans. Today no more than 20 percent of private sector workers are covered by traditional defined benefit pension plans, and that number is about to drop dramatically in the next two years. The result has been less cost to companies--a continuation of the subsidies for companies originally provided by Defined Benefit plans, but without corporate liability and responsibility for financing employee retirement. Thus 401Ks reflect a new set of rules that in essence allow corporations to effectively exit the pension benefits system. The analog to pension 401ks in health care is Bush's proposed Health Savings Accounts (HSAs), which are currently expanding rapidly throughout corporate America.
The Clinton Shift
In the 1990s under Clinton the idea of individual-personal health care received a further push with the introduction of managed health care, which essentially maintains that the consumer is the cause of rising health care costs, not insurance companies, private hospital chains, and drug companies. If consumers are the source of the problem, it follows that the solution must be to reduce their access to health benefits and services and/or to raise the cost of such services to consumers in order to ration the delivery of health benefit services. Moreover, once the consumer is thus tagged as both the cause and solution to the problem, it is a short step to shift liability to the consumer for financing the provision of those health benefits, which is exactly what consumer driven health care would later do.
The Clinton shift to targeting and blaming the consumer was not the only contribution of the Clinton period. Clinton's managed health care solution set in motion the historic run-up in health care benefits costs over the last decade, 1997-2007, which has fundamentally undermined the old rules for financing health benefits. By diverting health care cost containment away from the true origins of cost increases--which lay in health insurance, pharmaceutical companies, and private hospital chains' mergers, industry concentration, and monopoly-like pricing behavior--Clinton effectively gave a green light to the acceleration of health care costs that began in his second term, 1996-2000, and that continues today.
As health care costs began to rise precipitously in Clinton's second term, his solution was to add new rules which would allow companies to divert funds from their defined benefit pension plans to continue to subsidize their health benefit plan cost increases. But all that did was undermine traditional pension plans further, which were already in the process of a rapid decline and many of which would approach near collapse after 2000 because of the allowed diversions.
Health Care At the Crossroads
In 1992-93 roughly 75 percent of employers offered a traditional employer (or union-employer) provided health benefits plan to their workers. By 2003 this percent had declined to only 60 percent. That's more than 500,000 companies exiting the postwar system. About 10-12 million are now enrolled under HSA-type personal health plans. Both corporations and the government are today engaged in a major PR-push to expand HSA-type health benefit plans as rapidly as possible.
But with typical HSA plan deductibles of $1,500 to $3,000 per year, and with their much higher co-pays as well, many workers will simply continue to opt out of health care coverage altogether due to increasing lack of affordability. It is therefore quite possible that over the next decade at least 10-20 million more will be added to today's 47 million workers and their dependents who lack any health benefits coverage whatsoever.
Only two paths lead from the dead-end solution of consumer driven health care and personal health plans/HSAs. One way leads backward, to try to restore some semblance of the post-World War II system and resurrect employer-provided health care benefit plans. That essentially hybrid post-war arrangement, however, was a unique result of a specific set of conditions which no longer exist and can no longer be restored--despite a longing to do so by some in the trade union movement. Neither corporations nor their government-political allies will support it. Labor may be willing to throw more and more workers' wage raises into it to try to maintain it. But that effort over the past decade has proved a dismal failure. It results in a transfer of potential wage raises into the pockets of insurance companies and private hospital chains, as health care costs continue to rise, as employers continue to shift those costs to workers, and as benefits coverage levels continue to decline despite the additional contributions by workers.
The remaining choice is twofold: either the further expansion and entrenchment of personal-HSA plans, in which workers-consumers pay a greater share of total costs and corporations exit in stages from any liability for health care financing, or a return to the idea of a true single payer universal health care system delivered through the Social Security system.
Z
Jack Rasmus is the author of The War At Home: The Corporate Offensive From Ronald Reagan To George W. Bush, Kyklos Productions, 2006; and the forthcoming
From Us To Them: The Trillion Dollar Income Shift: Essays on the Origins of Income Inequality in America, www.kyklosproductions.com <http://www.kyklosproductions.com/>.