Philadelphia Reflections

The Resentfulness of Rejected Benefactors

Employer-based health insurance can be viewed as a lingering vestige of feudalism, or maybe Federalism. Employer-basing evokes images of the mansion on the hill, overlooking the factory and a little village of workers, allowing an eternal debt to the entrepreneur in the mansion who risked life and fortune to make the industry flourish. When a worker in the factory was injured, it really was the duty of the owner to see he was cared for. In fact, about 25% of major businesses are still controlled by the founding family, where notions of paternalism are taken more seriously. At least one mutual fund even specializes in family-owned and controlled businesses and can demonstrate that such attitudes really are an important asset. Unions, of course, sneer at such nonsense, while the owner-entrepreneur, in turn, reacts with fury at the implicit ingratitude. The Roebling family (of the Roebling Steel Company, builders of the Brooklyn Bridge, etc.) is famous for an epic performance with its company town, and there are a thousand such tales, starting with George Washington and his plantation. Although it is now difficult to see the slightest trace of feudal beginnings in the present administration of Blue Cross and other health insurance corporations, benign feudalism was in fact the foundation stone for employer-based health insurance.

And while most of them would deny it, it accounts for some of the vigor with which union leaders insinuate themselves into the board rooms of the present successor health insurance corporations, like schoolboys sitting on a vacant throne. It would go too far to describe the seventy-year struggle for national health care as entirely based on these primeval victories, but something does remain of that idea. In the 1920s, the big problem was to get people to buy health insurance. Civic-minded employers played such a leading early role in promoting this distinctively American solution it was often called an employer-based system. Dominating hospital boards of trustees, businessmen exerted peer pressure to spread the health insurance message. It became the right thing to do if you wanted to be regarded as the right sort, yourself. Even today, healthcare in many cities would suffer considerably if employers suddenly withdrew support.

In their civic role as hospital trustees, businessmen also recognized early that employer insurance mainly eased the cost load for the working population, and became less comfortable for outsiders, while insurer management increasingly recognized employer groups were the most profitable clients. Some of this was the inevitable tendency of all large customers to be more demanding of better treatment and to get it. This recognition became more apparent in scarcely two generations, as workers emerged as the healthiest, least expensive segment of our population. As a consequence, more assertive employer representatives professed uneasiness about employee premiums cross-subsidizing the rest of the population, even though it was always obvious that people with an income are the only ones available to help people without income. There was thus stubborn resistance to the idea that the main function of health insurance was to act as a transfer agent of health costs between age groups, unfortunately without a written contract to do so. There was then a period when the expedient was imagined that employed persons supporting their dependents, children and elderly parents, might cover the need more or less adequately. Eventually, government programs for the elderly and for the poor were recognized to be absolutely essential additions; by 1965, we had Medicare and Medicaid. Taxes were just a redistribution system on a larger scale, but Lyndon Johnson was in a hurry and those Great Society programs went unclarified as potential equivalents for the same goal: working people recycling funds for non-working ones. Unfortunately, 1965 was about the time the American post-war international trade balance turned negative, eventually forcing a recognition that the "pay as you go" financing systems designed for Medicare and Medicaid would be unsustainable until our trade balance turns positive again, which could be the same as saying "forever".

Current premiums (mostly from healthy people) are used to pay current costs (mostly generated by older, sicker people) on the assumption that new young subscribers will always outnumber sick older ones. Not a safe assumption.

Even large cost savings from nearly eliminating the common causes of healthcare delivery expense, like peptic ulcers, tuberculosis, polio, typhoid, malaria, heart attacks. strokes and rheumatic fever -- could not overcome the instability of balancing increasing non-worker costs on a steadily diminishing base of worker costs. "Pay as you go" requires quite a suspension of disbelief to be called anything but a Ponzi scheme. And the essence of a Ponzi scheme has been made widely familiar by the Bernie Madoff example of it. Current premiums (mostly from healthy people) are used to pay current costs (mostly generated by older, sicker people) on the assumption that new young subscribers will always outnumber sick older ones. The retirement of the baby boom bulge had been predictable for sixty years but was ignored. Even today, it is pronounced impossible to happen a second time. It became an informal banking system for healthy working-age people to store up savings for those later life eras of heavy health expenses when they would be unable to work. Unfortunately, it was implied without a written contract and thus was always a "best efforts" promise.

Even benevolent employers had to worry that our international competitiveness could not withstand the strain of it. Although most citizens, businessmen or not, probably did not understand why it was true, attempting to lower worker health costs through Managed Care HMOs proved to be a self-defeating disaster, combining worker antagonism with further upward-leveraging of employee premiums to support it; even so, it never addressed the underlying basis of the problem. Reform of hospital cost-shifting against employee groups was equally futile, as described in later paragraphs because such pushing on the balloon caused it to bulge out among the uninsured, who mostly transformed it into bad debts for the hospital. Unfortunately, cost-shifting which in 2008 generated a proposed solution as dumping the system's growing medical expenses on the backs of those with high premiums but low usage, became translated into a shift onto the backs of those who could not even afford their own costs. It violated the long-established tradition that those with the highest medical costs should pay the highest premiums, without proposing a way to make it politically acceptable. It must be evident that the solution supported here is a benevolent return to the concept of "Each ship on its own bottom," because of alarming signs of class warfare in the concept that one group must support another group against its will. The general concept here advanced as a more palatable substitute is individual lifetime insurance. A short-term concession would be to call for modified individual lifetime policies as a transition step. The success of even this proposal must frankly depend on the hope that interest rates will return to normal, and that cures for cancer and Alzheimer's disease are on some future scientist's horizon. No solution to this problem should be presented as free of problems, but it is equally unproductive to throw things against a wall, just to see what sticks.

To repeat an inconvenient truth: "service benefits" means cost is not a responsibility of the patient or his employer. It has been transferred to the hospital and the insurance company to "work it out", which they mainly do by raising prices or shifting them to outsiders.

Employer-basing is far from perfect, as are service benefits, but at least they only minimally distort the medical system. They do create the potential for the employer to invade employee privacy, and real awkwardness arises when the employee wants to change jobs, a situation often known as "Job Lock". Difficult as these features do make things, we are about to learn whether eliminating them by Obamacare will seem worth the disruption. First, transferring insurance to that of a new job needs rough uniformity between policies of different employers, and therefore hampers competition between insurance companies. A second seeming requirement is to recognize that a sick employee is an expensive employee, by creating pooling arrangements with "healthiness credits" and "sickness debits", unfamiliar concepts generated by "pre-existing conditions", which will not be changed by writing pre-existing condition clauses. Sweeping these perfectly sensible reservations aside without addressing their merits will not be helpful. It will be interesting to see how well Obamacare manages this difficult issue. Ultimately, most of the issue reduces itself to an extra charge (or discount) on the premium for the policy of the new employer. Since the Health Savings Account and catastrophic illness policies do not commonly include service benefits, they can be much more restricted to money issues with an indemnity resemblance. (Explanation: a service benefit is to pay all the costs of an appendectomy. An indemnity pays $5000 if you get appendicitis.) Therefore, indemnities also suit themselves better as a common denominator for quarrels between successive insurance carriers. To shrug off the Job-Lock issue by saying this problem has no solution is to say that employer basing has no place in health insurance, other than the present patchwork causing so much dissension. The public seems to be demanding some solution. Of the compromises available, the Health Savings Account imposes the least contortion because it requires a dollar settlement rather than an agreement to the open-ended limits of pain and suffering, weakness and disability. An employee with a disability needs to change jobs, but he is an expensive employee in the eyes of the new employer. His costliness occurred while his health was the responsibility of the first employer, but how is that to be transferred? Large employers will prefer a money solution, unnecessarily ending the employee's career. This problem cannot be solved unless health insurance is either permanent or freely transferrable; permanent is better because its costs are set in advance of the disability. Transferrable means costs are established after the fact by a referee who knows insurance will pay. To repeat an inconvenient truth: "service benefits" means cost is not a responsibility of the patient or his employer. It has been transferred to the hospital and the insurance company to "work it out", which they mainly do by raising prices or shifting them to outsiders.

Many problems will prove to be non-problems, while unanticipated problems are inevitable.

Even after conceding the advantages of permanent insurance, there remain problems. Increasing employment mobility collides with variable state regulation of insurance. That awkwardness is mandated by the McCarran Fergusson Act which is more or less guaranteed by the Tenth Amendment of the Constitution, challenged by the Roosevelt Court-Packing uproar, and tracing ancient origins to Thomas Jefferson and the anti-Federalists. Litigation could be protracted. Nevertheless, the idea of creating individually owned, lifetime health insurance is so attractive it is hard to say it is impossible and easier to say its traditional alternatives are worse. Health costs concentrate in the first and last years of life, while the several-thousand-dollar premiums would be largely unspent for long periods of time, gathering interest for many decades (in periods with normal interest rates) that might largely pay for the whole thing. Therefore, although it is attractive to design a program within existing laws, it is probably more feasible to examine the legal impediments and conduct a protracted campaign to modify them in many small ways. That is essentially why this proposal is offered as a Grand Strategy rather than a legislative package. When legal obstacles are proven to be intractable, it is then necessary to design workarounds. Many problems will prove to be non-problems, while unanticipated problems are inevitable.

Obamacare designers probably expected most of its problems to come from small business; they seem to have forgotten about ERISA, which presents some health insurance alternatives. Taking nearly a decade to design, ERISA is likely to withstand most attempts to change it.

Other Transition Problems To return to more mundane issues, it also generates vexing political problems to go from employer-basing to any government-dominated system, if you have allowed one segment to have a tax-deduction while denying it to another segment. At first, transferring the cost from employee to employer is a gift from one to the other. But in time, the employer adjusts, and the costs return to the employee as a reduction of wages; almost all economists agree this invisible readjustment occurs. But when one segment of the business has adjusted the pay-packet to pay for the fringes, while another segment has not, the unfairness surfaces abruptly when it does surface. That is the unfortunate situation with the coming program, and it accounts for much Tea Party rancor. Employers who have previously reached a tacit agreement that they won't offer health benefits, but will pay a little more in the pay-packet, will suddenly be confronted with a new cost which their bigger competitors have long since absorbed. In short, it is likely that small business will be much more hostile to the approaching Obamacare than big business, because they will genuinely be hurt more by it. Just what has been solved by delaying the implementation of large groups by a year is unclear; it does sound as if it had things backward. Perhaps a problem emerges from conflict with ERISA.

The mundane but ultimate downside of employer involvement is that top management of major companies seldom give healthcare a high enough priority on their time, thus allowing unions and human resources departments (their philosophical successors on the company payroll), to speak for the company in important forums, with the effect of appreciably softening price concerns. When top management was again drawn into a visible role by the Managed Care ("HMO") fiasco, the business-school approach did not distinguish itself, so government and academia have become less deferential, perhaps even hostile, to business. The final word on the role of employers in the transformation of an employer-based system by the Affordable Care Act has yet to emerge. Much will depend on how gracefully the transition is managed.

Originally published: Monday, June 03, 2013; most-recently modified: Friday, June 07, 2019