Wednesday, October 17, 2007

Dismantling the Postwar Health Care System

This is a long and detailed historical analysis of worker health care benefits in the US. As a Canadian I find it quite interesting since the situation is quite different here. With the recent agreement by the CAW with GM for the union to takeover funding health benefits this seems like a fitting end to the long decline in worker's power to force corporations to fund health care plans.

*Dismantling the Postwar Health Care System
Tracing the decline in worker health benefits

*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 .

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