So how did we get here? A couple of events in history paved the way for employer-based health insurance in the United States. The wheels were first put in motion when, in 1932, President Franklin D. Roosevelt chose to focus on Social Security instead of universal health care. And a series of government actions – some with unintended consequences — in the decades to follow further solidified our dependence on this type of system. The bottom line is, many experts agree that our employer-based health care system evolved, not necessarily accidentally, but in what can be considered an “unplanned” way that disregarded any long-term outlook.
One key to understanding this scenario is something called the “dependency ratio.” This is the ratio between the number of people who aren’t working in a population versus the number of people who are. Any employer who offers pensions and benefits to its employees has to deal with the consequences of this ratio.3 But as it turns out, employers back in, say, the 1950s, most often did not.
More on that later. But first, back to President Roosevelt , some important government decisions, and how we got to where we are.
The country was in a desperate state in the early 1930s. As Wilbur Cohen, who served in the Roosevelt administration, would later reflect, “Roosevelt in 1933 could have federalized or nationalized anything he wanted … at the bottom of the depression if (he) wanted to create all national banks … a national system of Social Security and health insurance, he could have gotten it.”2
As I mentioned, Roosevelt chose, rather, to focus on Social Security. Why he dropped health is debated. One theory points to the fierce opposition of the American Medical Association at the time. Another places the spotlight on famous neurosurgeon Harvey Cushing, Roosevelt’s son’s father-in- law, who had lunch with him the day before his announced decision. Whatever the reason, health insurance on a national scale was abandoned.2
Into the resultant void came non-profit Blue Cross and Blue Shield plans. For-profit companies watched from afar through the 1930s. Once profitability was clear, they streamed in behind the Blues, so that by the time the country was prepared for post World War II expansion, private insurance infrastructure was in place. It had a little help along the way. In the early years of the war, the economy super-heated and caps were placed on employee salaries to prevent inflation. Employers, competing for scarce workers, began to layer on benefits, including health insurance. By 1949, the government ruled that benefits were part of the negotiated wage package, and five years later, the IRS exempted employer-provided health benefits from income tax.4
Coincident with this, labor and management dueled over the issue. In 1949, the United Auto Workers Toledo local began a drive to create a regional pension plan that would spread risk across many auto industry suppliers. The reasoning was that even if your particular company went bankrupt, your benefits would be safe because they came from a regional pool, not directly from your employer. Business owners and large employers disagreed with the concept. They felt that collectivization threatened the free market and business owners’ autonomy. In the United States a year later, Charlie Wilson, then president of General Motors, began offering GM workers health care benefits and a pension. The offer was more defensive than beneficent. Before this decision, Wilson had been in contract talks with Walter Reuther, the national president of the UAW. Reuther disagreed with Wilson’s move, but it didn’t really matter. In the single decade between 1940 and 1950, the number of Americans covered by employer-sponsored health care increased from 20 million to 142 million. Today, the number has reached 159 million, which is 62.5% of our non-elderly population. 2
In the decades following these events, it became obvious to both employer and employee alike that tying one’s health insurance to one’s employment could be problematic. For the employee, the insurance was not portable and this meant that losing your job would be a double hit – loss of income and loss of health insurance. For employers, careful introspection has come at a more gradual pace. Lee Iacocca in the 1980s, pleading Chryslers’ case for a government bailout, was the first to identify a dollar figure subtracted from each automobile’s profits based on health care.5 Today, of course, it’s more obvious. Financier Wilbur Ross says it this way: “Every country against which we compete has universal health care. That means we probably face a 15% cost disadvantage versus foreigners for no other reason than historical accident … the randomness of our system is just not going to work.”3
Part of the reason why this system is not going to work much longer has to do with the unintended consequences of several government actions. First, in 1974, the Employee Retirement Income Security Act (ERISA) was enacted to protect employees against abuses of their pension funds. As a secondary effect, it conferred certain benefits to employers who self-insured — that is, they acted as an insurance company for their own employees.6 By doing so, they were exempted from state regulations that might, for example, impose universal coverage within state borders or demand coverage of services like in-vitro fertilization or mental health support. In addition, larger employers were able to remove and cover their healthy and wealthy workers, artificially skewing the case mix of those covered by private insurers, causing rates to go up.2,6
Secondly, changes in federal accounting rules in 1990 and in 2005 forced companies to reflect long-term liabilities on their balance sheet and predict total pension and health benefit costs into the future. The shock of what this will actually cost – a shock that was reinforced by Wall Street and bond raters — caused employers to more aggressively explore strategies to eliminate long-term coverage and shift financial risk to their employees.7,8,9
In 2005, an average family coverage premium reached $10,000 per year, the annual cost of wages for one minimum wage worker.2 This is incredible, but cost of health care for current workers doesn’t even begin to expose the size and scope of the problem. Lack of innovation or mismanagement on the part of companies can’t be blamed either. The real culprit is the dependency ratio — which as I mentioned before is the relation between the number of people working in a population and the number who aren’t — and its tie to the employer-based insurance approach. This is actually what has brought some of our largest, most revered U.S. companies to their knees.
GM is the perfect example. Today, it has an estimated $62 billion in health care liabilities and is under-funded for its long-term commitments to the tune of some $50 billion dollars. In 1962, the company had 464,000 U.S. employees and 40,000 retired beneficiaries. That’s a dependency ratio of 1 to 12, which is 12 employees contributing to the pension of each retiree. In 2005, GM had 140,000 workers and 453,000 retirees. That’s one-third of a worker to support each current retiree. Add to this the impact of layoffs and downsizing, which tends to preserve older workers, decrease workforce, and increase the number of pension-dependent retirees, and you can see why GM is in this dire situation.3
All of this is to say that while American business has avoided the perceived risks of regional planning and collectivization, with theoretical advantages for business autonomy and free trade, clearly, they have paid a very dear price. Today, innovations that increase efficiency and quality also increase the dependency ratio. Today, our most successful corporations are many billions of dollars behind in their health care obligations. Our corporate leaders are declaring bankruptcy to escape their own employees and to abandon the social contracts that they voluntarily embraced.
The reality is — in a global environment where business survival is a function of rapid innovation, age-independent knowledge management, real-time adjustments in role delineation, and rapidly changing value propositions, providing health insurance to an increasingly privileged few is an enormous distraction. GM’s Charlie Wilson got the whole thing wrong. For markets, especially global markets, to function optimally, benefits and risks, most especially when it comes to health, must be broadly shared.
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