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
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.
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.