May 16, 2006
The Health Care Trap Posted by Joshua Zeitz at 09:15 AM EST Apropos of John Steele Gordon’s post several days ago on the tangled mess that is America’s health care economy, there is a fascinating body of recent historical literature that deals with the origins of our country’s strange, patchwork system of employer-based insurance for those in the workforce and public-sector health care for the elderly and indigent. Jennifer Klein’s book For All These Rights: Business, Labor, and the Shaping of America’s Public-Private Welfare State, is a particularly strong contribution. Klein, a Yale historian, traces the development of private health and life insurance from the early twentieth century through the 1960s and argues convincingly that private insurers and industry appropriated New Deal language emphasizing economic and personal security (think, for instance, of FDR’s Four Freedoms, which promised Freedom from Fear and Freedom From Want) while insisting that the private sector, and not the government, could best provide that security. In effect, the private sector promised to build and maintain the safety net—in stark opposition to Western Europe where, in the years after World War II, states constructed vast, publicly-financed safety nets—in an effort to stabilize industrial relations and prevent the expansion of the American welfare state. But there were big problems with the so-called Treaty of Detroit, the generic name for a sweeping arrangement between large industrial unions and big employers, first ironed out between General Motors and the United Auto Workers in the late 1940s. The prevailing postwar arrangement in America was essentially that industry supplemented Social Security with private pension plans and assumed responsibility for workers’ health care, while unions, in turn, curbed their earlier demands for a more expansive system of state welfare (which would have been funded, of course, by higher personal and corporate taxes, as was the case in Western Europe). For one, the new arrangement left non-unionized workers out in the cold, and that meant that certain sectors of the population—namely women, Latinos and African-Americans—who were under-represented in the ranks of organized labor enjoyed less security than white men. In addition, by agreeing to let responsibility for health care rest with private industry, workers left themselves at the mercy and discretion of their employers. By the 1980s, a powerful combination of global competition and sheer greed emboldened many firms to cut or cancel out pension plans and health insurance, thus shifting risk back to working Americans. Morally, it’s somewhat clear what the stakes are. In an effort to stop the expansion of the New Deal welfare state, the private sector made a solemn promise in the 1940s to provide for Americans’ health insurance. If it cannot or will not continue to honor that pledge, then we need to revisit the idea of state-financed or state-run health care. But the situation is probably more complicated than that. Though the percentage of employers offering subsidized health care to employees has dropped from 69 percent in 2000 to 66 percent in 2005, most of that drop has been in the small-business sector (98 percent of firms employing more than 200 people offer some health insurance to their workers). Arguably, small businesses often cannot afford to build high premiums into their benefits packages. On the other hand, whereas industry leaders like GM—which helped pioneer the system of private insurance—led the way in the 1950s, today’s industry leader is Wal-Mart, which has stubbornly shirked its part of the social contract. And this position has had ironic consequences. Wal-Mart may be anti-statist, and it may clamor for lower corporate taxes, but it leaves many of its workers to rely on Medicaid. If the moral dimension of the problem is complicated, as John Steele Gordon points out, the economics are even more mind-boggling. On one hand, economists like Paul Krugman argue that America’s health care economy is inefficient. True, built into our system is a great deal of competition that theoretically keeps costs in check—something that monopolistic single-payer systems lack. On the other hand, competition creates an extra incentive for insurers to minimize their payouts, and as a result, America wastes a far greater percentage of its health care dollars on administrative costs (doctor’s offices fighting HMOs, HMOs fighting hospitals, etc.) than countries like France, which have single-payer systems. Krugman’s argument boils down to this: Why waste the money? Let’s spend it on insuring everyone. Which makes sense. On the other hand, my economist friends at Cambridge generally agree with Mr. Gordon that market competition is vital to keeping health care comprehensive and affordable. So what to do? It still seems to me that the much-maligned Clinton plan was on the right track, even if its political design was a disaster. It preserved market competition by creating large buying cooperatives—much like the highly successful Federal Employees Health Benefits Plan, which offers federal workers an enormous range of affordable insurance packages—that enlarge the risk pool and avoid the trap of discriminating between the healthy and the sick. It had the added benefits of portability (so essential in an age of high job turnover) and universal access. I’d be curious to know what my American Heritage friends think.
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