An Introduction to the Health Care Crisis in America: How Did We

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An Introduction to the Health Care Crisis in America:
How Did We Get Here?
by
Stephanie Kelton*
September 2007
* Associate Professor of Economics, University of Missouri-Kansas City and Research
Scholar, Center for Full Employment and Price Stability (CFEPS), [email protected]
The author thanks Ryan Dodd for his research assistance and Paul Kelton for reading and
commenting on early drafts of the paper.
INTRODUCTION
This paper provides an overview of the crisis in the U.S. health care system and lays the
groundwork for a deeper investigation into the nature of the current crisis. It addresses
three important issues. First, it provides a snapshot of the health care system and the
institutional arrangements through which health insurance is currently obtained and
administered. The second part of the paper examines the institutional development of the
U.S. health care system and examines the events that led to the emergence of a system in
which the majority of the population relies on an employer for health insurance coverage.
It is argued that the current system of employer-sponsored health insurance has its origins
in: 1) the failure of early twentieth century proposals for compulsory national health
insurance; 2) the impact of World War II wage and price controls; 3) the role of unions
and collective bargaining in the early postwar period; and 4) the impact of preferential tax
treatment for “fringe” benefits beginning in the mid-1950s. The last part of the paper
identifies a series of disturbing trends and suggests that the limits to employer-based
health insurance have been reached. The beginning of the contemporary crisis is traced
back to the end of the post-WWII prosperity in the 1970s, and it is argued that employerbased coverage is unlikely to remain the dominant source of insurance in the coming
decades.
HEALTH CARE IN AMERICA: A SNAPSHOT OF THE CURRENT ENVIROMENT
The United States does not provide health care to its citizens the way the rest of the
industrialized world does. Instead of guaranteeing coverage for all, it relies on a
patchwork system of market-based institutions in which those who are insured sometimes
1
receive coverage as a condition of employment, sometimes purchase individual policies
and sometimes obtain coverage through public programs such as Medicaid1 and the State
Children’s Health Insurance Program (SCHIP). Figure 1.1 shows where the non-elderly
population (i.e. those under 65 years of age) obtains its health insurance coverage. As the
data reveal, the vast majority of this population group – over 60 percent – relies on an
employer for health insurance.2
Figure 1.1
Sources of Health Insurance, Nonelderly
Population, by Own Work Status
2005
Uninsured
17.2%
Public
17.7%
Individually
purchased
7%
Employmentbased
62.7%
Source: Paul Fronstin, Employee Benefit Research Institute, May 2007
A relatively small number of those under age 65 – about 7 percent – purchase coverage in
the individual market, and about two-and-a-half times that many – today roughly 45
1
Adopted in 1965, Medicaid is a joint federal and state program that provides health
insurance for the poor and disabled. The federal government offsets its share of the
funding (roughly 50-80 percent, depending on a state’s income) from general revenue.
The majority of those covered are women and children, but the vast majority of the
spending supports the 30 percent or so who are disabled.
2
About half of those who receive coverage through an employer work directly for the
firm, while the rest receive it as a spouse or dependent of someone who is employed by
the firm.
2
million people – lack any kind of health insurance whatsoever.3 The number of
Americans without insurance would be even more staggering in the absence of
government programs, such as Medicaid and SCHIP, which have provided insurance for
millions of low-income families (particularly children) when their employment-based
coverage was lost (Gould, 2005).4 In total, the government picks up the tab for almost 18
percent of the non-elderly population.5
Figure 1.2 shows the four most important players in the health care arena.
Employers, governments and individuals comprise the group of Purchasers who supply
3
Employer-provided coverage is available to some of the uninsured, though they often
refuse it because they cannot afford the premiums. Indeed, studies confirm that
employees are less likely to enroll in an employer’s plan when the employee contribution
is relatively high and that the primary reason people are uninsured is the high cost of
health insurance coverage (Kaiser Family Foundation, 2004). This appears to be
especially true for low-wage workers (Blumberg et. al, 2004). Many other people – e.g.
temp or part-time workers – lack even the option to enroll in a company health plan, and
still others are effectively shut out of the health insurance market due to pre-existing
conditions.
4
There was a 2.3 percentage point increase in Medicaid (including SCHIP) coverage
from 2000 to 2004, which partially offset the 3.8 percentage point drop in employerprovided health coverage during the same period.
5
When the elderly population is included, government coverage is extended to about 78
million people – Medicare covers roughly 40 million elderly (over age 65) and disabled
Americans, and Medicaid covers about 38 million of the nation’s poor.
3
Figure 1.2
The U.S. Health Care System at a Glance
out-of-pocket payments
Purchasers:
Employers, Government,
Private Purchasers
out-of-pocket payments
$
$
$
Suppliers:
Medical
Supply,
Pharm.,
and
Computer
Industries
$
Insurers:
Public or
Private
Insurance
Agencies (e.g.
Medicare,
Medicaid,
Kaiser,
Humana, etc.)
$
Providers:
Hospitals,
Physicians,
Pharmacies,
Nursing
Homes, etc.
funds to public or private Insurers. The Insurers then reimburse Providers and Suppliers
by disbursing a portion of the funds they collect from Purchasers. Under this system,
both Purchasers and Insurers are considered “payers”, and there is a fundamental conflict
between them and the Providers and Suppliers who receive the payments they make. The
former would generally prefer to reduce health care payments, while the latter are keen to
maximize their receipts. Thus, health care costs “represent a battleground among
competing interests” (Bodenheimer, 2005, 848). As the largest purchasers of health
insurance coverage, employers are typically interested in reducing the premiums that
must be paid, while Insurers have an incentive to protect their profits by maintaining
higher premiums. At the same time, however, Insurers must compete for business by
offering competitively-priced plans.
Those covered by employer-based health insurance typically have access to one
or more of the following plans. The first kind of plan is the Health Maintenance
4
Organization (HMO). An HMO can be any organized plan other than a traditional health
insurance company that sponsors health care coverage. Some HMO plans are very
restrictive, requiring that the HMO’s own employees provide care in the HMO's own
hospitals or clinics, while other plans are cooperative agreements among independent
hospitals, doctors and other health care providers. The second type of plan is offered
through a Preferred Provider Organization (PPO). These plans also offer network-based
managed care, but they are generally less restrictive than their rival HMOs because
patients can see a specialist without a physician’s referral, and they can see any doctor
they choose for a higher out-of-pocket cost. Third, there is the traditional indemnity, or
fee-for-service, plan. Under this type of plan, patients see a doctor of their choice and
receive reimbursement for "covered" medical expenses (i.e., those listed in their benefits
summary). Fourth, is the Point-of-Service (POS) plan, which combines elements of the
HMO and PPO plan types. Point-of-Service plans require enrollees to designate an innetwork physician, but they allow patients to seek out-of-network care if they are willing
to pay higher out-of-pocket costs. Finally, there is the Consumer Directed Health (CDH)
plan. These plans are formed from Health Reimbursement Accounts (HRAs) or Health
Savings Accounts (HSAs), which provide traditional insurance for non-routine care but
require individuals to incur higher out-of-pocket expenses to cover routine care. As
Figure 1.3 shows, plans offered through PPOs are currently the most popular plan type.6
6
Consumer-Directed Health Plans are expected to be the fastest growing type of plan in
the coming years, as employers look to shift more of the cost burden to employees in
their on-going attempt to cope with rising health care costs. We will examine these plans
more closely in Part VI of this Series on Health Care.
5
Figure 1.3
Enrollment by Plan Type:
Employer-Sponsored Plans, 2005
Consumer
directed health
Point of Service plans (CDH),
(POS), 9%
3%
Indemnity, 3%
Health
maintenance
organization
(HMO), 24%
Preferred
provider
organization
(PPO), 61%
Source: 2006 Mercer National Survey of Employer-Sponsored Health Plans
Now that we know where most Americans get their health insurance and what
kind of coverage most of them have, it is time to look more closely at the characteristics
of the insured population. We focus on the segment of the population that receives
coverage through an employer since this is the most common source of health insurance.
Our goal is to learn more about the characteristics of those with employer-based
coverage. Figure 1.4 offers a gender-based look at this group. A number of points
should be immediately clear. First, well over half of all men and women rely on
employer-based insurance, making it the most common source of coverage for both
population groups. Second, both men and women have experienced a sharp decline in
employer-based coverage during recent years. Finally, females are now more likely than
their male counterparts to have employer-provided health insurance.
6
Figure 1.4
Coverage Rates
Employer-Provided Health Insurance,
Population Under 65 Years Old, by Gender
2000-2005
68%
67%
66%
65%
64%
63%
62%
61%
60%
59%
Male
Female
2000
2001
2002
2003
2004
2005
Source: Fronstin, 2007, EBRI Issue Brief No. 305
But gender is not the only area in which coverage is distributed unequally. In
fact, as Blumenthal notes, there is a “raft of arbitrary inequities in the availability of
health insurance” across population groups (2006, p. 86). Figure 1.5 details some of
these inequities.
7
Figure 1.5
Workers Aged 18-64 with Employment-Based Coverage, by Race,
Income, Occupation, Firm Size, Industry and Education, 2005
Race
Percentage covered within category
White
70.4
Black
50.4
Hispanic
41.3
Other
61.8
Family Income
Under $10,000
12.2
$10,000 - $19,999
22.8
$20,000 - $29,999
41.1
$30,000 - $39,999
55.9
$40,000 - $49,999
66.1
$50,000 - $74,000
76.2
$75,000 and over
85.8
Occupation
Managerial and
professional specialty
Service occupations
84.0
Sales and office
occupations
Farming, fishing and
forestry
Construction, extraction,
and maintenance
Production, transportation,
material moving
73.0
55.5
39.2
57.8
68.1
Firm Size
Private Sector
70.8
fewer than 10
49.5
10-24
59.9
25-99
70.0
100-499
77.1
500-999
79.9
1,000 or more
79.6
Industry
Agriculture, forestry,
fishing, mining and
construction
Manufacturing
51.7
Wholesale and retail
trade
Personal services
70.6
Public sector
88.1
79.5
64.8
Education
Less than high school
32.7
High school
57.7
Some college
66.7
College
79.4
Post-college
85.7
Source: Fronstin, EBRI, Issue Brief No. 305
8
As Figure 1.5 shows, whites are more likely to have coverage than blacks, Hispanics and
other minority groups; wealthier families are more likely to have coverage than poorer
ones; and college educated people are more likely to have coverage than those without
degrees.7 In addition to the inequities across race, gender, income and education, there
are inequities across industries and occupations. For example, those who work in
professional or managerial occupations are much more likely to have employersponsored insurance than those working in construction, sales or farming. Similarly,
those working in the manufacturing industry are more likely to have coverage than those
employed in wholesale and retail trade. Finally, those working for large companies are
more likely to have coverage than those who are employed by smaller firms.
There are a number of reasons why small employers are less likely to offer health
insurance than larger employers.8 First, the relatively high cost of underwriting and
administering policies for a small number of employees makes it too costly for many of
them to provide coverage. Second, small employers frequently state that their employees
have access to other forms of coverage (e.g. through a working spouse), making it
unnecessary to offer health insurance in order to attract workers. Third, small business
owners often argue that many of their employees would never acquire coverage anyway,
since turnover rates are relatively high and there is usually a waiting period before
benefits kick in for new employees. Finally, since small businesses have a higher failure
7
According to the Commonwealth Fund, workers earning more than $15 per hour are
more than twice as likely to have employer-provided health insurance as those earning
less than $10 per hour (Collins, 2004).
8
Although large firms remain more likely to offer health insurance than smaller ones, the
proportion of uninsured workers employed by firms with 500 or more employees has
been increasing. This is in part due to the loss of manufacturing jobs and a decrease in
unionization rates (Stanton, 2004).
9
rate than larger firms, small employers tend to limit “fringe” benefits in order to keep
costs under control.
THE INSTITUTIONAL DEVELOPMENT OF EMPLOYMENT-BASED HEALTH
INSURANCE
The previous section provided an overview of the current state of the U.S. health care
system. As noted above, the central financing mechanism is employer-sponsored private
health insurance, supplemented by an array of public insurance and subsidy programs
designed to help cover those most likely to lack coverage through an employer (in
particular the poor and the elderly). This section of the paper explores the historical
development of the employment-based system of health insurance. In particular, it
explains why the U.S. market for health insurance developed primarily as a private,
employment-based system when most European nations adopted some form of
nationalized, compulsory health insurance.9 Below, we examine the origins and
evolution of employment-based insurance and show that it emerged largely as an
“accident of history that evolved in an unplanned way” (Blumenthal, 2006, p. 82).
The institutional evolution of the American health care system is, perhaps, most
fruitfully examined in relation to the institutional evolution of American capitalism. For
the history of health care provisioning reveals the myriad of ways in which the system
has been shaped by developments within the broader political economy of American
9
The original function of health insurance was income stabilization. Health insurance
compensated sick workers for lost wages and was seen as a way to maintain the
“productive effort and political allegiance of the working class” (Starr, 1982, p. 238).
Germany adopted the first nationalized system in 1883. Following suit were Austria
(1888), Hungary (1891), Norway (1909), Serbia (1910), Britain (1911), Russia (1912)
and the Netherlands (1913). For more on this, see Mills (1937).
10
society. We therefore begin with an examination of the social, economic and political
forces that laid the foundation for the emergence of the modern health care system.
The Failure of National Health Insurance Proposals 1915-1948
Throughout the nineteenth century, there was scarcely a market for health
insurance in the United States. Family members cared for one another within the home,
and there was little reliance on the services of doctors or hospitals. By the end of the
nineteenth century, this was beginning to change. The increasing industrialization of the
American economy initiated a breakdown of the ‘household economy’ as:
[F]amilies came to depend on the labor of their chief wage earner for
income and on the services of doctors and hospitals for medical treatment. In individual households, sickness now interrupted the flow of
income as well as the normal routine of domestic life, and it imposed
unforeseen expenses for medical care . . . In the economy as a whole,
illness had an indirect cost in diminished production as well as a
direct cost in medical expenditure (Starr, 1982, p. 236).
By the late 1920s, medicine began to play an even larger role in people’s lives. Acute
illnesses were increasingly treated at medical facilities (as opposed to homes) and
hospitals became the centers for surgeries, X-rays and laboratories (Thomasson, 2002).
Along with these advances came an increase in the costs of treating illness and a desire
for some form of social protection to replace the traditional relations embedded in the
household economy of pre-industrial America. In response to these and other
developments, groups of social reformers arose in the early part of the twentieth century
to champion the cause of compulsory national health insurance.
11
Inspired by the advances in social legislation achieved in the area of worker’s
compensation, the American Association for Labor Legislation (AALL)10 produced the
first such proposal in 1915. The legislation was designed to provide compulsory
“sickness” insurance to industrial workers and their dependents. Specifically, the plan
would cover “sick pay” for income lost due to illness and a lump-sum payment to assist
with funeral expenses in the event of death. The plan was to be financed by contributions
from workers and their employers with additional support from general tax revenues.
The program was defended on the grounds of social justice and economic efficiency – the
former because it spread the risks of financial ruin and the latter because it mitigated the
social costs of illness. The AALL’s campaign for health insurance might have succeeded
if Theodore Roosevelt , who was nominated by the Progressives in the election of 1912,
had defeated Woodrow Wilson. However, the campaign got underway just as support for
Progressivism, as a political force, was beginning to wane.
It was two decades before there would be another political campaign to increase
the involvement of the national government in the management of social welfare. This
time it was President Franklin D. Roosevelt who believed that Americans needed some
form of protection against the growing costs of illness and economic insecurity. During
the Progressive Era, advocates for social insurance placed health insurance near the top of
the agenda. But the nation’s priorities were reordered in the ensuing years, as massive
job loss during the Great Depression elevated unemployment insurance to the top of the
10
Founded in 1906, the AALL is best described as a group of social progressives. It
consisted primarily of academics who were concerned with the extremes of capitalist
industrialization – e.g. child labor, unemployment and workplace disability. The
association’s membership included John R. Commons and Richard Ely, and Irving Fisher
gave the presidential address to the AALL in 1916 (Starr, 1982, p. 246).
12
reform agenda. Although health insurance was no longer considered a top priority,
Roosevelt came close to introducing legislation for universal health care coverage after
his election in 1932. At the time, a proposal for universal health insurance was linked to
the Social Security Act, which Roosevelt strongly supported. But the American Medical
Association (AMA) had a great deal of political clout, and it strongly opposed a universal
entitlement to health care. Roosevelt is said to have pulled his support for national health
insurance in order to prevent the AMA from dooming his Social Security legislation
(Blumenthal, 2006). So Roosevelt succeeded in providing Americans with Social
Security, unemployment insurance and workmen’s compensation, but he decided that
health insurance would have to wait.11
In 1945, while the war was winding down, Harry S. Truman became the first
American president to wholeheartedly advocate for national health insurance. He
proposed a single health insurance system to protect all classes of society, but his
program met with considerable resistance on both professional and political fronts. As
soon as the details of the plan were released, the National Physicians Committee issued
an emergency bulletin encouraging doctors to oppose the program. More opposition
from the medical profession came from the AMA, which stoked the fears of communist
influence by claiming that doctors would become “slaves” under Truman’s health
insurance plan. Thus, the debates played out against the backdrop of cold war politics as
the Republicans “charged that national health insurance was part of a larger socialist
11
There is speculation that Roosevelt was talked out of pushing for universal coverage by
a small group of physicians, including his son’s father-in-law, with whom he reportedly
had lunch the day before indicating that he was dropping the health insurance component
of his Social Security legislation (Blumenthal, 2006). Toward the end of his life,
Roosevelt revealed that he was planning to return to the health care agenda after the war
was over (Starr, 1982).
13
scheme” (Starr, 1982, p. 284). Meanwhile, private insurance strengthened its grip and
support for Truman’s plan dropped sharply in public opinion polls. By the late 1940s
anticommunist sentiments and powerful lobbying efforts made the prospects for national
health insurance “vanishingly improbable” (Starr, 1982, p. 285).
The Emergence of an Employment-Based System: 1929-1955
The demand for health insurance increased throughout the 1930s and 1940s, as
the development of antibiotics and improvements in anti-infection techniques gave rise to
an increased demand for medical care. The increasing supply and demand for health care
– with its attendant rise in prices – required a means of financing which did not rely on
family income and savings. However, a non-market based solution to rising costs and
expenditures was precluded by the failure of reform proposals in the first part of the
twentieth century. To fill this void, an alternative system of private health insurance
emerged.
Although they were initially reluctant to do so, hospitals and insurance companies
helped to accommodate the growing demand for medical care and health insurance by
organizing prepayment plans and marketing them directly to worker groups. Offering
health insurance coverage to groups of employees yielded two major benefits to the
underwriter.12 First, it enabled them to overcome the problem of adverse selection (i.e. it
was unlikely that a disproportionate share of those seeking coverage would be in poor
health). Second, the plans allowed employers to deduct premiums from employee
12
Interestingly, the first health insurance plans were offered by hospitals and not by
commercial insurance companies. The first “Blue Cross” plan was offered by Baylor
University Hospital in 1929 “as a means to ensure that patients paid their hospital bills”
(Thomasson, 2002, p. 237).
14
paychecks, thereby lowering the administrative costs associated with selling insurance
(Thomasson, 2002).
The popularity of these prepaid health insurance plans increased during the Great
Depression, when hospitals relied on them in order to smooth receipts in the face of
declining revenues.13 The American Hospital Association (AHA) encouraged the
proliferation of prepaid health plans, organizing them under the name Blue Cross, and
state laws gave the plans tax-exempt status and allowed them to operate as nonprofit
organizations. These “enabling laws facilitated the availability and growth of prepaid
health insurance” (Thomasson, 2002, p. 238).
But while many hospitals saw the benefits of offering prepaid policies, the
physicians themselves tended to oppose health insurance because they “feared that
interference from a third party would restrict their income and limit their ability to price
discriminate” (ibid., p. 239). In time, they decided that it was in their interests to offer
their own prepaid plans, so they introduced Blue Shield plans, which covered the
reimbursement of physicians’ services.14 Like the Blue Cross plans, Blue Shield plans
were given tax-exempt status and permitted to operate as nonprofits. In exchange for
these special provisions, Blue Cross and Blue Shield were initially required to
community-rate their policies, which required them to charge different employee groups
the same premium, regardless of their health status.
13
Mahar (2006) notes that average receipts per patient fell from $236.12 to $59.26 in the
aftermath of the Crash of 1929.
14
Groups of physicians were so interested in protecting their ability to price discriminate
that they ensured that laws were passed to prevent the Blue Cross plans from covering
physician services (Thomasson, 2002).
15
The success of the Blues soon invited competition from commercial, for-profit
insurance companies that were not required to community-rate their policies. When it
came to marketing policies to healthy employee groups, the for-profit insurance
companies could often undercut the Blues because they were allowed to experience-rate
their policies, offering lower-priced policies to healthier employee groups and charging
higher premiums to sicker groups. Competition intensified, and by the 1940s the market
for private health insurance began to grow rapidly. Between 1940 and 1950, the number
of Americans with private health insurance increased from 20.6 million to 142.3 million
(Blumenthal, 2006). But this explosion in coverage was not simply due to increased
competition and a growing demand for health insurance. Rather, a series of government
policies, passed in the 1940s and 1950s, provided private insurers with a new outlet for
their services – U.S. employers – and paved the way for explosive growth in the health
insurance industry.
Responding to the inflationary pressures of a wartime economy, the federal
government imposed wage and price controls to prevent employers from raising wages in
order to compete for scarce labor. While stripping them of their power to increase wages,
the 1942 Stabilization Act allowed employers to expand their benefit offerings. By
permitting employers to offer health insurance to their employees, the government
provided private insurers with a new market for their products.15 In the years that
followed, the government passed several additional rulings that reinforced the efforts of
insurance companies to link health insurance with employment and institutionalized the
employment-based system of health insurance that exists today.
15
A small number of U.S. companies offered health insurance coverage to their
employees before WWII.
16
The first piece of legislation, passed by the War Labor Board in 1945, ruled that
employers could not change or cancel an employee’s insurance plan during the contract
period. The second ruling, which became law in 1949, mandated that benefits should be
considered part of the compensation package so that unions could haggle over both
wages and health insurance in their contract negotiations. Finally, in 1954, the IRS
decided that workers would not be taxed on the contributions that their employers made
to their health insurance plans.16 This preferential tax treatment for “fringe” benefits
gave businesses an incentive to offer health insurance to their employees.
In sum, employer-provided health insurance, as an institution, emerged during the
two decades following WWII. The system is a legacy of Roosevelt’s decision not to
pursue universal health insurance in the 1930s. The decision has been called “an early
triumph of a vision championed by modern conservatives, in which the private sector in
the United States fulfills essential social responsibilities assumed by governments in most
other industrialized nations” (Blumenthal, 2006, p. 83). As one would imagine, the
private sector’s ability to fulfill these responsibilities depends crucially on the economic
fortunes of its business sector.
The Postwar “Golden Age” and the Health Care Crisis of the 1970s
With the employment-based system firmly in place by the mid-1950s, the incidence of
employer-provided coverage expanded rapidly over the course of the next few decades.
16
Under the current tax code, health insurance premiums paid by employers on behalf of
their employees are tax-deductible. President George W. Bush’s tax advisory
commission is considering sweeping cuts in the tax benefits of employer-provided health
insurance. By reducing the tax break, many employers would be discouraged from
providing health insurance coverage, pushing many employees into private insurance
markets – the goal of the policy – and many more into the ranks of the uninsured.
17
The supply of health care was stimulated by various government initiatives in support of
scientific research and hospital construction. The most important piece of social
legislation during this period was the 1946 Hospital Survey and Construction Act (also
known as the Hill-Burton Act), which provided states with grants to support the
construction of new hospitals. However, despite the expansion of both the supply and
demand sides of the health care industry, the fundamental organizational structure for the
financing and delivery of health care remained intact.
Most importantly, the financing of care remained largely retrospective, fee-forservice payment, with providers continuing to exert considerable control over pricing and
regulatory decisions. This contributed to an explosion in costs and aggregate
expenditures, but there was, at the time, no great sense of concern over health care
inflation. Price increases were made tolerable by the economic expansion of the socalled “Golden Age” of capitalism, which generated rapid increases in output,
employment and real wages. Thus, while the share of total expenditures going to health
care had begun to increase sharply, much of the increased spending was considered
justified in the face of scientific advances and increasing economic prosperity.
As the expansion continued, those with ties to the labor market enjoyed an
increase in the richness of their benefits. But enhancements also reached those without
such ties. The economy was booming, and many Americans had come to believe that a
great nation must ensure a minimum level of health care for its citizens. To provide for
those without employer-based coverage, Congress enacted Medicaid and Medicare as
part of the Great Society program in 1965.
18
The passage of these bills had two immediate effects. First, they substantially
enlarged the U.S. health care market. Millions of Americans who previously lacked
health insurance now enjoyed coverage under one of these publicly funded plans.
Second, they altered the composition of health care spending. As the government
covered a larger portion of the health care bill, the share of out-of-pocket spending
decreased. The combined effects of the increase in federal funding and the decrease in
out-of-pocket spending generated sharp increases in the price of health care:
From 1960 to 1975 the share of health care expenditures paid by
third parties increased from 45 to 67 percent. Like most private
plans, Medicare and Medicaid reimburse providers on a fee-forservice basis. Since under fee-for-service, doctors and hospitals
make more money the more services they provide, they have an
incentive to maximize the volume of services. Third-party fee-forservice payment was the central mechanism of medical inflation
(Starr, 1982, p. 385).17
Throughout the 1970s, sharp increases in medical costs spawned various forms of
legislation aimed at slowing the pace of health care inflation.
For example, in August 1971, President Nixon imposed wage and price controls
in an effort to contain inflationary pressures.18 These efforts continued in 1972, with the
creation of Professional Standards Review Organizations, which were designed to limit
the expansion of Medicare costs by increasing the oversight of physician practices. In
1973, the government sought a managed care solution to the problem of rising health care
costs by passing the Federal HMO Act.19 With health costs still mounting, the
17
The reimbursement practice for hospitals and doctors has since changed. Today,
Medicare and Medicaid reimburse health providers on a fixed fee schedule.
18
In most sectors of the economy, these controls were lifted in January 1973, but they
were maintained for health care until April 30, 1974.
19
The Federal HMO Act did a number of things to promote the creation and expansion of
HMOs. First, it provided seed money for nonprofit HMOs. Second, it offered eligible
19
government attempted to limit the growth of hospitals and other health care facilities
under the National Health Planning and Resources Development Act of 1974.20 The
Employment Retiree Income Security Act (ERISA) was passed the same year.21 The
ERISA legislation allowed employers to design their own coverage packages and refuse
to cover things like in vitro fertilization or to satisfy state requirements for minimal
mental health coverage (Blumenthal, 2006).
Despite the various measures to contain them, health care costs continued to
increase throughout the 1970s. When President Carter took office in 1977, he entered
with a perceived mandate to implement a national health insurance program. He viewed
cost containment as a necessary first step and quickly proposed legislation to restrain
health care inflation. But his proposals got bogged down in Congress, where the focus
became a debate over the relative merits of “competition” versus “regulation” as the best
way to control health care costs (Moran, 2005).
By 1982, the nation had endured double-digit increases in health care spending
for seventeen consecutive years. Health care inflation outpaced GDP growth, and wages
no longer kept pace with rising health care costs. Whereas the nation had been able to
HMOs an exemption from state regulation. Finally, the Act included a “dual choice”
provision, which required mid-sized and larger firms (i.e. those with more than 25
employees) to offer HMOs as a coverage option.
20
Readers might wonder why the government would seek to curb the expansion of
supply facilities in order to mitigate price increases, since economic theory tells us that
greater supply leads to more competition and falling prices. But, as Mahar (2006)
explains, “when it comes to health care . . . greater supply only excites greater demand”,
as hospitals and physicians compete for patients, brand name image, and loyalty (p. 16).
21
The passage of ERISA had a destabilizing effect on the health care delivery system.
As firms self-insured their employees, relatively healthy and higher-paid employees were
withdrawn from the risk pools covered by private insurance companies. This left behind
a smaller population of less healthy individuals and resulted in an increase in premiums,
which made it more difficult for smaller employers to offer health insurance coverage to
their employees.
20
absorb rising costs during the boom times of the 1950s and 60s, lackluster growth and an
erosion of middle-class incomes left Americans looking for new solutions to the problem
of health care inflation. Widespread dissatisfaction with the state of the medical care
system inspired a backlash against liberalism and government that culminated in the
election of President Reagan in 1980.
Neoliberalism and the “Managed Care Revolution” of the 1980s and 1990s
Shortly after Ronald Reagan was elected president in 1980 he declared that the nation’s
health care system had become too reliant on federal funding. Consistent with the
neoliberal philosophy that characterized his presidency, Reagan sought to shift
responsibility away from the federal government and onto the market. Deregulation and
an unwavering faith in the efficacy of unfettered markets epitomized the ideological tenor
of his administration The nation’s health care system soon underwent a major
reconstruction.
In the early 1980s, Washington eliminated the federal aid that helped to support
the nonprofit operations of nearly all of the nation’s HMOs.22 In response, many of these
organizations converted themselves into for-profit enterprises.23 At the same time,
HMOs grew in popularity as employers began switching to managed care in massive
numbers. The managed care model reorganized fee-for-service methods by limiting a
patient’s choice of provider and reimbursing providers according to prospective fee
22
The original intent of the HMO Act of 1973 was to encourage the creation and
proliferation of nonprofit operations through federal grants and loans. In 1981, nearly 90
percent of all HMOs were nonprofits (Mahar, 2006).
23
By 1986, 59 percent of all HMOs operated on a for-profit basis.
21
schedules rather than costs incurred. In 1993, 67% of those with employer-provided
coverage were enrolled in managed care plans (Gruber, 2000).
But market-based care governed by the restrictive features of the HMOs was not
the panacea that many hoped for. While managed care did succeed in reigning in costs
for a period of time – 1982 to 198624 – medical costs later escalated and health care
inflation stood at 15 percent by 1990. This is because the HMO, which serves as a
middleman between the doctor and the patient, carries an additional level of management
and profit. As Keyser explained, the middleman takes a cut, and that cut “consumed
much of the economic advantage that might have been expected in comparison to
traditional fee-for-service” (1993, p. 90). Mahar agrees, noting that “the very
entrepreneurs who promised to reign in health care costs were in fact attracted by the sea
of green – the seemingly unlimited flow of health care dollars” (2006, p. 25).
In 1992, Bill Clinton made health care reform a cornerstone of his presidential
campaign. His effort to fundamentally reorganize the health care delivery system began
soon after his election, with an announcement that First Lady Hillary Rodham-Clinton
would head a Task Force on National Health Care Reform. A comprehensive plan to
provide universal health care for all Americans was introduced as the Health Security Act
on November 20, 1993. Despite the fact that the legislation was introduced in a
Democratic-controlled Congress, it failed to garner sufficient support.25 By the mid1990s, health care inflation once again outpaced generalized price inflation. Then, in the
24
During this period, the rate of increase in total health care spending declined (Mahar,
2006).
25
In partnership with the insurance industry, Conservatives launched a successful
campaign against the Clinton plan, and even many Democrats withheld support for the
President’s plan.
22
late 1990s, when the economy experienced its strongest expansion in decades, employers
became concerned with recruitment and retention and relaxed their grip on cost
containment.26 When the economy turned down again in 2001, health care costs had
already begun to increase rapidly. And, once again, employers looked for ways to defray
rising premiums. This time around, they opted for benefit restructuring – relying heavily
on greater employee cost sharing – as opposed to restrictive managed care models.
The lesson in all of this is that the American health care delivery system is
constantly evolving in response to a changing economic and political landscape. During
the boom times of the 1950s and 1960s, liberal advocates of health rights tended to argue
for greater access to care and increased protection against the costs of illness. And they
succeeded in expanding access to care because tax revenues were rising, profits were
strong and productivity was increasing. But when the economy weakens, it sets up a
conflict between the liberal critic’s demand for equality and access to care and the
concern of government and business to control costs (Starr, 1982). This occurred with
jobs crisis of the 1980s and 1990s, and it “translated into a severe instability of health
insurance coverage” (Nayeri, 1995, p. 58). Since 2001, soaring health care costs and a
jobless economic recovery have intensified the internal contradictions of the employerbased system of health care provisioning. Indeed, the system itself appears unsustainable
in the face of mounting contradictions driven by a series of disturbing trends.
26
Surveys show that workers had become increasingly dissatisfied with managed care
plans by the late 1990s. Employers faced mounting pressure to offer plans with fewer
restrictions on provider choice and greater access to care. Preferred Provider
Organizations (PPOs) emerged as the dominant alternative to HMOs.
23
TRENDING TOWARD A COLLAPSE OF THE EMPLOYER-BASED HEALTH
CARE SYSTEM
Although the employment-based system remains the bedrock of the modern health care
system in the United States, it “faces challenges that are unparalleled in its roughly 70year history” (Blumenthal, 2006, p. 82). Indeed, the limits to employer-provided health
insurance appear to have been reached, peaking in 2000, when 66.8% of the population
had employer-based coverage. The story is a complex one, and it reveals no single
villain. Below, we examine a multitude of forces that are currently working to destabilize
the American health care delivery system.
The Thinning Out of Employer-Sponsored Coverage
The labor market has been the primary means of obtaining health insurance coverage in
the United States, partly due to the risk-sharing nature of the private health insurance
market. While employers benefit from these economies of scale, they also incur
substantial costs when health benefits are offered. Indeed, nearly 20 percent of the more
than $7 trillion that U.S. employers spend annually on worker compensation is devoted to
benefits (retirement, health and other benefits). As a result of escalating health care
costs, health benefits have taken an ever-increasing share of employers’ benefit spending.
In 2005, employers spent $596.5 billion on health benefits, up from $399.6 billion in
2000 (MacDonald, 2007). Until recently, the cost of health insurance was kept at an
affordable level for the majority of employers and working Americans. But this is no
longer the case. As Figure 1.6 shows, health insurance premiums have been rising
considerably faster than wages and prices, and this is “placing significant strains on the
employer-sponsored health insurance system” (The Kaiser Family Foundation, 2005).
24
Figure 1.6
With medical inflation far outpacing inflation in general, employers have taken
various steps to defray rising benefit costs.27 One strategy has been to require employees
to participate in greater cost-sharing by mandating higher premiums and larger
deductibles and co-pays. But not all firms have been willing to share in the burden of
rising health care premiums. Some have engaged in cost-shifting (i.e. they have cut
wages in order to offset rising health care expenditures), and others have simply decided
to eliminate health care from the benefit package.28 As a consequence of these actions,
the percentage of all employers offering health insurance to their employees during the
last six years has dropped from 69 percent to fewer than 60 percent.29
27
Part III of this Series on Health Care will examine the laundry list of strategies
employers have adopted in their effort to defray rising health care costs.
28
Indeed, according to a survey by the National Federation of Independent Businesses
(NFIB), sixty-five percent of small-business owners say that high costs are the reason
they do not offer health insurance to their employees (Baird, 2005).
29
The rate of employer-sponsored coverage continued to decline, even as the economy
added 1.5 million jobs between 2003 and 2004 (Gould, 2006).
25
But this “thinning out” of coverage has extended beyond the working population.
Among those hardest hit are the dependents of covered workers who continue to lose
employer-based insurance as firms increasingly choose to cover only their own
employees. Indeed, children accounted for the largest share of the roughly 3.7 million
people who lost employer-provided health insurance between 2000 and 2004. And while
public programs have taken up some of the slack,30 medical inflation and state budget
constraints are making it difficult for programs like Medicaid and the State Children’s
Health Insurance Program (SCHIP) to continue to absorb the growing number of
uninsured Americans.
Another group that has suffered a sharp decline in employer-based coverage rates
is America’s retirees. Retirees began losing access to employer-based coverage in the
early 1990s, following a 1990 ruling by the Financial Accounting Standards Board
(FASB). The ruling mandated that, beginning in 1992, businesses that offered health
benefits to their retirees would have to include their future retiree health care expenses in
their current financial reports. The implementation of this rule had the immediate effect
of reducing the valuation of these firms on Wall Street. As a result, the proportion of
mid-sized and large firms that offered health care to their retirees fell by almost 50
percent between 1980 and 2000. Retirees are now one of the least likely groups to have
employer-sponsored insurance.31
30
Between 2000 and 2004, the number of people receiving Medicaid (including SCHIP)
increased by nearly 8 million.
31
Other groups include employees of small establishments, minorities (especially
Hispanic males), young adults (19-24) and near-elderly working women with health
problems (Stanton, 2004).
26
But the most alarming statistic, in a system that ties access to health insurance to
participation in the labor market, is the drop in employer-based coverage for prime-age
working adults. In fact, members of this group were 26.7% more likely to be uninsured
in 2004 than in 2000. And while there are still government programs to help prevent
children32, elderly and disabled people from becoming uninsured, there is little support
for prime-age working adults when they lose coverage through an employer.
More Alarming Data on the State of the U.S. Health System
The rising health insurance premiums and declining coverage ratios examined above are
not the only forces working to destabilize the U.S. health care system. Below, we
chronicle just some of the other trends which, if they remain unchecked, will affect not
only the stability of the U.S. health care delivery system but also the broader macro
economy and the security of millions of American families.
•
Eighty percent of Americans reported that they were dissatisfied with high
national health care costs (ABC News/Kaiser Family Foundation/USA Today,
2006).
•
Over 45 million Americans are uninsured – more than 8 million of them are
children.
•
Approximately 15.6 million adults are underinsured (Hellander, 2006).
32
The Bush administration has recently tightened the standards that are used to determine
when coverage can be provided to uninsured children. The goal of the new policy is to
prevent states from expanding coverage under the State Children’s Health Insurance
Program (SCHIP) to middle-income families. Many state officials oppose the stricter
limits, arguing that they “could jeopardize coverage for thousands of children” (Pear,
2007, NYT Article).
27
•
Since 2000, premiums for employer-sponsored health insurance have been rising
four times faster than workers’ earnings (Kaiser Family Foundation, 2004).
•
The average employee contribution to an employer-sponsored plan has increased
more than 143 percent since 2000.
•
Average out-of-pocket costs for deductibles, co-payments for medications and coinsurance for physicians and hospital visits have risen 115 percent since 2000.
•
As a share of GDP, U.S. personal health care spending has more than doubled
over the past three decades (Ginsbburg and Nichols, 2002-03).
•
Total national health expenditures are expected to increase to $4 trillion by 2015,
when they are projected to account for 20 percent of GDP (Borger, 2006).
•
Americans pay more, both as a share of GDP and on a per-capita basis, than
citizens of other major industrialized nations.
•
The U.S. ranks far behind its international competitors in terms of health
outcomes (e.g. longevity and infant mortality), despite spending significantly
more on health care.
•
Almost half of all Americans report that they are very worried about having to
pay more for their health care or health insurance (National Coalition on Health
Care, 2007).
•
Fifty percent of all bankruptcy filings were partly the result of medical expenses
(Himmelstein, et. al, 2005).
•
Every 30 seconds someone in the U.S. files for bankruptcy in the aftermath of a
serious health problem (National Coalition on Health Care, 2007).
28
•
One-half of workers in low- and mid-range compensation jobs and one-quarter of
workers in higher-compensation positions reported problems with medical bills or
were paying off accrued medical debt (Collins, et. al, 2004).
•
More than 25 percent of those surveyed in a study by The Access Project reported
that they were unable to make rent or mortgage payments or that they suffered
bad credit ratings because of medical debt (Seifert, 2005).
The system for delivering health care in the United States is under great stress, and the
pressures are mounting. If cost increases continue unabated and employers persist in
their attempt to shift more and more of the burden onto the working population, the ranks
of the uninsured will continue to expand, health outcomes will worsen, more people will
be forced into bankruptcy, families will dissolve, and all of this will dampen economic
activity in the rest of the economy.
CONCLUSION
In the absence of national health insurance, Americans have long depended on employersponsored insurance as the primary means of protection against the cost of illness. Under
this system, access to coverage is linked to the fortunes (and misfortunes) of America’s
business sector. During the so-called “Golden Age” of American capitalism, the health
care system survived rising costs and increasing out-of-pocket medical expenditures as
the economy experienced historically low-levels of unemployment, rising real wages
based on productivity gains, and strengthened collective-bargaining rights. Costs
increased, but firms and their employees were able to absorb these expenses because
revenues and wages kept pace.
29
However, the economy faltered in the early 1970s, and America’s businesses
struggled to accommodate the rising costs of providing health insurance. Various efforts
at cost-containment were attempted through public sector legislation and private sector
innovation, though nothing succeeded in bringing about a permanent abatement in health
care costs. Since then, the employer-based system has weathered many challenges.
Innovations, such as HMOs, helped to mitigate spiraling cost increases, and an eventual
shifting away from these restrictive managed care plans helped to temper growing
dissatisfaction among the insured.
Today, the system faces many new challenges. As before, the number of
uninsured Americans continues to rise, but this time around bankruptcy and foreclosure
threaten the stability of the macro economy as well as the financial system. Employers
have shifted too much of the burden onto the working population, whose incomes are not
growing rapidly enough for them to endure it. And the social safety net, which has been
whittled at away for decades, remains under attack. Unless there is a substantial
abatement in health care cost increases, the fallout will likely bring about a radical
restructuring of the health care system. As Moran notes, employer-based insurance “will
continue to thin out and could amount to a ‘catastrophic only’ insured benefit before we
are too far into the next decade” (2005, p. 1420).
It is impossible to predict what the system will look like a decade from now. But
one thing is for certain – powerful lobbies will push to retain the for-profit system (with
subtle modifications that protect their interests), while the majority of Americans and a
growing number of physicians will push for a fundamental reorganization of the health
care system.
30
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33

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