posted April 1, 2008
Dismantling the Postwar Health Care System in America

Dismantling the Postwar HealthCare System in America
by Jack Rasmus
copyright 2007

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 then Presidents, Ronald Reagan and Bill Clinton. The dismantling of that system has been accelerating under George W. Bush.

This process of dismantling the postwar health care system is not unique. It’s been witnessed before. In recent years a similar dismantling of the employer-union negotiated pension system has occurred—it also largely a product of the late 1940s ‘social compact’ and compromise between Business, Unions and Government. Just as employer-union negotiated Defined Benefit Pension plans have been largely displaced over the past two decades by 401K-type individual contribution plans, so too now a similar process has begun with the displacement of traditional employer provided insured health care plans by individualized health care schemes.

The general replacement of that system is the Corporate-Bush ‘band-aid’ called ‘consumer driven health care’, now appearing in various ‘forms’ of individual-purchased health care plans. As in the case of Defined Benefit Pension plans, employers increasingly are ‘cashing out’ their previously provided insured health care plans, giving their workers a fractional part of their—the company’s—previous dollar contribution to employees’ health insurance, and telling them—the employees—to go buy their own private coverage and plans. Typically, the ‘cash out’ amounts on average to 50% or less of the cost once paid by the company for health insurance coverage for the employee, thus resulting in huge cost savings for the company and effectively transferring income from the employee to the company.

The Corporate ‘VEBA’ Cash-Out Solution

A variant, or new ‘twist’ on the ‘cash-out’ theme, and the latest milestone on the collapse of Employer negotiated health plans in the U.S., is the recent UAW-GM arrangement called VEBA, short for ‘Voluntary Employee Beneficiary Association’—a pension-like health care fund to be partially financed by GM. A VEBA deal allows a company to jettison its health care contribution responsibility and exit all obligations of future liability for providing health care benefits. With a VEBA, the company pays out a fraction of what it would otherwise to its employees’ health care benefits, saving the company tens of $billions as a consequence in the case of GM. With VEBA, GM will in effect ‘cash out’ its previously negotiated health care liability at reduced cost—i.e. much like, for example, the bankrupted United Airlines ‘cashed out’ its pension plan in recent years, saving itself $10 billion; or like IBM in 2006 was allowed to ‘cash out’ its defined benefit pension obligations in exchange for setting up a ‘Cash Balance’ personal pension plan. VEBA is thus the analogue in health care to the dismantling of the postwar defined benefit pension plan system.
A difference from the dismantling of the guaranteed pension plans is, in the case of VEBA, it is the union—in the GM case the auto union, the UAW—which will be responsibility for the liability and funding the shortfall in the employer’s (GM’s) contribution to cash-out. The union, the UAW, will thus have to make up the difference in the cash-out shortfall. That will undoubtedly mean the UAW will have to either ‘tax’ its working members and raise union dues to fully fund the shortfall or reduce the benefits of UAW union retirees to reduce the shortfall, or what is more likely, both tax working members and cut benefits for retirees.

How much is the estimated cash-out or ‘shortfall’ in the GM-VEBA solution? The company, GM, in recent negotiations reportedly used the figure of $51 billion in unfunded liability for UAW active members and retirees. Wall St. Journal estimates place the liability as high as $55-$56 billion. But the assumptions behind that liability are unreported and unclear. As in the case of assumptions for pension and health care plans, it is often a ‘fast and loose’ game played by negotiators and fund administrators. Assuming the $56 billion is correct, on the eve of the settlement between the UAW and GM in late September, GM had offered only 60% funding cash-out, or in other words about $30 billion—leaving $26 billion unfunded, but indicating it might fund 65% ($33 billion) if a settlement without strike occurred. More likely, it will agree to a settlement cash out funding of 71%-73%, or around $36 billion. That’s still $15 billion that will have to be made up by the union, UAW, at the direct expense of its members and result in pitting active members against its retired members. However, even the $15 will undoubtedly prove an underestimation, since a great percent of GM’s $30-$36 contribution is reportedly in the form of stock and pension fund income transfers. With a major, and perhaps global, recession just around the corner due to the emerging financial crisis, stock and investment values will no doubt decline significantly, leaving an amount well less than $30-$36 billion from GM and a corresponding even greater amount to fund by the UAW.

It is a great historical irony that the UAW, once pioneer in making employers pay for workers’ health care, now finds itself agreeing to transform itself from a labor union into a private insurance carrier and let the auto companies exit the health care financing field altogether. It is a choice that will undoubtedly prove disastrous to the union, as well as to the personal finances of its members.

In other words, the UAW and GM, once partners in the origination of negotiated company-provided health care plans in the late 1940s, now find themselves jointly presiding over the dismantling of that very same system of insured company-provided health care benefit plans, as that health care financing system that reigned for six decades approaches its final stage of terminal illness.

To understand the accelerating collapse of that system today requires placing the current process in historical perspective.
The Post-World War II ‘Rules of the Game’

Prior to 1947, with a few exceptions, the position of American 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 Universal Health Care as their primary policy focus to providing health benefits by directly negotiating health benefit plans with employers. The goal of Single Payer Universal health care was not rejected outright. It was still there. But it now became a secondary objective at best—derailed in all but words and the occasional perfunctory union convention speech.

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 work force)—employer resistance to the idea of negotiating health benefit plans was nonetheless strong at first. The idea of a system of health benefits based on union-employer negotiated health plans, with the insurance industry as ‘broker and middleman’, 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 for 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? Or create another program to administer, with yet another liability?

But corporate resistance, vigorous up until the late 1940s, 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 reducing corporate costs and in turn boosting company profits, stock prices, and in turn senior management bonuses. And there was a further 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. Negotiating benefit plans reduced overall labor costs, in other words, with positive bottom line results to corporate income statements.

Still another set of new incentives allowed businesses to boost corporate balance sheets as well as corporate income statements. Health benefit contributions often went into a healthcare 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 in fact was, providing a further boost to its stock price. And 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 grow and provide an alternative source of investment revenue—a still further corporate benefit. 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. work force at the time all but made certain that insurance costs would not exceed insurance revenues for decades to come. They too therefore added their substantial political and lobbying voice in favor of the new ‘rules’.

For the above material reasons employer resistance evaporated relatively 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. Either jointly negotiated with unions, introduced unilaterally by employers to avoid unionization, or required simply in order to attract skilled and other labor during the labor shortages of the fast economic growth years of the 1950s and 1960s—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% of all health care coverage was provided through Employer-Provided Health plans. (The remainder by the Medicare and Medicaid 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.

Dismantling the Post-World War II ‘Rules’ Governing HealthCare

The above post-World War II rules and Employer-Provided health benefit plans represents an essentially ‘hybrid’ system. Neither fully collective, or public, as would have been the case of a Single Payer System funded through the Social Security system; nor yet a fully privatized or individualized approach to delivering health care that would emerge after 2000 with George W. Bush’s ‘Consumer Driven Health Care’. And like all hybrid systems, over the long run it was unsustainable.

The new rules and system were the product of a broader set of tacit agreements and cooperative understandings between Business, Government and Labor that emerged during the period, 1947-1952. Those agreements and understandings have been breaking down since the 1980s and no longer exist—at least as far as Business and Government are concerned. When the basic agreements, tacit understandings, and social compromises between Business, Labor and Government began to unravel in the 1980s—and their breakdown accelerated further after 2000—so too would the above system of healthcare financing that was in essence a reflection of those same agreements and compromises.

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 nevertheless still were responsible and liable for providing and financing health care benefits. Union negotiated, and even 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 and liability was tolerable for employers so long as a better arrangement, providing the same financial advantages as the old rules but without the liability, had not yet emerged. 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 other middlemen did not seek to dramatically increase their relative share of profits in the industry at the direct expense of other employers directly providing the health benefit plans, money could actually be made off the arrangement.

But once the equation changed, 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, 1980-1988, 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 and balkanization of collective bargaining itself that accompanied that de-unionization. The second was the new ‘model’ for privatizing employee benefits that appeared with the creation of 401k personal pension plans as an alternative to traditional, negotiated defined benefit 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, so too unnecessary now were the health benefits financing system based on a system of negotiated Employer-Union health benefit plans.

Widespread de-unionization and the balkanization of collective bargaining cleared the way for the emergence later of ‘two tiered’ negotiated benefits. Two-tiered plans 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. Two-tiered benefits consequently over time would make a growing share of the workforce more amenable to accepting ‘new rules’ for financing health benefits that employers and government might subsequently propose. Younger workers disenchanted with the old system would become easy targets for Bush’s later Consumer Driven Health care proposals.

The second critical development during the Reagan period was the emergence of 401k pension plans that were 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 plan pension system also originated in the immediate post World War II period. It too then 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% of private sector employees were covered under Defined Benefit Pension plans. After the introduction of 401Ks in the 1980s, however, Defined Benefit Pension plans have been progressively dismantled and replaced with ‘Personal’ 401K private pension plans. Today no more than 20% of private sector workers are covered by traditional Defined Benefit Pension plans, and that number is about to drop dramatically further in the next two years. As defined benefit pension plans have disappeared by nearly 100,000 since the 1980s, they have been replaced with 401k plans. The result has been less cost to companies, continuation of the subsidies for companies originally provided by defined benefit plans, but without corporate liability and responsibility for financing employee retirement. 401ks thus reflect a new set of ‘rules’ that in essence allow corporations to effectively exit the pension benefits system.

The point is what has happened with 401k plans replacing traditional pensions is today happening as well with current employer-provided health care plans. The analog to pension 401ks in health care is Bush’s proposed ‘Health Savings Accounts’ (HSAs), which are currently expanding rapidly throughout corporate America. Reagan created 401Ks. George W. Bush spawned HSAs, which are essentially the same animal as 401ks—i.e. ‘new rules’ permitting corporate America to shed liability, dramatically reduce and eventually eliminate costs, and allow employers eventually to exit the health benefits financing system altogether, leaving workers and their families holding the entire financial bag.

Clinton Shifts Responsibility to Workers & Consumers

In the 1990s under Clinton the idea of individual-personal health care received a further push with the introduction of ‘Managed Health Care’. Managed Health Care 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 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. And that was the essence of Managed Care. Moreover, once the consumer is thus tagged as both the cause and solution to the problem, it is but a short step to shift responsibility and liability to the consumer for financing the provision of those health benefits—which is exactly what ‘Consumer Driven Health Care’, the George W. Bush direct offspring of the Clinton ‘Managed Health Care’, would later do.

The Clinton shift to targeting and blaming the consumer was not the only ‘innovation’ and fundamental contribution of the Clinton period toward the dismantling of the postwar health benefits financing system. Clinton’s ‘Managed Health Care’ solution actually 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 which continues today.

As healthcare 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.

George W. Bush Puts the Pieces Together

In 1992-93 roughly 75% 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%. That’s more than 500,000 companies exiting the postwar system. With the coming of HSAs after 2003 that process both company and worker exiting from the postwar health benefits system has continued to accelerate. About 10-12 million are now enrolled under HSA-type personal health plans, which lie at the heart of what Bush & Co. call ‘CONSUMER-DRIVEN HEALTHCARE. Both corporations and the government are today engaged in a major PR-push to expand HSA-type health benefit plans as rapidly as possible.

Just as 401k personal pension plans have provided the alternative and excuse for companies to exit traditional defined benefit pension plans, so-called ‘Health Savings Accounts’ make it possible for an increasing number of companies to abandon traditional employer-provided health benefit plans. With the ‘new rules’ and projected shift to HSAs it is not unreasonable to project that employer provided healthcare plans will continue to rapidly decline from today’s 60% to 20% within the next decade—just as defined benefit pension plans similarly declined to 20%. That’s several tens of millions more workers, and hundreds of thousands more companies, exiting from the postwar, traditional employer provided health benefits system.

Millions more workers will soon be thrown out of the disappearing postwar health benefits system and are candidates to migrate to HSA plans. But with typical HSA plan deductibles of $1500 to $3000 per year, and with their historically 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. Consumer Driven Health Care, HSAs, and personal-private health plans will therefore fail to solve the current healthcare benefits crisis. In fact, they will make that crisis worse, swelling the ranks of those without any coverage by literally tens of millions.

Healthcare At the Crossroads

Only two paths therefore lead from the dead-end solution of Consumer Driven Health Care, personal health plans/HSAs, and/or employer preferred VEBA solutions. 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 any longer 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 simply 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. A product of past historic agreements that no longer exit, that alternative cannot be restored to what it once was and should not be resurrected. It has become a ‘black hole’ for workers’ wages and incomes and a contributing factor to the virtual quarter century freeze in the hourly wages, adjusted for inflation, for the more than 108 million non-supervisory workers in the U.S. today.

The choice ahead therefore is twofold: either the further expansion and entrenchment of personal-HSA plans and VEBA plans, in which workers-consumers pay a greater share of total costs and corporations exit in stages from any liability for healthcare financing—or a return to the idea of a true single payer universal health care system delivered through the Social Security System. How to ensure that corporations and the wealthy pay their fair share of healthcare in America, and return to Labor’s original and only effective solution to providing health care benefits for all, is the subject of the companion piece to this article entitled: “Why Pays? How to Finance Single Payer Universal Healthcare?.

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