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ATLANTIC HIGHLANDS HERALD |
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THE MEDICAL INSURANCE MONSTER By now, even Hottentots in Africa know that medical insurance is causing a major headache to business in the USA. The image of Don Corleone rasping, “How did things get so far?” comes to mind. The situation is waaay out of control. Things weren’t always as they are now. So how did they get so far? When I started working at a university/government laboratory in 1964, medical insurance was mostly for serious illnesses and hospital care, including pregnancy and childbirth. In those days we called it major medical. My employer paid for it entirely. We paid for doctor visits ($6) and prescriptions out of pocket. Ditto for dental work. (Financing was unnecessary.) Medical insurance got started during World War II. It wasn’t a monster then. The Feds controlled most wages for the duration. This appeared to keep wage-inflation under control, but it was really an illusion. Millions of men under arms produced a serious labor shortage. Women were drawn into the workforce to fill the need, but workers were still at a premium. In an unregulated market, wages for workers with highly desired skills would have increased dramatically. The market would have sorted itself out, with industries paying the going price for the skills they needed. But a left-leaning Democratic administration could not possibly permit this. Wage-controls were considered a must. Market dynamics, however, cannot be repealed by fiat. The forces that wanted to drive wages up were simply diverted elsewhere. Medical insurance plans became one outlet for the intense pressure on wages. It was compensation that FDR’s brain-trust didn’t try to control. Unions and competitive businesses quickly saw medical insurance as a discriminator that could help them attract needed labor. By the 1960s MI was an established part of worker-compensation. In the 1970s, insurance started getting expensive (although those costs seem trivial, contrasted to the present). Individual companies have tried to rein in the coverage (and costs) of medical insurance, but unions have pushed the envelope for better plans. Aggressive union contracts have brought out-of-pocket costs for employees, in some cases, to nearly nothing. (I have personally stood behind customers at the pharmacy counter whose “co-payment” for prescriptions was as little as $2.) Naturally, this makes insurance premiums costly. All of this cannot be laid on unions, of course. No doubt it was natural for unions to push as hard as they could for new benefits. But in the go-go ‘80s and ‘90s, companies felt obliged to do whatever was necessary to keep plants running. The Cold War pressured compensation just as World War II did. In the engineering and research industry – most of it non-union – companies used medical insurance benefits to compete for highly skilled professionals. A tug-of-war between increasing benefits and controlling costs has gone on for thirty years. During the 1990s I spent several years on employee-issue committees in the private engineering company I worked for. We grappled constantly with medical insurance coverage tradeoffs in a vain attempt to hold costs down for both employees and the company. We were an employee-owned company, so we all knew that higher insurance costs reduced our bottom line – degrading the stock price and our investment in the company, and affecting our financial futures. Wages typically track closely to skills and merit, but medical insurance retains a New Deal socialist flavor. Thus, it was considered unthinkable to reduce insurance benefits for less skilled employees and increase benefits for those with more skills – even if that made sense in business terms. Even the merit-oriented company I worked for cancelled a special insurance benefit meant to reward people at the highest technical levels, and gave it to the lowest worker echelons instead. Management was deaf to arguments that the move would lessen our ability to attract the best professionals. It was regarded as the socially correct thing to do. Today, lavish insurance plans – requiring employees to pay little of actual medical costs – have created a “third-party-payer” environment. The seller can set prices without considering the buyer’s ability (or willingness) to pay because the buyer pays little of a transaction’s true cost. Neither buyers nor sellers of medical care have much interest in controlling costs: sellers, for self-interested reasons; buyers, because of indifference, since the costs do not touch them. But companies that provide insurance and the insurers themselves do have an interest in cutting costs. Insurers have attracted criticism – especially from medical providers – for specifying what they will pay for medical procedures and services. In some cases, insurers have even tried to control the direction of treatment, but this stratagem has been very controversial. Some business areas are trying to control medical insurance costs. Businesses drawing from labor pools with surpluses are beginning to curtail medical coverage significantly – in some instances eliminating it altogether for at least some employee levels. Walmart – the retail giant whose low prices and aggressive marketing have made it successful – has attracted sharp criticism for offering medical coverage that some politicians deem “substandard”. In a radical move that has national portents, Maryland legislators enacted a law (over the governor’s veto) requiring companies of more than 10,000 employees to pay at least 8% of employee compensation as medical insurance. Currently, only Walmart would be affected by the legislation. Similar bills specifying 9% of compensation for medical insurance have emerged in Oregon and Florida; also, in Kentucky (10%) and Colorado (11%). New Hampshire, Indiana, Washington, West Virginia, and Vermont legislators have rejected such legislation. Critics point out that competitors pushing these legislative initiatives hope to diminish Walmart’s competitive edge via higher business costs. Other critics (c’est moi) are amazed that Walmart’s modest attempts to control medical insurance costs are being denounced by politicians who ought to be praising such efforts. Some pundits believe courts will strike down the new law. Wags say Walmart should retaliate by pulling out of Maryland entirely and ringing the state with new stores. (Walmart has indicated no plans for such a move.) The most controversial business strategy for controlling medical insurance costs is employment of illegal aliens. Not every business can do this, but those who can find their medical insurance costs – indeed, their entire labor costs – significantly reduced. (This helps explain why business wants more illegal immigration, not less.) Most illegals are hired as “day laborers”. They are paid in cash, off the books, at the end of each day. There are no fringe benefits. Others are hired as regular employees, but when their documents (e.g., Social Security numbers) are found to be false they often are reduced to no-benefits employment. Large, unionized corporations (such as airlines and automobile manufacturers) – now in serious financial trouble because of poor sales – have finally noticed the medical insurance “elephant in the parlor”. Insurance rates have been galloping ahead at double-digit percentage rates since 2000. One US auto-maker says each of its new cars includes $1500 in MI costs. Under union contracts, some companies furnish subsidized MI for retirees as well as current employees. This can cost billions a year – adding no value to the corporation’s products. Companies with the most expensive MI benefits are often boxed in by union contracts that cannot be abrogated unilaterally. And unions have not been very cooperative in helping companies out of that bind. Bankruptcy might be inevitable – bringing with it a certain relief. Bankruptcy judges can cancel union contracts with their lavish medical insurance plans. Unions’ refusal to cooperate with employers could end up killing the goose that has laid the golden eggs. Medical insurance for retirees might be the first sacrifice unions will make to help industries cut costs. Retirees no longer pay union dues, so they are expendable. This would produce a crisis for early retirees who expected to have low-cost medical coverage until Medicare age. Insurance would still be available, but retirees might have to pay its full cost. Premiums for an individual in the 55-65 age-group can cost $1,500+ per month. Some early retirees are already paying this, but their numbers are still small. The political uproar will grow as more and more early retirees are hit by high insurance costs for which they were not prepared. Will unions actually help their industries? Maybe, and maybe not. It is hard for unions to shake the old attitude that corporate financial problems are not their concern. The extent to which unions realize (or not!) that they must share responsibility for solving problems will be one indicator of whether the medical insurance problem can be brought under control. But business and unions cannot solve it alone while a large segment of the working population remains aloof from escalating medical insurance costs. The “segment” of which I speak is government employment at all levels (including teachers) – amounting to nearly 20% of the workforce. Both active government workers and retirees have been promised affordable medical insurance for the indefinite future. Whatever insurance might cost in years ahead, they know their coverage will not diminish, or its cost increase, significantly. This unrealistic expectation cannot continue while the MI monster stomps through the rest of the country. The MI problem can never be solved until government becomes part of the solution. Some will say medical insurance costs are the symptom, and that the true problem is the dramatic escalation of costs for medical care and prescription drugs. They have a point. Those costs have been bounding upward at a phenomenal rate for the last decade. On the other hand, medical insurance plans have poured increasing numbers of dollars into the medical care pipeline, driving costs up. One can hardly say, at this point, whether the chicken or the egg came first. What is clear is that the status quo cannot continue without grievous economic and social damage accruing to the nation. Medical care costs – 15.3% of GDP in 2003 – are expected to be 18.7% of GDP by 2013. From 2000 to 2004, employee spending for medical insurance coverage rose 126%. Experts say employee health insurance premiums will rise, on average, to $14,500 per family in 2006. (Most employees have no idea their insurance costs that much!) Half of all bankruptcy filings are partly due to medical expenses. (1) Something has to give, or medical care and medical insurance will become the monster that ate the USA. ******* (1) Numerous statistics and projections on health care and medical insurance costs can be found in “Health Insurance Cost”, published by the National Coalition on Health Care in 2004. (http://www.nchc.org/facts/cost.shtml )
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