An Introduction to the Health Care Crisis in America: How ...

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), keltons@umkc.edu 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

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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

Public 17.7%

Uninsured 17.2%

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.

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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.

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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

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