Unraveling of a health-care system

Robert Kuttner

December 03, 1991|By Robert Kuttner

AN APPEALS court ruling last week giving employers the right to deny health benefits to employees with costly illnesses is the latest sign that our health system is unraveling.

The case involves a small Houston company that shifted its health coverage from a group plan offered by an insurance carrier to self-insurance. When it did so, the company reduced several benefits, including payments for AIDS-related illnesses, which were dropped from a maximum of $1 million to $5,000.

An employee with AIDS sued, but the U.S. Court of Appeals for the 5th Circuit ruled that the company, as a self-insurer, had the right to change the health plan as it wished, as long as it was not discriminating or retaliating against any individual employee. In effect, an insurance company may not unilaterally cut benefits -- but an employer can.

In the United States, most people get health insurance through their jobs, but employers are not obliged to provide such benefits (except in Hawaii).

Few Americans are aware of it, but employer-sponsored health insurance is largely an unintended side effect of World War II. During the war, workers were scarce and government wage controls prevented employers from offering pay hikes to attract employees. Many large companies got around the regulation by offering more generous fringe benefits.

How times have changed! Today, employers are frantically cutting costs, restraining wages and shedding fringe benefits as fast as they can.

In 1974, Congress attempted to regulate the whole system of health and pension benefits in a badly flawed piece of legislation known as the Employee Retirement Income Security Act (ERISA), which protects employees from arbitrary treatment. But the basic flaw in ERISA is that you can't effectively regulate something that is voluntary to begin with.

To escape from ERISA's ground rules, an employer need only cash in a pension plan, or substitute a self-insurance plan for traditional health insurance.

Lately, more and more companies have turned to self-insurance. They hire health insurance companies to advise them and to manage the plans but bear the financial risks themselves. About half of America's insured employees are now members of plans based on self-insurance, and therefore are outside ERISA's jurisdiction.

From the employers' perspective, the health system is out of control. Average employee costs for health coverage are inflating at about 18 percent annually, more than triple the general rate of inflation.

The factors driving health-cost inflation are largely beyond the control of individual employers. They include a patchwork health system with more than 1,500 different health plans, which wastes tens of billions of dollars annually on paperwork; an entrepreneurial mentality in the pharmaceutical and medical technology industries, which try to maximize what they bill the health system; and the expense of treating 37 million uninsured people in venues such as emergency rooms, which are the most expensive places to provide treatment. All these costs are eventually passed along to the insured part of the system, which pays the bill.

Employers have responded to the inflation by hiring "managed care" companies that make deals with doctors and hospitals to reduce allowable benefits, or by using the self-insurance loophole to restrict coverage, or by simply shifting costs to their employees. Most recent labor disputes have not been about wages or working conditions, but about proposed cutbacks in health benefits.

People who have adequate coverage on paper increasingly find that in practice their coverage has been limited by a managed-care plan, or by unilateral changes by their employer. In theory, a competitive marketplace is supposed to give consumers bargaining power. But in reality most people lack the power to shop around for better insurance, either because they are locked in by "pre-existing conditions," are stuck with whatever their employer provides, or because really comprehensive insurance has become prohibitively expensive.

The common pathology in all of these symptoms is the lack of a universal health system. With a single system there would be no pre-existing condition worries, no shifting of costs from uninsured people to insured ones, no incentive for employers to shed costs and no incentive to entrepreneurs to inflate them.

Recently, the Washington Post reported that because of the expense of former Republican National Chairman Lee Atwater's brain tumor, employees at the Republican National Committee, a relatively small employer, faced large hikes in their health insurance costs, and several lower-paid employees there could no longer afford insurance at all. President Bush, unlike his political aides, enjoys full health coverage as a perquisite of his job.

For years, lack of coverage of America's poor has caused a lot of a suffering, and has caused liberal hearts to bleed in sympathy. But compassion for the uninsured has not added up to a successful political movement for universal health insurance.

However, start messing with the coverage of the insured middle class and you have the makings of a real revolution. In the case of health care, that revolution is overdue.

Robert Kuttner writes regularly on economic matters.

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