- The Washington Times - Saturday, April 15, 2006

Medical insurance today evokes Don Corleone’s question: “How did things get so far?” From 2000-‘04, employee medical insurance costs rose 126 percent. Insurance premiums will rise, on average, to $14,500 per family in 2006. (Most workers have no idea their insurance costs so much.)

Things weren’t always so expensive. In 1964, medical insurance — called “major medical” — covered serious illnesses and hospital care, including pregnancy and childbirth. My employer paid the premiums. We paid for doctor visits ($6) and prescriptions out of pocket. Ditto for dental work. So how did things get so far?

Employer-paid medical insurance got started during World War II. The government controlled most wages. This appeared to arrest wage-inflation, but it was an illusion. Millions of men under arms produced a serious labor shortage. Women were drawn into the work force to fill the need, but workers were still at a premium.

In a free market, wages for skilled workers would have increased dramatically, with industries paying the going price for the skills they needed. A left-leaning Democratic administration could not permit this, so it controlled wages. But market dynamics can’t be repealed by fiat. Unions and business used medical insurance to attract needed labor and relieve the pressure on wages.

In the 1980s, insurance started getting expensive. Individual companies have tried to rein in medical insurance, but unions pushed for better plans, bringing out-of-pocket costs, in some cases, to nearly nothing. (I have seen $2 “co-payments” by some pharmacy customers.)

But business pushed insurance, too. In the ‘80s and ‘90s, companies wanted to keep plants running. The Cold War pressured compensation just as World War II did. Engineering and research companies, largely nonunion, used medical insurance benefits to compete for highly skilled professionals. A benefits/costs tug-of-war has gone on for 30 years.

My employer — an employee-owned engineering company — grappled constantly with insurance tradeoffs, trying to hold costs down.

Wages typically track skills, but medical insurance retains a New Deal socialist flavor. Thus, reducing insurance benefits for lower-level employees and increasing them for more skilled people was unthinkable, though it made financial sense. Even my merit-oriented employer canceled an insurance benefit reserved for senior technical people, and gave it to the lowest worker echelons instead. Management ignored arguments this would hurt our ability to attract the best professionals. It was regarded as the socially correct thing to do.

The medical care/insurance economy today is a “third-party-payer” environment. Sellers set prices independently because buyers don’t pay true transactional costs. Neither buyers nor sellers of medical care much about controlling costs: sellers, for self-interested reasons; buyers, because costs do not touch them.

But insurers and businesses do want to cut costs. Insurers have offended medical providers by limiting payments for medical services. Businesses using unskilled labor are trying to curtail medical coverage, eliminating it altogether at some employee levels.

Retail giant Wal-Mart offers medical coverage that some politicians deem “substandard.” In a radical move, Maryland legislators enacted a law (over the governor’s veto) requiring companies with more than 10,000 employees to put at least 8 percent of employee compensation into medical insurance. Currently, the legislation affects only Wal-Mart. Some pundits believe courts will reject the new law. Similar “Wal-Mart bills” are pending in Oregon, Florida, Kentucky and Colorado. New Hampshire, Indiana, West Virginia, Washington, and Vermont have rejected such legislation. (Ironically, politicians who should praise any attempts to control medical insurance costs are damning them instead.)

The most controversial business strategy for controlling medical insurance costs involves hiring illegal aliens. Not every business can do this, but those who can find their medical insurance costs — indeed, their payroll costs — significantly reduced. (It is business’ dirty secret.)

Some large, unionized corporations in financial trouble because of poor sales have finally noticed the medical insurance “elephant in the parlor.” Under some union contracts, companies subsidize insurance for retirees as well as current employees. This adds no value to their products.

One U.S. automaker says each of its new cars includes $1,500 in medical insurance costs. Expensive contracts cannot be canceled unilaterally, except by bankruptcy judges. Without union cooperation, bankruptcies might result. Unions could kill the goose that lays the golden eggs.

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 show whether the medical insurance monster can be brought under control.

Union retirees’ medical insurance is a tempting target for cutting costs, but reduced subsidies would mean much higher premiums. This would pinch retirees who anticipated low-cost medical coverage until Medicare age. Premiums for an individual over 55 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 retirees pay steep insurance costs for which they were not prepared.

But business and unions cannot solve the medical insurance problem alone while a large work force segment remains aloof from escalating insurance costs. That “segment” is government employees (including teachers) — nearly 20 percent of the work force. Active workers and retirees expect to enjoy low-cost, high-coverage medical insurance, indefinitely. This unrealistic expectation cannot continue while the medical insurance monster ravages the country. Government must become part of a solution.

Some will say medical insurance costs are the symptom and the true problem is medical-care costs. They have a point.

Costs have galloped upward for the last decade. They will reach 18.7 percent of gross domestic product by 2013. But floods of insurance dollars have driven those costs. One can hardly say whether the chicken or the egg came first.

What is clear is that the status quo is doing serious economic and social damage to the nation. Medical insurance could become the monster that ate America. It must be stopped.

WOODY ZIMMERMAN

Woody Zimmerman’s weekly column, “At Large,” runs in the Atlantic Highlands Herald, an Internet newspaper.

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