Unaffordable Health Insurance and Presidential Politics

Milton Fisk, Against the Current 111 (July-Aug 2004): 30-33.

The Permanent Crisis.

Uninterrupted crisis has plagued American health care since 1981. It began with Ronald Regan, whose tax cuts led to cuts in Medicaid as well as more stringent eligibility rules for it. The crisis has continued, even through the boom years presided over by Bill Clinton, to the present.

The crisis has two sides to it. One is the upward spiral of premium rates charged by commercial health insurers; the other is the increase of the uninsured, within only two decades, by some 15 million up to 44 million.

Moreover, in response to higher premiums for comprehensive plans, people have bought cheaper health plans, ones with higher deductibles and co-payments and fewer covered conditions. Thus, even those who have insurance are often underinsured.

The roots of the crisis are in dispute. Some blame it on the high cost of malpractice insurance; some say it comes from the success of disgruntled consumers in ending various cost-saving features of managed care; some explain it as due to the expensive new technology that patients ask for; and still others say insurers are catching up on the profits they failed to make in the mid-1990s. These accounts either fail to explain the depth of the crisis or explain only short-term aspects of it.

Working people the employed as well as the frequently unemployed“ are those most affected by the crisis. Employers are shifting the costs of health insurance to employees. The working poor can only hope they might qualify for the under-funded Medicaid program. Those eligible for Medicare are under-insured since illness could leave them with devastating co-payments and even when George W. Bush’s drug program finally kicks in many of them will still pay large amounts for medicines. A change is needed that would eliminate all these vulnerabilities.

The current presidential campaign offers an opportunity to discuss the crisis and to agitate for ending it. Yet the major political parties, the AFL-CIO, and other organizations like the AARP show little interest in opening a debate on whether still more incremental change“ like computerizing health records or expanding eligibility for the Children’s Health Insurance Program“ will serve to end the crisis.

Dennis Kucinich, even after getting little support in the preference primaries for the Democratic Party presidential candidate, is trying to spark such a debate. If, in addition to his efforts, the few state AFL-CIOs and unions, like AFSCME, UAW, and UNITE, that support basic change in the health industry were to become active on the issue, then indeed a debate on the crisis might ensue that goes beyond talk of incremental change.

Otherwise, we are in danger of being treated in the campaign to a celebration of choice, with each candidate claiming his tinkering with the industry would give people the most choice.

President Bush advocates personal Health Savings Accounts, pointing out that they give their owners the choice of whether they want to spend their HSA on health care or keep it to gather tax-free interest. Senator John Kerry wants to give any citizen the same choice a congressperson has, under the Federal Employees Health Benefit Program, among various plans coming from different insurers, assuming he or she can pay for one of those plans.

The real issue posed by the crisis is not choice between one insurer and another or between one doctor and another. The issue is rather having affordable insurance. All these choices are irrelevant to the individuals who can’t afford insurance.

The choices the presidential candidates celebrate are the choices of individuals about their individual well-being. The choice to have affordable insurance in our society is, though, not one that individuals make on their own nor is it merely about their individual well-being. It is a choice that we as a society must make together about the good of our society. This would be a choice worth celebrating“ if only we had it.

The Hostile Intermediary.

Shouldn’t, though, having individual choices keep both medical costs and insurance rates down? With only one insurer trying to get my business, that insurer has no incentive to put pressure on health care providers to keep their charges for my services down. The providers will get what they charge since the insurer has only to raise the premium rate. My insurance is important to me, so I’ll follow along paying higher premiums until I can no longer afford them.

Following this logic, we should have at least a second insurer who will also want my business. This insurer will try to take business away from the first one by charging a lower premium. This will force the first insurer to lower premiums as well. Then these insurers will tell health providers that they have to lower their charges in order to get fully reimbursed. As a result, medical costs will go down and more people will be able to afford health insurance.

This of course is a fairy tale since selling insurance is different from selling most other things. Say you build a house and the suppliers of materials are charging more than previously. When you sell the house, you will include the additional cost in the price precisely so you can pay the bills from the suppliers. However, raising the price gives you no additional money to play around with since suppliers won’t wait to be paid.

The case of insurance is different because of a lag effect. When I pay a higher premium to my health insurer due to health providers raising the prices of their services, these providers, unlike the suppliers of building materials, don’t expect to get the additional amount immediately. There is a lag since it may be weeks, months, or if I’m lucky, years before I have to go to a health provider. After all, when I pay my premium that commits my insurer to cover my risk of incurring future expenses instead of my previously incurred expenses.

The lag effect opens up the possibility that the insurer will become a hostile intermediary, working against my interests as an insured. There is the basic fact that the insurer can profit from investing“ usually in stocks, bonds, or real estate“ a premium payment prior to the time a claim is made to pay for a covered service. This of itself doesn’t harm the insured.

Yet from this fact it follows that the amount by which the premium rises to cover increased provider charges can also be invested to make a profit. Insurers derive from this the perverse incentive to allow providers charges to rise. For, once those charges rise insurers have an excuse to raise premiums. Doing so provides them with additional funds to invest profitably.

Wouldn’t competition over premiums between insurers be strong enough to overwhelm this perverse incentive and hence keep insurers from acquiescing in higher and higher medical costs? It would indeed; but the health insurance industry cannot afford such competition. It relies for an important part of its profit on taking advantage of the lag effect to invest the higher premiums that increased medical charges seem to legitimate.

There is a reason the profits derived from this acquiescence in rising provider charges are important. The lag effect in health insurance is shorter than it is in life insurance and liability insurance. One goes to the doctor more frequently than one has automobile accidents and one only dies once. In health insurance, then, a great deal of liquidity is called for, leaving less money for investment. Thus, profits in those other areas of insurance tend to be higher.

How then do health insurers compensate for this drawback? They must do something to attract investors to buy their stocks. In competing for investors with insurers in other areas, health insurers need to make extra profits from raising premiums as provider charges rise.

Still from time to time, frustration with rising premiums reaches such intensity that health insurers are led to take measurers. The most obvious measure at their disposal is the subordination of providers to the insurance function. An attempt of this kind took place in the 1980s and 1990s with the corporatization of the health care industry.

If successful, this would have freed insurers to compete on premiums or capitation fees. With providers under control, they would accept less remuneration so that stabilizing insurance rates would not lower insurers profits. Providers, though, turned out not to be so easy to control. The result was a return to a truce among insurers based on accepting rising premiums as their way of life.

There is an important spillover from this non-competitive way of life among health insurers. If they can increase premiums when providers charge more without a competitive challenge, then they might be able to increase them even faster than providers are increasing their charges. They will all profit thereby discouraging any competitor to break ranks.

These gratuitous increases in premiums have actually become a cyclical feature in the history of health insurers. Premiums rose dramatically in the late 1980s leading to profits that were 44% higher than only several years earlier. Health insurance profits came down in 1990 as investments by the industry in real estate and stock lost value.

A decade later, starting in 2000, premiums were again increasing faster than payments to providers and insurers were showing large gains in profits. Apologists said that the insurers were merely catching up for their low profits of the mid-1990s. No competitor challenged the gentleman’s agreement to have catch-up.

Another consequence of the view taken here of rising premiums has to do with the justification for increasing health care costs themselves. Those increases have multiple roots. One of the most important is, though, subjective. It is the certainty on the part of providers that if costs go up insurers will still pay them. Medical equipment, laboratory tests, consultations, and hospital rooms are priced high in the light of the knowledge that the demand for them coming through insurance will not be significantly lowered.

The message, then, is that we commit ourselves to a continuing inflation in health care costs so long as commercial insurance plays a major role.

Fear of Going Public.

In view of the inflationary tendencies released by commercial insurance, it is remarkable that the main presidential contenders still rely on commercial insurance to reduce health care costs.

In his campaign for the presidency, John Kerry’s grand gesture concerning health care has been to promise to make a program universally available that is now available to the Congress and nine million federal employees, the Federal Employees Health Benefits Program. Its advantage is the large pool over which it spreads risk and hence keeps premiums lower than they might be for smaller pools.

For those who are not federal employees, Kerry would set up a separate pool, which could attract significantly higher numbers. There would though be a parallel structure in both. Individuals and large and small employers could join the plan. If you or your employer were in the plan, there would be a variety of commercial insurers among whom you could choose.

In an urban setting, you might have the option of choosing between an HMO, which charges a capitation fee but sends you no bills for services; a PPO, which gives discounts for services coming from a specific list of providers; and a non-PPO. A federal employee in Indianapolis, for example, can now enroll in the M*Plan, a local HMO, for $336 a month to cover his or her family, or among other options, the family can enroll in one of several national Blue Cross/BlueShield fee-for-service plans for $245 a month. There would be a great deal more out-of-pocket expenditure with the cheaper plan.

What about people who can’t afford to join the proposed FEHB-style program? Outside this program, Senator Kerry would have the federal government pay for the cost of 20 million children enrolled in Medicaid in exchange for the states insuring both children in the Children’s Health Insurance Program, which would be expanded up to 300% of poverty, and working parents of children in Medicaid or CHIP up to 200% of poverty.

These expansions would put the US nearer to universal insurance coverage. However, the Kerry plan does not require that they take place through public insurance even though public funds would foot the bill.

He wants employers who now provide money for their employees health insurance to continue to do so. To keep the cost of doing so from rising rapidly, he proposes that the government reimburse employee benefit plans by 75% of the expenses of catastrophic illnesses costing more than $50,000. This would reduce insurance claims for catastrophic illnesses, thereby lowering premiums. The condition Kerry puts on this reimbursement is that employers use the resultant savings in insurance costs to reduce premiums paid by employees.

This reimbursement plan locks employee benefit plans in place without asking whether they might be part of the problem. Even with reimbursement of catastrophic expenses, the costs of employee health benefits will continue to rise due to the non-competitive nature of insurers. Where employees are insured under employer self-insured plans, the costs of health benefits will also rise since the costs allowed by commercial insurers will act as the norm.

As costs of health benefits rise, employees will have to battle with employers over threatened cuts in health benefits, as was the case recently with grocery workers in California . The struggle for affordable health care, though, should be one that engages us all for the purpose of reaching a society-wide commitment, rather than one that pits a few workers at a time against powerful employers in relatively isolated struggles.

The main weakness in the Kerry plan is, though, the assumption that keeping commercial insurers in it will create the competition to control the rise of premiums. To stick with this assumption he has to create a patchwork of measures in order to give the impression he is solving the problem.

The FEHB-style program does spread the risk. However, the advantage of spreading risk diminishes quickly as the pool gets larger. In controlling insurance costs, spreading risk will only take us so far. It is easy to cancel out the savings from spreading risk by the raising the unit charges made by providers. This takes us right back to the non-competitive nature of insurers stemming from their need for an added boost to their profits from higher premiums.

Even with millions of people in an FEHB-style program, the participating insurers will seek to make profits from increasing premiums. It is less painful for them to raise premiums when they can point to the increasing charges providers are making. Kerry’s bold gesture doesn’t, then, touch the root problem that with profit-making insurers premiums will continue to rise leaving a large number of uninsured. He, or those who wrote his proposal, surely knows this, but they fear the consequences of advocating public insurance as the alternative.

Just Saying No to Insurance.

Despite its defense of the commercial health insurers, the Bush right-wing feels instinctively that there is something socialistic about insurance. The reason is that insurance involves, not self-reliance, but reliance on others to help us cover our risk of incurring expenses through illness.

Relying on others makes us profligate, according to these ideologues. When we undergo a medical procedure and are covered by insurance, we may never know how expensive it is. We don’t really care: we’re covered! George W. Bush philosophizes that with insurance There is no demand for better prices, which is what I have been arguing all along.

Bush, however, sees the other-reliant individual as the culprit, whereas I’m pointing the finger at the commercial insurer. To make the individual self-reliant, Bush wants him or her to swear off insurance, at least partially. One can swear off by setting up a tax-deferred Health Savings Account of $5,000 to cover many of the ordinary expenses needed to keep a family healthy.

One will think a second time about sending Johnny to the doctor with his earache. One may even scowl at the doctor when he recommends a panel of blood tests for Susie that will cost $1,000. If Johnny gets well at home and Susie doesn’t get the tests, then one’s HSA stays in tact and continues producing tax-free interest. With demand for health care reduced by self-rationing of this kind, our doctors and laboratories will start charging less.

The Bush campaign for re-election knows that HSAs by themselves are not enough. People want to rely on others to pay for catastrophic health expenses. Thus along with HSAs, Bush says there will have to be insurance for major illnesses.

This will be a high deductible insurance with an accompanying HSA at hand to pay the greater part of the deductible. The premiums for such a major medical plan would cost 30% to 50% less than those for a traditional low deductible plan. Insurance would then have been made more affordable.

HSAs plus major medical insurance make sense if one is healthy. If instead, one needs considerable health care, it may be cheaper to join a traditional plan in order to avoid using one’s HSA up every year to pay the high deductible of the major medical insurance.

However, HSAs will have a serious impact on the affordability of traditional plans. Even if only a quarter of all those insured opt for HSAs, the premiums of traditional low-deductible insurance would go up an estimated 50% to 60 %. By taking the healthy who choose the HSA-plus-major-medical route out of traditional plans, there will be a greater concentration of the not so healthy left in the traditional plans.

There will also be a tendency for the major medical insurance of those who opt for HSAs to become more expensive. Even though they may be healthier, they will have an incentive to keep their savings accounts rather than spend them on physical check ups. They may also delay getting treatment for a condition until it calls for expensive treatment. Their thrift merely makes it more likely that they will incur expenses for which their major medical insurance will be needed. The net effect will be to make that insurance less affordable.

Bush’s proposal to promote HSAs parallels several of his other programs. First, it serves the same individualism that is appealed to in regard to Individual Retirement Accounts, with which he hopes to privatize Social Security. Like the retirement accounts, HSAs roll back cooperation in favor of self-reliance. Second, they promote choice by having individuals decide between saving money and getting health care in the way that the recent Bush reform of Medicare promotes choice between HMOs and fee for service. Third, HSAs entail a mini tax cut, with the savings being tax-deferred until 65 when one would cash in the account as one became eligible for Medicare, and with the interest on the savings being tax-free.

The Real Choice.

Government federal, state, and local already contributes half the money that is used in health care in the US . Its contribution is slightly more than that of employers for their employees health benefits.

Would it be possible to use what government already spends together with what employers already spend on employees health care as an adequate financial base for a more reasonable system? Specifically, could that sum support universal comprehensive coverage and at the same time rein in the inflation in charges coming from providers?

By most estimates, it could. There is, though, an important condition. That sum would be sufficient provided a major part of it does not go to commercial insurers as intermediaries. For, their interest in profits from rising premiums overrides the interest the public has in controlling the charges made by providers. Yet as far as the goal of controlling costs goes, neither Kerry nor Bush sees anything problematic in using private insurers as intermediaries between either government or employer funds and providers.

We are at a critical juncture. To save what we have in the way of public insurance, it has to be expanded to cover everyone. If the public insurance system is left as an isolated part of the overall insurance system, it will be underfunded, blamed for failure, and ultimately destroyed.

Medicare is in the crosshairs of the Bush sharpshooters. They want to use, not just part, but all of the funds it is based on to buy private insurance. This would be one of the largest privatizations in history. It would add, on a continuing basis, huge sums to the capital that circulates in the private financial system.

It is critical, then, that there should be a counter-offensive that would expand rather than privatize public insurance. The expanded system would be a Medicare For All. Defensive efforts will not suffice to protect Medicare.

Consider the sorry history of one such effort. In order to defend Medicare from rising costs, Medicare began during the Clinton period to pay private managed care companies to care for the elderly.

That failed with the big insurers involved in managed care dumping millions of the elderly. Now in the Bush period the Congress, still wanting to defend Medicare from rising costs, is having Medicare pay the same big insurers for managed care 7% more to enroll an elderly person than the per capita spending for traditional Medicare. In a twist of irony, this increase was used, shortly after its passage, to show that Medicare will be bankrupt by 2019.

We need, then, a public insurer whose mission would be to pay fairly for services coming from those professionals and institutions whose work is to provide health care or to provide assistance or guidance in controlling behavior and environments which tend to create needs for health care.

The likelihood that the services will be compensated fairly is increased when democratic procedures are used. This requires procedures for agreeing on rates for services and budgets for institutions through discussion and debate involving both providers and the public, which funds the public insurer.

In the current campaign, Kucinich has emphasized the need for health care reform that would end the role of commercial insurers. His talking about a single payer health plan on the same panels as other Democratic candidates has helped educate a new generation about an idea with lots of history. President Harry Truman fought for it in the late 1940s as did Edward Kennedy in 1970. Al Sharpton and Carol Moseley Braun, who both dropped out of the race for Democratic presidential candidate, and now Ralph Nader, an independent candidate for president, have also contributed to the revival of the idea.

Is, though, the idea of national health insurance realistic? This is the question people ask, often implying that they see a need for a public insurer as a way of putting an end to the seemingly permanent crisis. To respond, one must begin by recognizing the obstacles. In order of rising importance they are: distortions, bribery, and inertia.

We can answer the distortions that the press distributes from places like the Fraser Institute in Vancouver about long waiting lists for MRIs in Canada . The are nowhere near as long as the lists of uninsured in the US . As to bribery, we can ask candidates for the Congress how much they have received from health sector corporations and whether they plan to receive any more before the crisis of unaffordable insurance is really resolved.

The prods to reducing citizens inertia are multiplying: employers are cutting health benefits, Medicaid is being cut back, Medicare funds are being squandered in subsidies to HMOs, and health corporations are regularly found guilty of fraudulent practices. Increasing numbers of people are no longer willing to accept the patchwork reforms offered by presidential candidates.


[1] Laurie Garrett, Betrayal of Trust: The Collapse of Global Public Health ( New York: Hyperion, 2000), 380-389.

[2] I have derived insight on this issue from the discussion of it by Lawrence D. Weiss, No Benefit: Crisis in America’s Health Insurance Industry (Boulder: Westview Press, 1992), chapter 8.

[3] John Kerry’s Plan to Make Health Care Affordable to Every American,http://www.johnkerry.com/pdf.kerry_health_plan.pdf. Governor Howard Dean had also promoted a plan modeled on the FEHB program before he dropped out of the race for Democratic presidential candidate.

[4] For details on and problems with the FEHB program, see Employment and Health Benefits, edited by Marilyn J. Field and Harold T. Shapiro (Washington DC: National Academy Press, 1993), 175-177.

[5] On the history of issues connected with employee health benefits, see Marie Gottschalk, The Shadow Welfare State: Labor, Business, and the Politics of Health Care in the United States ( Ithaca NY: ILR Press, 2000), chapter 4.

[6] George W. Bush, Comprehensive Agenda to Expand Access to Health Care, January 28, 2004, http://www.georgewbush.com/HealthCare/Red.aspx?ID=2185.

[7] The Congress approved an experimental program for HSAs in 1997 with unimpressive results. Howard Gleckman, The Nasty Side Effects of Medical Savings Accounts, Business Week ( October 25, 1999): 42.

[8] See, for example, Steffie Woolhandler and David Himmelstein, “Paying for National Health Insurance And Not Getting It,Health Affairs 21, #4 (July/August 2002): 20-30.

[9] Milt Freudenheim, Using New Medicare Billions, H.M.O.’s Again Court Elderly, The New York Times ( March 9, 2004).

[10] Dennis J. Kucinich, Dennis Talks About Health Care, http://www.kucinich.us/issues/universalhealth.php.