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Two New York Times items today provide a useful, if discouraging, overview of the way the American reliance on employers to provide health and pension benefits hurts our economy (and health).
One explores how collectively-bargained benefit commitments hampered General Motors and left it vulnerable to collapse — and may do the same to many public employers. The other discusses the massive lack of health coverage in the small business sector and how states are attempting to remedy it.
GM’s Current Status Bleak
- American market share down from half to barely 20%.
- Stock at lowest level in 50 years
- Market valuation less than that of Hershey
- Facing yet another round of layoffs
- Considering selling brands like Buick and Pontiac
Origins and Scope of GM’s Benefit Plan Problem
General Motors established its pension in the “treaty of Detroit,” the five-year contract that it signed with the United Automobile Workers in 1950 that also provided health insurance and other benefits for the company’s workers.
Walter Reuther, the union’s captain, would have preferred that the government provide pensions and health care to all citizens. He urged the automakers to “go down to Washington and fight with us” for federal benefits.
But the automakers wanted no part of socialized care. They seemed not to notice, as a union expert wrote, that if Washington didn’t provide social insurance it would be “sought from employers across the collective bargaining table.” . . .
In the ’90s, the consequences of maintaining a corporate welfare state became too obvious to ignore. In that decade, General Motors poured tens of billions of dollars into its pension fund — an irretrievable loss of opportunity.
Dire Consequences
The opportunity cost of funding ever-more-expensive gold-plated benefits was huge:
What else might G.M. have accomplished with that money? It could have designed new cars or researched alternative fuels. Or it could have acquired half of Toyota — a company that the stock market now values at close to $150 billion.
G.M. acknowledged in its most recent annual report that from 1993 to 2007 it spent $103 billion “to fund legacy pensions and retiree health care — an average of about $7 billion a year — a dramatic competitive and cash-flow disadvantage.” During those 15 years, G.M. paid only $13 billion or so in shareholder dividends.
New York Times: Siphoning G.M.’s Future
Small Business Disadvantaged, Contributing to Health Insurance Crisis
Because smaller businesses cannot spread the costs and risks of an individual’s high medical bills over a large work force the way a big company can, they often must settle for less-generous coverage that leaves workers with substantial out-of-pocket medical expenses.
Many small employers simply choose not to provide health benefits, which can cost more than $12,000 a year for a family of four.
Of the 47 million uninsured people in this country, at least 20 million are employed by small businesses or work for themselves — a figure that has increased by an average of more than 500,000 a year since 2000. . . .
Nationally, the percentage of businesses with fewer than 200 employees that offer insurance fell to 59 percent last year, down from 66 percent as recently as 2002, according to the Henry J. Kaiser Family Foundation. And less than half of the smallest companies, those with under 10 employees, were providing coverage last year.
Not only does the cost of insurance tend to be a bigger burden for a smaller business, but Jon R. Gabel, a health policy researcher at the National Opinion Research Center at the University of Chicago, estimates that small firms pay 18 percent more for the same insurance than big companies.
New York Times:
Small Business Is Latest Focus in Health Fight
Part of the Problem is Simple to Describe, If Not to Solve
It’s a risk-pooling problem, which is what insurance is supposed to be all about, right?
Big company, big pool. Insurance company underwriters can set premiums based on averages of large worker populations. Occurrences of individual employee cost increases are insignificant to insurance equation (premiums minus claims) because anticipated in premium based on large-population data.
Small company, small pool. Underwriters view each employer group in isolation, pitching lowball premiums to get the business, then raising with every suggestion of increased risk — and every significant claim (never mind that covering those big claims is why we have the insurance!). The Times gives vivid examples.
[S]mall businesses . . . complain of the shock of sharply higher rates when, for example, they replace a 25-year-old man with a 35-year-old woman — insurers know that women tend to go to the doctor more frequently [and may become pregnant] — or when a worker celebrates a milestone birthday.
[A] florist shop . . . that covers three people had its premiums raised by more than 50 percent last year, after the owner turned 60. The business, which pays the full premium for employees, now spends nearly $1,800 a month on health insurance, up from $1,100.
So why wouldn’t an insurer just throw all small businesses and individuals into one big pool and rate all equally, as if it were a mega-corporation’s plan? The Times offers some reasons.
State laws now typically make it impossible for businesses to cross state lines to create their own purchasing pools, and small companies have had little success to date in being able to band together in sufficient numbers within state borders.
The laws I get: insurance regulation has historically been a matter of state law.
But why little success in “banding together”?
Lack of effort? Maybe.
But maybe the insurance companies find the status quo more profitable?
In any event, the Times article about small business health insurance is a good read for anyone interested in this important issue.
Major changes equalizing the ability of large and small businesses and individuals to obtain health insurance, of whatever nature, should relieve big businesses such as GM of some of the huge burdens remaining from much different economic times.
They should also enable individuals to choose to work for small businesses (including ones they start) and to be self-employed, without confronting loss of health insurance or much higher costs for it.
This should promote workforce mobility, hence economic growth, as labor would be more free to move to positions of highest utility.
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Comments
Thanks for commenting. I generally agree with you.
But while it may be true that “everyone covered by a health ‘insurance’ program will submit a claim,” that does not make it less appropriate to consider it a form of insurance, of risk sharing.
The risk is that you will have larger-than-average claims and/or more of them. While nobody’s house in your neighborhood may have burned, you are not just insuring against fire in a typical homeowner’s policy. And I bet some of your neighbors have submitted claims for storm damage, burst pipes, etc.
The insurance paradigm makes sense for “catastrophic coverage.”
As to your third point, maintaining a free market in health insurance, but one that is subject to the added constraint of being requiring to accept everyone who applies and to set prices accordingly — on the basis of a vast pool — will allow varying insurance products to be offered, with varying coverages.
(1) An auto manufacturer is in the business of building cars, not designing and delivering health care to individual patients. A florist shop is in the business of stocking and reselling flowers, not designing and delivering health care to individual patients. As long as we foster the premise that a person’s access to health care is properly based on their employment status, and the parallel premise that an economic entity that employs people must also be expert in health care economics, we will remain far from a solution to the mis-defined problem.
(2) Yes, risk sharing is what insurance is about. And that is why “health insurance” is a misnomer. Everyone in my neighborhood buys fire insurance every year; nobody’s house has burned in the 18 years I’ve lived here. Lloyd’s of London prospered because a distinct minority of vessels that put to sea were wrecked. By contrast, everyone covered by a health “insurance” program will submit a claim. This has become statistically more certain as state legislatures have mandated that “insurance” pay for preventative services that individuals are encouraged to use every year, or periodically. “Health insurance” is not the problem we have to solve; paying for health care is the problem that we have to solve.
(3) In order to devise a system to pay for health care, it is necessary to decide exactly what health care is. What pills, what machines, what procedures, and under what circumstances. No legislature has had the will to do this.