Rx For Health-Care Reform

Before the day is out, AT&T will spend about $3 million on employee health benefits. General Motors will spend some [...]

June 1 1992 by Edwin J. Feulner


Before the day is out, AT&T will spend about $3 million on employee health benefits. General Motors will spend some $9 million-adding close to $800 to the sticker price of every car it produces in the U.S. this year.

And this is only the tip of the iceberg. For some companies, the cost of providing medical insurance for employees has doubled, tripled or even quadrupled in recent years. The typical corporation spent more than $3,600 per employee for health insurance last year, according to A. Foster Higgins & Co., the benefits consulting firm. If trends continue, costs will soar to about $20,000 a year by the end of the decade.

It’s not surprising, then, that business executives want this fiscal albatross off their backs.

The problem is that many of them are looking to Washington to help them remove it. Several major corporations-including Chrysler, Bethlehem Steel, Dayton-Hudson, Westinghouse Electric and Xerox-are backing “play or pay” legislation, which would require employers to provide medical insurance to their employees or pay a new tax to fund a public program. Others are embracing a Canadian model, in what would amount to the complete nationalization of American health care.

Neither scheme would bring about what everyone agrees we need: universal access to quality health care at reasonable costs.

By now, the failings of the U.S. health system are numbingly familiar. About 35 million Americans lack health insurance. Health-care spending this year will swallow 14 percent of gross national product, and business spending on health care now exceeds corporate after-tax profits.

Most, though not all, business executives have the sense to reject the central planning approach of the Canadian-style legislation now in Congress. It’s not hard to see why: When government tells people that health care is free, but then limits budgets for medical care, it is the sick who suffer. Demand exceeds supply, causing shortages and rationing.

Canadian health care is fine-if all you have is a runny nose. But Canadians who need heart-bypass surgery, kidney dialysis or other costly procedures frequently can be found in U.S. hospitals. For example, when Quebec‘s Premier, Robert Bourassa, needed treatment for cancer several years ago, he came to the U.S.

FREE COVERAGE?

Americans are not likely to accept the long lines patients must endure in Great Britain, or the diagnostic and surgical waiting lists common in Canada-two of the supposed Meccas of national health insurance. Nor are they likely to rejoice about the savings. If the U.S. has the most expensive medicine in the world, Canada is a close second.

Meanwhile, the other government-heavy approach, play or pay, enjoys considerable business support. And, again, it’s not hard to see why: Many executives think play or pay is the solution to their health-cost problems. Ever since the Internal Revenue Service ruled in the late 1940s that company-paid medical benefits would not be taxed, employees have been pushing companies to provide as much “free” coverage as possible. In large corporations, medical benefits are a more vexing issue at the bargaining table than wages. According to one survey, three-fourths of all strikes in 1991 involved disputes over health benefits.

The play or pay option would allow companies to pay a fixed tax (now a proposed 7 percent of payroll) instead of increasingly costly health insurance. Thus, many employers think the play or pay option would cost them less than insurance premiums.

In the short term, perhaps. But in the long term, forget it. Nothing starts off small and simple in Washington and stays that way. Congress, ever beholden to special interests, will face constant, growing pressure to expand the benefits provided under the new public program. We’ve already seen this trend at the state level, where lawmakers have enacted more than 800 “mandates” during the last 15 years requiring insurers to cover various exotic services-even when there was little consumer demand for those services.

As benefits expand, so do the costs, and the taxes needed to pay those costs.

POLITICAL PRESSURES

But if bad for business, play or pay is even worse for employees. More than 50 million workers now covered by company-based health plans would be dumped into the government program under the plan, according to an Urban Institute study. That means that half of all working-age Americans would find themselves in what would amount to an expanded Medicaid program.

If employers try to play by the rules of the legislation and provide health insurance for workers, they’ll again be at the mercy of Washington. And the same special-interest pressure would be applied-this time to expand the required “basic” benefits package “players” must provide. Again, bigger health plans mean bigger costs, and employers eventually will be forced to take countermeasures: either by trimming their full-time workforce or hiring only those employees considered low medical risks.

Neither option would be easy. Under the proposed legislation, companies providing insurance would face heavy fines and crippling damage suits if it is believed they discriminated in their hiring practices. And in our lawsuit-crazed culture, rejected job applicants could have a field day in court-at the expense of businesses regardless of their size.

There is another way, one that avoids creating another government program. Rather, it is based on the twin pillars of the free market: consumer choice and competition.

The Heritage Foundation Consumer Choice Health Plan would end the tax-free status of company health benefits and replace the tax exclusion with tax credits given directly to individuals to purchase their own health benefits. Companies now providing insurance would add the cash value of their existing health plans to the paychecks of their employees to help them pay for health plans and out-of-pocket expenses.

Shifting the focus from the workplace to individual purchasers would have at least two advantages. First, it would produce a market for new, creative health-benefits programs. Second, it would make consumers conscious of costs. Only when individuals pay for insurance and routine medical care out of their own pockets-as they do for most other services-will they shop around for good value for their money. And only then can we expect to slow the spiraling costs of medical care.

COST FREEZE

The impact on businesses now struggling to contain their employee health expenses would be no less dramatic: By getting business out of the business of providing health benefits, the Heritage plan would freeze corporate health-care costs-after years of double-digit increases. In addition, our plan would put an end to an increasingly divisive labor-management issue.

We know this sort of market-based system will work, because we’ve seen it work on a smaller scale: It’s called the Federal Employee Health Benefits (FEHB) Program. The 32-year-old plan, which covers more than nine million federal employees, retirees and their families, has created among federal workers the competitive health benefits environment so desperately needed nationwide. Employees around the country have 400 health plans to choose from. As a result of this competition, cost increases in recent years have averaged a third less than in the corporate-sponsored system.

Only when individual consumers pay the piper will health-care providers and health insurers dance to the tune of consumer demand. Only then, in a competitive market, will all Americans receive the high-quality health care they need at prices they can afford.


Edwin J. Feulner, Ph.D., is president of The Heritage Foundation, a Washington, D.C.-based public policy research institution. He also serves on the boards of several other foundations and research institutes. Dr. Feulner is the author of Conservatives Stalk The House.