Posted on August 28, 2006

What Would Lenin Do?


Attempting to shore up our dysfunctional employer-based health care system is counterproductive, not progressive.

By Maggie Mahar
The American Prospect
Web Exclusive: 08.25.06

While some progressives applaud efforts to force employers like Wal-Mart to take on greater responsibility for health care, others argue that our employer-based health care system is a failing relic of the past and that such gambits are actually counterproductive. Rather than trying to shore up our employer-based system, they say, we should seek to capitalize on that system’s mounting woes to build support for replacing it with national health insurance. Call it the Leninist road to universal health care — things have to get worse before they get better.

Chicago’s recent decision to pass a “living wage” ordinance that would require big-box retailers to pay $3 an hour in benefits has revived that debate. Last week, the Prospect’s own Ezra Klein offered quotes from labor leader Andy Stern to buttress his own argument against efforts like Chicago’s. Rather than continuing to try to build on what Stern describes as “a very unstable” employer-based foundation, Klein argued that we need wholesale reform — that is, national health insurance. “Progressives are, or at least should be, engaged in a longer-term project of creating a better, more just society for everyone, regardless of employment status.”

Labor lawyer and blogger Nathan Newman wasn’t impressed:

There is a strain of liberal advocacy for national health care that hopes for the system to get worse, in the assumption that only then can serious reform happen. . . . [A]ccording to Ezra, progressives should “view a slightly better menu of options for Wal-Mart employees as delaying the ultimate, more important victory.”

So the worse the lives of low-wage workers, the better for certain liberal social engineers trying to enact national health insurance. Then, we can eliminate employer responsibility for health care with a completely government-financed system.

He goes on to argue that “currently, federal and state governments cover just 39 percent of funding for $1.75 trillion in U.S. health care spending annually. So for the government to take over the rest of health care financing would require roughly a $1 trillion annual increase in general revenue taxes.” (His emphasis.)

While making it clear that, over the long run, he favors moving toward national health insurance, Newman suggests that, at present, there is no way to hike taxes enough to replace the hundreds of billions contributed by private sector employers to health care: “Some believe that the worse the health care system gets [as employers back away from offering health benefits], the better, since that will open up the possibility of national health care reform,” he observes. “But it’s actually the opposite — the more we shore up the employer side of health care responsibility, the more likely we can afford to bring the rest of the population into a reformed system.”

This sounds like a reasonable case for incremental reform. But on closer inspection, Newman’s argument doesn’t hold up.

Begin with the contention that at present, federal and state government cover just 39 percent of the nation’s health care bill. The numbers Newman uses show only the government’s direct contributions to healthcare. The question that needs to be asked is how much of the total bill is subsidized — directly or indirectly — by taxpayers.

When you put the question that way, it turns out that taxpayers bankroll 51 percent of the nation’s $2 trillion health care bill: this includes paying for private insurance for public employees (accounting for 6 percent of total health care spending), Medicare (17 percent of the total), Medicaid and SCHIP (16 percent), and other public health services including veterans’ programs, public hospitals, and school programs (12 percent). (These figures come from the Centers for Medicare and Medicaid Services.) And as the number of people on Medicare, Medicaid, and SCHIP climbs, the taxpayers’ share of the bill is rising. By contrast, private insurers pick up just 30 percent of the tab — and the money they lay out comes from the premiums paid by employees as well as employers. In other words, private sector employers pay less than 30 percent of the total. The remaining 19 percent of the $2 trillion total is covered by patients themselves (14 percent) and by the nonprofit philanthropy sector (5 percent).

But even those numbers don’t do justice to how much of total health care spending is subsidized by taxpayers. In 2004, when employers laid out roughly $443 billion for health benefits for their employees and retirees, employers deducted that $443 billion from their taxable income as part of the cost of doing business — just like wages. But while employees pay taxes on their wages, neither current employees nor retirees are required to declare their health benefits as part of their income. As a result, a recent study published in Health Affairs calculates that in 2004 the government lost $108.5 billion in tax revenues and another $66.4 billion in payroll taxes for Social Security and Medicare.

Other taxpayers, not fortunate enough to work for an employer who offers health benefits, must cough up income and payroll taxes to make up for that $174.9 billion in lost revenue. Add that amount to the $950 billion that taxpayers spent in 2004 to fund both government programs and private insurance for government workers — plus the money they spent out of pocket — and their contributions to the health care system ultimately equal roughly 74 percent of the nation’s total bill. Some “private” health care system.

Moreover, contra Newman, reformers who talk about replacing employer-based healthcare with national health insurance are not suggesting that we simply bid farewell to the employers’ contribution. Rather, they propose that, instead of paying premiums to private insurers, both employers and employees pay taxes into a common fund that would finance health care for all.

Physicians for National Health Insurance points out that for large employers, “a payroll tax in the 7 percent range would mean that they would be shelling out less than they currently do (about 8.5 percent).” As for small employers, the physicians’ group argues that with everyone contributing to the pool, small businesses would find healthcare insurance far more affordable — especially since the government would be negotiating prices with drug-makers, device-makers, and health care providers with an eye to insuring that taxpayers are getting value for their health care dollars.

Today, our profit-driven health care system is bloated with waste. Studies published in journals like the Annals of Internal Medicine and Health Affairs reveal that roughly half of our health care dollars are squandered, each year, on unnecessary or redundant tests, ineffective, sometimes unproven treatments, and over-priced new drugs and devices that are no better — and sometimes worse — than the products that they replaced. Meanwhile, a fee-for-service system encourages over-treatment. Last week, when The New York Times asked its readers, “Have you ever suspected that a physician had financial incentives for recommending a medical treatment to you?,” the paper received 237 replies in just one day.

In virtually every other developed country in the world, the government takes responsibility for trying to check health care inflation. This is why patients in other countries pay so much less for both drugs and medical devices. In nationalized systems, governments are the health care industry’s biggest customer, and they use their clout to negotiate lower prices. By contrast, in our fragmented employer-based system, individual employers are left to attempt to negotiate lower premiums with insurers who, in turn, are fighting their own price wars with drug-makers, device-makers, and health care providers.

When employers find they cannot afford to fight the battle, they retire from the field. Over the past five years, the share of employers who offer health benefits has fallen from 70 percent to 60 percent. As for insurers, if they cannot persuade a drug-maker to offer the drug at a discount, they simply pass the higher costs on in the form of higher premiums — one reason why premiums have jumped by more than 75 percent over the past six years. Little wonder that a recent poll by the Commonwealth Fund shows that 23 percent of families earning $75,000 or more report they have trouble paying for health insurance

This is where “heightening the contradictions” — or letting things get worse so they can get better — comes into play. The fact that not only the middle-class but many in the upper-middle-class are beginning to panic over whether they can afford healthcare suggests that national health insurance is becoming a political possibility. Indeed, a 2005 Pew Poll shows that 65 percent of Americans want universal insurance — “even if it means paying higher taxes.” Even more surprising, a 2003 study by the University of Indiana shows that nearly half of all physicians favor national health insurance.

But if support for universal healthcare is swelling, does Washington really have the will to fight the lobbyists who defend the health care system’s hazardous waste? On this point, recent history is discouraging. The 2003 Medicare reform infamously prohibits the government from negotiating with drug-makers for lower prices. And earlier this year, when Medicare announced that it was planning to cut reimbursements for some of the most over-priced medical devices and procedures, lobbyists representing companies like Boston Scientific marshaled their forces, Congressmen wrote letters—and Medicare capitulated. Describing the incident on his blog, Brown University medical professor Dr. Roy Poses quoted Piper Jaffrey securities analyst Thomas Gunderson: “[T]hey didn’t even back off — they folded.”

Poses does an outstanding job of tracking the conflicts of interest that fuel healthcare inflation; and his blog also documents how the opposition to collusion and corruption in our system is mounting As more and more Americans worry that neither they, nor their employers, can afford to keep up with spiraling health care costs, both patients and doctors are beginning to call for government intervention. In the end it seems inconceivable that Americans will be willing to continue supporting a health care system that is funded largely by the public but run largely by lobbyists.

Winston Churchill famously said that “You can always count on Americans to do the right thing — after they’ve tried everything else.” When it comes to healthcare, haven’t we tried everything else long enough?

Maggie Mahar is the author of Money-Driven Medicine: The Real Reason Health Care Costs So Much (Harper/Collins, 2006).