By Randall Margo, PhD
G.L.O.B.A.L Justice Commentator/Global Economy & Administration Adjunct Faculty, Golden Gate University; Public Administrator
Health insurance captivates us like few other issues because it affects us personally and distinctively. In more recent times it has come to reflect our political disposition regarding individual and collective responsibility. While the Affordable Care Act (ACA) repeal and replacement presently hangs on a legislative precipice, the philosophical dimensions of this debate concerning the role of the individual and the state should merit greater attention. Instead, the ACA’s destiny now appears to rest on the resolution of Medicaid and the division between federal and state governments.
One cannot examine this topic without some background, or as Shakespeare wrote much more eloquently in his play that aptly describes the present healthcare debate, The Tempest, “Whereof what’s past is prologue; what to come, In yours and my discharge.”
Health insurance coverage in America began during the early part of the 20th century, in the form of workers’ compensation insurance. The impetus for this reform was multifaceted and set the stage for subsequent health insurance programs. First, it reduced the burgeoning litigation by workers who were injured on the job and claimed their injuries resulted from the negligence of their employers; Second, it shifted the healthcare costs to employers, who assumed the insurance costs; And, it ensured compensation for physicians and hospitals that treated injured workers.
The financial consequences of the Depression drove hospital usage down dramatically, made consumers less likely to repay their medical expenses and curtailed their charitable contributions. In response, hospitals began to offer insurance plans. However, these insurance plans differed from typical insurance products provided by life or casualty in several important respects. Unlike other insurance products, health hazards were neither measurable or definitive. “The problem with offering a policy that paid when one was sick was that everyone had an incentive to declare herself sick once she had coverage.” To resolve this issue, characterized as ‘moral hazard’, required a physician (gate-keeper) to determine if hospitalization was warranted. Plans like Blue Cross didn’t initially offer health insurance, but rather hospitalization coverage. Still, by the end of the 1930s just 9 percent of the population had health insurance. It should be noted that medicine prior to the 1940s was extremely limited in curing common debilitating diseases such as polio, tuberculosis, syphilis, leprosy, or many other maladies subsequently addressed by modern medicines. Therefore, the value of paying for health coverage had to be evaluated in light of other financial hardships experienced by many during the Depression.
World War II created further interest in health insurance. At the outset of America’s involvement in the war, the Roosevelt Administration instituted wage and price controls. Meanwhile, during the course of the war over 14 million men were needed for service. This created a severe labor scarcity for businesses, which could no longer increase wages to fill this shortfall. The federal government, however, did provide some relief in the form of administrative rulings. The National Labor Relations Board determined that health insurance was not a wage, thus enabling employers to provide coverage without violating the wage and price control decree. In addition, the Internal Revenue Service (IRS) issued a ruling that health insurance benefits were not subject to income taxes. These administrative regulations greatly enhanced the spread of health insurance during the 1940s. Congress would later codify the IRS ruling in 1954 through legislation. After the war, labor unions were in ascendance, and the Taft-Hartley Act of 1947 allowed health insurance to be a condition of employment, and thus, subject to collective bargaining. By the end of the 1940s nearly 23 percent of the population had some form of health insurance.
Premiums for health insurance originally provided by Blue Cross and Blue Shield plans were based on community rating, “…which meant that all of the subscribers of a plan were in one large risk pool.” Commercial insurers began to vie for these customers by identifying groups of people who were more healthy than the entire community pool and then offering that group lower premiums, otherwise known as experience rating. By the 1960s, experience rating plans had replaced community rating, which benefitted the healthy groups, but meant that higher risk groups and individuals could not benefit from the community rating at large, and therefore, experienced much more costly premiums.
The 1960s also brought into existence socialized medicine. First advocated by the Truman Administration after World War II, President Johnson’s landslide victory in 1964 also brought large Democratic majorities in both houses of congress. The result was Medicare and Medicaid.
Medicare was separated initially into two parts: Part A provided hospital and limited nursing home coverage financed through payroll taxes on employees and employers, with eligibility based upon Social Security participation; Part B coverage included physician and ambulatory services was voluntary and funded by a combination of general tax revenues along with individual premiums. At its outset, Medicare taxes for Part A required 0.7% of payroll up to a maximum of $6,600. By comparison, the current respective payroll tax is 2.9% of payroll with the maximum taxable earnings is $127,200. The original premium for Medicare Part B coverage was $3 per month. President Truman was the first enrollee in the program. For calendar year 2017, the Part B rates shown in (Table 1) represent a huge increase from the $3 monthly pittance paid by former President Truman back in 1966. Yet, even with these massive increases required for participants, Medicare premiums do not come close to covering their actual costs for physician and clinical services.(see Tables 2 & 3). Furthermore, during Medicare’s history tax rates and the wages applicable to such taxes have had to continuously rise to meet ever larger program costs. (see Appendix A).
Medicaid enabled those in poverty to receive health services with the following stipulations: responsible for a child under age 19; living with a disability; pregnant; and, could be 65 or older if indigent. In fact, elderly participants in long-term care arrangements now represent the most expensive and fastest growing part of the Medicaid budget. The program was jointly funded between the federal and state governments averaging a 57-43 ratio of federal to state dollars prior to the ACA.
While the Medicare and Medicaid programs minimized out of pocket spending for participants, these programs contributed significantly to overall health expenditures through a massive subsidy of tax dollars. Unfortunately, even with billions of tax dollars annually, the Medicare Part A Trust Fund is projected to be exhausted by 2028 under the current financial structure, thereafter paying just 87 percent of benefits that eventually drop to 80 percent by 2050.
More recent Medicare reforms included Part C during the Clinton Administration, providing participants with the option of purchasing a Medicare Advantage plan to cover the 20 percent of hospital related services not paid for under Medicare Part A. And, Part D, which allocates subsidies for prescription drugs, and was enacted during the George W. Bush Administration in 2003. As noted in Table 4, Part D expenditures in calendar year 2015 totaled $90 billion, with just 14 percent of the aggregate amount coming from premiums
The views and opinions expressed are those of the author(s) and do not imply endorsement by G.L.O.B.A.L. Justice. We are a faith-based, nonpartisan organization that seeks to extend the conversation about justice with a posture of dignity and respect.