CHAPTER TWO: Fitting Employer-Based Health Insurance Into an Individual-based Framework

Chapter Two:

No history of American healthcare finance is complete without acknowledging the deep debt of gratitude we all owe to Big Business. Negotiating stormy waters, they created a workable insurance system and held it together for decades. Their legal premise was good health care for employees was essential for modern business. Society has now decided good health care is essential for life. This extension of the mandate has been awkwardly arranged. The main function of this chapter is to ease the transitions between employer-based health care and the other half of life, before and after forty years of employment. In the process, we would like to see Health Savings Accounts become a voluntary alternative for working people, both of them changing enough to co-exist. As a start, I can see no reason to prohibit anybody from having an HSA, with or without employer insurance as well. Nor can I see the slightest justification for unequal income tax treatment. Yes, health insurance companies must make some major changes, but after all, we're talking about changing health insurance.

History. Theodore Roosevelt had proposed a system of national health insurance, probably based on the example of Bismarck's German system, and Teddy nearly pulled it off. The American Medical Association considered the reform idea quite favorably until some physician leader (legend relates it was Morris Fishbein) had a change of heart and denounced it. Legend also has it that Fishbein was influenced by the bad treatment the Mensheviks received at the hands of the Bolsheviks in Russia. Fishbein was related to many Mensheviks, and this is said to have influenced his thinking, although its connection to Bismarck and the Flexner Report is a trifle hard to understand at this distance. Word of mouth history also blames this episode for the alienation of academic medicine (medical schools) from organized medicine (the AMA), dating from this issue. Somehow or other, this has to do with the Flexner Report of 1914, favoring the affiliation of medical schools to research universities. Much of this is gossip, and much of it is possibly quite wrong. It is related here to help the reader understand why many present political alignments exist, even if they do not explain why they persist. The fact that hardly anyone alive can recount precise details, does not diminish the intensity with which some present partisans hold their (possibly mistaken) beliefs.

Big Business was obviously drawn into a dispute of this magnitude, but in view of Teddy Roosevelt's past activities as a trust-buster, business leadership was unable to unite its constituents into taking one side or the other, openly. That division continues to this day, although it is fair to say the leadership of Big Business leaned in the direction of "reform" of the healthcare system, even while many heavy hitters in their ranks still remain violently opposed. Businessmen lean heavily on their lawyers for advice about non-business issues, and there can be no doubt it makes Big Business uneasy to read the plain language of the Constitution, especially the Tenth Amendment, and the McCarran Ferguson Act of 1945. The Constitution firmly proclaims the Federal Government is to have only a limited role in most areas, so medical care is therefore regulated by state governments. As a reminder, the states license hospitals, universities, medical schools and physicians, and the entire structure of organized medicine revolves around state control. As well as upon the Constitution, for which all this stands. The President of every county medical society in the nation takes his inaugural oath, with the wording of great similarity to those of George Washington, to uphold the Constitution. Not the Governor, or the State, but the Constitution. Medical Schools, nursing societies, hospital administrators and all similar officers are expected to take much the same oath, although many feel free to disregard it. When they do so, they meet the glares of many physicians and many lawyers. A corporation is only a creature of the state legislature, and all lawyers know what danger lies in flouting the courts.

With all this background of stern rules and bitter recollections, it must have taken skill and courage for Big Business to act as negotiator and peace-maker in constructing the collection of compromises and invisible unity, now called employer-based health insurance. The edifice was negotiated in the 1920s and rescued the health system from near-dissolution after the crash of 1929. Much of its strength lay in family-controlled corporations with close associations to local hospitals and other members of civil society. As family-held businesses gave way to stockholder-controlled corporations, American business became much less local and more national, with hired managers much more congenial with government bureaucrats and university presidents, than self-made entrepreneurs ever felt. The stage was set for "reform", and for several decades things seemed to work very well. Its legal high point was probably Franklin Roosevelt's court-packing confrontation, which Harry Truman tried but was unable to exploit. In 1965 Lyndon Johnson succeeded in some patchwork, successful for old folks, a failure for poor people. Hillary Clinton tried again and failed, with rumors circulating that Big Business had ruined her plan. Then Barack Obama tried the same plan; whether he succeeded or failed is yet to be made clear. In all these efforts, the issue was the same: take control of healthcare away from the States, and give it to the Federal Government. The decisive argument for business to avoid total war was also the same: if you ignore the Constitution for medical care, you may find you have opened the door for federal conquest -- of all corporate independence.

That's a capsule history of healthcare reform, confessing it must contain many omissions about closed-door arrangements. And leaving to last mention, Henry Kaiser's tax-avoidance scheme during World War II. In an effort to move steelworkers from the East Coast to build ships in his West Coast shipyards, Kaiser found wartime wage controls prevented him from paying workers to move. So he persuaded the War Production Board to look the other way from his healthcare scheme, devised as a non-taxable inducement. After the war ended, Congress continued to include employer-donated healthcare as a necessary business expense for the employer, while excluding it from the taxable income of the employee who got the "gift". Furthermore, the same tax exclusion was denied for the same expense unless it was donated by an employer. For seventy subsequent years, the tax abatements have repeatedly defied Congressional repeal, in spite of the denial of the same tax abatements for competitors. In this case, competitors are foreigners without voting rights, uninsured persons, and self-insured. The critical legal issue was health insurance had to be donated by the employer to qualify. Management would have everyone believe they are powerless to persuade unions to be reasonable. In the next section, we explore other motives and suggest a different solution.

Originally published: Tuesday, January 06, 2015; most-recently modified: Wednesday, May 15, 2019