Op-Ed: The original mistake that distorted the health insurance system in America

A World War II-era mistake distorted the U.S. health insurance system. Reformers tried to fix the problem with patchwork solutions until Obamacare dumped yet another layer of misguided policy onto what was already a mess. Now the tangle is so perplexing that a Republican Congress, under a Republican president, could not even bring a health-insurance reform bill to a vote last week. But legislators will no doubt try to tackle the issue again, and when they do, they should consider erasing the original error instead of merely papering it over.

As World War II raged, competition for scarce labor grew fierce, what with so many able-bodied men in the military. Legislators, worried about possible runaway inflation, imposed wage controls in 1942. In response, employers began enticing workers by offering rich benefits in lieu of increased wages, and, as these benefits were not income, they were exempt from income and payroll taxes, a subsidy to workers and employers alike. Chief among these benefits was health insurance, whose cost was originally modest.

But as the cost of healthcare rose in the 1950s, retirees and the poor found insurance unaffordable, and President Johnson, who never saw a problem he didn’t think big government could solve, injected Medicare and Medicaid into the health-insurance business. Prices continued to rise, in part because of spectacular advances in medicine, such as the development of coronary bypass surgery in the late 1960s. By 1980, corporations found their medical-insurance costs increasingly burdensome. They tried all sorts of schemes to bring those costs under control, from health-maintenance organizations, which added administrative costs, to employee wellness programs, which helped keep workers alive long enough to develop the diseases of aging. Employer costs, in short, went up instead of down. Behind closed doors, executives remarked that it might be better if workers died before they retired, to ease the strain on the corporate pension fund.

Aside from all this lay a great inequity. People with corporate jobs got (relatively) affordable group insurance, subsidized by the two tax exemptions. People without such jobs had to buy unsubsidized and therefore more expensive individual insurance.

Future reforms, then, ought to get employers out of the healthcare business entirely, since they are there by accident and add nothing of value to the health of the nation. The tax deduction should go to the individual, not the employer.

Obamacare provided health-insurance subsidies to individuals without employer coverage; House Speaker Paul D. Ryan’s bill would have given those same individuals a tax deduction or refundable credit. But until the government removes the double tax deduction that encourages employers to provide insurance — not to mention the mandates forcing them to do so — corporations will retain the real leverage in healthcare finance. Only when the individual wields the power of the purse will his needs come first.

A second worthwhile reform would be to encourage the rebirth of the mutual health-insurance company, such as Blue Cross Blue Shield used to be. Like the Victorian Friendly Societies, early American health insurers were just vehicles for pooling risk. Everyone knew that he or his family was subject to serious illness, but no one knew whether he would be among the lucky or the unlucky, so it made sense for all to pool their money to pay the expenses of those among them unfortunate enough to contract one of the thousand natural shocks that flesh is heir to.

In the 1940s and �50s, the owners of these insurance companies were the policyholders, and their employees were just administrators who calculated the risks, collected the premiums, and paid out the benefits. Blue Cross and Blue Shield were in the insurance business, not the investment business, and they needed no high-paid top executives to make investment decisions to enrich non-policy owning shareholders. There were none. No insurance company presumed to tell a doctor how to treat his patient to promote the interests of the insurance company, for the interests of insurer and patient were identical. The demutualizing of these companies was a huge policy mistake, vastly increasing the cost of health insurance in order to reward public shareholders and executives, not policyholders. Now the tail wags the dog.

I’ve said nothing about healthcare for the poor. I’d only point out there were always doctors who wouldn’t charge patients who couldn’t pay, always charity hospitals staffed by the same doctors who staffed the fancy hospitals, always union clinics and company doctors, always emergency rooms that would treat first and ask about ability to pay later. And all these delivery systems, in midcentury America, arguably provided better care than Medicaid.

The ruling concept in America’s technology companies is continuous improvement. Health-insurance reformers, starting now, ought to make it their watchword as well.

Myron Magnet is editor-at-large of the Manhattan Institute’s City Journal, from which this essay was excerpted.

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