FEATURE | SPRING 2010 EFFECT

A Century of Change: Benefits and Health Insurance

by Suzy Frisch

“Health care in America is badly organized, highly inconsistent, internally dysfunctional, sometimes brilliant, almost always compassionate, close to data free, amazingly unaccountable in key areas, too often wasteful, too often dangerous, and extremely expensive,” George C. Halvorson writes in the book Health Care Will Not Reform Itself: A User's Guide to Refocusing and Reforming American Health Care (Productivity Press, 2009). “Care costs more in America than it does anywhere else in the world—by every measure. Care costs more per person, more by the unit, more by the dose, more by the disease, and more in the aggregate. We spend far more than anyone else in the world on care, and we are alone among the industrialized countries in not covering all of our people. We need to do a lot better.”

If there is one constant in American health care, it’s the desire to do better. Our collective notion of how to deliver health care and retirement security has been in a constant state of flux during the past century. Both have evolved continuously, undergoing much debate, analysis, and change, over and over again. And now health care is on the cusp of another renovation—and it probably won’t be the last.

To understand the many options to improve our health care system and retirement services, it’s useful to know how we arrived at the point we are today.

Early insurance ideas

In the early decades of the 20th century, before antibiotics, vaccinations, and advanced treatments for heart disease and cancer, there really wasn’t much doctors could do for ill people. They could set bones, ease pain, and deliver babies. Health care didn’t cost very much, and people paid for medical services out of their own pockets.

The seeds of American health insurance were planted in the Civil War era by workers, who started small mutual funds called sickness insurance. Each week fund members would throw money into a kitty—usually a dime. If a worker got sick, he could apply for wage replacement, which would cover about two-thirds of his paycheck, explains John E. Murray, Ph.D., a professor of economics at the University of Toledo, who wrote the 2007 book, Origins of American Health Insurance: A History of Industrial Sickness Funds (Yale University Press). Set up through employers, unions, or fraternal organizations, these funds gained steady popularity into the 1920s.

In the 1910s and 1920s, members of the Progressive movement started advocating that state governments provide their citizens with health care. They were inspired by German Chancellor Otto von Bismarck’s successful initiatives to provide health insurance to his country’s citizens. His efforts to create a social welfare system in the 1880s motivated other countries, including Great Britain, which passed national health insurance legislation in 1911.

Progressives attempted to create the nation’s first state-sponsored health insurance system for California residents in 1918. But voters rejected the constitutional amendment 2.5 to 1. “The historical interpretation is that voters didn’t want anything that seemed German after World War I. Another is that they were too stupid to realize what was good for them,” Murray says. “But it was a rational reaction because people understood how corrupt state governments were at the time.”

In addition, sickness funds had spread far and wide across the country, giving most workers access to this form of health insurance. The funds were prudently run and helped workers when they needed it most, says Murray, adding, “They were reasonably happy with the status quo.”

The Depression and WWII bring changes

The 1930s brought big systemic and philosophical changes to American health care and retirement. Before this time, there really was no concept of enjoying a “retirement” or having a safety net for people who could no longer work. “No one stopped working. You needed to work to get paid,” says Jean Setzfand, director of financial security for AARP in Washington DC.

People relied on their large families to care for them when they could no longer work. Others stayed on the job long after they should have retired, dragging themselves to work in order to earn a paycheck.

By the time the Great Depression hit, President Franklin Roosevelt was looking for ways to encourage less productive elderly workers to retire. At the peak of the Depression, 25 percent of the country was unemployed, and those out of jobs were eager for work. In 1935, FDR championed Social Security insurance, which would pay people not to work. And with people living an average of six months after the set retirement age of 65, it was a wise investment, says Nancy Rehkamp, a health care principal with LarsonAllen who specializes in aging services.

With Social Security, the federal government would give employees 65 and older half of their pay to retire, and then use the money left over to hire a more able-bodied worker, explains Ross Azevedo, an associate professor of human resources and industrial relations at the University of Minnesota’s Carlson School of Management. At the same time, retirees would boost the economy by having money in the bank to spend on goods and services.

Health care also began to change during the 1930s and 1940s. During World War II, the government froze wages to keep costs low for war production, and employers needed to find other ways to attract employees—especially because many men were off fighting for Uncle Sam. So they started providing perks like health insurance.

After the war, employers tried to eliminate these fringe benefits, but workers fought back. In the Inland Steel case of 1949, unions convinced the U.S. Supreme Court that employee benefits should be part of collective bargaining and negotiated in good faith. “That opened up the floodgates for the continuation of employer-based health care and pensions,” says Azevedo. “Unions demanded it, and employers had to do it.”

As veterans returned from the war and the economy started booming, employers continued to use health insurance, pensions, and other benefits to attract employees, says John Richter, principal-in-charge of health care at LarsonAllen.

“Employers were looking for a competitive edge in the Baby Boom years, and they were looking for ways to be family friendly,” Richter adds. That meant that employers started expanding health insurance coverage to family members, too.

Boom years: 1950s–1970s

More and more American workers got set up with health care during this time, especially those who belonged to unions. But not everyone had coverage for their medical costs. As health insurance became increasingly tied to employment, retirees and the unemployed were being left out, says AARP’s Setzfand. In fact, more than half of the people 65 and older had no health insurance.

Comparing Health Care Spending Worldwide The United States spends far more than other industrialized nations on health care—16 percent of its national income in 2007, according to the Organisation for Economic Cooperation and Development (OECD). This compares to an average of 8.9 percent for other OECD countries. Here’s a look at how the United States stacks up on health care spending as a percentage of national income in 2007.   At the same time, Americans consumed $7,290 in health care per capita, almost two-and-a-half times more than an average of just under $3,000 for other OECD countries. For example:   Finally, the OECD found that despite all of this spending, the United States has lower life expectancy than most of the OECD countries—78.1 compared to an average of 79.1—while it falls below on a wide range of other measures, such as infant mortality. One positive note: the United States excels at cancer care compared to these same countries.

Though President Harry Truman proposed the concept of universal health care in the 1940s, the notion didn’t catch on until John F. Kennedy was president. He moved slightly away from the concept of a national health insurance system, advocating instead that the elderly and the poorest of the poor receive coverage. President Lyndon Johnson signed the Medicare and Medicaid legislation into law in 1965.

“People look at the start of the Medicare program in 1965 as the beginning of our modern era of health care,” notes Greg Hart, a health care principal with LarsonAllen. “There was much less employer-based health care and government-based health care before then.”

Around this time, health care offered by employers also became more generous. Previously employers would offer insurance for major medical events with high deductibles, but in the 1960s and 1970s the plans started covering more family members, paid for more services, and required lower deductibles, Hart says.

Seeking more ways to attract and retain employees, companies also began funding pensions to help pay for their retirement. Employers would set aside a fixed monthly benefit based on years of service, age, and salary history into these pension funds or defined benefit plans.

Similar to the government’s thinking behind Social Security, employers banked on their retired employees not living long after retiring. They saved for a set number of employees and years then hoped for the best, says Rehkamp.

Inspired by this new financial safety net, the notion of the “golden years” developed. Retirement communities started cropping up in California, Arizona, and Florida, and seniors engaged in leisure activities like golf and travel. “Following World War II, we became much more affluent, and we now had pensions and Social Security. There wasn’t a financial need to work,” Rehkamp says. “So many created lifestyles based on enjoying life.”

And as life expectancy climbed steadily higher, retirees got to enjoy these golden years much longer. But the rapidly swelling ranks of retirees and their lengthening life expectancies forced new changes in employer-backed retirement savings.

ERISA on the rise

After several large employers went bankrupt (including multiple railroads and steel companies) and took their pension plans down with them, Congress stepped in and passed the Employee Retirement Income Security Act (ERISA) in 1974. It standardized states’ rules about pensions and benefits and ensured the timely and uninterrupted payment of monthly benefits through the Pension Benefit Guaranty Corporation (PBGC). ERISA turned a good thing into an even better benefit for workers.

Pre-ERISA, contributions were made “in the name of all” employees. But they really were only paid out to some—the folks who stuck around long enough to retire with the company, says Azevedo. Thanks to the new law, employers had to pay out employees’ pensions, even if they retired from another company. The only condition was that employees “vest” in their pension based on a set schedule.

Though this was a much better setup for employees, Azevedo says, “it dramatically increased the cost of defined benefits plans, and employers started canceling plans like crazy.”

ERISA also opened the door for retirement planning as we know it today. Instead of preparing pensions for employees and shouldering the financial burden of their retirement, employers started turning to qualified plans like 401(k), 403(b), and individual retirement accounts—qualified meaning that they were eligible for tax benefits.

At first companies used these qualified plans as an additional carrot paired with a pension, but eventually businesses started swapping pensions for 401(k)s and other qualified plans. As retirees began living longer, 401(k)s helped give employers more predictability in what they would owe for their employees’ retirement funds. And at the same time, these mechanisms shifted more of the retirement saving burden onto employees, Rehkamp says.

Moving to managed care

The 1970s brought changes to health care, too. Companies were looking for ways to limit employees’ access to health care, because when people didn’t have to pay much out of pocket, they acted like health care was free and tended to overuse it, Hart says. Federal legislation in 1973 allowed for the creation of Health Maintenance Organizations (HMOs), and the country ultimately shifted to this delivery format.

It worked like this: HMOs would not charge deductibles or co-pays in hopes that patients would get regular physicals and other preventive care. In turn, their health outcomes would improve and health care costs would decrease, Hart says.

Eventually HMOs evolved into the managed care model in the 1980s, where people were restricted to seeing only certain physicians or had to get permission to see a specialist. “It was clearly an effort to control costs and the public reacted very strongly to that,” Hart notes. “Managed care became linked with corporate medicine, and it became a joke or a dirty word.”

As health care costs continued to rise year after year, companies looked for ways to control costs. In 2003, Congress authorized health savings accounts (HSAs) as a new vehicle for employer-sponsored health care benefits. Employees could contribute to these tax-favored savings accounts and use their contributions to pay for eligible medical expenses.

The accounts are paired with a high-deductible insurance policy, which often covers preventive health services without the enrollee needing to first meet a deductible. Besides significantly reducing employer-sponsored benefits costs, the theory is that if employees have more control over how and where to spend their health benefit dollars, they will use medical services more judiciously and shop around for the most cost-effective care.

Though some criticize these plans as being useful to only healthy participants, who can accrue funds tax-free, the numbers using HSAs are increasing. Ten percent of employers, large and small, offered HSA accounts to their workers in 2009, reports the Kaiser Family Foundation. As of January 2009, 8 million Americans received their health insurance through an HSA/high deductible plan, compared to 3.2 million in 2006, according to America’s Health Insurance Plans’ annual census. Though they do not meet the needs of all individuals or businesses, HSAs represent one more effort in the evolution of health coverage and benefits.

Revolving retirement

The concept of retirement also continues to change. As people live longer, many are not ready to stop working entirely and find ways to challenge themselves intellectually, try new fields, or give back to their community through volunteer work. Others need to continue working after the Great Recession pummeled their finances.

In fact, in the first quarter of 2009, people 50–64 lost 38 percent of their assets, while those 45–54 lost close to 50 percent, according to an Employee Benefit Research Institute study. “People aren’t going to be retiring as early because they won’t have the economic means,” says Rehkamp.

Richter notes that 30 percent of people who are 65–70 are still covered by an employer’s health care insurance, meaning they are still working. They might want to work, or they might need to work. “As we say in our business, 85 is the new 65,” he adds. “If someone retires at 62 or 65, they are young and have a lot of good years left.”

When the Baby Boom generation starts to retire and a growing-again economy demands more workers, employers just might swing back to an era of richer benefits. As in all things, there is no certainty in health care and retirement, but the certainty of change.