Humpty Dumpty Health Insurance
The announcement that Xerox Corp. wants to abandon the administration of health insurance is a shocker. Xerox wants to give each of its employees a fixed sum of $5,000 or $6,000 per year and leave it to them to select an insurance carrier. Apparently, employees would have a choice of plans administered by private carriers, not Xerox. Those workers who selected plans costing less than the allowance could pocket the difference. It is unclear what would happen to workers with medical problems that private insurers would shun. Still, by offering earmarked dollars for health care and assistance in plan selection, Xerox is more generous than those employers who offer no health insurance at all.
There has been gradual erosion of employer-provided health insurance coverage in the U.S. But for those people under the general Medicare age of 65, about 90% who do have private insurance obtain it through their employer or the employer of a family member. That a major firm such as Xerox--a company generally known for progressive employment practices--wants out of the traditional system should be a wake-up call for average Americans who count on employers for coverage.
Yet the Xerox move is easy to understand. Xerox is good at making copying machines. Ford is good at making cars. Microsoft is good at making software. But why should any of these firms be especially good at administering health programs? Health insurance is especially attractive to employees with costly medical conditions. Why should an employer particularly want to attract and retain those workers? More generally, why should the American system of health care be so dependent on employers?
At one time, individuals were responsible for their own medical bills. Private insurance companies were reluctant to provide individual policies because of “adverse selection.” That is, people who knew they had medical problems would join up disproportionately, leaving the carriers saddled with bad risks. On the other hand, if health insurance were offered through employers who covered all workers on their payrolls, insurance carriers would end up with a mix of good and bad risks that mirrored the general population. Administrative costs would be low, at least for larger employers, because paperwork and marketing expenses could be minimized. Thus, large firms such as Xerox were encouraged by insurance companies to view offering health coverage as a recruitment and retention tool.
In the 1930s and 1940s, the medical profession strongly opposed proposals for European-style government-run systems, either federal or state. So the tax code was amended to provide incentives for employers to provide health coverage voluntarily. But that approach omitted people without employment, those working for small firms or those who were self-employed or in temporary positions. As a result, the American health insurance system has never been universal and more than 40 million people lack coverage. An attempt by the Clinton administration to offer a complex but comprehensive federally administered system was killed by a coalition of insurance companies fearful of losing markets.
If employers such as Xerox had supported the Clinton plan or had come up with a comprehensive alternative, their administrative problems might have been resolved. But in the early 1990s, the corporate world was split. Human resource executives, whose internal status depended on health plan administration, were not keen to see their tasks “outsourced.” CEOs feared being handed the bill for some unknown plan without the ability to control it.
What the Xerox proposal shows is that the issue has not gone away. Moreover, it cannot be solved by any one firm. An unattractive health plan at Xerox could undermine employee morale. In a time of tight labor markets, employees may be reluctant to join or stay with firms that depart from what has been traditionally seen as good personnel practice. Adverse selection could send the costs of the better plans on Xerox’s proposed menu skyrocketing. Some employees might not be able to obtain coverage. Baby boomers, now aging into years in which health problems become more frequent, may well be fearful.
Politicians have been scrambling to deal with popular unrest over health care rationing by HMOs and managed care plans. But after Clinton’s health care debacle, few wanted to tackle the fundamental problems inherent in the current employer-based approach in which the provision of health care is always at risk. Unfortunately, there is no alternative to the hard work of developing a national consensus on revamping the American health care system. If that occurs soon, we can thank Xerox for copying us in on its proposal.
