Earlier this summer, in "Jobs and Health Care, Disconnected," I discussed the historical accident that is employer-provided health insurance, and I described some of its unfortunate effects on the U.S. citizenry and our economy. I focused on what is sometimes called "job lock," in which people are afraid to change jobs because they might lose their health insurance, as well as the "legacy costs" of retirees' health care that bankrupted GM and Chrysler and threaten to do the same to many other American companies. I also pointed out that employer-based insurance creates an unnecessary political controversy by turning "family coverage" into a fight over whether gay workers' families will be covered.
As it turns out, the consequences of employer-provided health coverage are especially damaging for one group of people: retirees whose former employers discontinue their health insurance coverage. With virtually no chance of coming out of retirement and finding a job that would provide adequate (or any) health insurance, these retirees are as vulnerable as any population that one could imagine. Having lived up to their part of the quid pro quo, they now cannot do anything about it when the promised consideration is (legally) withdrawn.
In a forthcoming article, "Retirees at Risk: The Precarious Promise of Post-Employment Health Benefits" (Richard L. Kaplan, Jordan Zucker, & Nicholas J. Powers , 9 Yale J. Health Pol'y, L. & Ethics 287 (2009)), my friend and tax colleague Dick Kaplan and his co-authors discuss the depressingly-common situation in which workers retire in reliance on promises made by their employers to continue to provide health insurance coverage, only to have such coverage discontinued when the employer later decides that the coverage is too expensive. Even where coverage is not discontinued entirely, employers are increasingly reducing coverage in the face of rapidly rising health care costs.
Kaplan et al. describe the conditions under which such changes in coverage can be legally imposed on retirees, and they discuss the personal and financial catastrophe that follows for the retirees. For those retirees who are not yet covered by the government-run single-payer health plan called Medicare, there are three options: (1) continuation coverage purchased from the former employer, (2) individually obtained health insurance, and (3) health savings accounts. All three options are, Kaplan et al. conclude, very poor substitutes for the coverage that has been lost.
The authors then suggest extending Medicare coverage to early retirees, which certainly seems like a reasonable choice (unless, again, one believes that "socialized" medical insurance will destroy the world). What I find interesting about this suggestion is what economists would call the "moral hazard" that is introduced by such an ex post provision of insurance by the government. Knowing that the public will not tolerate a situation in which workers have spent their entire careers "doing everything right," only to find that their former employers (for innocent reasons or not) will not do what is right, of course it will be necessary for the government to pick up the slack. This creates an incentive for employers increasingly to off-load their health care costs on the government, especially once we have in place a system that eases the transition to early government-run health insurance for retirees.
If we really did not want to allow employers to game such a system, there are no good alternatives. Telling employers that they must honor their obligations even in the face of severe economic adversity, while an interesting question of contract law (especially under the doctrine of impracticability), is simply bad policy. We like to talk about the "flexibility" of the U.S. labor market, which in part relies on the ability of employers to respond to changing economic circumstances. A policy decision to force employers to continue to provide health coverage for retirees at the levels originally promised, no matter what, could be economically crippling for many companies.
Consider what would be required to make such a policy work. Companies would be told that they must honor all retiree obligations to the letter. Assuming away the subsequent litigation over the change toward more burdensome regulations, and setting aside the disincentive that this would create for companies ever to offer such coverage again, such a policy would require that ongoing companies devote every dollar necessary to meet their obligations to retirees. Since it would be an even more profound violation of the precepts of free market capitalism to forbid companies from going out of business, this would mean that the one and only way out for companies facing crippling health care costs is to fold.
Knowing that companies would thus have strong incentives (and, in many cases, would face overwhelming financial pressure) to go out of business, the only plausible way to require those companies to live up to their obligations is to require them to fully fund an escrow account to cover their health care promises to retirees. Experience shows that such requirements are difficult to enforce and to administer, and it still requires a commitment on the part of government to let the retirees suffer if the amount in escrow nevertheless turns out to be too small. Moreover, this itself imposes a high cost on businesses, making it more expensive to start up and to stay in business.
Viewed in this light, the extension of Medicare coverage to this group of retirees begins to look distinctly like a pro-business strategy. Why, however, stop at that group of retirees? Businesses chafe at their health care costs for current workers, and those costs make the companies less able to compete against foreign-based companies whose governments provide health care directly to their citizens without putting businesses in the middle.
The choice, therefore, amounts to having the government make explicit its implicit commitment to insure companies against rising health insurance costs, a commitment that allows companies to lower their costs of doing business and to contribute to the dynamism that is supposed to flow from a free-enterprise system. Not having nationalized health care is a business-killing choice that we should not tolerate.
-- Posted by Neil H. Buchanan