Neil H. Buchanan

Can Capitalists Learn to Love Socialized Medicine?

By NEIL H. BUCHANAN


Thursday, September 10, 2009

The health care debate has taken many unexpected turns this year. The most obvious of these were the outrageous claims heard in August about euthanasia and rationing, and other scare tactics. Lost in that din, however, was the quiet disappearance of a much more plausible storyline from earlier in the year – which held that now, finally, American businesses large and small would support health care reform.

With businesses facing high and rising health care costs for their employees, the thinking went, they would put aside their historical alliance with Republicans and get on board with President Obama's efforts to change the health care system.

This clearly has not happened. Granted, there have been some prominent stories about how the Obama team negotiated a ceasefire with the pharmaceutical industry and perhaps some other directly interested parties. Yet we have not seen any meaningful examples of, say, auto makers making a major push for health care reform in an effort to reduce their health care costs.

In this column, I will not attempt to explain why businesses have not stepped up in favor of universal health care this year. Instead, I will argue that universal government-run health care will ultimately be necessary to save American businesses. Capitalism, it turns out, actually needs socialized medicine.

What Happens When You Do Everything Right, and You Still Lose?

A recent academic study co-authored by Richard L. Kaplan, Jordan Zucker, & Nicholas J. Powers, "Retirees at Risk: The Precarious Promise of Post-Employment Health Benefits," discusses the plight of people who have retired from their jobs before they become eligible for Medicare, relying on their former employers' guarantee (as part of the employees' compensation package) to continue to pay for health benefits after retirement. With increasing frequency – and despite the promises that were made to them -- these workers are losing their health care coverage as their former employers cut back on costs and, in some cases, go out of business.

During the financial crisis last autumn, we learned about institutions that are "too big to fail" – that is, they are so large and well-positioned that it would be damaging to the rest of us to allow them to face the ultimate market discipline: liquidation. The resulting bailouts were, however, distasteful precisely because people felt that those institutions had somehow "played" us and were now laughing all the way to the Treasury.

By contrast, the workers identified by Professor Kaplan and his co-authors are entirely sympathetic. These workers have as strong a claim on their promised benefits as anyone could hope to have: They worked hard for years, accepting salaries that were lower than they could otherwise have been, in exchange for the promise of a valuable post-retirement benefit.

These former workers, moreover, are now in the weakest position imaginable -- as they try to mitigate the damage that they face due to this contractual breach. Their age is a major obstacle. While a 30-year-old is likely to be relatively healthy and can offer an employer many years of potential service -- yet nevertheless faces an extremely difficult time finding a job in today's economy -- a retiree not only faces the same bad economy, but also is far more likely to be sicker than the 30-year-old, and to be accurately viewed as a bad investment by a potential employer.

The employers who are violating their guarantees to their former workers, moreover, are themselves not obviously villainous. There is no reason to believe that they planned to end up where they are. They most likely tried to stay afloat but -- faced with ruinous health care inflation coupled with the worst economic disaster in over 75 years -- they finally had to pull the plug.

In sum, this situation features many innocent victims, and no one wearing black hats. Accordingly, public support for a rescue (surely not to be called a "bailout") of these workers will be strong.

After all, what else can be done? The workers themselves have no good choices without government help. They can try to buy "continuation coverage" from their former employer, if the employer still exists and if such coverage is offered at affordable rates (or at all). They can try to buy health insurance on their own. Or they can try to put money into health savings accounts. Especially in the current economic environment, however, none of those options offers any real prospect of relief.

That leaves only the government to step in and help these workers. As Kaplan et al. argue, the best option is to extend Medicare (single-payer, government-run health insurance) to these people, even though they have not yet reached the legal retirement age. Adding these former workers to an established system would mean that there is no need to create a new bureaucracy, and no need to create rules for the provision of "bridge insurance" from private insurers, etc. Thus, extending Medicare is, in a very meaningful sense, efficient.

Can We Prevent Similar Problems in the Future? Examining the Options

There are surely other groups and individuals whose stories will arise and command our sympathy, now and in the future. One response, which I endorse, is simply to admit right now that that there will always be people who fall between the cracks and to protect them by bringing them into our existing single-payer health care system. Those who oppose that outcome must answer a key question: What are the alternatives?

If we would like to guarantee that workers can rely on their employers' promises to continue health care after they retire, then we face one of the classic problems in contract law. When – as in the case of retirement benefits -- workers must fully perform their duties under a contract before their employer will fully perform hers, the possibility of the employer's breach (opportunistic or otherwise) makes it necessary to create a mechanism to force the employer to honor her promises.

The standard remedy, of course, is for the worker to sue under the contract and to require the employer to do what she promised. When, however, the employer has breached the contract precisely because she has no money with which to pay the health insurance premiums, or because she has liquidated her company, the standard remedy fails. The worker may sue, but the employer still will not be able to pay the judgment against her. Thus, we are forced to ask: What else can be done?

Anticipating these situations, we could in the future require companies to pay the money to which the workers will be entitled when they retire up front. Under such a system, employers would put funds into an escrow account to cover the possibility of future financial distress.

We do, in fact, have laws in place to require just such advance planning -- for example, in the area of private pensions. However, experience has shown that those laws have been far too easily manipulated, and the money in such accounts has too often turned out to be inadequate to cover the promises made.

An alternative approach -- which leaves the government out of the financial picture (though still very much in the picture as the enforcer of the contracts that would be required) -- is to allow companies to buy insurance to cover their future obligations. Then, even if an employer goes belly-up, the insurer, and not the government, would be on the hook for the health insurance premiums.

Leaving aside the possibility of those insurers themselves going bankrupt (a possibility that might have seemed far-fetched only a year ago, but surely not now), the inescapable fact is that these attempts to protect workers would be expensive for their employers. We currently allow companies to make some promises that they might not keep, knowing that the "too sympathetic to suffer" victims will end up being taken care of by the government.

Socialism Rescues Capitalism

Many of the commitments that companies make to their workers are, therefore, really commitments that the taxpayers are making to those workers. Until last year, we had never had to face the fact that we would have to bail out AIG if its imminent collapse threatened the global financial system. We learned, to our dismay, that we were the insurance company's insurer. Similarly, we have very good reason to believe that we will not allow people who have done nothing wrong to twist in the wind.

To make the public purse no longer available for such mop-up operations, our only choice would be to make companies truly face the costs of their promises. "Do you want to pay your workers lower salaries, but promise them things in the future? Put your money where your mouth is today, not later."

In short, the only way to save public money is to force companies to commit their own money up front. Yet even if such a requirement could be designed with sufficient safeguards to guarantee future payments, this increase in the cost of doing business would discourage companies from starting up, or from offering such benefits in the first place.

We thus have a choice. We can either limp from crisis to crisis, finding to our dismay that there is always something that we did not think of and some potential victim whose plight calls out for mercy -- mercy that must be paid for by the public. Or, we can admit that it is ultimately the government that makes this system work, and follow that point to its logical conclusion: We should simply cover everyone with a government-run program.

If our political leaders frame the choice in this way, then businesses will surely see the value in lowering their costs by having the government provide health care directly. Unfortunately, the state of the political debate this year suggests that we might be doomed to several more rounds of crises before the issue is seen clearly.

Sooner or later, however, it will become obvious that we already have a system of socialized medicine. We might as well admit that fact, and set up the system so that health care is no longer a burden on businesses and so that people are protected when they need it most.


Neil H. Buchanan, J.D. Ph. D. (economics), is a Visiting Scholar at Cornell Law School, an Associate Professor at The George Washington University Law School, and a former economics professor.

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