Should employers be responsible for health?

Jim Millstein headed a Lazard restructuring team that advised the United Auto Workers in negotiations with Big Three automakers to shift liability for retiree healthcare to the union.

Wilbur Ross was called the "King of Bankruptcy" by Fortune magazine. He has been involved in the restructuring of over $200 billion of defaulted companies’ assets around the world.

Robert Galvin is responsible for GE’s $3 billion annual health programs, oversees the clinical group of over 215 clinics in 30 countries, and leads health policy for the corporation.

Stan Garstka: What we want to talk about is the current employment-based health insurance system, and how it’s working in America. Is it time to abandon it? Could we fix it? What are some of the alternatives?

Jim, maybe you could start us off by telling us a little bit about what happened in the UAW’s negotiations with GM?

Jim Millstein: I’d like to go back to your basic question, because I think it’s illustrated by some of the history of the auto industry. I think the answer is no. We can’t afford it. It doesn’t work.

In the auto industry, the union — after trying to promote an agenda in the post-war period of national healthcare and having been defeated — became very supportive of and negotiated for the employer-based model that is now collapsing around us. And I think the success of that model for 50 years in the post-war period was really a function of the oligopolist structure of the industry and the absence of international competition of any real strength.

The cost of healthcare was something that each company could bear without affecting the competitive dynamics of the industry. But once you introduce foreign competition from employers whose costs are either subsidized directly or indirectly through a national healthcare system, it becomes a competitive disadvantage. It’s not by any means the determinative factor in competition; product health and control of other costs are equally important.

You could write that same story in the steel industry and the airline industry. It’s all about the introduction of competition. In the case of steel, it’s foreign competition. In the case of the airlines, it’s deregulation. But as long as you had an oligopoly structure, where everybody with a unionized workforce bore the same cost structure, it didn’t matter. It was just a cost that was passed on to the consumer.

Garstka: Maybe Wilbur can comment on this. Have you found healthcare obligations in the companies you’ve restructured to be one of the main focal points?

Wilbur Ross: Absolutely, particularly the retiree benefits. I want to follow up, first, on what Jim said. This system not only doesn’t work from the point of view of the corporations that have it. It doesn’t work from the societal point of view, in that it means that your healthcare funding is a function of who your employer is. Basically the big, old-line, unionized companies have the lush plans, not anybody else. And what tends to happen is, when one of them goes bust, the retiree loses the healthcare benefits that were bargained for. So you can have two people exactly the same age, both of whom worked in the same industry. One of them had the misfortune to work for a guy who went bust. The other worked for a guy who didn’t go bust. And so one of them will still have a very good healthcare plan, and the other won’t.

So there’s an unevenness of it throughout the society that, in turn, leads to a significant portion of society, namely the uninsured, tending to use the emergency room as their family doctor. And that drives up the cost of healthcare for everyone quite a bit, because that’s a wildly inefficient way to deliver family doctor service.

It doesn’t work for the companies who have it, and it doesn’t work for the individuals who don’t happen to be working for those companies. So I think it’s a terrible system, from all points of view. It only was historical accident that it came into being.

Millstein: And it’s not a freebie to society. We’re allowing employers to deduct their expenses, and the employee to not include it in income. So to the extent that it’s a benefit to the employee, it’s not being taxed like any other benefit. There’s a tax subsidy on both sides of the equation. Free-marketers like to pound their chests and talk about getting the government out of the business, but the government’s in the employer-based system. They’re just doing it indirectly, through the tax structure.

Ross: But there still is a net cost to the corporation, because nobody’s in a 100% bracket.

Millstein: And the deduction is only good if you’re making money.

Ross: The company losing money doesn’t really benefit from it. Everything about it is just wrong.

Robert Galvin: Yet it’s persisted for 60 years. It’s probably one of the longest-standing institutions we have in the country. While I can’t disagree with any of the particulars of the prior discussion, I think there are two flaws in framing the discussion about ESI [employer-sponsored insurance] the way we’re doing.

The first is the failure to stratify. Only about 8% of the private workforce is now unionized versus 40% when employer-based insurance started. And of that 8% it’s only some industries, particularly steel, autos, and telecoms, that have let themselves get into the position of having health benefits decrease their competitiveness. I think that, while the preceding analysis is correct for those industries, there are more than 150 million people covered by employer-based insurance and the story differs by the size of the firm, by the degree that they compete in global markets, and by the particular philosophy of the company. We shouldn’t let the “tail wag the dog” when we use the case of the autos to talk about ESI in general. I think the biggest flaw I hear when people talk about ESI is they assume a one-size-fits-all explanation.

Garstka: But are you happy with what’s going on at GE?

Galvin: This is the second way I’d change the framing of the discussion: We should always be asking, “are we happy compared to what?” What are the alternatives? Like any company, GE would prefer not to have any indirect costs. But given that we do, while we agree that the current healthcare system is very inefficient, at least we have the opportunity to impact our fate — by making our employees healthier or by being smart buyers of healthcare. We worry that a government-run system, with all the politics at play, would leave us with the responsibility to pay without the authority to do something about how much we pay.

Garstka: One valid argument I heard was that this is an inefficient way to deliver healthcare to an entire economy. Is some form of national healthcare insurance a better alternative to having this decided piecemeal by unions, by companies, by different interest groups?

Ross: I think there’s a public policy question, which is, should reasonable levels of healthcare be a societal obligation to its individual members or not? And I think, depending how you answer that, it gets easier to answer what you should do about it.

Galvin: I agree ESI is an inefficient way to organize a system and that some form of national health insurance would be more streamlined. But I think the country has known this for a long time and national-type reform keeps getting rejected. We could solve the uninsured problem today, within the ESI system, by creating new structures and finding the $150 to $200 billion it would take to cover everyone. To me it’s more a matter of national will than the employer-based system standing in the way.

Millstein: But let’s evaluate it. You’ve got a subsidy for the poor in Medicaid. You’ve got a subsidy for the old in Medicare, and employer-based healthcare supposedly filling in the gaps. And yet, in a near-full-employment economy, we’ve got 45 million people uninsured. So in terms of coverage itself, the system isn’t succeeding.

Galvin: In Massachusetts, you have a plan, with an employer-sponsored insurance system, depending on what level they want to pay, that would lead to 98% to 100% insured.

Ross: But the Massachusetts plan is so unpopular they have to force people into it.

Galvin: I wouldn’t say they have to force people in because the plan is unpopular. Some people won’t want to join because it’s unaffordable. Still others — up to 20% of the uninsured — don’t join even though they can afford it because they don’t believe they’ll ever need it. Free-riderism is a constant in insurance.

Millstein: Well, let me ask you this. Since you’re defending employer-based plans, what’s the advantage?

Galvin: It’s important for me to get across that I’m trying to be balanced about it rather than defend it, per se. We go down a black hole when we make out things to be black and white. If I were creating a healthcare system de novo, I would never do it this way. What I’m trying to do is frame the discussion around some different basis than “is ESI good or is ESI bad?” I think ESI brings some real positives to the system.

Ross: What are the positives?

Galvin: Well, one positive is a lot of innovation in the delivery system that we don’t see in other countries. Managed care has had some positive impacts, the most significant of which has been the redistribution of care from inpatient to outpatient settings. A second positive has been the generation of successful models that integrate the financing and delivery of care, like Kaiser Permanente. Other new ideas have resulted from the application of successful innovations in industry to healthcare: moving to centers of excellence for highly complicated procedures like bone marrow transplants or creating carve-out industries like pharmacy benefit managers or disease management. I think a profound change catalyzed by ESI is our current focus on quality measurement, transparency, and pay-for-performance. These innovations are driven by the fact that employers see an immediate return from higher-quality and lower-cost healthcare because they pay the bills directly. I would also say that what you’re seeing now in the tremendous investment that companies are making on the health promotion and wellness side is another positive coming out of ESI.

Ross: You don’t have to have employers in the mix to foster some of that. That could be fostered whoever the payer is.

Galvin: Maybe. But the fact is that despite many decades of centrally controlled healthcare systems working hard on controlling costs and improving care, you simply haven’t seen most of these innovations arise elsewhere.

Ross: But the people benefitting from those innovations are not universal. It still depends on who their employer is.

Garstka: Aren’t there some other issues, though? Things like portability of coverage? Certainly, wouldn’t GE, as a company, rather not have to incur those costs?

Galvin: It depends what the alternative is. We’d like to not pay anything for healthcare costs, but we’re going to pay it whether we’re taxed for a government-run system or through our current system. So the issue really is, in what way do we want to pay? What control over the payment do we want to have? And let me hasten to add, I think with a blank slate we wouldn’t have developed ESI as a way to fund healthcare. But I think we should be careful to avoid the magical thinking that if ESI went away our healthcare challenges would be solved. The voluntary nature of ESI is the proximate cause of the uninsured, but the real crux of the problem in our system is the unsustainable costs. We could solve a small percent of the cost problem if we eliminated the cross-subsidies that occur, but this is really a small percent.

Millstein: So what is driving costs?

Galvin: The economists tell us technology and innovation are driving almost half of the cost increases. The next biggest factors driving it are the incomes that physicians get in this country, which are far higher than other countries. And we have a payment system that really drives a lot of overuse of very expensive, high-tech interventions.

Millstein: The question is, who negotiates better? Corporations providing subsidies to an employee who just takes coverage wherever he finds it? Or is it better to put money in the pockets of people and let them make their choices?

Galvin: One of the original sins of ESI is third-party payment shielding people from the actual costs and quality. I’m a great believer in putting much more responsibility, financial and choice-wise, into the hands of consumers.

Millstein: I am too.

Ross: I agree with that. I think it was a big mistake to separate who receives the healthcare from who pays for it. I think that leaves a huge problem.

Garstka: With all this in mind, if you each could advise the presidential candidates what to do with healthcare, what would you suggest?

Ross: I would put in a new tax that would bring in, as a funding source, not just the goods that are produced in this country, but the imports. Call it, I don’t know, a “health added-value tax,” where everything produced and sold in the country would have this imposed on it, and everything imported, and it then would be rebated on the exports. That would help solve the problem of where you get the extra money to expand the coverage. And what you could do is, if a company already had an existing plan, they could use the tax that they collected to offset against their existing plans. So it wouldn’t necessarily deprive anybody of the benefits they are now getting. But it would bring in all the imports, which cause a lot of the economic problems — the net imports, which, as we know, are quite substantial. If you had something like a 17% VAT on imports, which would not be out of line with other countries, since the net imports are something approaching $800 billion, there’s your $120 billion of funding, without interfering with the economics of American companies. And then if you had it rebated on exports, you’d also help our industries, both relative to imports coming in here, and relative to their competition in third-country markets for exports.

Millstein: Thank God you didn’t propose a big change.

Ross: Well, I think a big change is needed. Trying to think in small packages isn’t going to get us anywhere.

Galvin: My advice to the presidential candidates would be to think along two lines. One would be the funding, but funding alone, without dealing with the fact that our system is the most costly in the world, is not going to get you there. With respect to funding, I favor more individual responsibility and more ability for consumers to make choices. I like the idea of the insurance or health connector [organized markets of health insurance options]. The health insurance connector in Massachusetts is an example where you can give employers the choice of continuing to manage health benefits or to give employees some sort of voucher to go through the connector to make choices. Although the cost issue is very complex, one place we have to pay attention is the debate around a minimum benefit package, which will most likely be a part of the architecture of these exchanges. I think we need to be very careful about having an overly rich basic package. This is an area where I part ways with Senator Clinton, who wants the basic package to be what the federal employees have. I think that package is too rich to be a floor.

Millstein: Talk about a nice union plan.

Galvin: I think people should be able to choose from everything from high-deductible or consumer-directed plans to so-called major medical options. But developing an exchange or connector and a minimum package is not enough. We also need to delve quickly into our delivery system and its set of incentives that drive escalating costs — and create some pretty big innovations around comparative effectiveness, around paying differently, and around getting information to people in a really digestible way.

Millstein: I agree with most of what you just said. In terms of funding, I would radically expand the HSA [health savings account] and give people tax credits for contributions to it, and subsidies if they don’t have the income to do it. Allow people with income to fund their own healthcare and make their own choices, and subsidize those who can’t.

Galvin: Agreed. While I like the HSA a lot, I think choice is critical. People should have choices from a high-deductible HSA to an integrated system to major medical policies, as long as they pay out of their pocket, without any tax-favored treatment, whatever is in excess of what the country decides is a minimal package, which I tend to think is the HSA model.

Millstein: You can’t have been raised in this country without having some fundamental faith in the market, even though it may be flawed. Until we empower consumers to make choices with financial consequences as well as health consequences to themselves, we’re not going to fix the system.

Garstka: How big a problem is it, really, to our competitiveness?

Millstein: About $2,000 a car. It’s big.

Galvin: Again, you’ve got to stratify among parts of the economy. If you’re talking about companies competing in the global economy, I think it’s a significant issue. When you’re talking about plenty of medium-sized companies and smaller companies, I think it’s less of an issue. We spend $10,000 now, on average, per year, on employees, as do most large employers. And the question is, if we moved to a different kind of system, would we spend less than $10,000 or greater than $10,000? And, more importantly, would a different system be able to drive the kind of changes within the delivery system that need to occur to rationalize costs better? That’s why we get very nervous about a centrally controlled system: what we don’t want is the responsibility (e.g., paying taxes) without the authority to act. We always try to think on parallel tracks: The funding and the coverage of the uninsured is one track, but just as important are the changes in incentives and information.

Ross: Don’t you then have to get into the whole question of malpractice insurance and litigation on the doctors’ side, and co-pay systems on the patients’ side?

Galvin: I think you do. If you’re going to look at what’s driving costs in the system, then there’s no way you can’t look at those as well.

Garstka: Payment for performance could get competition into the provider side, as well. And I think that comes with transparency and patient involvement.

Galvin: Disclosure of information could exist without changing the payment system. You see much more activity now in transparency of information than you do with payment reform.

Garstka: If you all had a shot to do one thing, and one thing only, what would you tweak first? When I look at healthcare, it’s the same as when I look at the tax system, and I say, “Gee, I’d like to make a lot of changes to taxation.” But then there are so many political barriers to overcome that it seems impossible. Are we so mired in the swamp here that it’s impossible to do anything but minor tweaks? Or can we really shake up the place?

Galvin: It’s a fair question — and awfully tough to answer. If I had to lead with something, I would lead with addressing the uninsured. But I would attach to this change, at a minimum, two other pieces: a robust plan to create and disseminate performance and cost-effectiveness information and mechanisms to drive consumerism into the system.

Millstein: I totally agree with Robert on both fronts. The lack of transparency on outcomes from different providers — unless you solve that, there is no consumer choice.

Galvin: There are some interesting lessons beginning to come out of the Massachusetts reform effort. The savvy policymakers and politicians knew that they were less likely to have anything passed if they started with cost. But they also knew that without tackling costs at some point, the reform would not be sustainable. At this point it looks like they’ve gotten their wish: legislation that has allowed real success with the uninsured, but as they predicted, the cost issue is rearing its head. In addition to more people signing up than they budgeted for, the cost of care continues to go up and they’re having to exempt more citizens from the individual mandate. I think they did it the right way, but it’s the most important set of decisions being made in the country now, to try to wrestle with costs. Having spoken with several of the leaders in Massachusetts, although they say they do not have the silver bullet, what they are seeing is more people having more rational discussions about cost and options to manage it. I’m not sure if any of us could do better than that at this point.

Garstka: High-deductible plans might squeeze some costs out of the system. But what about the trade-off with preventative care? Do we worry about creating disincentives for preventative care?

Galvin: The data shows that people buy less of everything when it’s their money. They buy less of the stuff that they don’t need, which is good. But they buy less of the stuff they need, like preventive treatments. The latest versions of these plans are starting to incorporate a new concept, which is called “value-based insurance design.” They’re beginning to eliminate payment of any kind for accepted preventive services. These designs tend to be a little bit more expensive up front, but I think you have to do that.

Millstein: In my capacity as trustee of the village of Larchmont, one of the smallest municipalities in the state of New York, we are trying to push our municipal workforce into high-deductible plans, but we’re grappling with this very problem of preventative care.

Galvin: The national health system is broken into three million entities.

Garstka: There’s really no role for the unions, at this point in time, to come to the forefront in healthcare reform, other than in a transaction like the one with GM, is there?

Millstein: I actually disagree with the premise. I think that for industries exposed to international competition, there’s been a sea change where management are now advocating national healthcare, because they want it off their own income statements to the greatest extent possible. They’re looking for something more than a tax subsidy. And on the other hand, more enlightened unions, exposed to international competition, are equally advocating the position they originally advocated going back 50 years, which is national healthcare. So I think both sides of that equation are looking to the federal government to create greater coverage, and get it out of the income statement.

Garstka: Is there any final point that all three of you would like to make?

Millstein: It’s a mess.

Garstka: Well, that we know. Are you not really optimistic that things will change?

Galvin: I think it’s a Washington game, now. Let’s assume we get a Democratic president, and we pretty much know we’ll have a Democratic House. A lot depends on the Senate. And if you get a big, big win for Democrats, approaching filibuster-proof, I think you could see something substantial happen. I think if you fall short of that, then I’m not sanguine about big change.

Garstka: Are you comfortable that, if we hypothesize that the Democrats get in total power, that what they do will actually be something that you’ll be happy with?

Galvin: No. But it’ll be a lot of fun, I can tell you that. Look at the CBO projections. In five years, if things continue like they are now, a premium for a family of four is going to be in the range of $20,000. So we’re not quite at armageddon yet, but we’re a lot closer than we were 15 years ago. And so, am I sure that things are going to get better? The devil’s always in the details. Do
I think it would be good to have things shaken up? Yes, I do.

Ross: I think it would be good to get it shaken up, although some of the ideas that have been proposed by some of the candidates didn’t strike me as very useful.

Garstka: When you look at the costs of Medicare and Medicaid going forward — maybe there’s a need just to change the system.

Millstein: Their costs are unsustainable. Whether Medicare or Medicaid is paying for it, it’s another reason to look at the cost side. We’re either all going to be patients and nurses or we’re going to fix it.

Galvin: The candidate who has the most specific plan on managing costs is Senator Clinton. She states that when we bring everyone into the system under an individual mandate, we’re going to make sure that the maximum anyone pays is an acceptable percentage of their income. And that leads you to what almost every other Western country has done, which is to get pretty tough on costs. She starts with the insurance companies and capping their profits. But I think once you start down the road of limiting healthcare costs to a percent of individual income, it’s another way of saying healthcare is going to be a certain percent of GDP, and unless you’re willing to raise taxes annually, you’re going to run into some pretty serious opposition from the diagnostic companies, pharma, and the device companies.

Ross: You’re going to run into rationing of healthcare.

Galvin: I think you do run into rationing. But we all know that we ration today, but it’s just the people without political power who are the rationees.

Millstein: At the end of the day, that is the question on which this likely founders: Is there the political leadership to tell the truth, that we just can’t afford as much of this good as we’re using?

I think that’s the key, politically. Shared sacrifice is a well-worn concept in terms of motivating political change, but unless we have something to share, we can’t sacrifice it.

Garstka: Do we run a risk of stifling some of the innovation that exists in this country around healthcare?

Millstein: It’s the other way around. Recognizing that we’re subsidizing innovation, can we substitute market forces that create incentives for it?

Galvin: It’s a great question that always leads to a heated debate. And I don’t see, at the end of the day, how you end up telling people, “Yeah, it will suppress innovation. But you’ve got to live with it.” Good luck saying that to the American public.