Spring 2001; Volume 2, Number 1
Why Are There So Many Uninsured Americans? Is the Problem Permanent?
Uwe E. Reinhardt, Ph.D.
"I know of no country in which there is so little independence of mind and real freedom of discussion as in America."
Alexis de Tocqueville, Democracy in America. Vol. I, Ch. 25
This paper was presented at a recent symposium on the uninsured, convened by the U.S. Chamber of Commerce. Our panel was to explore (1) why there are so many uninsured in this country and (2) what it means for us, the already insured. Not raised was a third, seemingly relevant question, that is, what does a lack of insurance mean for the uninsured themselves. A failure to raise that question, of course, effectively answers the first.
In this presentation, I may well violate one or the other sacred tabu described by de Tocqueville in his treatise on freedom of speech in America. In seeking to express my thoughts freely, I may lapse here and there into political incorrectness, for which I apologize at the outset. My excuse is that I received my high-school education in Europe and my undergraduate education in Canada. Thus, I may lack the social graces that keep the discourse on public policy in these latitudes always so utterly civilized - even on the topic of the uninsured.
The points I sought to make in my presentation were the following:
- The phenomenon of the uninsured is an inevitable by-product of our employment-based health-insurance system. I know of no health policy analyst who would have proposed that unwieldy system, were we to develop a national health insurance system from scratch. Alas, we are stuck with that system and must forever cope with its fallout.
- The nation has not seriously addressed the problems faced by the uninsured - and is not likely to address them soon - because the uninsured represent a politically and economically marginal socio-economic group without much leverage in the commercial or political marketplace. (I say "group" rather "class," lest I be accused of engaging "class warfare.")
- We have learned by now that major, bold policy initiatives in health care are unpopular in America, which leaves incremental reform as the only practical alternative. Alas, attempts to solve the problem of the uninsured through incremental steps tend to stumble over the so-called "crowding-in effect," that is, the migration of hitherto privately insured persons into new public programs. An incremental reform is targeted on that day's narrowly selected "objects of compassion (OCs)." The "crowding-in" effect tends to raise the total federal budget cost per originally intended OC to politically prohibitive levels, which often nips the incremental reform in the bud. The result is chronic policy paralysis.
- The already insured do pick up through hidden cross-subsidies the incremental cost of health care rendered the uninsured on a charitable basis. Even so, leaving the uninsured in their current state is a bargain for the already insured. It is so because uninsured Americans receive, on average, only a fraction (perhaps 60%) of the health care that similarly situated insured Americans get. The idea that covering the uninsured actually will save the already insured money seems dubious. Only the outbreak of serious contagious disease among the uninsured would forge a coincidence of self-interest among the already insured and the uninsured.
- We are now embarking upon yet another round of studies, policy conferences and Congressional hearings on the problem of the uninsured. Although this activity may be perceived as "action," it can be doubted that much more than new body counts of the uninsured and some rehashed old proposals will come of the effort, unless the nation slides into a serious recession. A serious recession might drive home to the middle class its own economic vulnerability on this score. It would also stress the providers of health care financially to the point where each special interest group might be willing to countenance Plan B - that is, a reform proposal not entirely of its own making. Short of a major recession, we shall be lucky if, by the year 2010, the number of uninsured stands only at today's level: 40 million or so.
A question commonly posed by foreigners at international conferences on health care is the following:
"What can explain why, uniquely in the industrialized world, a country that spends close to 70% more on health care per capita1 than does the next most expensive health system in the world (Germany) still leaves close to 18% of its population without the economic, emotional and physiological benefits of insurance coverage?" 1
The answers to that overarching question are many-fold. They must be explored and understood to appreciate that this problem is likely to remain a distinct feature of American health care deep into the new century. They also explain why income-based rationing of health care is likely to remain a permanent, officially sanctioned approach to cost control in the United States. It would be hard, on the evidence, to reach any other conclusion.
The Employment-Based Health Insurance System
At the top of the list of explanations for the chronic problem of the uninsured, I would put our unwieldy employment-based health insurance system. Time and space does not permit an elaboration of that bold assertion here; but I have gone to some length to do so elsewhere. 2
If one thinks about it for a moment, it is unreasonable on its face to look to private employers, especially to small firms with a low-wage workforce, as the foundation for a nation's health insurance system. Use of the labor contract between private citizens and private employers as a source of health insurance has to rank as one of the oddest ideas in the development of modern social policy. Even more dubious is the idea to prop up such a system with a tax-preference that any economist would certify as both inefficient and highly inequitable. Many of the problems faced by the
American health system today - its extraordinary expense and the permanent insecurity that it visits on American families - can be traced to this awkward approach to private health insurance.
For one, the employment-based system offers Americans only temporary insurance that is tied to a particular job in a particular company and that is lost with that job. Second, the private health-insurance industry has never been able to serve the employees of small business firms or individual Americans economically, if at all. At the same time, however, the industry has been forever vigilant to stop initiatives to cover the uninsured, if that initiative might divert clients from the private insurance industry to some new government program.
Virtually the only initiatives that the industry would brook would be programs that funnel any public subsidies to the uninsured through the books of the industry. For that reason, these approaches remain the best hope for extending coverage to the uninsured, whether or not they are the most effective and most economical way to achieve universal coverage. Unfortunately, these approaches tend to be not only expensive, but also exceedingly difficult to implement and to administer. (More on that point later in the section on incrementalism.)
The Uninsured as a Marginal Socio-Economic Class
Year after year, experts on the uninsured have patiently explained to us just who the uninsured are. Year after year, the description is always the same. Properly viewed, the uninsured are not at all a diverse group, as the question posed to this panel implies. About one third of them have high enough incomes to be able to afford health insurance, if it were available to them at the favorable rates of group health insurance. Often they remain uninsured, because the private health insurance sector has never been able to serve individual customers at affordable rates. The majority of the uninsured, however, belong to families headed by the economically homogenous group that we might call "low-income hard-working stiffs." As such, they represent for the most part a marginal socio-economic class that has neither economic nor political leverage. 3
These uninsured lack economic leverage because, in the parlance of economics, they do not constitute a precious economic resource. The employment of an additional such person usually does not add much to the firm's revenue. It is out of this so-called "marginal revenue product" yielded by the additional worker, however, that his or her take-home pay and other fringe benefits are paid. As every first-year student learns, the total payroll expense booked for a newly hired worker cannot exceed the "marginal revenue product" that worker adds to the firm.
To illustrate, if the employment of an extra worker yields the firm an extra net marginal revenue (gross revenue minus additional expenses other than the employee's own wages and fringes) of, say, $ 18,000, then the sum of take-home pay and fringes for that employee cannot exceed $18,000, lest the firm incur a loss on employing that worker. It would be unrealistic to expect the total payroll expense associated with workers who have such a low marginal revenue product to absorb the cost of a health-insurance policy that may amount to $6,000 or more for the employee's family. It also follows that a simple government mandate on employers to provide such coverage to all employees would effectively force the employer either to reduce the workers' take-home pay or to dismiss them outright. Either way, it is a brutal tax on workers. Finally, it follows that, if we want to see these families insured, we, the better off, will have to step up to the cashier's window and subsidize them directly and heavily with public funds, through a tax-and-transfer mechanism.
Concretely, who are the people under discussion here? They are the taxi drivers who convey us, the waiters and waitresses who serve us, the gas-station attendants who fill our tanks and similarly hard-working people in low-paying service jobs. For the most part, they are easily replaced, often with pliable, imported labor. Because these people are not "precious" to us, economically, and are so easily replaceable through imports, we do not have to be particularly nice to them. Only a very, very tight labor market might induce us to change our perspective, and even then only for so long as the labor market remains very, very tight. A mild recession would quickly cause a relapse into our current attitude.
In any event, it is not obvious that Americans are willing to finance, through higher taxes or foregone tax-cuts, the health care of people who can technically be taken for granted. And even if, in its heart of hearts, the American public did wish to be more generous to these low-income families, there is no evidence at all that the policy-making elite would be ready to act on such a wish.
The uninsured lack political leverage because as a group they are not noted for high voter participation and, therefore, need not be appeased in the political arena. Their political apathy could be written off as indolence. On the other hand, unlike the powerful interest groups that hold sway over the formation of health policy in this country, the uninsured themselves are too disorganized to concentrate any economic and political might upon legislators. Therefore, their apparent political apathy may be just a rational response to rational expectations, namely, the expectation that their individual votes could never be a match for the economic, hence political, clout of organized interest groups. After all, the perceived dominance of interest groups in the political process is often cited as the reason for voter apathy even among educated American college students. 4
Be that as it may, lack of both economic and political leverage has made the uninsured in this country a social class whose yearning for the benefits of health insurance can be disregarded with impunity by the policy-making elite. That simply has to be a major part of the explanation why there are so many of the uninsured, and why their numbers have been inexorably growing.