Financing universal health insurance: taxes, premiums, and the lessons of social insurance.

Journal of Health Politics, Policy and Law

Financing Universal Health Insurance: Taxes, Premiums, and the Lessons of Social Insurance Thomas Bodenheimerand Kevin Grumbach University of California, San Francisco

Abstract In a society with strong antitax sentiment and large government deficits, the enactment of universal health insurance is blocked by an impasse over financing. The two chief mechanisms for funding universal health insurance are taxes and insurance premiums. Taxes and premiums are not distinct entities; rather, a spectrum of financing methods exists with varying tax-like and premium-like features. Premium-like financing tends to be voluntary and earmarked for health care, with coverage contingent upon making payments and payments going to private insurance firms. Tax-like financing, in contrast, tends to be mandatory and not earmarked for health care, with coverage not dependent upon making payments and payments going to governments. Over the past century, most industrialized nations have developed highly popular social insurance programs to cover periods of retirement, disability, unemployment, and payment for medical care. Social insurance constitutes a blend of tax-like and premium-like features, offering lessons that might assist in breaking the current impasse over universal health insurance financing.

Universal health insurance commands strong support from the American population. Over 70 percent favor insurance coverage for the entire population (Blendon and Donelan 1990; Jajich-Toth and Roper 1990), and over 60 percent support government-financedhealth care (Blendon et al. 1990; Blendon and Donelan 1991). But when people are asked whether they are willing to pay for universal access, public support drops. In a 1990 survey, only 22 percent were willThe authors wish to thank Tom Oliver for his insights into the principles of social insurance, and the participants in the writing seminar at the University of California, San Francisco, Institute for Health Policy Studies for their helpful comments. Journal ofHealth Politics,PolicyandLaw,Vol. 17, No. 3, Fall 1992. Copyright 0 1992 by Duke University.

Published by Duke University Press


440 Journal of Health Politics, Policy and Law

ing to adopt a comprehensive national health insurance (NHI) program if they had to pay more than $200 per year to make it happen (Blendon and Donelan 1990). A 1987 survey reported that while 68 percent of Americans favored a tax-funded national health insurance program, only 10 percent were willing to pay an additional $100 per year (Pokorny 1988). And in a 1978 Gallup poll, although 76 percent favored national health insurance, the support declined 23 percent when respondents were asked if they were willing to pay more taxes to finance it (Goodman and Steiber 1981). Similar findings have been recorded since 1938 (Blendon and Donelan 1990). Americans perceive themselves as excessively taxed, even though the United States has one of the lowest levels of taxation among industrialized nations (Blendon and Donelan 1990). Partly as a result of politicians’ desire to lower rather than raise taxes, the federal deficit has grown from about $5 billion in the 1960s to over $200 billion in the 1980s and 1990s, with state and local governments in perennial budgetary crisis (Rosenbaum 1991). In this deficit-laden society with its strong antitax environment, the passage of any form of universal health insurance is blocked by an impasse over financing. One prominent proposal for universal access, employermandated health insurance, attempts to cover most of the uninsured through mandatory private insurance premiums rather than taxes. Does financing by premiums have the capacity to bypass unpopular tax-based funding? In this article, searching for ways to extricate the nation from the health-financing impasse, we explore the dimensions of tax and premium payment for universal health insurance. We begin by discussing the differences between taxes and insurance premiums, proposing seven parameters for characterizing health financing mechanisms along a tax-like and premium-like continuum. To illustrate these parameters, we use them to describe existing health insurance programs in the U.S. and proposals for insurance reform. We then review some episodes in the political history of American and European social insurance, applying the same seven parameters to our historical exploration. Our conclusion highlights some lessons that different eras and nations may offer for resolving the political impasse over universal health insurance financing. Taxes or Premiums?

The standard alternatives offered for financing universal health insurance are to pay more taxes to fund expanded government-run programs or Published by Duke University Press


Bodenheimer and Grumbach 9 Social Insurance 441

pay more premiums to purchase private insurance for more Americans. “Taxes” and “premiums” are usually regarded as straightforward, dichotomous alternatives for financing health care. Webster’s Dictionary (1984) defines a tax as “a contribution for the support of a government required of persons, groups, or businesses within the domain of that government.” In contrast, Webster’s definition of a premium is “the amount paid or payable, often in installments, for an insurance policy.” In the complex world of health care financing, however, the definitions of premiums and taxes are less clear. Employer-mandated health insurance, for example, illustrates these indistinct boundaries. Under employer mandates, the government compels employers to purchase health insurance for their employees. One of the political purposes underlying this arrangement is to avoid the imposition of new taxes. Yet economist Uwe Reinhardt (1988) comments that “mandated benefits are taxes in the sense that they coerce fiscal transfers among private entities in the economy. They are, alas, pseudo-taxes that permit the politician to exercise the government’s power to tax without having to book these taxes as government revenue and, thus, without assuming accountability for the disposition of the implied tax revenue” (p. 13). Employer mandates are in effect “a payroll tax in disguise” (Reinhardt 1987: 107). While mandatory premiums paid to private insurers can be considered pseudo-taxes, direct government receipt of health care payments does not necessarily define those payments as taxes. Some governments rely on premiums rather than taxes to fund portions of their public plans. For example, the U.S. Medicare program charges beneficiaries a premium to enroll in Part B, and British Columbia finances a portion of its government-run health system through premiums. Where, then, do premiums end and taxes begin? To clarify this question, it is helpful to reduce the general terms taxes and premiums into their component features. This enables us to characterize different financing methods by specific criteria. The following list of questions covers the major defining ingredients in any health care financing scheme: (1) Is payment voluntary or mandatory? (2) Is coverage contingent on making payments? (3) Are payments earmarked exclusively for health care purposes? (4) Do some people who do not benefit pay for the benefits of others, or are all payers also beneficiaries? (5) Are benefits received directly proportional to payments made, or do some groups receive more (or less) benefits in relation to their contributions? (6) What is the source of the payments (taxpayers, employers, or employees)? and (7) What is the destination of the payments (government or private insurance companies)? Tax-like qualities include mandatory payments, coverage not continPublished by Duke University Press



gent on making payment, nonearmarked funds, payers not necessarily eligible to receive benefits, benefits not proportional to payments made, payments from taxpayers, and payments to government. Premium-like features are voluntary payments, receipt of benefits contingent upon making payments, funds earmarked for health care, payers always eligible to receive benefits, benefits received proportional to payments made, funds coming from employers/employees/individuals , and payments going to private insurance institutions. Since taxes and premiums represent a continuum of qualities rather than distinct entities, it is essential to view these tax-premium distinctions as tendencies rather than pigeonholes-analogous to the concept of electron clouds with probabilities, as contrasted with discrete clumps of matter. Thus taxes can be earmarked (e.g., gasoline taxes going to highway maintenance) and premiums, as noted above, can be paid to governments. Profiles of Existing Financing Methods

Table 1 illustrates how different forms of health insurance in the United States rarely consist of either pure taxes or pure premiums but typically involve a blend of tax-like and premium-like features. The table uses the seven parameters delineated above to characterize existing private health insurance, Medicaid and Medicare programs, as well as to profile three major types of proposals for insurance reform. Medicaid is the most tax-like of these examples. The entire population makes mandatory payments into the Medicaid program through income, sales, corporate, and other taxes. These payments arrive as general revenues to federal and state treasuries; they are not identifiably earmarked for health care services at the time of payment. Enrollment in the Medicaid program is not contingent on making these payments; on the contrary, the payments are perceived as particularly odious taxes, because many of those who pay do not benefit from the program. The next example, payments for Medicare Part A (the U.S. hospital insurance program for the elderly and permanently disabled), has two important features that distinguish these payments from Medicaid’s general tax-funding mechanism. First, the Medicare Part A payroll tax contributions paid by employers and employees are earmarked for the Medicare trust fund. In addition, while working Americans make these payments for a program that primarily benefits retired or disabled Americans, workers’ payments contribute to their own future insurance coverage. To qualify for Medicare, a person or spouse is required to work and to pay into



Bodenheimer and Grumbach 9 Social Insurance 443

social security for at least ten years; persons over sixty-five who do not qualify can enroll in Medicare Part A by paying a monthly premium (U.S . Social Security Administration 1991a). These two features-earmarked payments and enrollment contingent upon payment-give Medicare Part A payments something of a premium-like character. Medicare Part B (providing medical benefits) also has elements that are both tax-like and premium-like. While much of the funding for Medicare Part B derives from general government revenues similar to Medicaid financing, eligible individuals must also pay a flat-rate monthly premium to enroll in the program. Although Medicare Part B is a governmentoperated insurance plan, enrollment and its attendant monthly payments are voluntary. The last example, drawn from existing insurance programs, is the conventional American private insurance model. In this model, the destination for payments is a private insurance company instead of a public entity, and premium rates are set by experience rating-with payment levels determined by the amount of benefits a group of people is expected to receive-or by across-the-board flat rates. The private insurance model contains two variants-the individual policy, representing 11 percent of all private health insurance policies in the U.S., and the employmentbased group policy, representing the remaining 89 percent of private policies (Levit and Cowan 1990). While the former conforms closely to the “pure premium” model, the latter strays rather far from this prototype. Employment-based insurance has an often-overlooked tax subsidy analogous to the government revenues that supplement the premiums for Medicare Part B. Whereas the Medicare subsidy represents explicit tax revenues flowing into the Medicare program, the government subsidy for employment-based insurance is a tax exclusion, worth $50-60 billion per year (Pauly et al. 1991), represented by the tax-exempt status of health insurance premiums paid by employers. To summarize, Medicaid financing and payments for private, individual insurance policies represent the tax and premium poles, respectively, of health care financing. Lying between these diodes is a spectrum of financing methods with varieties of tax-like and premium-like qualities. Profiles of Proposed Financing Methods

Two major types of NHI proposals are now under consideration in the United States. First are the pseudo-tax models of employer-mandated health insurance-proposed, for example, by the Pepper Commission


Mandatory

Mandatory

Voluntary Mandatory

Voluntary Mandatory

Voluntary

Programs

Existing Programs Medicaid

Medicare A

Medicare B a

Private: Groupb

Private: Individual

Yes

Yes

Yes No

Yes No Yes No

Yes

Yes

Yes No

No

No

Yes

Yes No

Yes No

Yes

No

Benefits Contingent Earmarked All Payers on Payment Payments Beneficiaries


Mandatory/ Voluntary

Yes

Yes No

Yes No

No

No

Benefits Proportional to Payments

Table 1 Methods of Financing Health Insurance: Existing and Proposed Programs

Individuals

Employees/ers Taxpayers

Individuals Taxpayers

Employees/ers

Taxpayers

Source of Payment

Private plans

Private plans Private plans via government

Government Government

Government

Government

Destination of Payment

Yes

No

Single-PayerPublic

Yes

Yes No

Yes No

No

No/Yes No

No/Yese No


Individuals Taxpayers

Taxpayers, Government employees/ers, individuals


Employees/ers Taxpayers


a. Medicare Part B has two financing mechanisms: a voluntary premium paid by Medicare recipients and funding through general government tax revenues. b. Private group health insurance has two financing mechanisms: a voluntary premium paid by employers/employees and a tax subsidy represented by the tax-exempt status of health insurance premiums paid by employers. c. Employer mandates have the same tax subsidy described in footnote b and may have tax credits for small business. Pay-or-play plans have a payroll tax component. d. Individual mandates have two financing mechanisms: compulsory premiums paid by individuals and individual tax credits for lower-income people. e. Depending on the nature of tax credits, pay-or-play arrangements, and other premium subsidies.

~~

Yes No

Yes No

Individual Mandatesd Mandatory Mandatory

Mandatory

Yes No

Yes No

Mandatory Mandatory

Proposed Programs Employer Mandates



(U. S. Bipartisan Commission on Comprehensive Health Care 1990), the American Medical Association (Todd et al. 1991), and congressional Democrats (Friedan 1991)-and mandatory individual insurance, i .e., the Heritage Foundation plan calling for government to mandate individually paid private health insurance policies (Butler 1991). Second is the unified public insurance proposal, commonly referred to as a “singlepayer” or “Canadian-style” system, exemplified in the Physicians for a National Health Program plan (Grumbach et al. 1991), and the Universal Health Care Act of 1991 (H.R. 1300), introduced by Congressman Marty Russo. How do these proposals measure up on the tax-premium axis? Both the employer mandate and the Heritage Foundation proposals could be seen, respectively, as instituting pseudo-taxes on business or on individuals, thus providing a compulsory feature that further dilutes the premium-like character of private insurance financing. The employer mandate model shares many features of the Medicare Part A mechanism, such as compulsory employment-based payments (see Table l), although the destinations of payment differ. Both mandate models would require substantial increases in general government revenues to subsidize private insurance premiums for lower-income people or to promote enrollment in a supplementary public plan. Most single-payer proposals, with all health dollars flowing to a public health care trust fund, rely on a variety of taxes to finance universal coverage. Earmarking the taxes for health care tints them a premium-like hue. The Russo Universal Health Care plan includes an individual premium to help fund long-term care. One state-level single-payer proposal, the Florida Universal Health Access Plan, would finance the majority of its program through a flat-rate individual premium (Vinger 1991). Other state-level single-payer programs have considered the institution of an income-adjusted premium similar to that used in British Columbia, where health care premiums, collected by the provincial government, are graduated to increase with income. Late twentieth-century America is by no means the first society to confront a health care financing dilemma. For an entire century, the interplay of premium-like and tax-like financing of public programs has occupied policymakers attempting to implement a political program known as “social insurance.” Central to the history of social insurance movements in both the United States and other industrialized nations has been the tension between the universal need for income security, including health insurance, and the political difficulty of funding such programs.



Bodenheimer and Grumbach

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Social Insurance 447

As Americans come to terms with the inadequacies of health insurance and grapple with proposals for reform, the rich history of social insurance offers many lessons for reconciling the funding dilemma. To this history we now turn. Historical Lessons of Social Insurance

The very name social insurance reveals its dual nature: social denotes taxlike properties, while insurance embodies premium-like qualities, Social insurance is a compulsory program of payments to insure against (i.e., to provide financial assistance for) interruption or loss of earning power due to retirement, unemployment, disability, or other causes (Lubove 1968). From the beginning, the social insurance movement included payment for medical care in its list of insurable financial hardships. What Is Social Insurance?

Insurance is a mechanism by which people reduce the adverse financial consequences of an event by paying small amounts in advance to an institution, which in turn pays all or part of the costs incurred by the event. Insurance has two major branches, private insurance and social insurance, which have similarities and differences. Both private and social insurance are based on the pooling of risks over a large population. Both involve payment of premiums or contributions, and individuals have a right to benefits only if they have made contributions. The main distinction between private and social insurance lies in the former being voluntary while the latter is compulsory (Booth 1973). The other major contrast is that the insuring institution is a private company in the case of private insurance and generally (but not always) a public agency in the case of social insurance. Historically, social insurance evolved as a response to the inevitable periods during which wages were interrupted. The financial effects of sickness, involuntary unemployment, death of an essential breadwinner, old age, or industrial accident became disastrous for large numbers of families. During the nineteenth century, voluntary associations (tradeunion- or employer-sponsored benefit funds, fraternal societies, and commercial insurance companies) developed in Europe and America, providing voluntary insurance that paid cash benefits to assist people during periods of income interruption (Rubinow 1916). Most workers, however,




earned wages insufficient to allow for the purchase of these mutual benefit programs. In the words of American social insurance reformer Abraham Epstein (1933: 21): So long as the wage-earner is able to hold his job, he somehow manages to subsist; but when through either accident, sickness, invalidity, unemployment or old age he is deprived of work, he frequently becomes helpless and destitute. Try as he may to provide for a rainy day through friendly societies, trade unions, savings and voluntary insurance, he finds that there are altogether too many rainy days.

To effectively cover the “many rainy days” at affordable cost, social insurance developed, with four mechanisms to make the insurance affordable to the great majority of unskilled workers: ( 1 ) spreading the risk very broadly throughout the population, an end accomplished by making the insurance mandatory; (2) requiring employers to pay part of the premium cost; (3) administering the insurance through public or quasi-public institutions with no profits and low administrative costs; and (4) designing the program to allow for some income redistribution from higher- to lower-income families. A Historical Glance at Social Insurance Programs

In 1883, Germany passed the first national compulsory sickness insurance law. This pioneer law built on existing voluntary sickness funds and simply required insured employees to belong to such a fund, with obligatory payments coming from employers and employees. Benefits included payment for medical care and cash benefits to make up for lost wages during sickness. Germany enacted industrial accident insurance in 1884, old-age and long-term disability insurance in 1889, survivors insurance in 1911, and unemployment insurance in 1927 - Virtually all European nations and the British Commonwealth followed Germany’s example, and social insurance was widespread by 1930 (Epstein 1933; Falk 1936; Gordon 1988; Stam 1982). In 191 1 , Great Britain established a system of health insurance similar to that of Germany, also initiating disability and unemployment benefits. Old-age and survivors insurance were added in 1925 (Falk 1936). In 1942, the world’s most renowned treatise on social insurance was published, the Beveridge Report. Sir William Beveridge ( 1942) proposed that Britain’s diverse and complex social insurance programs be financed and administered in a simple and uniform system, that eligibility be extended beyond




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limited population groups, that all citizens be covered for medical care through a national health service, and that those people unable to contribute to the social insurance system due to lack of employment receive public assistance. A number of these recommendations, including the national health service, were enacted by Britain’s postwar government. The United States lagged behind the rest of the industrialized world in establishing social insurance programs. While the first program was compulsory workers compensation for industrial accidents, enacted during the twentieth century’s early years, the landmark social insurance law was the Social Security Act of 1935. This law provided insurance benefits for old age and unemployment and public assistance (welfare) programs for aged and blind people and dependent children below a certain income level (Booth 1973).While the major advocates of social insurance hoped to include health insurance in the 1935 law, President Roosevelt rejected this idea, fearing too much political opposition (Hirshfield 1970). In contrast with Germany, which began its social insurance system with medical care, the United States has yet to add comprehensive health coverage into its social insurance program. The first serious American attempt to place medical care into a social insurance framework came in 1943, with the original Wagner-MurrayDingell bill, which proposed that employer and employee contributions to cover physician and hospital insurance be added to payments mandated under the 1935 Social Security Act. The contributions were to be administered by a federal social insurance trust fund, which would pay health providers. Versions of the Wagner-Murray-Dingell bill were introduced in numerous sessions of Congress over the following fourteen years, but never passed (Harris 1966). The bill’s failure led social insurance advocates to turn to the more limited goal of health insurance for the elderly, eventually resulting in the 1965 Medicare law. Issues Addressed by the Social Insurance Movement

Let us now return to the components of Table 1 and use the experience of the social insurance movement to illuminate current issues in U.S. national health insurance financing. Is social insurance mandatory or voluntary? The critical feature distinguishing social from private insurance is the former’s compulsory quality. Compulsion in social insurance is the only way to extend protection to everyone who needs it. Were social insurance voluntary, people of low incomes would be unlikely to contribute, because their incomes are barely




sufficient to cover present necessities of life. And people of higher incomes would be likely to use voluntary insurance schemes with greater levels of benefits. Only a mandatory program can insure contributions from a large proportion of the population, thereby allowing a system that provides a degree of security for most families. Exceptions to universal compulsory payments do exist in social insurance programs; in Germany, for example, high-income employees are not required to contribute to the health insurance system (Iglehart 1991). Are social insurance benefits contingent on making a contribution? While the mandatory nature of social insurance has the appearance of a tax-supported public service, its architects constructed the system as an insurance program through which only those who make contributionshave the right to receive benefits (the contributory principle). Since the initial, German law of 1883, social insurance payments have frequently been called “contributions,” borrowing the vocabulary of voluntary mutual benefit societies. The 1883 German health insurance law covered only industrial wage earners with incomes less than $500 per year; the eligible population was extended in later years (Falk 1936). There were no requirements for a minimum contributory period. In contrast, the German old-age pension system required a contributory period of 1,200 weeks (shorter for older workers) in order to receive a full pension. For permanent disability insurance, two hundred weekly contributions were required (Dawson 1913). The British Beveridge Report of 1942 was adamant on the linkage of benefits to contributions: “Benefit in return for contributions, rather than free allowances from the State, is what the people of Britain desire” (p. 13). Beveridge defined social insurance as “the providing of cash payments conditional upon compulsory contributions previously made by, or on behalf of, the insured persons.” For example, the Beveridge Report proposes that workers receive unemployment and disability benefits only if they have made twenty-six contributions, and receive full benefits only after making forty-eight contributions in the preceding contribution year. Reduced benefits are paid to people who have made partial contributions. Beveridge was strongly opposed to a means test under the social insurance system. He made a clear distinction between social insurance and public assistance, the latter being a means-tested program for people who have not contributed to the social insurance system: “However comprehensive an insurance scheme, some, through physical infirmity, can never contribute at all and some will fall through the meshes of any insurance” (p. 12). Beveridge insisted that benefits under public assistance be less





desirable than those paid under social insurance, “otherwise the insured persons get nothing for their contributions” (p. 141). Interestingly, in the case of health insurance, Beveridge made an exception to the linkage of benefits to contributions and to the separation of social insurance and public assistance. Because “restoration of a sick person to health” is a public responsibility, medical care should “be provided where needed without contribution conditions in any individual case” (p. 154). The British national health service accordingly makes no distinction between social insurance and public assistance. The German health care system also includes unemployed and retired people without separating them from the employed population (Kirkman-Liff 1991). The American philosophy of social insurance, following that of Beveridge, holds that social insurance benefits are an earned right, not an act of mercy by the government: “In America, we still believe that a man should be rewarded for his own efforts” (Haber and Cohen 1960). Such a philosophy should in practice lead to a strict application of the contributory principle. But U.S. scholars differ in their estimation of the strength of the contributory principle in American social insurance programs. Robert Ball has written that “social insurance payments are made to individuals on the basis of the work record, and are part of the reward for services rendered. . . . it is this work-connection that gives social insurance its basic character” (quoted in Burns 1949: 30). Eveline Burns (1949) counters that “the relationship between performance of work and the right to social insurance benefits is . . . tenuous in many instances” (p. 30). She cites the examples of an aged worker who becomes entitled to an old-age pension after earning as little as $50 in each of six calendar quarters, or an employee who might draw over twenty weeks of unemployment benefits after working as little as four to eight weeks in the previous year. Burns argues that social insurance and public assistance have many features in common, and that the contributory principle is not a clear dividing line between these two concepts. The Roosevelt-appointed Committee on Economic Security, which crafted the Social Security Act of 1935, debated whether to finance social security through the contributory principle or from general tax revenues. The committee recommended a mix of employee, employer, and federal tax revenue financing. “The setting aside of a percentage of wages has long been a customary method of thrift among American wage earners” (p. 205). To justify the employer contribution, the committee argued that “just as industry, generally, has become accustomed to meeting charges for the depreciation and replacement of its material equipment, many




employers have developed programs for the payment of retirement allowances. . . . Such costs are considered proper additions to the cost of production” (Committee on Economic Security 1937: 205). The final 1935 law was based on the contributory principle, and rejected the proposal that a portion of social security funding derive from general tax revenues. Receipt of old-age benefits is dependent on the employee securing the necessary number of years of employment-based contributions to the social security system (U.S. Social Security Administration 1991b). Partial benefits are available to families with shorter contributory periods. The Wagner-Murray-Dingell bill was another forum for debate over the contributory principle in U.S. social security. In a 1946 report to the U.S. Senate on medical care insurance, I. S. Falk, a principal author of the bill, wrote: “The basic choice to be made in determining how a system of health benefits is to be financed is between a system of special contributory financing on an insurance basis, financing from general governmental revenues, or combinations of both methods” (p. 150). The insurance approach, with employer and employee contributions, was chosen as the main funding source because of favorable “public attitudes inherent in an insurance or prepayment approach to the problem of paying for medical care” (p. 150). Falk projected that 80-90 percent of the U.S. population-employees, self-employed people, and their dependents-would be covered under the contributory principle; the remaining 10-20 percent of the population would require medical care paid for by public assistance (Bureau of Research and Statistics 1946). Because the medical benefits for contributors and for public assistance recipients would be equal, the 1943 Wagner-Murray-Dingell bill, like the 1942 Beveridge Report, did not strictly extend the contributory principle to medical services, but took the position that everyone in the population was entitled to a single standard of care (S. 1161). The U.S . Medicare/Medicaid law of 1965 constituted a retreat by social insurance advocates from universal health insurance and from the Beveridge principle that health care requires a melding of the social insurance and public assistance approaches. The retreat was made necessary by the alliance of conservative forces and the American Medical Association that defeated the Wagner-Murray-Dingell bill fifteen years previously. A similar alliance forced the separation of social insurance (Medicare) from public assistance (Medicaid) in 1965. Medicare is a social insurance program conforming to the contributory principle (employer-employee payments for Part A and tax-subsidized voluntary individual premiums for Part B) ,while Medicaid is a tax-supported, means-tested public assistance





program. In contrast to Great Britain, Germany, and most industrialized nations, these two programs were kept separate in the United States. Many underdeveloped countries maintain a separation in health programs between social insurance beneficiaries and public assistance recipients; the two groups often have their own hospitals and physicians, with the former sector enjoying more resources than the latter (Roemer 1976). In summary, social insurance is based on the contributory principle that only those who contribute have the right to benefits. Indeed, social insurance systems of almost every nation require a certain minimum number of contributions for full benefits, with reduced benefits available for persons who have not contributed for the required period (Gordon 1988). However in the arena of medical care insurance, many nations provide equal benefits to citizens whether or not they have made contributions. Are social insurance contributions earmarked or not? Almost universally, social insurance contributions are earmarked to pay specified benefits (Jenkins 1969). For that reason, most social insurance programs set up funds that are separate from general governmental revenues. Earmarking social insurance payments allows the contributory principle to function by guaranteeing that money paid in is utilized to pay out benefits. The earmarked nature of the funds is one of the strengths of the social insurance approach, giving its programs a high degree of stability, “protected from the political ups and downs of parliamentary debate” (Roemer 1976: 237). Are the people who pay for social insurance and public assistance programs the same as the people who benefit from these programs? Do payers always beneJit? Social insurance is based-sometimes more strictly, sometimes more loosely-on the contributory principle, which distinguishes social insurance from public assistance. But as a society-wide program, social insurance is limited to the families of wage earners, and virtually all societies have small or large marginal populations that-for a variety of reasons-do not subsist through employment. These populations are ineligible for social insurance, and require public assistance to survive. In public assistance programs, which are tax-financed, the payer does not appear to be the beneficiary nor the beneficiary the payer. For that reason, public assistance programs are unpopular, since the employed population appears to be paying to support the unemployed population. In fact, the unemployed population in the U. S . does pay a share of governmental expenditures, including public assistance, through regressive taxes such as the sales tax and through taxes on business, which are in part shifted to consumers through higher prices (Pechman 1985). For example, the lowest income decile of the U. S . population spends the same




percentage of its income (1.1 percent) paying for the Medicaid program as most of the remainder of the population; the wealthiest 20 percent pay only slightly more (1.4 percent of income) (Cantor 1990). Clearly, the complexity of payment systems obscures the relationships between payers and beneficiaries. As social insurance and tax revenues intermingle in government treasuries, it becomes increasingly difficult to determine who is paying for whom. Are contributions and benefits risk-adjusted, proportional to wages, or equal for everyone who contributes? I.e., are social insurance programs based on the private insurance principle, or do they redistribute income? Social insurance programs can distribute their contributions and benefits in at least four ways. First, they could employ the private insurance underwriting principle that those with higher risk of making a claim should pay higher premiums than those with lower risk; benefits would be uniform. Second, social insurance could levy a uniform (flat-rate) contribution on everyone, and pay everyone an equal benefit. Third, they could make contributions strictly proportional to wages and pay benefits that are strictly proportional to contributions. Finally, contributions could be progressively adjusted to income, and benefit levels could be proportionately greater for lower-income employees than their level of contributions. U. S . workers compensation generally charges premiums to employers in some relation to their risk of incurring a claim (Nelson 1991). But few social insurance programs follow this example. Beveridge (1942: 13) wrote that there has been an unmistakable movement of public opinion away from these original ideas, that is to say, away from the principle of adjusting premiums to risks in compulsory insurance and in favour of pooling risks. . . . None should claim to pay less because he is healthier or has more regular employment. . . . The term “social insurance” . . . implies both that it is compulsory and that men stand together with their fellows. For retirement, disability, and unemployment programs, Beveridge (1942) proposed a flat rate of contributions and uniform benefits for everyone, irrespective of earnings. Such a policy hurts lower-income workers in terms of contributions, but helps them on the benefits side. German social insurance has generally pegged contributions and benefits to wages (Falk 1936). The American Social Security Act of 1935 was passed in an environment created by radical reform movements in the areas of old-age pensions and unemployment insurance, notably the highly popular Townsend Plan





for retirement income and the Lundeen Bill to tax the rich and give generous benefits to the unemployed (Douglas 1939). The specifics of the 1935 law forged a compromise between those movements, which sought to redistribute income, and advocates of the more conservative principle that benefits should mirror contributions. While U.S. social security follows Germany in making contributions proportional to wages, there is a top limit on wages subject to contributions, which allows higher-income employees to contribute a smaller proportion of their earnings. On the other hand, American old-age benefits are based on a formula that returns a higher proportion of earnings to beneficiaries with lower wages, thereby redistributing funds to lower-income families (Burns 1949;Jenkins 1969). In general, social insurance moves away from the actuarial principles of business insurance and redistributes income from young to old and from higher-income to lower-income (Rubinow 1916; Haber and Cohen 1960). The extent of such redistribution varies widely among nations and among historical periods within nations. The original goal of social insurance was to prevent destitution created by the interruption of wages for lowerincome industrialized workers. Thus the entire social insurance concept has acted as a redistributive conveyor from employed people to people unable to work, from better-off to worse-off. During the life of each individual and family, social insurance represents a redistribution of funds from periods of employment to periods of unemployment, retirement, and disability. Do social insurance funds come from taxpayers or employer-employee contributions? With their reliance on the contributory principle, most social insurance programs are principally financed by contributions from employees and their employers. Yet these programs vary greatly in their degree of reliance on the contributory principle. This variation can be measured by the proportion of the system financed by employer-employee contributions as opposed to the proportion financed by general tax revenues. Between 1979-80, New Zealand employees made no direct contributions to that nation’s social security program, 97 percent of which was financed by general government revenues. In contrast, over the same period West Germany funded 40 percent of its program through employee contributions and 35 percent from employers, with only 23 percent from general tax revenues. In spite of the views and influence of Sir William Beveridge, employer-employee contributions to social security totaled only about 40 percent of Great Britain’s program, with 60 percent from taxes. And notwithstanding American support of the contributory principle, 32 percent of the 1979-80 funding for U.S. social security programs




came from general tax revenues (Gordon 1988). Thus social insurance programs are not dominantly premium-like in character, but have incorporated a number of tax-like elements. What is the destination of the social insurance contribution? While most social insurance programs are administered by governments, nongovernmental entities can also serve as the insuring agency. Throughout the social insurance movement, debate has persisted over the question: Who receives and administers the mandatory social insurance contribution? At the time of the passage of its 1883 health insurance law, Germany already had voluntary health insurance institutions called sickness funds. The law made use of these funds to receive the mandatory contributions of employers and employees and to administer health benefits, and the sickness funds continue to be the insuring institutions of the German health insurance system. The funds are nonprofit public corporations, generally run by directors elected by insured persons and employers, and closely regulated by the government (Dawson 1913;Falk 1936). Great Britain’s health insurance law of 1911 also utilized existing voluntary insurance funds (“friendly societies,” trade union and employer provident funds, and commercial insurers). These institutions could become “Approved Societies” under the condition that they be nonprofit and controlled by their membership. Unlike the German sickness funds, the approved societies only handled cash disability benefits whereas medical benefits were administered by insurance committees at the county level (Falk 1936). Over time, the commercial insurers surpassed the friendly societies in importance (Sakala 1990). The complexity of these multiple administrative bodies led Beveridge (1942) to call for unified public administration of social insurance in Britain, with elimination of the approved societies and their high administrativecosts. Compulsory social insurance in the United States began with industrial accident insurance, enacted in all but four states during the first decade of the twentieth century. The passage of these workers compensation laws was attended by vigorous battles over the destination of the employer-paid premiums; under pressure from the commercial insurance industry, most states allowed private insurers to carry industrial accident insurance, an arrangement that continues to the present day (Falk 1936; Lubove 1968). Thus began the tradition of privatization of social insurance in America, a tradition echoed in the present-day proposal for employer-mandated private health insurance. Private, for-profit workers compensation insurance has been the subject of criticism, especially for its high administrative costs (28 percent in 1988), long delays in contested cases, and inequities



Bodenheimer and Grumbach m Social Insurance 457

in the compensation mechanism (Falk 1936; Nelson 1991; Worrall and Appel 1985). The Social Security Act of 1935 routed its employer and employee old-age security contributions to a federal trust fund, thereby setting the stage for the Wagner-Murray-Dingell health insurance bill with its federal administration of health care payments. That bill’s failure represented a triumph for those interests hoping to privatize social insurance; the political battle over who will receive and administer hundreds of billions of health care dollars has not yet ended. I. S. Falk (1936), a leading spokesperson for publicly administered health insurance, actually defined social insurance for illness as “protection against . . . loss of wages or costs of medical care or both under a government-supervised, non-profit scheme” (p. 273), thereby eliminating mandatory private health insurance as a true social insurance program. Falk points out that the German sickness funds are historically quasipublic institutions under the democratic control of their members. Abraham Epstein, another social insurance analyst, considered public administration an essential feature of social insurance. Epstein (1933) argued that social insurance is less expensive than private insurance because it eliminates the costs of advertising, profit, and underwriting. Lessonsfrom the Social Insurance Movement

It is not the task of each new generation of health insurance reformers to reinvent the wheel. Rather, the wheel should be adapted to the current and unique historical and political terrain. The history of social insurance provides lessons for American policymakers grappling with reform of the health insurance system. 1 . Participation in social insurance programs is compulspry for the great majority of the population of most nations, with limited exceptions (e.g., the affluent are not obligated to join the German health insurance program). 2. Contributory (premium-like) social insurance is popular worldwide because people feel they are getting something for their payments. 3. Payments are generally earmarked to guarantee that they are used to pay benefits. 4. Although in principle social insurance and public assistance are entirely different, in practice these types of programs have overlapping qualities. Especially in health care, many nations (e.g., Ger-




many and Britain) integrate programs of social insurance and public assistance. The United States resembles underdeveloped countries more than other industrialized nations in relegating the poor to separate public assistance health programs. Medical care is unlike other social insurance programs because it is a service rather than a cash payment. Differentials in cash payments between social insurance beneficiaries and public assistance recipients are customary in most developed nations, but differentials in health services are often seen as producing unacceptable inequality. 5. Correspondence between the amount of contributions and the amount of benefits is not a strict feature of social insurance. Generally, social insurance represents a compromise between the contributory principle (a premium-like feature) on the one hand and redistribution of income (a tax-like feature) on the other. Most nations (e.g., Germany and the United States) set contributions for social insurance as a percentage of wage earnings, but some countries (e.g., Great Britain) use a flat premium-like rate. 6. Social insurance may be financed by contributory payments from employers and employees and by general taxpayers in varying proportions. Most nations demonstrate a strong contributory component to social insurance; the degree of general revenue supplementation varies from nation to nation. The intermingling of premium-like and tax-like features is common in the financing of social insurance programs. 7. Social insurance programs can be administered through public, private, or quasi-public institutions. Public institutions have the advantage of simplicity, fairness, and lower administrative costs. Although some nations (e.g., Germany’s health insurance program) have retained their existing insurance entities to administer social insurance, others (e.g., Britain’s health insurance program) have not. Even in nations where funds are directed to nongovernmental entities, payments tend to redistribute income and are not guided by private insurance underwriting principles. Back to the Future

The passage of universal health insurance in America faces at least two major hurdles: (1) how to finance such a major social program and win popular support for a specific financing mechanism in the face of strong antitax sentiment, and (2) how to construct a coalition of interest groups



Bodenheimer and Grumbach = Social Insurance 459

sufficiently powerful to enable the passage of such a program. This paper is concerned with the first of these barriers, and does not attempt to tackle the second. Regardless of the interest group obstacles lying ahead, a popular movement for universal health insurance is likely to stumble in its first steps out of the starting gate if it cannot assuage the public’s concern about taxation and compulsory health care payments. The social insurance mechanism has the potential for breaking the financing impasse. The broad mass of public opinion in the United States supports social security, in marked contrast to its view of public assistance (Blendon and Donelan 1990; Navarro 1985; Jenkins 1969). With its contributory foundation and earmarked funds, social insurance is far more acceptable to the voting public than is general revenue taxation. A Harris poll found that 66 percent supported the social security tax as a means to finance universal health insurance (Blendon and Donelan 1990). Public assistance recipients could be folded into the social insurance program, with those recipients making a contribution to help pay for the benefits they receive. Historically, inclusion of a certain measure of income redistribution has not politically undermined the contributory principle. While it is not our intent to propose a specific financing plan here, an example based on a social insurance-type premium-tax hybrid might be instructive. Universal health insurance could be financed by a mandatory increase in social security contributions by employers, employees, and self-employed people, with the funds earmarked for health care. Payments could be proportional to wages and benefits equal for everyone. To account for the fact that some employers already pay for group private insurance premiums while other employers do not, further redistributive efforts might be needed to soften the impact on small and marginal employers and low-wage employees. Contributions made by the employed population could be sufficient to insure dependents and to cover periods of unemployment, temporary and permanent disability, and retirement. How would public assistance recipients be incorporated into such a system? Current U.S. health care financing appears to divide society into two groupings: (1) those who pay for their own care through social security contributions and employment-related insurance premiums (note that economists consider most employer payments for employee health insurance as a portion of employees’ total effective wages or as included in the prices of goods or services sold by the employer [Reinhardt 1987]), and (2) those whose care is supported by taxes or (in the case of uncompensated care) by surpayments on the premiums of people who do pay. Americans do not want to pay more taxes under such a system because the first




(majority) group appears to pay twice, once for themselves and another time (through taxes) for the care of others. Employer-mandated private health insurance, which could be labeled a social insurance program because of its compulsory aspect, has the disadvantage of perpetuating a strict separation of social insurance and public assistance programs rather than melding them together as other industrialized nations have done. To lessen the division between social insurance beneficiaries and public assistance recipients as other nations have done, the latter could be folded into the social security financing program. To maximize the contributory principle, public assistance recipients could be required to make contributions to their health care coverage; perhaps the often-overlooked payments of low-income people-in sales and other taxes-should become more evident, such that no one is viewed as a “free rider,” completely supported by the payments of others. The lessons of social insurance tell us that people are willing to pay for their benefits as long as they receive the benefits. Contributions need not be proportional to benefits received, but everyone should contribute and everyone should benefit. The history of social insurance also affirms that social insurance benefits, including health insurance, should be financed by earmarked funds, such that there is no mistake that contributions pay for designated benefits. Finally, financing of universal health insurance has the greatest chance of commanding strong public support if it ceases to perpetuate the division of society between those who appear to contribute both for their own benefit and for the benefit of others vs. those who benefit without appearing to pay. While other nations can provide lessons for the United States, the implementation of these lessons must be consistent with U.S. political culture (Morone 1990). The existing American social security program, a compromise between a contributory and a redistributive system, may provide better guidance for the financing of American national health insurance than Canadian and some European approaches that primarily rely on general revenue financing. If Americans feel confident that everyone contributes and everyone benefits, perhaps our nation can overcome the antitax impasse to the passage of universal health insurance.

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4.62 Journal of Health Politics, Policy and Law

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