A Broken Clock Was Right About Health Insurance

On January 31, 2025, the Wall Street Journal published an editorial about UPS’s announcement that it was shutting down an unprofitable line of business and cutting its workforce accordingly.  A labor agreement of two years ago between the company and the Teamsters had driven costs to an uncompetitive level.  The editorial said that the average compensation of UPS drivers with five years of seniority is $170,000, and they get seven weeks of vacation and don’t pay anything for health insurance.

Twenty-eight years ago, in 1997, the WSJ published a prophetic op-ed about United Parcel Service and the Teamsters.  At the time, the company and the union were in the throes of a nasty contract negotiation, with not only pensions being a sticking point but also health insurance and other benefits.

The opening paragraph of the 1,397-word op-ed of 1997 was this:

As UPS’s battle with the Teamsters over pensions and part-time workers demonstrates, the American system of employer-provided health and retirement benefits has become an anachronism, a holdover from World War II that is now out of step with the realities of today’s labor market.   Employers and employees would be better off if medical coverage and retirement programs were independent of the employment relationship.  To understand why, it is necessary to look at how the programs came into existence.

The last paragraph was this:

The devil is of course in the details [of reforming the system].  But if business leaders do not take the lead in working out the details, the government will do it for them, continuing a trend that began in the middle of World War II.  Maybe after 55 years, the time has come for business to correct an accident of history and get out of the benefits business.

Today’s developments show that the author of the 1997 op-ed was prescient.  Not to brag, but the author was me.  The op-ed was one of seven commentaries of mine published by the WSJ over the years, including one that was used as a case study in business schools.

Hey, even a broken clock is right twice a day.

As a result of the 1997 op-ed, I became active in efforts to reform America’s health insurance system.  I hosted a national conference of experts and politicians at my expense, worked with various reform groups, went on a speaking tour, and published articles in influential publications.

I also worked behind the scenes in crafting reform legislation for Congress with one of the few companies that understood the strategic and equitable importance of separating health insurance from employment and giving American workers better and cheaper alternatives and more control over their healthcare.  The company was Walmart.

The reforms were killed by the many special interest that benefitted from the status quo.

Now, Americans are so frustrated with the cost of medical insurance and treatment that many of them cheered when a health insurance executive was assassinated on a New York street.

You can blame me for failing to reform the system.  My op-ed, which is pasted below, didn’t accomplish a damn thing.

Mr. Cantoni can be reached at craigcantoni@gmail.com.

The Case Against Employee Benefits
Craig J. Cantoni/ The Wall Street Journal August 18, 1997

As UPS’s battle with the Teamsters over pensions and part-time workers demonstrates, the American system of employer-provided health and retirement benefits has become an anachronism, a holdover from World War II that is now out of step with the realities of today’s labor market.   Employers and employees would be better off if medical coverage and retirement programs were independent of the employment relationship.  To understand why, it is necessary to look at how the programs came into existence.

In 1940, prior to America’s entry to World War II, only 10 percent of the American work force, or 12 million people, were covered by health insurance, primarily through such plans as Blue Cross and Kaiser Pemanente, which grew in response to the hardships of the Great Depression.  After America’s entry in the war, Congress passed the Stabilization Act of 1942, which limited wage increases in order to keep prices and inflation in check during wartime.  The Act permitted the adoption of employer-paid insurance plans in lieu of wage increases.

Then, the War Labor Board ruled in 1945 that it was illegal to modify or terminate group insurance plans during the life of a labor contract.  That was followed by a National Labor Relations Board ruling that redefined wages to include insurance and pension benefits. America was on its way to employer-paid health and retirement benefits.

The Liberty Mutual Insurance Company led the way by introducing major medical coverage in 1949, a new insurance product that coupled comprehensive coverage with the new features of deductibles and coinsurance.  By the end of 1951, 100,000 people were covered by major medical insurance; by the end of 1960, 32 million; and by the end of 1986, 156 million.  The coverage proved so popular that at its peak, 97 percent of full-time employees in medium to large companies had employer-sponsored health insurance.

By the 1990s, however, the percentage of the population with health care coverage had dropped to 83 percent, and of those with coverage today, only 61 percent are covered through an employer plan.  The remainder either do not have coverage or are covered by the government or an individual plan.  What happened?

One thing that happened was the decline in employment in durable goods manufacturing, where 93 percent of workers have employer-sponsored health care benefits.  At the same time, there was a growth in retail services, where only 62 percent of the predominately female work force is covered.  Further, there was a precipitous drop in the average length of service to today’s 5.6 years, a marked contrast to the lifetime employment of the 1950s and 1960s.  Even with mandated Cobra coverage (Consolidated Omnibus Reconciliation Act of 1985) and recent portability legislation, waiting periods and exclusions for pre-existing illnesses leave frequent job-changers without coverage.

The picture is even worse for retirement benefits.  Less than 50 percent of workers are covered by private retirement plans.  In construction, it is less than one-third; and in retail services, even less than that.

The most significant cause of the decline in health and retirement coverage has been the growth in the contingent work force, which, if current trends continue, will be 40 percent of the working population in ten years.  To a large extent, companies are using part-time and contract workers for the express purpose of avoiding benefit costs and the burdensome record keeping required by legislation.  Who can blame them?

From December 1971 to December 1991, the cost of medical care alone rose 398.9 percent, while the Consumer Price Index rose 235.5 percent.  Although medical costs have leveled off for now due to managed care, the cost of all fringe benefits has climbed to the stratospheric level of 40 percent of total compensation, compared to 17 percent in 1955.  According to the Commerce Department, benefits have gone from 4.4 percent of corporate revenue in the 1950s to almost 12 percent today.  In 1966, company contributions to Social Security and Medicare were $12 billion; now they are $200 billion.  As a result, the average per employee cost of all benefits is just under $15,000.

These numbers do not include the costs of administering benefits or complying with an ever-increasing complexity of government regulations.  The Employee Retirement Income Security Act (Erisa) alone has spawned regulations that, when printed on two sides and in 10-point type, are two-feet thick.  It takes an army of outside Erisa attorneys and benefits consultants to administer and interpret the regulations, in addition to in-house benefits administrators (about one for every 1,000 employees).  Consequently, the annual cost to a mid-size or smaller business of administering just a “simple” 401(k) plan is $475 per participant.  Unfortunately, job-creating smaller businesses are hurt the most, for they cannot spread administrative and regulatory costs across more employees like their larger brethren.

And what do companies get for this trouble and money?  They get black eyes, not only from the usual adversaries in the media and government — as UPS is finding out —but also from the recipients of their generosity:  employees.  Except for the largest and richest companies that can afford gold-plated programs, benefits are often a source of employee dissatisfaction and distrust, and rarely a source of motivation or productivity.  This is particularly true with medical insurance.

Company-sponsored medical insurance creates a parent-child relationship, in which the employer plays the role of the munificent, all-caring parent, who protects the dependent employee-child from the vagaries of life — a role that is at odds, and often in conflict, with the economic decisions of running a business.  It also forces the employer to intrude on the most personal and private aspects of someone’s life, from knowing the intimate details of a family’s medical history, to knowing the gender of an employee’s unmarried partner (for those companies offering domestic partner coverage).  Once involved with such personal matters, it seems perfectly normal for employers to devote precious time and energy to matters of health and lifestyle, by offering smoking cessation programs, stress reduction classes, cholesterol screenings, health awareness lectures and news letters about diet and nutrition — all of which creates goodwill that evaporates as soon as the employer increases premiums, switches managed care networks, or denies a claim.

Non-cash benefits corrupt the employer-employee relationship in other equally important ways.   When 40 percent or so of total compensation is in the form of benefits, it is difficult for employees to put a true market value on their compensation package or to walk away from a job that they do not like.  Similarly, from a company’s point of view, it is difficult to have true pay-for-performance when 40 percent of pay is an entitlement for which the company gets very little in return, other than complaints and headaches.

What is the answer?  With respect to health insurance, it certainly is not another Rube Goldberg version of Hillary Clinton’s nationalized health scheme — although that is what Corporate America is getting one piece of legislation at a time by not joining forces to come up with a better idea.

One better idea would be legislation mandating that private employer group health plans be replaced with non-profit, private-sector buying cooperatives, which would be open to everyone, including working and non-working people, full-time and part-time workers, single parents and their dependents, heterosexual couples, gay couples and any other variation of family life known to modern society.  The cooperatives would perform the same role as large employers:  getting reduced group insurance rates from insurance companies and managed care networks, being a consumer advocate, interpreting and explaining coverages, reconciling claim disputes, and educating members about healthy living.

Getting companies out of the retirement business would be much easier.  Basically, it would require changes in tax and pension law to allow people to save as much money in individual retirement accounts as can be saved in corporate defined-contribution retirement plans.  The recent budget agreement took a step in this direction.

The devil is of course in the details.  But if business leaders do not take the lead in working out the details, the government will do it for them, continuing a trend that began in the middle of World War II.  Maybe after 55 years, the time has come for business to correct an accident of history and get out of the benefits business.

Mr. Cantoni is president of Capstone Consulting Group of Scottsdale, Ariz.