By Theodore R. Marmor
Journal of Health Politics, Policy and Law, December 2018
Social insurance, like commercial insurance, is about protection against financial risk. In the United States, Medicare and the Social Security Administration’s programs for retirement, disability, worker’s compensation, and worker’s life insurance have become dominant features of American public policy, amounting to more than 41 percent of the federal budget. Yet their fiscal centrality does not rest on anything like an understanding of what makes social insurance social—or why that is so important to American political life. This essay seeks to clarify the crucial differences between social and commercial insurance and elaborates on the conceptual justifications and distinctive operational features of America’s social insurance programs.
What Is Social about Social Insurance?
Social insurance, like commercial insurance, is about protection against financial risk. It is “insurance” in the sense that people contribute to a fund to protect themselves against unpredictable financial risks. These include outliving one’s savings in old age, the early death of a breadwinner, the onset of disability that makes work difficult if not impossible, the high costs of illness, involuntary unemployment, and work-related injury. Contributions are not prices in a market and so, unlike commercial insurance, are not higher or lower depending on the customer’s risk profile. Instead of a commercial insurance contract between enrollee and insurer, social insurance is for shared protection among participants in which they agree that each should pay for that protection according to their work income. The “insurer”—a government agency or, originally in Europe, a corporate body with a joint labor/management board—is the agent of the contributing enrollees. The social insurance contract, once created, cannot be voluntary and survive long. By law contributions are required, because otherwise adverse selection would be financially disabling.
Social insurance, then, spreads the costs of coverage according to a different logic than that of commercial insurers. In commercial insurance, price must reflect risk. Social insurance, by contrast, operates on the premise that contributions are calculated according to one’s income and benefits are related to one’s needs. But the central political feature of social insurance is that the contributors are also beneficiaries. This is not the case with social assistance programs with means-tested eligibility standards. As important as such programs are for those who experience poverty, taxpayers do not in general identify with welfare beneficiaries. And, finally, private insurers, unlike governments, cannot tax citizens to make up for losses. But private insurers do routinely try to select customers with an eye to signing up those least likely to experience the risk the insurance policy is to mitigate. That’s why fire insurance is more expensive in poorer neighborhoods, not because insurance firms are racist.
Medicaid, Medicare, and Social Insurance
Medicaid’s very structure is ill designed for broad expansion. Its means-tested mode of eligibility creates a fiscal cliff. That is the term for when an additional dollar of a beneficiary’s income means the loss of a program’s benefit.5 No wealthy democracy has found a way to set the cliff at a point where some other arrangement and a means-tested program can combine to create universal health care. The design problems are particularly evident in the supposedly more middle-class part of the program, long-term care. The means testing and asset testing create cliffs and incentives for fraud. Quality problems can be severe, and yet many people go without needed services
There is little to say about Medicare in the context of conflict over the ACA. Democrats did not rely on expanding Medicare, save for a brief dalliance with voluntary coverage for Americans fifty-five to sixty-five years of age. The “public option” relied on Medicare’s ability to limit prices but not on explicit social insurance principles.6 Indeed, there was no serious discussion of how social insurance ideas were relevant, even though they were important in fact. The regulatory innovations of Obamacare represent earnest efforts to regulate commercial health insurance to become more like social insurance. Requiring insurers to guarantee issue at a fixed price regardless of preexisting conditions would reduce risk selection that social insurance eliminates directly. Requiring commercial insurers to offer a basic benefit plan also moves toward the common coverage that social health insurance offers automatically. The partial measures in the ACA appealed to the values underlying social insurance, but almost no connection was made between these measures and a principled vision of social insurance.
Our Lost Vocabulary of Social Insurance
By Theodore R. Marmor
Niskanen Center, December 10, 2018
Social Insurance, Our Neglected Heritage
There are at least two plausible criticisms of this essay’s argument about the importance of relearning the appeal of social insurance principles. One is that the world has changed dramatically since the birth of social insurance in the late 19th century, let alone since the 1934-35 Committee on Economic Security provided a blueprint for expanding social insurance in American public life. The other is that changes in long-standing European social insurance programs show that major adjustments in the American programs are required as well.
The claim that the world has changed does not necessarily mean that the economic risks against which social insurance programs offer protection have been fundamentally altered. Consider every one of the risks noted in this essay — outliving one’s savings, involuntary unemployment, medical costs, and disability. Not one has disappeared, and social insurance programs for each have been implemented in wealthy democracies. I doubt, in other words, whether social insurance is in any conceptual trouble.
But that does not mean social insurance programs don’t need to adapt to contemporary circumstances. The spread of contract employment has been particularly challenging for European countries where social insurance is a function of trade unions and other sector-level organizations. It is equally obvious in the US that employer-provided health insurance puts a damper on labor market flexibility. Reduced employment in regular jobs with health coverage will demand the search for other sources of provision. These and other realities of our changing economy will only bring to the fore the central claim of this essay: Social insurance programs dominate American social policy but what that means for our politics is too little understood or explained. And that criticism extends not only to harried reporters but to a significant amount of the public policy community, as well.
By Don McCanne, M.D.
From Repeal and Replace to Medicare for All, with heavy doses of health care financing policy such as accountable care organizations, other alternative payment models, and the public option, we are being inundated with messages intended to ignite much needed improvements in our health care financing system. What seems to have slid out of these discussions is the crucial importance of policy design based on a solid foundation of social insurance.
Ted Marmor has provided us with an excellent account of the principles and paradoxes of social insurance as it has played out, or rather failed to play out fully, in the United States. Rather than reading comments here that I might make, it would be more important to download his article from the Journal of Health Politics, Policy and Law. The publisher has kindly removed the paywall, allowing free access to this article, available at the link above. A modified version has also been published by the Niskanen Center. Reading both versions can clarify any points that might not be clear on your first reading.
I believe that this is one of those landmark articles that should be in your health policy library file, whether you are an academic, activist, or simply someone who really cares about our health care system and the people who receive its services. Whatever we do, it is imperative that our future system be imbued with the principles of social insurance. Actually the principles are already there in our model of a universal single-payer improved-Medicare-for-all national health program. But people have to feel it.
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