October 11, 2015

Opposition to the Cadillac Health Plan Tax: Control Foolishly Trumping Self Interest

I was struck by the parallels between a story published this past week and an event I recalled from the recent baseball Hall of Fame voting. The story appeared in the Saturday, January 9, article in The New York Times entitled “Unions Rally to Oppose a Proposed Tax on Health Insurance.” The event was the beginning of free agent negotiations between Marvin Miller, the lawyer for the Players’ Union, and the baseball owners in the 1970’s, an event discussed at some length this past week as commentators correctly noted that the Hall of Fame voters’ decision to deny Miller admission is a grave injustice.

What do these two situations have in common? In both cases, a party to a dispute values continuation of the status quo and control more than they do economic benefit.

The Baseball Free Agent Negotiations

In 1976, after nearly 75 years of baseball operating under the legal notion that owners could permanently force players to contract with the same team year after year or be prevented from playing Major League Baseball, arbitrator Peter Seitz ruled that the standard Major League contract only allowed owners to renew the contract for one additional year, not perpetually.

As a result, the owners had to bargain with the Players’ Union over the terms of free agency, that is, when and how players could offer their services competitively. One owner, Charlie Finley, proposed publicly that every player should be able to be a free agent every year. As Miller said:

“The moment I heard Charlie’s proposal, I was worried that the owners would agree to it. He understood Economics 101. If you made all the players free agents, every year, they would be competing against each other for a limited number of jobs. It would not have been in the players’ interests.”

Using the laws of supply and demand, salaries would be depressed. Instead, by having a more limited free agency, which ended up being in the agreement, the few free agents available every year were subject to competitive bidding that drove up salaries and severely hurt the economics of owning a baseball team for many owners.

Why did the owners reject Finley’s proposal? As author Rob Neyer, in his book, Big Book of Baseball Blunders quoted Miller,

“ I think they (the owners) couldn’t envision an environment in which they no longer controlled the players. It was not just about the money. They were accustomed to saying, “You must play for me or you can’t play professional baseball for anyone anywhere in the world.” That was a tremendous power and I suspect they didn’t want to relinquish it too abruptly.”

In effect, the owners valued the appearance of power and control, but did not understand that they were severely compromising their short and long term economic interests in so doing.

The Union Opposition to the Tax on “Cadillac” Health Plans

The opposition of many labor unions to the tax on high-cost health plans is in the same category as the owners’ opposition to unlimited free agency. They are fighting to keep control of an economic model that is not in their best interests financially. If the Dartmouth Atlas research has a single message, it is that more aggressive health care is not better care, and does not deliver better health.

Medical benefits are not like pension, 401(k) or even life insurance benefits. In the case of pension, 401(k), and life insurance, the more the employer pays, the more the union member is enriched. In the case of medical benefits, the more the employer pays, the more an outside doctor, hospital, or insurance company is enriched. Whether making outside medical providers richer translates to better health care or health for union members is pure accident.

Think about it for a moment. If I am a union member and go to the emergency department of my local hospital for a sore throat, instead of going to the local retail walk-in clinic, my employer pays $1,000 instead of $50 for me to get examined and to get a prescription for an antibiotic. Am I better off for having triggered a $1,000 expense instead of a $50 expense for the employer? Clearly not. Yet, in many instances, these Cadillac plans cover emergency department and hospital care at 100%, but require a $20 pay for a visit to a retail clinic. If the health plan created a $100 co-pay for a non-urgent emergency department visit, the union member would go to the retail clinic, not the emergency department, the employer would pay less, and the union member would have an opportunity for some form of gain sharing.

Wouldn’t I be better off if the employer paid $50 and gave me $400 worth of salary, pension benefit, 401(k) contributions, or life insurance premium money? That’s what we did at Pitney Bowes in the early 1990’s in weaning our employees off these rich, dysfunctional health plan benefits. They got more cash in their pocket, as did we, and the only losers were those providers who had benefited from overcharging us in the past.

Why do these unions not see this? Going back to the Marvin Miller commentary, I suspect it is because they do not want to appear like they are “giving up” something, even if they could do better for their members by making a concession on the Cadillac health plan tax. If I were they, I would propose a subsidy for pension, 401(k) or some other real economic benefit in exchange for “giving up” on the Cadillac health plan tax issue. Their current opposition seems very misguided.