Abandoned Surgery: Business and the Failure of Health Reform

I n the Progressive Era, business leaders and organizations played an indispensable role in developing and promoting the social legislation that first blunted the sharp edges of laissez-faire capitalism. Key business groups backed the Meat Inspection and the Pure Food and Drug Act, the creation of the Federal Trade Commission, and the passage of child labor and workers' compensation laws. Without significant business support, most of this legislation would not have been adopted until the Clutch Plague, when a national crisis neutralized potential opponents to change and invited a host of radical measures.

As Bill Clinton took office, it looked as though business would play a similar role in the formulation and passage of his major social initiative, universal health insurance. At Clinton's December 1992 economic summit in Little Rock, Ford CEO Harold Polling made the case for national health insurance. During Clinton's first months, the three main business lobbies in Washington the Business Roundtable, the U.S. Chamber of Commerce, and the National Association of Manufacturers (NAM) and business-dominated health coalitions such as the Washington Business Group on Health, the National Leadership Coalition for Health Care Reform, and the Jackson Hole Group were all on record supporting universal coverage and cost containment the twin goals of the president's health care reform. The only sharp dissenters were the National Federation of Independent Business (NFIB) and the Health Insurance Association of America (HIAA), which represents smaller insurance companies.

Yet barely 13 months after Clinton had taken office, most of the prominent business groups turned abruptly against his plan for universal health insurance. In the space of three days, the Chamber of Commerce dramatically reversed its stand in favor of employer-funded reform; the Business Roundtable declared itself in favor of the rival plan advanced by Representative Jim Cooper; and the NAM announced that it could not support the Clinton plan. The defection by these business organizations helped to doom the Clinton plan and any other comprehensive reform effort by removing the most important outside pressure for bipartisan support.

How did these business organizations first come to support health care reform? And why did they suddenly bail out? In the answer to these questions lies the answer to the larger question of whether and if so, under what conditions any kind of significant social reform is now possible in American politics.

To the Center and Back Again

While many business organizations traditionally have supported labor and welfare legislation, they have shied away from national health insurance. During the Progressive Era, the American Association for Labor Legislation, funded by John D. Rockefeller and U.S. Steel's Elbert Gary, sponsored a health insurance plan, but it was actively opposed by the most important big business lobby, the National Civic Federation, by the major insurance companies, and by the American Federation of Labor, which saw government health insurance as an assault upon its prerogatives. The main business lobbies also opposed Harry Truman's health care initiative and the passage of Medicare.

But the rise of health care costs over the last three decades, and particularly during the late '80s, spurred business to reconsider its opposition to or indifference toward national health insurance. As political scientist Cathie Jo Martin has argued, the benefits managers, consultants, and insurance administrators who were hired in the last decades to oversee corporate insurance policies played an important role in this reconsideration. During the early '80s, the Washington Business Group on Health, which was created by the Business Roundtable, and in which corporations are often represented by their benefit managers, opposed Reagan administration attempts to deregulate health care. In 1986, the National Leadership Commission on Health convened a blue-ribbon panel of business leaders, labor officials, and health experts who issued a report recommending universal reform. In 1990, Henry Simmons, a member of the commission, transformed it into the National Leadership Coalition for Health Care Reform, which included major auto, steel, electronics, and retail companies. In 1991 the coalition came out in favor of a "pay or play" reform that would have mandated employers to buy insurance for their employees or to pay a tax that would have created a federal insurance system for the uninsured. Even groups that had historically opposed any national plan began to advance reforms of their own. Insurance companies worked with Stanford Business School Professor Alain Enthoven's Jackson Hole Group to develop a plan for managed competition.

Small businesses, whose premiums began rising rapidly in the late '80s and averaged about 30 percent more than those of big businesses, got into the act. At the Chamber of Commerce, 96 percent of whose members have less than 100 employees, Robert Patricelli, the CEO of a health benefits management company, convened a subgroup of the Chamber's Health Committee that was entirely composed of purchasers. Insurance and pharmaceutical companies were not invited. By the time Clinton took office, Patricelli's committee had concluded that to control costs, the government had to create a universal system and in order to fund it, an employer mandate was necessary. With labor and public interest groups also backing health reform, and with the recession still feeding public insecurity about access to health care, some kind of legislation seemed inevitable.

Over the next 18 months, many groups backed away from the initial consensus in favor of reform, but the two most important defectors were the Chamber of Commerce and the Business Roundtable. The Chamber, founded in 1912, has about 200,000 members. Unlike today's typical Washington organization, it is not entirely staff driven but organized through local and state Chambers and a national board of directors. Over the years, it became known as a tenacious and effective foe of any measure that threatened small business from increases in the minimum wage to affirmative action. In 1991, in response to a recent loss of influence and members, Chamber President Richard Lesher tacked toward the middle. He elevated William T. Archey, known as a "pragmatist," to vice president. When Clinton took office, Archey steered the Chamber to a more conciliatory stance toward the administration. The Chamber backed the administration's stimulus and budget packages and did not join the opposition to the Family and Medical Leave Act.

The Chamber's position on health care was dictated in part by the same conciliatory political strategy but also by the realities of small-business economics. By 1993, 67 percent of Chamber members provided health insurance for their employees and were being hurt by rising premiums and by competition from other small businesses that didn't provide insurance. In March 1993, the Chamber's board of directors voted unanimously to back Patricelli's recommendations, and the organization published a position paper drafted by Patricelli and his staff supporting universal health insurance financed by mandated employer contributions for 50 percent of the premiums.

O ver the next six months, as the administration's task force was drafting its health plan, Clinton aide Ira Magaziner and other officials met once or twice a month with Chamber representatives to discuss how the plan should be framed. In the discussions, Patricelli, Archey, and Lesher voiced concern about how the mandate would work and the size of firms that would be required to join the insurance purchasing cooperatives (later called "alliances") that the administration was proposing. The administration did not satisfy the Chamber on the alliances the Chamber wanted them voluntary for firms over 100 employees, and the administration finally settled on an upper limit of 5,000 employees. But the White House went at least halfway in meeting Chamber concerns about the mandate.

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The Chamber objected to a predetermined payroll tax rather than a premium, and it wanted some subsidies for small business. In response, the administration incorporated a Chamber suggestion that it combine a premium with an upper limit on the percentage of its payroll that small businesses could devote to health care. The administration still insisted on employers being responsible for 80 percent of their employees' premiums rather than 50 percent, as the Chamber had advocated, but it held open the door for compromise. In October, when Patricelli testified before the Senate on the administration's bill, he was positive about its use of mandates. "We accept the proposition that all employers should provide and help pay for insurance on a phased-in basis," he told Senator Edward Kennedy's Labor and Human Resources Committee. Archey and Patricelli found fault with much of the bill, particularly the huge regional alliances, but they expected that they could significantly modify these features of the bill during the congressional debate.

Since the first months of the Clinton administration, conservatives had been complaining bitterly about Lesher's and Archey's conciliatory posture. They were pilloried by Wall Street Journal columnist Paul Gigot, columnists Rowland Evans and Robert Novak, and Human Events, and by the 75-member House Conservative Opportunity Society, chaired by Representative John Boehner of Ohio. In one meeting, Boehner and the House Republicans in the Conservative Opportunity Society informed Archey and Lesher, according to one participant, that it was "the Chamber's duty to categorically oppose everything that Clinton was in favor of." Republicans refused to attend an awards banquet sponsored by the Chamber. Boehner, Representative Richard Armey of Texas, and Representative Chris Cox of Ohio contacted local and state Chambers to organize opposition to Archey and Patricelli, even urging that local Chambers leave the national organization. A Washington group, the Small Business Survival Committee, sent a letter to the Chamber board of directors signed by former board members protesting the organization's support of employer mandates. Like other Chamber critics, they equated support of mandates with support of the Clinton plan. Conservatives also mobilized talk shows. And House Republicans, determined to undermine the Clinton administration, threatened that if the Chamber persisted in supporting mandates, they would ignore Chamber lobbying on other issues.

A t the same time, the Chamber began to suffer defections among its rank and file, as its chief rival, the NFIB, began to raid the Chamber's members. The 600,000-strong NFIB, founded in San Mateo in 1943, has recently become more of a Washington activist organization, driven by its staff rather than by a hierarchy of organizations and chapters. Unlike the Chamber, it does not include publicly traded businesses. The group's typical business employs six or seven people; it grosses under $300,000 and is much less likely to provide health insurance to its employees than a Chamber member. Like the Chamber, it is closely linked to the Republican party, but unlike the Chamber under Archey, it didn't loosen those links after Clinton's election. When the NFIB brought its members to Washington, it recruited House Republicans to brief them on health care.

As the debate over health care began, the NFIB unequivocally rejected the employer mandate that was at the center of the Clinton plan's financing. The NFIB even refused to testify at task force meetings. And over the next eighteen months, it devoted its resources to killing the Clinton plan through lobbying Congress. By the fall, its strident campaign was also beginning to win converts among businesses that the Chamber was trying to reach. The Chamber, which had lost members in the late '80s, began once more to suffer defections. Says Kristin Bass, who worked for Patricelli at the Chamber, "We were getting creamed in the field by NFIB. It was as much a market share, competitive issue as anything else."

The NFIB's message found a particularly warm reception among Chamber members that didn't provide health insurance, including large corporations like Pepsico, General Mills, and Woolworth that had growing numbers of workers who received few or no benefits. The National American Wholesale Grocers' Association resigned from the Chamber itself. The National Retailers Federation urged each of its members to pressure the Chamber. "It was the 30 percent that didn't provide insurance that were the most vocal," one staff member recalled. By February, Lesher, who had initially encouraged the Chamber's conciliatory line, was ready to reverse his stand. Then an event brought matters to a head.

The Stampede Begins

With the Business Roundtable scheduled to announce its position on February 2, the Clinton administration urged the House Ways and Means Committee to move up Chamber testimony from Patricelli to February 3 so that if the Roundtable went against the administration, Patricelli's testimony might counteract the negative publicity. As was customary, Patricelli submitted a copy of his testimony prior to the hearing, in which he reaffirmed the Chamber's support for an employer mandate. "We accept the proposition that all employers should provide and help pay for insurance on a phased-in basis," Patricelli's testimony read. When Boehner learned what Patricelli planned to say, he and other House Republicans contacted the Chamber and Chamber members in their district urging them to protest the organization's stand. Under intense pressure, Chamber President Lesher backed down. He ordered Patricelli to change his testimony, and on the date of the hearing, a chastened Patricelli told the Ways and Means Committee that the Chamber "cannot support any of the mandate proposals that have been advanced in legislation by President Clinton or members of Congress." It was, in effect, a complete repudiation of the Chamber's and Patricelli's earlier position.

Later that month, the Chamber made it official. On February 28, the Chamber's board of directors voted to oppose not only employer mandates but also universal coverage. On April 5, Lesher fired Archey, and soon afterward Patricelli resigned his position as the head of the Chamber's Health committee. And for the next five months, the Chamber used its considerable resources to kill any chance of universal health insurance.

The Business Roundtable, which is composed of the CEOs of Fortune 500 companies, ended up playing an equally important role in defeating Clinton's plan. Founded in 1973, the Roundtable quickly demonstrated its clout by helping block a new consumer protection agency and labor law reform during the Carter administration. It took positions on health care issues from the beginning, largely through the Washington Business Group on Health, which it established in 1974. In 1985, however, it set up its own Health, Welfare, and Retirement Task Force, which became the focal point for debate over health care reform.

Within the Roundtable, there were four distinct kinds of businesses and CEOs, each of whom had a different vantage on health care reform. Some of the large manufacturing companies, including the Big Three automakers, Xerox, and the major steel producers, were members of the National Leadership Coalition for Health Care Reform and had backed its "pay or play" program for reform. Others, like IBM and Kodak, did not support "pay or play" but nonetheless supported the use of an employer mandate to fund universal access. These companies already insured their workers. Their CEOs saw national health care reform as a way to end the cost-shifting from the uninsured to the insured and, in the case of the auto companies, to defray the costs of their early retirees. They were not upset by price or premium controls. If they had a concern, it was about preserving the Employment Retirement Security Act of 1974 (ERISA), which preempted states from micro-regulating employer health plans. More broadly, they wanted to be able to buy insurance for their employees nationally on terms that their managers negotiated.

Another group of companies was directly involved in selling health care to companies and individuals. It included large insurance companies like Prudential and CIGNA, drug companies like Abbott and Eli Lilly, and health care conglomerates like Humana. Many of these companies favored a managed care model of health reform that did not include employer mandates, price controls, or premium caps. Explained one consultant who worked with these businesses, "Their big concern was that, as far as they could tell, being in favor of an employer mandate also meant being in favor of price controls. If you get one, you were going to get the other." They were most comfortable with the health plan advanced by Representative Jim Cooper and supported by Enthoven's Jackson Hole Group. This plan eschewed employer mandates and premium caps and tried to hold down costs and subsidize the uninsured by taxing the more expensive health plans.

A third group of companies insured many of their employees but had diversified into businesses where they employed many part-time and low-wage workers for whom they provided partial or no health care benefits. These included General Mills, Pepsico, Sears, J.C. Penney, and the Marriott Corporation. Many of them were opposed to comprehensive health reform. Explained Alan Richey, General Mills's vice president for compensation and benefits, "From our standpoint, there was a growing need to provide some stability for people on health care issues and we believed right from the beginning that this could be achieved through a relatively small amount of change that would focus on universal access and some minor underwriting reforms. Beyond that, we felt that the health care market, which has been in rapid change anyway, would develop reasonable alternatives for people."

A fourth group of CEOs headed companies that insured their employees and had a direct stake in health care reform but were nonetheless opposed on ideological grounds to government intervention. These included Drew Lewis of Union Pacific and Jack Welch of General Electric. It didn't matter that health care reform could save their businesses money. They saw reform as the opening wedge for a more interventionist government that would eventually threaten their prerogatives in other areas. According to a senior White House aide, Lewis said that he was opposing the Clinton plan even though his company had "costed it out" and found that it would save millions annually.

The first kind of company, which strongly favored mandates and accepted the idea of price controls or premium caps, was in a minority within the Roundtable. These companies were at an even greater disadvantage in the Roundtable's Health, Welfare, and Retirement Income Task Force, which was chaired by Prudential CEO Robert C. Winters. At least 18 of the 35 companies on the task force were either in the health business or did not insure all their workers. A similar situation prevailed in the Roundtable's Washington Business Group on Health, whose president, Mary Jane England, was a former vice president of Prudential and, like Winters, an active participant in the Jackson Hole Group and backer of the Cooper plan.

The White House began meeting with the Roundtable's Health Task Force almost immediately after taking office. According to the White House, Winters and the other CEOs initially expressed concern about price controls, about whether large businesses could opt out of the alliances, and about whether the health plan would undermine ERISA. One senior official said, "I got the impression that Winters thought we were moving in the right direction."

B ut by October, when the administration released its plan, negotiations between the White House and the Roundtable's task force had begun to break down. The meetings, one official recalled, became more "strident." Winters and the CEOs from other health-related industries took special umbrage at the premium caps in the Clinton plan. "The insurance and pharmaceutical companies were going bananas over price controls," recalled Ford official Susan Schackson. They were joined by General Mills, Pepsico, and Marriott, who rejected the employer mandates. Together, they set out to stop the Clinton plan. Explained Roundtable official Johanna Schneider, "There was a feeling that the Clinton plan was moving forward unless somebody stood up and said this is not going to work."

Of course, not all the firms in the Roundtable were ready to abandon the Clinton plan. But even firms like IBM and Kodak that supported the thrust of the Clinton plan objected very strongly to provisions regulating self-insured plans and allowing states to establish single-payer plans that could include large corporations. They also feared that the regional alliances would gain so much clout in the market that corporations would no longer have much bargaining leverage with health care providers.

The White House desperately attempted to keep the Roundtable in the fold. It insisted that it could compromise on premium caps, mandates, and ERISA but explained that Democratic committee heads in Congress wanted to use the process of compromise to win votes for a final plan. They set up meetings for the Roundtable CEOs with Ways and Means Chairman Dan Rostenkowski and pleaded with them not to reject their plan. They also held separate meetings with Kodak, IBM, and other companies in the Roundtable that were more sympathetic to their aims. But they couldn't satisfy these companies' worries about ERISA and about the freedom of action that corporate self-insurers would have under the Clinton plan.

With even the administration's supporters wavering, Winters moved quickly to get the Roundtable on record against the Clinton plan. His task force endorsed the Cooper plan, and in February, when the Roundtable's policy group convened, he got it to back Cooper. To make the outcome all but certain, Winters framed the issue as a choice between endorsing the Clinton plan and using the Cooper plan as a "starting point." Naturally, the CEOs, most of whom were uncomfortable with Clinton's plan but somewhat unfamiliar with Cooper's, chose Cooper over Clinton. But in their endorsement of Cooper, they rejected the tax financing that was central to the Cooper plan's funding and cost control. It was as if they had endorsed the plan but not its provisions. Winters had, in effect, gotten them to back Cooper simply as a way of rejecting Clinton.

Afterward, some Roundtable officials insisted the organization had not tried to kill the Clinton plan and blamed the Clinton administration for the furor that surrounded the organization's vote. Mary Jane England explained, "My feeling was that, by having a knee-jerk reaction to the Business Roundtable, the administration polarized the issue. All the Business Roundtable said was that the Cooper plan ought to be considered as well." But General Mills's Richey knew better. He later boasted of the vote for Cooper and against Clinton, "The Roundtable became one of the first groups that stepped out and said this is bad for America."

Indeed, the Roundtable's vote was decisive in shifting overall business sentiment. While it did little to help Cooper, it opened the door for other business groups to reject the Clinton plan. NAM, which had been hedging its bets, followed suit three days later, declaring that "NAM is unable to support the administration's health care reform plan in its present form." Combined with the Chamber's opposition, the rejection by the Roundtable and NAM created a united front against the Clinton plan. Clinton could still claim the support of some individual companies and of smaller organizations like the National Leadership Coalition, but he had lost the support of the business groups that really mattered in Washington.

White House officials insist that even after the business organizations' defection, Clinton could have still gotten a bill through Congress. Perhaps under ideal conditions he could have, but as Congress began to debate health reform that spring, the conditions were not right for a bill to pass. Conservative attacks on Clinton's character and probity had begun to erode his authority, and Republicans in Congress, sensing the possibility of an electoral killing in the fall, had become determined to block any bill from passing. The recession's end reduced the sense of urgency about passing even a modest bill. And the forces in favor of comprehensive reform unions and public interest organizations were not sufficiently powerful to sway Congress. Without the support of the Chamber, Roundtable, and NAM, what would have been difficult became impossible. Health care reform was doomed.

Why Business Backed Out

Why then, in retrospect, did the business organizations fail to support the Clinton plan? One answer won't pass muster: that business was simply acting in its best interest. On the contrary, something very close to the Clinton plan could have held down costs for both large and small business. Some businesses would have been hurt the small insurance firms that the HIAA represents, for instance, or some of the NFIB's mom-and-pop operations that didn't insure their workers but most would have benefited. The "slippery slope" argument advanced by CEOs like Drew Lewis was also without merit. Business opposed reform in spite of its being in its long-term interest.

On a very basic level, business support for reform was a victim of the inescapable conflicts among businesses themselves that often prevent any kind of cooperation for long-term ends. Those businesses that sold health care or that didn't provide health insurance to their workers were able to outgun those like Ford or Bethlehem Steel that saw their interest in a universal health plan. "It was a classic example of the divisiveness of an issue in which the business community devoured its own," one veteran of the Chamber battle declared. In addition, reform was stymied by businessmen's and Americans' historic fixation with a Lockean liberal model of society in which government is at best a necessary evil. This vision remains barely below the surface in public debate and is ready to emerge when the specter of governmental activism looms.

American business leaders have periodically overcome their internal disunion and Lockean liberalism, but only under extraordinary circumstances. These have consisted of recessions or depressions that appear to threaten the viability of industry itself and to raise the specter of insurgency from below. During the Progressive Era and the Clutch Plague, business leaders were worried both about the system's survival and their own. During the Progressive Era, repeated financial panics lay the groundwork for unity between the powerful Wall Street and the smaller midwestern and southern banks, and led to the creation of the new Federal Reserve System. During both eras, the threat of labor unrest and socialism underlay business support for labor reforms and collective bargaining. These kinds of conditions did not exist during the first two years of the Clinton administration. Whatever sense of urgency business felt about rising health costs abated as the recession abated; and labor is simply too weak today to scare business into attempting to co- opt its program of social reform.

American business also lacks today the kind of farseeing leaders who have the intelligence, objectivity, and authority to unite it around its long-term interests. In the Business Roundtable, Chamber of Commerce, and NAM, business leaders deferred in the end to CEOs who were acting primarily in their narrow, immediate self-interest without regard to the larger effects that health care reform could have on American industry. In addition, the men and women who lead the lobbies in Washington see their organizations as businesses. They compete for members and influence the same way that a company competes for profits and market share. The contest between the NFIB and the Chamber was over members and influence, not over the wisdom of their recommendations. In the health care debate, there was even the ultimate irony of conservative politicians representing a narrow partisan interest successfully lobbying major business lobbyists, who were in fact supposed to be lobbying the politicians.

O f course, Clinton must bear some blame for business's defection. He made a significant strategic error during his first months in office. Clinton took Roosevelt's New Deal and his Hundred Days as his model. He thought he could get a comprehensive program through a Democrat-dominated Congress. But Clinton didn't possess Roosevelt's majority, nor, needless to say, his political powers, and he governed at a time when extremely powerful forces were arrayed against change. At best, his situation was similar to that of Woodrow Wilson who won office because of a third-party challenge and who had to rely on support from Republicans and Progressives to adopt his programs. To pass national health insurance, Clinton would have been well advised to delegate a bipartisan commission to devise a health care plan one that later could have avoided the pitfalls of partisan combat.

Clinton's critics have faulted the plan itself for being overly complex and bureaucratic, but one must be careful here. As the experience of Democrats and Republicans who later tried to craft alternative plans demonstrated, it is very hard to develop a "moderate," incremental plan that doesn't have extremely negative consequences. Enforcing community rating by insurers, for instance, without enforcing universal coverage, will radically increase rates and costs. Clinton's plan was in many ways a brilliant synthesis that went beyond any prior comprehensive plan. It built upon rather than dismantled the emerging structure of health care. It tried to come to terms with vagaries of cost, quality, and universality. It needed serious modification, not wholesale rejection.

From business's standpoint, the Clinton plan's most serious weakness was its neglect of the knowledge and skill accumulated by corporate professionals over the last decade. The plan introduced in October 1993 assigned them little role in holding down costs and maintaining quality. And the ERISA provisions held open the possibility that they could be shoved aside entirely. Patricelli, Archey, and the corporate officials at the Business Roundtable or National Association of Manufacturers had reason to be put off by this aspect of it. But this was precisely that part of Clinton's plan that could have been fruitfully merged with Cooper's. Instead, any attempt at a new synthesis was sabotaged by Republican guerrillas acting with the tacit or active support of the business lobbies.

What happened with business and health care reform bodes ill for the American future. Health care reform was not simply one of many reforms that an administration could contemplate but was integral to addressing the country's social, economic, and fiscal ills. Genuine, and not merely punitive, welfare reform, for instance, is impossible without guaranteeing health insurance for the working poor. Over the long run, deficit reduction is impossible without curbing health costs. And national health insurance is the surest way that government can address the erosion of middle-class living standards. But without a business community moderately supportive of social reform, little is possible in the present era. The U.S. is on a slippery slope not toward socialism, but toward the kind of mean-spirited capitalism that the earlier reforms of this century were supposed to mitigate.