Obamacare’s Grandpa Fought Markets in World War II

Published December 15, 2016

Today’s crisis of rising health insurance and health care costs, exacerbated by the Affordable Care Act (ACA), descends from policies the federal government started creating more than 70 years ago–during World War II and the postwar decades–argues Hillsdale College professor Dr. Gary Wolfram. President-elect Donald Trump and Congress should heed the history lesson, lest they repeat our past leaders’ mistakes by replacing Obamacare with Obamacare-lite.

The federal government inadvertently began yoking health insurance to people’s employment by exempting fringe benefits from a wage freeze implemented by the National War Labor Board in the 1940s, Wolfram argues in a lecture available online as part of a free, online, not-for-credit Hillsdale College course, Public Policy from a Constitutional Viewpoint.

Unsurprisingly to those acquainted with the companion course, The Presidency and the Constitution, the War Labor Board’s authority ensued from Congress ceding some of its regulatory powers to the executive branch.

Congress increased President Franklin D. Roosevelt’s power at its own expense, recounts an article published in the University of Pennsylvania Law Review and American Law Register in December 1942:

The third phase of the War Labor Board’s wage policy began [in 1942] with the October 2 Amendment to the Emergency Price Control Act of 1942, under which the President was given even wider powers to regulate and control wages and salaries. Pursuant to this Amendment, President Roosevelt, by executive order [on October 3], gave the War Labor Board jurisdiction over all wage increases, including voluntary agreements.

More commonly known as the Stabilization Act of 1942, this amendment broadened Roosevelt’s power. The day after its passage, Roosevelt prohibited employers from raising wages above the level of September 15, 1942, except when the War Labor Board ruled otherwise, the article states.

The wage freeze came when demand for manufacturing labor was high and the supply of workers was shrinking, due to the military’s growth during 1941–1945. (In 1943, more than 9 million people were serving in the U.S. Armed Forces.) Consequently, employers had to get creative, Wolfram told me during a December 2016 episode of the Health Care News Podcast:

Markets being what they are, people became clever and said, “Well, how about we provide health insurance for our employees, and that won’t count against the wages?” And, indeed, in 1943, the War Labor Board ruled that the wage freeze didn’t apply to fringe benefits.

To glimpse how the War Labor Board forced employers to find creative ways to compensate employees, consider the plight of Staley Manufacturing Co., recounted in the 1942 University of Pennsylvania Law Review and American Law Register article:

The company had refused the union’s first request for a wage increase; but when its employees began quitting their jobs to find employment at a nearby plant, it entered into a voluntary agreement granting the increase. The Board disapproved the wage rise, saying that since there had been no showing that the parties had taken any other steps to solve the manpower problem, there were no grounds other than lack of manpower to support the raised rate.

Here is a company actually wanting to increase employees’ wages to keep them competitive, in direct response to employees’ en masse demand for a raise, yet required by the War Labor Board to dream up a substitute for the compensation demanded.

The tale of Staley Manufacturing Co. may resonate with many present-day employees. An increasing number of present-day workers would prefer to receive higher wages from their employers in lieu of health insurance “benefits” too expensive to enjoy.

Unlike Staley Manufacturing, Co., however, companies today prefer to compensate employees with fringe benefits packages in lieu of simple wages (and many employees share this desire). This is because Congress, in the Revenue At of 1954, created a tax exclusion for employer contributions to employees’ health insurance benefits.

Consequently, assuming one’s income tax rate is 30 percent, “if the employer gave you a dollar in income, and you went out to go buy health insurance with it, you’d only have 70 cents to buy the health insurance,” Wolfram says. “But if the employer bought the health insurance, then you’d get a full dollar of health insurance. So, naturally, that became the dominant way of buying health insurance.”

Having securely tied health insurance benefits to employment in the 1940s and especially 1950s, Congress responded to the nation’s growing expectation that the federal government help provide health insurance for people too old or unable to work, resulting in the creation of Medicare and Medicaid in the 1960s, Wolfram says.

Time and increasing dependence on state and federal governments fortified these expectations, culminating in Congress’s strictly partisan passage of ACA in 2009. Obamacare’s market interference, however, surpasses that of predecessor health insurance laws, hearkening back to Roosevelt’s and the War Labor Board’s mandates of the 1940s.

Long before Obamacare, health insurance was aimed at satisfying the demands not of employees but of their employers–the insurers’ true customer, thanks to unintended consequences of the Revenue Act of 1954. Obamacare piled onto this distortion of the market by mandating which health care services insurers must cover; that employers with at least 50 employees working at least 30 hours a week provide insurance benefits; and that most people buy health insurance or pay a tax penalty.

Trump and the Republican-controlled Congress have floated numerous proposals to reshape the country’s health insurance landscape using the federal tax code. As they continue brainstorming ways to manipulate the market through tax credits and deductions, or whether to manipulate the market at all, their guiding rule should be one of less taxation, regulation, and interference.

— Michael T. Hamilton ([email protected]) is a Heartland Institute research fellow and managing editor of Health Care News, author of the weekly Consumer Power Report, and host of the Health Care News Podcast.



Matt Mayer of Opportunity Ohio: I am a fervent believer in the power of competition to solve America’s toughest challenges. When states compete, they use innovation to make meaningful reforms, as they did when moving millions from welfare to work in the late 1990s and in improving educational outcomes in places like Florida.

Based on the responses of the nearly 11.5 million Americans who viewed Opportunity Ohio’s videos on competitive federalism this year, I know Main Street America also has faith that states can do great things when free to do so. Keep in mind, when Washington fails, it affects 320 million people; when a state fails, it affects only that state’s people. The competitive pressure from successful states forces the failed state to reform or risk losing citizens and businesses to better-run places.

For years, politicians have claimed to support competitive federalism, but too often put their hands out making states further dependent on Washington. Medicaid is a great example of this problem, as state budgets are increasingly comprised of federal funds and governors expanded Medicaid due to the lure of more federal money.

It looks like expanded Medicaid under Obamacare will be replaced by a program in which the states get block grants with fewer, but still, strings attached. That is better than the status quo, but far from what we should expect. After all, with Medicaid being funded entirely by deficit spending, a block grant program will still increase the national debt that our kids and grandkids will have to pay off. It also leaves states dependent on federal funds and constrained by federal laws, rules, regulations, and mandates.

Can’t we do better than that? Why not cut federal taxes by the amount spent on Medicaid and decentralize 100 percent of the program to the states? Each state then would be free to design and pay for a Medicaid program tailored to its population. …

SOURCE: Matt Mayer, The Columbus Dispatch


A contingent of state senators and other officials, led by Senate President Stanley Rosenberg, arrives in Minneapolis Thursday (forecast: partly cloudy with a high of 6 degrees) for two days of meetings with public officials, academic researchers, and health care executives. It’s part of a broader investigation of whether Massachusetts needs new legislation to curb rising medical spending.

Experts say Minnesota has been ahead of the curve in adopting payment models that are designed to reward quality of care over quantity of services provided, and addressing social issues, such as lack of housing, that contribute to poor health. And Minnesota is better than most states at controlling costs — an area where Massachusetts struggles.

“There are number of things Minnesota has been doing for a long time that may be of interest to Massachusetts,” said Douglas McCarthy, senior research director at the Commonwealth Fund, a New York foundation that studies health care.

McCarthy authored a report that ranked every state according to dozens of health care measures. Minnesota was the top state in the country for the past two years. Massachusetts ranked fourth last year, down from number two in 2014.

The biggest difference between the two states? Minnesota was eighth in the nation for avoiding wasteful spending and high costs. Massachusetts ranked a mediocre 31.

Commonwealth developed its rankings by studying health insurance costs and avoidable hospital visits and readmissions in each state, noting that “higher spending is not system-ically associated with better outcomes.” …

SOURCE: Priyanka Dayal McCluskey, The Boston Globe


Florida fell three notches to 36 among all 50 states in the annual “America’s Health Ranking” for 2016 released Thursday by the United Health Foundation, a nonprofit arm of insurer United Health Group.

For the fifth straight year, Hawaii was ranked the nation’s healthiest state. Massachusetts finished second followed by Connecticut, Minnesota and Vermont.

Mississippi was the unhealthiest state in 2016 followed by Louisiana, Arkansas, Alabama and Oklahoma. In the 27 years that the annual report on resident health status has been released, Mississippi has finished last or next to last 25 times. In 1998 and 1991, Mississippi ranked 48th.

The state rankings are based on 34 measures involving four health determinants: behaviors, community and environment, policy and clinical care. The scoring methodology was developed and reviewed by public health experts.

Florida’s ranking – down from 33 in 2015 – in part reflects its high rate of residents with no health insurance, 15 percent. Only two states – Texas and Alaska – had higher rates. Florida also struggles with a high child poverty rate of 24.4 percent. Only six states had higher rates. …

SOURCE: Tony Pugh, The Sacramento Bee


Mindful of the clock ticking down to a Trump presidency, the Obama administration issued a final rule on Wednesday to bar states from withholding federal family-planning funds from Planned Parenthood affiliates and other health clinics that provide abortions. The measure takes effect two days before the Jan. 20 inauguration of Donald J. Trump.

The rule was proposed three months ago, when many Democrats assumed the next president would be Hillary Clinton; she presumably would have promoted the rule’s completion if it were still pending. It requires that state and local governments distribute federal funds for services related to contraception, sexually transmitted infections, fertility, pregnancy care, and breast and cervical cancer screening to qualified health providers, regardless of whether they also perform abortions.

Mr. Trump has sent mixed messages on Planned Parenthood’s work, supporting its health-related services other than abortion. Yet with backing from Republican leaders in Congress, he has indicated he will undo many Obama administration rules and regulations, especially last-minute additions. In this case, however, unraveling the new rule would first require a time-consuming process, according to the Department of Health and Human Services.

The department began the rule-making effort in September after more than a dozen Republican-dominated states moved in recent years to “defund” Planned Parenthood by blocking clinics from receiving public money. Those funds included so-called Title X money — named for the federal family-planning program — as well as Medicaid reimbursements for treating low-income patients. …

SOURCE: Jackie Calmes, The New York Times