Unions and Health Care Reform

I started working on this weeks ago, but kept running out of steam.  But in light of the seeming agreement reached last night between the Administration and organized labor, I wanted to describe a little bit of what is at issue here and why unions have been so concerned about the so-called "Cadillac Tax."

I have spent a good deal of the last twenty-five years working on employee benefits issues for unions.  In fact, traditional labor law, labor-management relations, and litigation probably constitute only about a third of my daily time these days, with the lion's share of my work advising union pension and medical plans.  I don't think most people, including even well informed commenters like Ezra and Matt, really know much about this part of the employee benefits universe, so it might be worth putting on my pedagogical hat for a minute and explain a bit what the concerns might be in at least a portion of the union universe.  [Update:  One of the joys of working in my universe is that I get to see libertarian know nothings like Megan McArdle and Tyler Cowen-- people who couldn't pour piss out of a boot if the instructions were written on the heel -- weigh in as if they have the slightest idea about the subject matter that they are discussing -- Cowen's Galt-like commenters are even more priceless in their ignorance.]

In industries like construction, printing, trucking, and mining, it is very common for employees to move from employer to employer depending on where work is at a given time.  This is especially true in the building trades, which is where the bulk of my experience has been.  In these industries, the union is the most central institution in many of the members' working lives -- they are often dispatched through a hiring hall to union employers when they meed man power.  When the demand for employees falls off for a given employer, it lays the workers off, and they then return to the union and sign an out of work list and get referred out again.  (Some people do have stable careers with relatively few contractors, but that is probably the exception.)

As a result of this, pension and medical plans in the building trades were generally originated by unions -- however, by law, they must be set up as trust funds separate and apart from the union as a legally entity and they must -- as part of the Taft-Hartley Act's goal of emasculating unions -- be governed by a board of trustees in which management has equal representation.  (Robert Taft was alarmed by the clout that John L. Lewis and the United Mineworkers were amassing through their groundbreaking [mining pun] pension and medical plans, their ownership of a bank, and their general intrusion into the capitalist landscape.) 

These trust funds are financed by a negotiated hourly contribution that comes out of the overall wage package for employees.  Virtually all of these plans are "self-funded" meaning that there is no insurer involved -- medical claims are paid directly out of the corpus of the trust funds.  Plans often contract with providers like the Blue Cross/Blue Shield entities to rent their provider networks (at substantial fees) in order to benefit from the discounts available through those networks, but there is no "insurance" aspect to the arrangements -- gains and losses are borne directly by the trust funds.  As a result, benefits levels need to be calibrated to the contribution level and financial health of a given trust fund. 

The unionized construction sector is also one of the few places where employees have actual input into their medical coverage.  First, union members elect their leaders.  Union "bosses," unlike every other boss in America are selected by their members through secret ballot voting conducted at least every three years for local unions and at least every five years by parent unions. (Union members also have a "bill of rights" under federal law, including a right to free speech, and have access to detailed financial reporting filed annually by every union with the federal government.)  Most benefit fund trustees from the union side of the table serve either by virtue of their office or are elected directly by the membership served by the trust fund, making these funds among the few medical plans where constituents can literally throw the bums out if they are dissatisfied.  Second, the members have a great deal to say about the level of benefits that they will receive versus the amount that they pay for these benefits.  The contributions necessary to sustain the medical funds come directly from the collectively bargained wage package.  In most unions, the membership has the right to ratify any collective bargaining agreements, meaning that they will have the opportunity to accept or reject wage increases (or decreases sad to say), including adding additional contributions to their medical fund.  (In recent years, a significant percentage of most wage increases have been put into the health and welfare funds, at the expense of in-pocket wages.  This development obviously reflects the daunting inflation level for medical services, as well as the commitment of union members to maintain good coverage.)  

Both unions and their trust funds are subject to intense regulation.  Each files annual reports with the federal government setting forth their income, expenses, and salaries and fees paid to employees or service providers.  There is a level of transparency to the membership that is completely unavailable to the average non-union employee.

The hourly contribution rate for these "Taft-Hartley welfare funds" as the medical plans are generally known in the industry is designed not only to pay for the true cost of benefits, but typically to provide subsidized coverage to retirees and to unemployed or underemployed members.  Construction workers are often unable to work until they are 65 -- it is work that is simply too physically demanding.  As a result, there is often a gap of several years between retirement and Medicare eligibility.  This group of members -- generally ranging in age from 55 to 65 -- are the most expensive demographic to which to provide health coverage.  As a result, almost every Taft-Hartley plan subsidizes the continued medical coverage for retirees, especially non-Medicare eligible retirees.  When I first started in this business, most of the funds actually gave free coverage to retirees or provided it at a token cost.  Over time this has become impossible, although it is still normal to see retirees having anywhere from 50 to 80% of their medical costs subsidized.

That means that there is inter-generational solidarity built into the hourly contribution rate.  As a younger, active electrician or plumber or iron worker, I am agreeing to pay part of my hourly wage to cover the costs of my union brethren who have come before me.  Implicit in this is the social contract that those who come behind me will do the same for me. I am also pledging some of my hourly wage to help other members in times of low employment -- it is common for these funds to allow unemployed members or members who are working few hours, to continue receiving coverage at subsidized rates for periods of time that can extend for as long as a couple of years.  Again, this is all premised on the old-fashioned notion of mutual obligation -- that what I do for my fellow members, they too will do for me.

Because of this ethic of mutual obligation and a sense that the medical and pension funds are the living embodiment of that ethic in action, it is common for a union membership to do what is necessary to keep the funds healthy, even if it means foregoing raises or actually cutting wages.  As a result, the notion that this could ultimately result in their benefit contributions being taxed is anathema to both union leadership and membership.  (I can't tell you how many messages I've been getting about the impact of the Cadillac Tax, even with groups who are not terribly close to the $23,000 per year triggering point.)  

The bottom line is that this battle is being fought because it strikes at the heart of what many see as the fundamental bedrock of their employment culture.  I am happy that the matter seems on the threshold of resolution, because I continue to think that passing this bill, however flawed, is incredibly crucial.  But I did want to acknowledge that the fear of the Cadillac Tax comes from a highly legitimate, indeed a highly moral place, in my mind, and is not a product of greed or obduracy.

Comments

[litbrit]

Excellent post, Sir C, absolutely excellent. Thank you. I hope the young whippersnappundits (who shall remain unnamed!) will read this and incorporate its wisdom and ethos into their oftentimes a-bit-too-cheerleaderish stance i.e. Let's do whatever it takes to get the bill passed.

Here, hammer really meets nail-head with a *BAM*:

fear of the Cadillac Tax comes from a highly legitimate, indeed a highly moral place, in my mind, and is not a product of greed or obduracy

[low-tech cyclist]

That is one great post, Sir Charles. Thanks for fighting my ignorance on this subject - and I'm sure I'm hardly the only one.

Construction workers are often unable to work until they are 65 -- it is work that is simply too physically demanding.

If only we could require Robert J. Samuelson to work construction for one year for each time he suggests raising the Social Security or Medicare eligibility age. And kudos to the construction unions for actually doing something about it. Taxing this sort of plan would obviously make it harder for the unions to keep providing the same benefits.

I'd say that this sort of plan warrants exclusion from the 'cadillac tax' because even though it fits the broad definition of insurance, it's not insurance as we know it: nobody's buying a policy from an insurance company. It's more an institutionalized agreement among a group of people to help each other out in certain ways. It's not really part of the insurance marketplace in any meaningful way.

[litbrit]

it's not insurance as we know it: nobody's buying a policy from an insurance company. It's more an institutionalized agreement among a group of people to help each other out in certain ways. It's not really part of the insurance marketplace in any meaningful way.

Exactly, ltc! It really is more of an in-house contract among members to share the risk and cost of getting injured or falling ill than a "benefit" in the classic sense of benefit-as-perk, i.e. a guaranteed Christmas bonus or some other perk with which an employer remunerates a worker in exchange for his labor.

[big bad wolf]

nice hat, SC

[kathy a.]

this is a really good post. i really, really like the intergenerational, mutual obligations, good times and bad ethic of the community. that is exactly why i think universal health care is an objective toward which we need to keep moving. we will all get old if we are lucky; many of us will be unable to work at one time or another before we get there; each of us is at risk for something bad or even catastrophic happening along the way.

the "pull your own weight, pay your own way, you deadbeat" strand of libertarianism is just about as offensive to me as racial and gender discrimination. the independently wealthy can usually survive storms of bad luck without relying on the generosity of others, but [a] that doesn't mean they are better or more valuable human beings, and [b] the very rich get that way thanks to aggregating profit from the labor of others.

[Steve Balboni]

Son of a building trades union member here, Sheet Metal Workers.

Thanks always SC

[ikl]

Great post. I learned a lot.

[Sir Charles]

Thank you -- very kind of you all.

I am going to do something on the pension side of the equation one of these days.

I actually think that the model I describe is one that classical conservatives should adore. It is entirely private-sectored based, it requires a high level of labor-management cooperation, employees are acutely aware of what their health care costs and what benefit improvements are likely to take away from their wages, and the contribution rate/benefit level can be calibrated to suit the market in which the union and contractors operate.

[TOP]

Thank you for this informative post.

Also, what Kathy A said.

[Labor Law Sacramento]

Is this new reform going to work? This tax will cut the income of so many employees and employers also. I am sure it will cause problems to people around.

[Prup (aka Jim Benton)]

Wow: I actually clicked through on the post above, the one signed "Labor Law Sacramento." I found it was posted by a law firm -- not an indiviudual in the firm, this is actually spam by the compsny -- called Palmer Kazanian Wohl Hodson, located in Northern California which boasts of specializing in representing 'unionized companies' in labor law, providing employers 'legal guidance in every aspect of the employment relationship' and aggressive litigation where needed.

I am not sure which intrigues -- and horrifies -- me more, the concept of 'legal spam' or the position taken, or the level of writing in the note. Do any of our lawyers know anything about 'PKWH'?

[low-tech cyclist]

Prup - there are, unfortunately, an ample supply of law firms that advise companies on how to keep their workers from unionizing, and make it as difficult as possible for workers to enjoy any benefits from a union once one is in place.

How these alleged human beings manage to live with themselves is an open question.

Sir Charles - you're right, the model you describe is one that classical conservatives should adore. Except that such conservatives are implacably opposed to the very existence of unions.