A pivotal moment in the health care debate came when the president went before Congress and said this: "Millions of our citizens do not now have a full measure of opportunity to achieve and enjoy good health. Millions do not now have protection or security against the economic effects of sickness. The time has arrived for action to help them attain that opportunity and that protection."
The time was November 19, 1945, and the president was Harry S. Truman. He was unveiling a health care reform proposal that included, as its controversial centerpiece, a national health insurance plan to be run by the federal government. The idea was that people could choose to get their health insurance from the government instead of through a private insurer. The plan was an early version of what would be known, in the political parlance of 2009, as a "public option."
The health care contretemps currently playing out in the halls of Congress is the latest episode in a lengthy political conflict that stretches back even decades before Truman's unsuccessful proposal. It's a conflict over contrasting visions of the structure of the health care sector of the U.S. economy, generally pitting proponents of a sharply expanded government role against opponents who seek more market-oriented approaches to providing health care.
The stakes involved are vast, with far-reaching implications for the financial well-being of investors as well as the physical well-being of patients. Health care stocks have demonstrated acute sensitivity to the prospects of sweeping restructurings of the sector by government. This was the case both in the early 1990s, during the clash over the Clinton administration proposal spearheaded by then-First Lady Hillary Clinton, and in the recent legislative maneuvering over what has come to be known as Obamacare.
Moreover, health care currently accounts for some 15 percent of gross domestic product, and the strength or weakness of such a sizable slice of the economy will affect the overall investment outlook. In particular, health care has demonstrated a profound capacity to affect government finances, increasingly so since the advent of Medicare in the 1960s. Thus, the prospective effects of current reform efforts on government spending, and on taxes and deficits, will be a major shaper of the investment climate.
The history of health care politics can be sobering. It suggests, for one thing, that government health care programs can cost a great deal of money, possibly much more than their proponents indicated or realized when the programs were proposed. History also shows that the health care sector, traditionally touted as largely recession-proof in that people will continue to purchase its products even in a downturn, can be quite volatile, especially when political debates are afoot that could transform the sector.
Another sobering feature of health care debates over the decades is that they fall into predictable grooves, with reformers often seizing on the same basic idea -- a government-run health insurance program -- rather than contemplating a broader array of reform possibilities. Meanwhile, opponents often have focused on the downsides of such a government-heavy approach rather than emphasizing alternative reforms to address problems in existing health care arrangements.
In recent years, a number of market-oriented reform proposals have taken shape, such as lowering regulatory hurdles that prevent consumers from buying health insurance across state lines, and revamping tax incentives to facilitate direct purchasing by individuals rather than through employers. However, such proposals have remained relatively marginal to the health care debate, which instead has focused on finding a large-scale, centralized solution to the problem Truman identified, of millions of people not having "protection or security against the economic effects of sickness."
The Early Decades
Health care reform's first stirrings as an American political issue came in the 1912 presidential campaign. Theodore Roosevelt, in his losing campaign as nominee of the Progressive or "Bull Moose" Party, called for compulsory health insurance for industrial workers. European nations had been adopting similar mandatory plans, a trend initiated by German Chancellor Otto von Bismarck in 1883.
But the issue gained little traction in the United States. The association with Germany, for one thing, was a negative after World War I broke out; Prudential Insurance executive Frederick Hoffman called health insurance mandates a "German plot." Labor leader Samuel Gompers was suspicious as well, preferring that workers get their coverage through union contracts rather than from any government requirement.
The conservative Republican presidents of the 1920s showed little desire to expand government's role in health care. Meanwhile, American doctors were starting to worry that European-style health systems meant less income and less freedom for physicians. The American Medical Association, which had shown some amenability to government mandates during the Progressive Era, now emerged as a leading opponent.
In the Depression-struck 1930s, the New Dealers took new interest in restructuring the health care sector, and reform ideas increasingly moved beyond mandates and into the realm of publicly funded health insurance and services. But "socialized medicine" was gaining currency as a term that could rally opponents, and Franklin D. Roosevelt's administration left any major health care push out of its Social Security legislation so as to avoid a fight that could damage the nascent program.
In 1939, Senator Robert Wagner of New York introduced national health insurance legislation, and during World War II that approach became the subject of an annual congressional push co-sponsored by Sen. James Murray of Montana and Rep. John Dingell Sr. of Michigan. FDR may have intended to press for such legislation in his fourth term, but his death in April 1945 left health care as an issue for his successor.
Truman's health care proposals, launched seven months later, drew heavily on ideas developed during the Roosevelt years, and came to Congress as a Social Security expansion bill co-sponsored by Wagner, Murray and Dingell. Organized labor, unlike in the Gompers days, was now firmly on the side of national health insurance, but had lost much public support after a series of unpopular strikes.
When Republicans gained a majority of both houses of Congress in the 1946 elections, Truman's health care reforms stalled. Soon, the president was lambasting the "do-nothing" Republican Congress for not passing national health insurance. Truman won the 1948 election, and Democrats regained majorities in Congress. However, it turned out that conservative southern Democrats were unenthused about Truman's health care agenda, and the whole issue went to the back burner, where it stayed for a decade and a half.
Medicare and Beyond
The difficulties of getting national health insurance enacted inspired its proponents to try a more incremental approach. By the early 1960s, their focus was on establishing a government program to provide health insurance to the elderly. John F. Kennedy favored such a program, but made little headway. Lyndon B. Johnson's 1964 landslide, with large Democratic majorities in Congress, opened the way for Medicare's passage.
The AMA sought to limit government health insurance to cover just the elderly poor, but such opposition did not fit the era's liberal mood. Wilbur Mills, a southern Democrat who had opposed Medicare, changed his mind and masterminded its passage, along with the Medicaid program to provide health care to the non-elderly poor.
With these programs in place, health care costs grew rapidly as a percentage of the federal budget, reaching 11 percent by 1973. Meanwhile, millions of people still had no health insurance, and their medical costs began to spiral, along with general inflation, in the 1970s. The push for national health insurance now resumed, with competing proposals from, among others, President Richard Nixon and Sen. Edward Kennedy.
However, as inflation worsened over the 1970s, it edged out national health insurance as a pressing concern, especially since stepped-up government health care spending could exacerbate inflation. The prospect of such a program then receded further as Ronald Reagan's 1980 election marked a conservative turn in American politics.
Health care reform returned to the center stage of American politics in the early 1990s. Bill Clinton emphasized health care reform in his 1992 campaign, and as president he appointed Hillary Clinton to chair a task force devising a reform plan. The proposal, unveiled in September 1993, sought to provide universal coverage through government mandates and regulation. Insurers would engage in tightly managed competition, and their customers would be organized into business and consumer groups known as "health-purchasing alliances." Every American would get a "health security card."
The proposal generated intense opposition from industry groups and Republicans, with much emphasis on its regulatory burdens. The Health Insurance Association of America ran widely publicized ads depicting a middle-class couple agonizing over the prospective system. (The AMA also criticized the proposal but was less prominent than in earlier debates.) Meanwhile, Democrats fragmented, with many preferring a single-payer government plan instead of the Clinton emphasis on managed competition.
After much legislative maneuvering, health care reform was shelved in the summer of 1994 without coming to a vote. The failure weakened the president politically and helped pave the way for Republican wins in that November's elections. The fortunes of the Clinton proposal were tracked in a strikingly inverse way by health care stocks. Health insurance and pharmaceutical stocks plummeted in 1993 while the reform effort was launched, and such equities recovered briskly in 1994 as the initiative sputtered out.
However, Clinton had succeeded, as Truman had before him, in raising the profile of health care as a political issue. In 1997, the Clinton administration and a Republican Congress passed the Children's Health Insurance Program, an expansion of Medicaid. In 2003, the George W. Bush administration and a still-Republican Congress added a prescription-drug benefit to Medicare. Barack Obama's 2008 election victory, along with sizable Democratic majorities in Congress, opened the way for a new prescription to treat health care's ills with the century-old remedy of expanding government's role.
Troubling Drug Effects
Efforts to cap drug prices are a recurrent feature of health care reform efforts. They also can have major negative effects on the stock prices of pharmaceutical companies.
In a 2001 paper in the Journal of Law and Economics, economists Sara Ellison of MIT and Wallace Mullin, now at George Washington University, found that a portfolio of 18 large drug stocks underperformed the market by 38 percent during a 1992-1993 period in which information about candidate and then president Bill Clinton's health care proposal was gradually revealed.
The key stock declines, they found, came as it became evident that constraining drug costs through price controls was a central element of the Clinton approach.
University of Connecticut finance professors Joseph Golec, Shantaram Hegde and John Vernon documented similar poor returns in a broader sample of drug and biotech stocks during the Clinton health care debate. Moreover, they found that stocks of research-intensive companies were particularly hard hit, and that R&D spending declined on expectations that breakthrough drugs would become less profitable.
Kenneth Silber is the senior editor of Research. His work on science, economics and history has appeared in a variety of publications, including The Wall Street Journal. He appears regularly on the Gabe Wisdom Show, broadcast via Talk Radio. To hear or download his recent broadcasts, go to www.researchmag.com/Pages/Research-Magazine-Podcasts.aspx