Industrial Sickness Funds

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Industrial Sickness Funds

Posted Fri, 2010-02-05 12:25 by backend

John E. Murray, University of Toledo

Overview and Definition

Industrial sickness funds provided an early form of health insurance. They were financial institutions that extended cash payments and in some cases medical benefits to members who became unable to work due to sickness or injury. The term industrial sickness funds is a later construct which describes funds organized by companies, which were also known as establishment funds, and by labor unions. These funds were widespread geographically in the United States; the 1890 Census of Insurance found 1,259 nationwide, with concentrations in the Northeast, Midwest, California, Texas, and Louisiana (U.S. Department of the Interior, 1895). By the turn of the twentieth century, some industrial sickness funds had accumulated considerable experience at managing sickness benefits. A few predated the Civil War. When the U. S. Commissioner of Labor surveyed a sample of sickness funds in 1908, it found 867 non-fraternal funds nationwide that provided temporary disability benefits (U.S. Commissioner of Labor, 1909). By the time of World War I, these funds, together with similar funds sponsored by fraternal societies, covered 30 to 40 percent of non-agricultural wage workers in the more industrialized states, or by extension, eight to nine million nationwide (Murray 2007a). Sickness funds were numerous, widespread, and in general carefully operated.

Industrial sickness funds were among the earliest providers of any type of health or medical benefits in the United States. In fact, their earliest product was called “workingman’s insurance” or “sickness insurance,” terms that described their clientele and purpose accurately. In the late Progressive Era, reformers promoted government insurance programs that would supplant the sickness funds. To sound more British, they used the term “health insurance,” and that is the phrase we still use for this kind of insurance contract (Numbers 1978). In the history of health insurance, the funds were contemporary with benefit operations of fraternal societies (see fraternal sickness insurance) and led into the period of group health insurance (see health insurance, U. S.). They should be distinguished from the sickness benefits provided by some industrial insurance policies, which required weekly premium payments and paid a cash benefit upon death, which was intended to cover burial expenses.

Many written histories of health insurance have missed the important role industrial sickness funds played in both relief of worker suffering and in the political process. Recent historians have tended to criticize, patronize, or ignore sickness funds. Lubove (1986) complained that they stood in the way of government insurance for all workers. Klein (2003) claimed that they were inefficient, without making explicit her standard for that judgment. Quadagno (2005) simply asserted that no one had thought of health insurance before the 1920s. Contemporary commentators such as I. M. Rubinow and Irving Fisher criticized workers who preferred “hopelessly inadequate” sickness fund insurance over government insurance as "infantile" (Derickson 2005). But these criticisms stemmed more from their authors’ ideological preconceptions than from close study of these institutions.

Rise and Operations of Industrial Sickness Funds

The period of their greatest extent and importance was from the 1880s to around 1940. The many state labor bureau surveys of individual workers, since digitized by the University of California’s Historical Labor Statistics Project and available for download at EH.net, often asked questions such as “do you belong to a benefit society,” meaning a fraternal sickness benefit fund or an industrial sickness fund. Of the surveys from the early 1890s that included this question, around a quarter of respondents indicated that they belonged to such societies. Later, closer to 1920, several states examined the extent of sickness insurance coverage in response to movements to create governmental health insurance for workers (Table 1). These later studies indicated that in the Northeast, Midwest, and California, between thirty and forty percent of non-agricultural workers were covered. Thus, remarkably, these societies had actually increased their market share over a three decade period in which the labor force itself grew from 13 to 30 million workers (Murray 2007a). Industrial sickness funds were dynamic institutions, capable of dealing with an ever expanding labor market

Table 1: Sources of Insurance in Three States (thousands of workers)
Source/state	Illinois	Ohio	California
Fraternal society	250	200	291
Establishment fund	116	130	50
Union fund	140	85	38
Other sick fund	12	N/a	35
Commercial insurance	140	85	2 (?)
Total	660	500	416
Eligible labor force	1,850	1,500	995
Share insured	36%	33%	42%
Sources: Illinois (1919), Ohio, (1919), California (1917), Lee et al. (1957).

Industrial sickness funds operated in a relatively simple fashion, but one that enabled them to mitigate the usual information problems that emerge in insurance markets. The process of joining a fund and making a claim typically worked as follows. A newly hired worker in a plant with such a fund explicitly applied to join, often after a probationary period during which fund managers could observe his baseline health and work habits. After admission to the fund, he paid an entrance fee followed by weekly dues. Since the average industrial worker in the 1910s earned about ten dollars a week, the entrance fee of one dollar was a half-day’s pay and the dues of ten cents made the cost to the worker around one percent of his pay packet.

A member who was unable to work contacted his fund, which then sent either a committee of fellow fund members, a physician, or both to check on the member-now-claimant. If they found him as sick as he had said he was, and in their judgment he was unable to work, after a one week waiting period he received around half his weekly pay. The waiting period was intended to let transient, less serious illnesses resolve so that the fund could support members with longer-term medical problems. To continue receiving the sick pay the claimant needed to allow periodic examinations by a physician or visiting committee. In rough terms, the average worker missed two percent of a work year, or about a week every year, a rate that varied by age and industry. The quarter of all workers who missed any work lost on average one month’s pay; thus a typical incapacitated worker received three and a half weeks of benefit per year. Comparing the cost of dues and expected value of benefits shows that the sickness funds were close to an actuarially fair bet: $5.00 in annual dues compared to (0.25 chance of falling ill) x (3.5 weeks of benefits) x ($5.00 weekly benefit), or about four and a half dollars in expected benefits. Thus, sickness funds appear to have been a reasonably fair deal for workers.

Establishment funds did not invent sickness benefits by any means. Rather, they systematized previous arrangements for supporting sick workers or the survivors of deceased workers. The old way was to pass the hat, which was characterized by random assessments and arbitrary financial awards. Workers and employers both observed that contributors and beneficiaries alike detested passing the hat. Fellow workers complained about the surprise nature of the hat’s appearance, and beneficiaries faced humiliation upon grief when the hat contained less money than had been collected for a more popular co-worker. Eventually rules replaced discretion, and benefits were paid according to a published schedule, either as a flat rate per diem or as a percentage of wages. The 1890 Census of Insurance reported that only a few funds extended benefits “at the discretion of the society,” and by the time of the 1908 Commissioner of Labor survey the practice had disappeared (Murray 2007).

Labor union funds began in the early nineteenth century. In the earliest union funds, members of craft unions pledged to complete jobs that ill brothers had contracted to perform but could not finish due to illness. Eventually cash benefit payments replaced the in-kind promises of labor, accompanied by cash premium payments into the union’s kitty. While criticized by many observers as unstable, labor union funds actually operated in transparent fashion. Even funds that offered unemployment benefits survived the depression of the mid-1890s by reducing benefit payments and enacting other conservative measures. Another criticism was that their benefits were too small in amount and too brief in duration, but according to the 1908 Commissioner of Labor survey, labor union funds and establishment funds offered similar levels of benefits. The cost-benefit ratio did favor establishment funds, but establishment fund membership ended with employment at a particular company, while union funds offered the substantial attraction of benefits that were portable from job to job.

The cash payment to sick workers created an incentive to take sick leave that workers without sickness insurance did not face; this is the moral hazard of sick pay. Further, workers who believed that they were more likely to make a sick claim would have a stronger incentive to join a sickness fund than a worker in relatively good health; this is called adverse selection. Early twentieth century commentators on government sickness insurance disagreed on the extent and even the existence of moral hazard and adverse selection in sickness insurance. Later statistical studies found evidence for both in establishment funds. However, the funds themselves had understood the potential financial damage each could wreak and strategized to mitigate such losses. The magnitude of the sick pay moral hazard was small, and affected primarily the tendency of the worker to make a claim in the first place. Many sickness funds limited their liability here by paying for the physician who examined the claimant and thus was responsible for approving extended sickness payments. Physicians appear to have paid attention to the wishes of those who paid them. Among claimants in funds that paid the examining physician directly, the average duration of their illness ended significantly earlier. By the same token, physicians who were paid by the worker tended to approve longer absences for that worker—a sign that physicians too responded to incentives.

Testing for adverse selection depends on whether membership in a company’s fund was the worker’s choice (that is, it was voluntary) or the company’s choice (that is, it was compulsory). In fact among establishment funds in which membership was voluntary, claim rates per member were significantly higher than in mandatory membership funds. This indicates that voluntary funds were especially attractive to sicker workers, which is the essence of adverse selection. To reduce the risks of adverse selection, funds imposed age limits to keep out older applicants, physical examinations to discourage the obviously ill, probationary periods to reveal chronic illness, and pre-existing condition clauses to avoid paying for such conditions (Murray 2007a). Sickness funds thus cleverly managed information problems typical of insurance markets.

Industrial Sickness Funds and Progressive Era Politics

Industrial sickness funds were the linchpin of efforts to promote and to oppose the Progressive campaign for state-level mandatory government sickness insurance. One consistent claim made by government insurance supporters was that workers could neither afford to pay for sickness insurance nor to save in advance of financially damaging health problems. The leading advocacy organization, the American Association for Labor Legislation (AALL), reported in its magazine that “Savings of Wage-Earners Are Insufficient to Meet this Loss,” meaning lost income during sickness (American Association for Labor Legislation 1916a). However, worker surveys of savings, income, and insurance holdings revealed that workers rationally strategized according to their varying needs and abilities across the life-cycle. Young workers saved little and were less likely to belong to industrial sickness funds—but were less likely to miss work due to illness as well. Middle aged workers, married with families to support, were relatively more likely to belong to a sickness fund. Older workers pursued a different strategy, saving more and relying on sickness funds less; among other factors, they wanted greater liquidity in their financial assets (Murray 2007a). Worker strategies reflected varying needs at varying stages of life, some (but not all) of which could be adequately addressed by membership in sickness funds.

Despite claims to the contrary by some historians, there was little popular support for government sickness insurance in early twentieth century America. Lobbying by the AALL led twelve states to charge investigatory commissions with determining the need for and feasibility of government sickness insurance (Moss 1996). The AALL offered a basic bill that could be adjusted to meet a state’s particular needs (American Association for Labor Legislation 1916b). Typically the Association prodded states to adopt a version of German insurance, which would keep the many small industrial sickness funds while forcing new members into some and creating new funds for other workers. However, these bills met consistent defeat in statehouses, earning only a fleeting victory in the New York Senate in 1919, which was followed by the bill’s death in an Assembly committee (Hoffman 2001). In the previous year a California referendum on a constitutional amendment that would allow the government to provide sickness insurance lost by nearly three to one (Costa 1996).

After the Progressive campaign exhausted itself, industrial sickness funds continued to grow through the 1920s, but the Great Depression exposed deep flaws in their structure. Many labor union funds, without a sponsoring firm to act as lender of last resort, dissolved. Establishment funds failed at a surprisingly low rate, but their survival was made possible by the tendency of firms to fire less healthy workers. Federal surveys in Minnesota found that ill-health led to earlier job loss in the Depression, and comparisons of self reported health in later surveys indicated that the unemployed were in fact in poorer health than the employed, and the disparity grew as the Depression deepened. Thus, industrial sickness funds paradoxically enjoyed falling claim rates (and thus reduced expenses) as the economy deteriorated (Murray 2007).

Decline and Rebirth of Sickness Funds

At the same time, commercial insurers had been engaging in ever more productive research into the actuarial science of group health insurance. Eventually the insurers cut premium rates while offering benefits comparable to those available through sickness funds. As a result, the commercial insurers and Blue CrossBlue Shield came to dominate the market for health benefits. A federal survey that covered the early 1930s found more firms with group health than with mutual benefit societies but the benefit societies still insured more than twice as many workers (Sayers, et al 1937). By the later 1930s that gap in the number of firms had widened in favor of group health (Figure 1), and the number of workers insured was about equal. After the mid-1940s, industrial sickness funds were no longer a significant player in markets for health insurance (Murray 2007a).

Figure 1: Health Benefit Provision and Source

Source: Dobbin (1992) citing National Industrial Conference Board surveys.

More recently, a type of industrial sickness fund has begun to stage a comeback. Voluntary employee beneficiary associations (VEBAs) fall under a 1928 federal law that was created to govern industrial sickness funds. VEBAs are trusts set up to pay employee benefits without earning profits for the company. In late 2007, the Big Three automakers each contracted with the United Auto Workers (UAW) to operate a VEBA that would provide health insurance for UAW members. If the automakers and their workers succeed in establishing VEBAs that stand the test of time, they will have resurrected a once-successful financial institution previously thought relegated to the pre-World War II economy (Murray 2007b).

References

American Association for Labor Legislation. “Brief for Health Insurance.” American Labor Legislation Review 6 (1916a): 155–236.

American Association for Labor Legislation. “Tentative Draft of an Act.” American Labor Legislation Review 6 (1916b): 239–68.

California Social Insurance Commission. Report of the Social Insurance Commission of the State of California, January 25, 1917. Sacramento: California State Printing Office, 1917.

Costa, Dora L. “Demand for Private and State Provided Health Insurance in the 1910s: Evidence from California.” Photocopy, MIT, 1996.

Derickson, Alan. Health Security for All: Dreams of Universal Health Care in America. Baltimore: Johns Hopkins University Press, 2005.

Dobbin, Frank. “The Origins of Private Social Insurance: Public Policy and Fringe Benefits in America, 1920-1950,” American Journal of Sociology 97 (1992): 1416-50.

Hoffman, Beatrix. The Wages of Sickness: The Politics of Health Insurance in Progressive America. Chapel Hill: University of North Carolina Press, 2001.

Klein, Jennifer. For All These Rights: Business, Labor, and the Shaping of America’s Public-Private Welfare State. Princeton: Princeton University Press, 2003.

Lee, Everett S., Ann Ratner Miller, Carol P. Brainerd, and Richard A. Easterlin, under the direction of Simon Kuznets and Dorothy Swaine Thomas. Population Redistribution and Economic Growth, 1870-1950: Volume I, Methodological Considerations and Reference Tables. Philadelphia: Memoirs of the American Philosophical Society 45, 1957.

Lubove, Roy. The Struggle for Social Security, 1900-1930. Second edition. Pittsburgh: University of Pittsburgh Press, 1986.

Moss, David. Socializing Security: Progressive-Era Economists and the Origins of American Social Policy. Cambridge: Harvard University Press, 1996.

Murray, John E. Origins of American Health Insurance: A History of Industrial Sickness Funds. New Haven: Yale University Press, 2007a.

Murray, John E. “UAW Members Must Treat Health Care Money as Their Own,” Detroit Free Press, 21 November 2007b.

Ohio Health and Old Age Insurance Commission. Health, Health Insurance, Old Age Pensions: Report, Recommendations, Dissenting Opinions. Columbus: Heer, 1919.

Quadagno, Jill. One Nation, Uninsured: Why the U. S. Has No National Health Insurance. New York: Oxford University Press, 2005.

Sayers, R. R., Gertrud Kroeger, and W. M. Gafafer. “General Aspects and Functions of the Sick Benefit Organization.” Public Health Reports 52 (November 5, 1937): 1563–80.

State of Illinois. Report of the Health Insurance Commission of the State of Illinois, May 1, 1919. Springfield: State of Illinois, 1919.

U.S. Department of the Interior. Report on Insurance Business in the United States at the Eleventh Census: 1890; pt. 2, “Life Insurance.” Washington, DC: GPO, 1895.

U.S. Commissioner of Labor. Twenty-third Annual Report of the Commissioner of Labor, 1908: Workmen’s Insurance and Benefit Funds in the United States. Washington, DC: GPO, 1909.

Citation: Murray, John. "Industrial Sickness Funds, US". EH.Net Encyclopedia, edited by Robert Whaples. June 5, 2008. URL http://eh.net/encyclopedia/article/murray.industrial.sickness

Book Title:	Origins of American Health Insurance: A History of Industrial Sickness Funds
	Author:		John Murray
	Published:		New Haven, Conn.: Yale University Press, 2007
	Price:		$40.00 (Hardcover)
	Pages:		Pp. xiv, 313
	Reviewer:		Werner Troesken
	Affiliation:		University of Pittsburgh
	This book review appeared in the Fall 2009 issue of The Independent Review

In Origins of American Health Insurance, John Murray tackles a big question: Why doesn’t the United States have universal, government-provided health insurance? Murray approaches this question historically and focuses on a critical period in the American past, the Progressive Era (1900–1914). During this period, the United States probably came as close as it has ever come to creating a state-sponsored health insurance program. For most historians and students of the U.S. welfare state, the question of why the United States does not have universal, state-provided health insurance reduces to, Why were Progressive Era reformers unable to secure passage of such a program?

The standard answer to this question is that a combination of special-interest groups that included labor unions, big business, organized medicine, and the insurance industry defeated proposals for government insurance. Because this unholy alliance stood to lose from government-provided health insurance, its members organized to defeat and suppress the will of the electorate. In this standard story, the typical voter wanted some sort of government insurance because the existing modes of providing for workers in times of illness consisted of a patchwork of disorganized, underfunded, and largely ineffective industry- and union-backed sickness funds.

As Murray points out, though, the traditional story line has a number of problems, not the least of which is the fact that whenever government-provided insurance programs were put on referendum ballots, they were resoundingly defeated. Murray’s primary area of focus, however, is not politics but economics. In particular, he analyzes the efficiency and effectiveness of privately provided sickness funds. For the people enrolled in them, sickness funds gave financial support to the afflicted worker and the worker’s family. Although Murray is not the first scholar to consider the efficacy of these funds, he is among the first to consider them using the tools of modern economics, which leads him to radically different conclusions. His careful econometric and statistical analyses show that privately provided sickness funds worked reasonably well and protected a broad swath of the industrial labor force.

One of the book’s most admirable and compelling aspects is the respectful way Murray treats those with whom he disagrees. In this way, Origins of American Health Insurance is a model of balance and thoroughness. Unlike much of the literature on the Progressive Era and universal health care, Murray’s book actually takes seriously the ideas and arguments of all participants, whether they comport with his ideological priors or not. If you want a balanced treatment of Progressive Era politics, this book is a great place to start. Murray also writes very well, weaving historical narrative, econometric analysis, and economic theory together into a coherent argument. I was particularly impressed with the way he uses labor mobility to explain the concept of tax incidence and then builds on this explanation to highlight the hidden costs of universal health care.

When Progressive Era reformers pointed to the inadequacies of the U.S. health insurance system, they presented a multifaceted indictment. They claimed that sickness funds were miserly and covered only a tiny fraction of the labor force. Eval‎uating this charge, Murray argues that sickness funds indeed were very frugal. Such funds were designed to keep workers out of the poor house and off the dole, “nothing more, nothing less.” Stinginess in the early 1900s probably made a great deal of sense. Aside from administering diphtheria antitoxin, physicians could do very little for their patients except to recommend bed rest and a healthy diet. So why spend much money on physicians, as in some European countries, when such care was not efficacious? This being said, sickness funds in the United States typically replaced about 60 percent of wages lost to illness—a higher replacement rate than observed in insurance funds sponsored by European governments.

As to the charge that only a handful of workers were covered by sickness funds, Murray argues that this charge is based on faulty data and reasoning. After scouring industry, state, and federal sources, he concludes that sickness funds covered about one-third of the labor force—a higher proportion of the labor force than was covered by government programs in Belgium (13 percent) or France (30 percent). He argues further that the two-thirds of the U.S. labor force who were not covered by sickness funds chose not to be covered because they were engaging in precautionary savings outside the fund or because they were relatively young and healthy. Both direct and indirect evidence supports this contention. Drawing from the work of Price Fishback and Shawn Kantor, Murray explains that workers compensation laws reduced precautionary savings in the early twentieth century. He also uses data from a large sample of Michigan workers to show that wealth, savings, home ownership (a proxy for illiquidity), and age were strong predictors of whether a worker chose to enroll in a sickness fund or not. This evidence undermines claims by Progressive Era reformers that workers in the early twentieth century lived scarcely above the subsistence level and could not engage in precautionary savings.

As today, reformers in the early twentieth century pointed to European-style health insurance programs as models that U.S. policymakers should follow. Reformers argued that in contrast to U.S. sickness funds, European programs were actuarially sound and avoided many of the moral-hazard and adverse-selection problems that plagued voluntary funds in the United States. Murray demonstrates, however, that there was no free lunch for workers, governments, or employers. When governments imposed taxes on employers and employees to pay for these programs, wages adjusted accordingly. He also shows that European programs were not the paragons of efficiency that reformers claimed they were. On the contrary, voluntary funds in Europe were plagued by adverse selection (only the sickest, most needy workers joined), and mandatory, universal funds encountered serious moral-hazard problems. Employees feigned illness, and physicians shaded their diagnoses according to who was paying the bill: the employee or the government. Because U.S. funds were privately run, they were highly sensitive to costs and created incentives so that the ill returned more quickly to work.

Book reviewers often conclude with a brief list of things they thought could have been done better or with a set of questions that have gone unaddressed. Other than to say I would like to see a second volume that brings the story up to the current time, there is not much here to criticize. I liked even the little things, such as the quotations that open every chapter. Such epigraphs are typically little more than window dressing. Here, though, they also tell us something substantive about the arguments to come and the broader historical landscape. Particularly relevant is the quotation from Alexis de Tocqueville that opens the first chapter: “A government could take the place of some of the greatest American associations, and within the Union several particular states already have attempted it. But what political power would ever be in a state to suffice for the innumerable multitude of small undertakings that American citizens execute every day with the aid of an association” (p. 3).

Much like Tocqueville, Murray appreciates the wisdom and power of small groups and voluntary associations that operate on a shoestring. Whether you share these sympathies or not, Murray’s book is simply the best, most balanced, and most thorough treatment of the topic available. I cannot recommend it more highly or with any greater enthusiasm. Origins of American Health Insurance is simultaneously a lesson in economics and a lesson in history.

Buy Origins of American Health Insurance: A History of Industrial Sickness Funds at Amazon.com for $40.00 (Hardcover)

http://www.independent.org/publications/tir/article.asp?a=756