In recent weeks, some members of Congress have begun laying the groundwork for what could be the most significant debate over the fundamental basis of how health insurance is delivered in the United States. Various policy proposals under development threaten to eliminate or cap the employer tax exclusion for health insurance. This would decimate the employer-based system, where a recent report found that a majority of Americans, roughly 169 million, receive their insurance coverage through this system. NAHU is very concerned about these proposals, which is why we called on all members and your employer clients to take action last week on an Operation Shout urging Congress not to change the health insurance delivery model that has worked for Americans for decades.
The employer exclusion allows an employer’s contributions to an employee’s health insurance to be excluded from that employee’s compensation for income and payroll tax purposes. Critics of the exclusion charge that the employer-based health insurance system was developed accidentally out of wage controls put in place during World War II. At the time, employee wages were tightly controlled, however fringe benefits were not controlled. As a result, employers offered their employees benefits, including health insurance, to make up the difference in employee compensation forming the basis of the employer-based health insurance system in this country. While the system was born out of accident, NAHU contends that the end result has been a highly efficient means of providing American workers and their families with affordable coverage options through group purchasing and its associated economies of scale by spreading risk and avoiding adverse selection.
The effort to eliminate or cap the employer exclusion is led by Speaker of the House Paul Ryan (R-WI) along with several other conservative allies as part of their healthcare white paper. They contend that eliminating the exclusion would result in Americans having more control over their coverage, reduce job-lock, and result in greater transparency and reduced costs. Their paper, expected to be released ahead of the July national party convention, is the long-awaited response from Republicans on the alternative to the Affordable Care Act (ACA). The paper is not expected to take the shape of legislation this year, but would form the basis of any repeal/replace effort by Republicans, and would be pushed for adoption under a Republican presidential administration.
While details have not yet been formalized, NAHU and other industry groups that strongly support the employer-based healthcare system have been leading the charge to prevent proposals that would eliminate or cap the exclusion from being included in the final white paper. Earlier today, NAHU staff participated in a Republican Party platform discussion meeting to determine what proposals should be included in the party’s official platform to be released this summer. During the meeting, we urged that the platform should preserve existing tax incentives for insurance, including the exclusion, as well as stressed the value of agents and brokers.
Proposals that eliminate the exclusion would push individuals from group coverage into the individual market. To make up the difference in what employees currently receive in employer contributions to their plans, these proposals in tandem call for offering individuals and families a tax deduction for purchasing coverage on the individual market. These deductions, varying among the proposals, roughly amount to $7,500 for individuals and $20,500 for families. While deductions or refundable tax credits would help consumers secure coverage in the individual market, NAHU believes that they would fall far short both financially and in terms of coverage of the current system that allows for tax-free contributions from employers.
An individualized health insurance market would be ripe for adverse selection leading to higher insurer losses participating in these markets. Insurers would offset these losses by reducing provider networks and increasing cost-sharing. Currently, employer-sponsored plans are much more likely to have a mix of health risks and, in this case, the volume of individuals allows the costs associated with higher risks to be spread over that mixed population of high and low risks. Eliminating the exclusion and pushing consumers to the individual market would reduce the means for spreading risk among healthy and unhealthy individuals. The healthiest would be more likely to opt-out of coverage, leaving the most unhealthy covered. Employers still offering health insurance could be faced with difficulty meeting participation requirements and ever-increasing rates in a potential death-spiral as only the sickest remain insured.
Financially, employees receiving employer contributions already receive generous “subsidies” for their health coverage. Group premium rates tend to be more favorable than individual markets given the ability to control for adverse selection, and employers and employees alike benefit by reducing the taxable income for contributions made to insurance premiums. When employees’ taxable income increases due to the new taxable status of employer contributions, the employer’s FICA match would also increase. For every new dollar of taxable income due to newly taxable employer contributions or employee contributions previously made on a pre-tax basis under Section 125, employers would be responsible for 7.65% in new costs until the employee reached the Social Security wage base. Ultimately, eliminating the exclusion would in turn result in a massive tax increase on middle class Americans that would not come close to being offset by any deduction, particularly for lower-paid workers who don’t have a deduction for income tax. Rather, a deduction for this type of worker would likely cause them to forego coverage altogether since it would offer no immediate relief towards the cost of coverage.
Finally, moving from a group insurance marketplace to an individualized marketplace would cause considerable strain on the enrollment process. Group plans are highly efficient at seamlessly enrolling millions into coverage, and without these group plans agents and brokers would be faced with enrolling upwards of 170 million Americans individually into plans. The ACA has demonstrated the challenges of enrolling as few as 13 million consumers onto the federal and state marketplaces. Increasing this number by more than ten-fold would not be any less chaotic.
The bottom line is that the employer-based system has proven highly efficient at providing Americans with affordable coverage options for decades. Eliminating the tax exclusion would likely result in the demise of the employer-based system, a significant tax increase on middle-class families, significantly increased costs for coverage, and more restrictive plan offerings. Healthcare reform has proven its challenges; however it is important that any policy proposals not make difficult situations worse and eliminating or even capping the exclusion would be far worse for all Americans. As Congress continues to discuss the future of health reform, NAHU will continue to advocate on behalf of agents, brokers, and employers for the continuation of the employer-based health insurance system.
You can help us defend the employer exclusion by taking action below:
Contact your senators and representative. Send an Operation Shout today asking your federal legislators to oppose the elimination or cap of the employer tax exclusion of health insurance in any healthcare reform legislative proposals. You can take action here.
Tell your employer clients to take action. Your employer clients would be most directly impacted by the elimination or cap of the employer tax exclusion. Tell them to take action sharing why the exclusion must be preserved in any healthcare reform legislative proposals. Tell them to take action here.
Share your story. As a licensed insurance specialist who works closely with employers to help them offer and utilize employer-sponsored health insurance, you know personally about how the employer tax exclusion directly impacts your clients. Stories from your clients will demonstrate the value of the exclusion and the need to preserve it. We will share your stories with appropriate legislators and staff. You can share your story here.