The ongoing coronavirus outbreak has some policy analysts contemplating changes to employer-provided health insurance. Although the number of individuals who have become uninsured because of COVID-related layoffs or furloughs appears lower than the left would have people believe, the coverage changes have highlighted one of the two drawbacks to the system by which most Americans receive health insurance.
In addition to the lack of portability — when people lose their job, they generally lose their health coverage — employer-provided health insurance also tends to raise health costs. The unlimited tax preference for employer coverage favors (untaxed) health benefits over (taxable) cash wages, meaning employees have an incentive to overconsume health insurance and thus health care. Obamacare’s Cadillac tax tried, albeit clumsily, to curb this uncapped tax preference, but lawmakers repealed the levy outright last December without first enacting a replacement.
Thankfully, regulations put into place by the Trump administration will solve the portability problem, while also working to realign incentives in ways that will make the health-care system more efficient. While some have suggested other reforms, the Trump administration’s regime will likely prove more effective than less efficient alternatives.
Change Tax Preferences
A recent American Enterprise Institute paper suggested reforming the tax treatment of health insurance via carrots rather than sticks. The plan proposed offering firms a tax credit to firms that:
- Raise the percentage of the premium paid out-of-pocket by workers, to make workers more cost-conscious of expensive insurance plans;
- Provide workers with a broad array of plans to choose from, including both less-costly insurance plans and private insurance exchanges that would make coverage more portable; and
- Pass through the value of the new federal credit to their employees, so the employees don’t feel like they “lost” money by paying more of their wages on health insurance without receiving a commensurate “gain” via the credit.
In theory, this package of changes would make workers more aware of the true cost of their health insurance, and encourage employees to explore more efficient options.
Bureaucratic Morass
But in practice, the mechanism the AEI paper proposes would likely centralize power in Washington — an outcome that should give conservatives significant pause. In six pages of discussion surrounding the proposal, the paper mentions the word “standards” 10 separate times, and some variation of the word “certify” another 20 times.
All of the references to standards and certification represent instances where the federal government would have to intervene, regulate, and define terms and practices for firms receiving the credit. Among the myriad decisions federal bureaucrats might have to make:
- What plans employers could offer, including the number of plan choices, types of plans (e.g., HMOs, PPOs, etc.), and potential differences among the plans;
- What private exchange (or exchanges) employers could direct their workers to, and how those exchanges could operate;
- How much firms would have to raise wages in future years; and
- What would happen if health costs continue to rise.
In one sense, the AEI proposal contemplates using the tax credit as leverage to let federal bureaucrats micromanage all aspects of employer health coverage — a technocrat’s dream come true.
It doesn’t take a great deal of imagination to come up with controversies that would result. Democrats would undoubtedly use the new federal regime to force employers to subsidize coverage of abortion, contraception, and much else besides. They may also seek to require decisions based on cost-effectiveness grounds, likely amounting to bureaucrats forcing employers and insurers to ration care.
The Better Way Forward
By contrast, the regulatory regime finalized by the Trump administration seems both far simpler and less intrusive. Employers can now provide funds to workers via Health Reimbursement Arrangements that the workers can use to purchase health insurance plans they own and control. Letting workers own the plans gives the workers portability; the firm subsidizing the coverage may change, but the worker can retain the plan as long as he or she wishes.
While workers can pay their share of premiums on a pre-tax basis, the still-unlimited nature of this tax preference tends to skew incentives slightly, as the firm provides only a defined contribution towards coverage the worker chooses (e.g., $300 per month) via the HRA. Therefore, workers still have strong incentives to select plans wisely, because they will pay every additional dollar in premiums above the employer’s contribution, even if they will do so on a pre-tax basis.
Trump Proposal Is Popular
A recent survey by Towers Willis Watson, which provides benefit solutions (including HRAs) to employers, found that about one in six (15 percent) employers are planning to offer or considering the HRA option, with larger employers expressing an even stronger interest. It makes every sense that they should do so, given the widespread benefits: employers gain predictability in health-care costs, while workers gain a bigger choice of plans and coverage they can take with them from job to job.
Provided Democrats do not undermine the Trump administration’s rules — a huge “if,” to be sure — they represent an ideal way to reform the American health insurance system. The HRA regime seems far preferable to the well-intentioned, albeit bureaucratic and clunky, regime outlined in the AEI paper.
