The battle to reform health insurance has largely concentrated on the individual market, in which only 15 million Americans are enrolled. By contrast, 158 million Americans are covered by employer-sponsored plans. The Obama administration did very little to shake up those arrangements—and the same was true of the Trump administration until last month, when it announced a proposed rule that might bring sweeping changes to this bigger market.
The dominance of employer-sponsored health insurance owes much to its exemption from federal taxation, which allows employers to purchase health insurance for their staff without incurring income or payroll taxes. Because the tax exemption does not extend to the purchase of health insurance and medical services by individuals, it has put employers in charge of purchasing coverage, which has helped to inflate the cost of healthcare.
Cost controls under employer-sponsored insurance tend to be unpopular, as any savings accrue to the firm, while reductions in access to care are borne by staff. Because employers must make the same plans available to all workers, who have a multitude of idiosyncratic needs and preferences, businesses tend to purchase benefit packages and networks that are broader and more expensive than price-sensitive individuals would buy for themselves.
While only 9 percent of employers offer a health plan with a narrow network, 73 percent of individuals responsible for purchasing their own coverage opt for narrow network plans. These are on average 16 percent cheaper than comparable broad network plans, and are particularly popular with younger enrollees. Not only must broad network plans pay for more expensive doctors and hospitals, they have less leverage to get good deals from relatively low-cost providers. This problem is compounded for self-insured plans, which account for 61 percent of employer-sponsored insurance. Under those plans, insurers merely process claims, and pass on medical costs incurred to employers.
The Affordable Care Act sought to remedy the bias of the tax code towards employer-sponsored insurance by imposing a 40 percent “Cadillac tax” on high-cost healthcare plans. But making employer-sponsored coverage more expensive would do nothing to make insurance more affordable for individuals to purchase, and might instead push millions into public entitlements. The implementation of this tax has rightly been delayed, and is likely to be repealed altogether.
A regulation proposed by the Trump administration attempts a more constructive approach. Acting within the existing tax code, it would allow employers to deposit funds in Health Reimbursement Accounts for individuals to purchase their own preferred health insurance coverage. (Previously, HRA funds could only be used to pay out-of-pocket expenses associated with a group plan.)
The regulation imposes several safeguards to prevent employers from using HRAs to skimp on providing adequate coverage to staff with costlier medical needs. Ironically, it does this in part by making use of ACA regulations.
The rule imposes no limit on the amount of funds that can be deposited pre-tax into an HRA for the purchase of ACA-compliant insurance, whose premiums must be the same for all enrollees regardless of their expected medical costs (with the exception of small adjustments for age and family size). It further requires that identical HRA payments be made to all workers with an equivalent employment status (e.g. full-time, part-time, or seasonal workers).
Yet, the plans on the ACA-regulated market are likely to be unattractive compared to most group plans. The administrative costs of insurance purchased on the individual market (including state taxes) may account for 40 percent of premiums, compared with 5 percent for employer-sponsored plans with over 10,000 enrollees. Self-insured employer-sponsored plans are also exempt from many state regulations that drive up the cost of insurance, and have more flexibility to deliver care in innovative and cost-saving ways.
The reasons for employer-sponsored insurance therefore extend beyond its tax advantages. But allowing employers to provide partial contributions to help their staff purchase health insurance from the individual market might help small employers close the gap with large employers when it comes to the health benefits they confer on their employees. Fifty percent of small firms (between 3 and 49 workers) provide health benefits to their employees while 96 percent of larger employers (with at least 100 staff) do. For self-employed, part-time, and seasonal workers, and those who often transition between multiple jobs, such assistance is likely to be particularly valuable.
Yet, since the ACA required premiums on the individual market to be set regardless of medical risks, healthier individuals have refused to purchase coverage, and so premiums disproportionately reflect the high medical costs of the seriously ill. While premiums on the individual market averaged 40 percent less than those of large group plans prior to the ACA, they have since risen well above.
The Trump administration’s rule allows employers to deposit up to $1,800 in HRAs to subsidize the purchase of plans that are exempt from the ACA’s regulations, so long as employers subsidizing HRAs continue to provide the option of a comprehensive benefit package compliant with the ACA’s minimal essential coverage requirements. The premiums of the recently deregulated plans average $1,488 per year, compared with $4,716 for ACA-regulated coverage. As such insurance would be portable between jobs, and subject to renewal guarantees, it would also protect individuals from the risk of being disqualified on the basis of having developed a pre-existing condition prior to seeking new coverage associated with a change in employment status.
The proposed rule offers an opportunity to test the feasibility and advantages of a broader shift away from employer-sponsored insurance. Such a shift is not without risk, and so the administration is right to proceed cautiously. But there may be much to be gained from empowering consumers in the choice of health insurance. Our fear of doing so has needlessly inflated the cost of healthcare for far too long.
Chris Pope is a senior fellow at the Manhattan Institute.
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