Republicans facing tough questions about how to pay for their Obamacare replacement are looking hard at a controversial but revenue-raising idea: capping the tax break for employer-sponsored coverage.
The proposal is part of draft legislation that House Republicans are working on, according to lobbyists with knowledge of the discussions. Not only is House Speaker Paul Ryan a huge fan of limiting the tax break, but it also could help solve the underlying financial problem of keeping the law’s benefits while repealing the taxes that pay for them.
No final decisions have been made about where the cap would be placed, or whether it will be included in the replacement, but employer groups say they’re worried it will prove too attractive for lawmakers who are seeking a good score from the Congressional Budget Office on their Obamacare repeal-and-replace measure.
“Everything is extremely fluid right now, but all indications are that there are a lot of forces seeking to include it,” said Jim Klein, president of the American Benefits Council.
Republicans want to keep some of the most expensive elements of the Affordable Care Act, including a version of subsidies to help people buy coverage. At the same time, they want to repeal many of the taxes that help pay for those benefits, including several taxes on insurers and medical device makers.
Their problem is paying for it. If they add a cap on the tax exclusion for employer-sponsored coverage, which costs the federal government about $260 billion every year, they could manipulate the final CBO score by adjusting the cap up or down depending on the revenue they need.
“There’s a lot of money there,” said Linda Blumberg, senior fellow at the Urban Institute’s Health Policy Center. “It’s a huge amount of money, so it has always been an attractive target for a number of reasons.”
Employer groups are arguing that capping the tax exclusion could disrupt the group insurance markets, where most Americans get their coverage. The exclusion, passed after World War II, incentivized employers to offer their workers health benefits that are tax-free.
The idea of a cap was discussed and then discarded as too politically difficult during the Affordable Care Act’s creation in 2009 and 2010. Instead, lawmakers decided to tax high-cost health plans through the so-called “Cadillac tax,” which didn’t appear to hit regular Americans so directly.
Yet Republicans want to repeal the Cadillac tax as well as many of the law’s other revenue-raisers.
“There’s no way to make replace work if you get rid of a quarter of the funding to make the law go,” said Jonathan Gruber, a Massachusetts Institute of Technology professor who advised the White House as the law was being written.
The healthcare law’s Medicaid expansion and subsidies, while likely to be changed in a GOP plan, cost the federal government $110 billion last year. Capping the employer tax exclusion could fill in the hole from repealing the taxes.
Setting the cap at the 75th percentile of premiums and other medical benefits provided by employers would produce $264 billion in new revenue over the next decade while preserving 93 percent of the tax subsidies provided to workers, according to an Urban Institute study.
Yet employer groups are pushing back against even a modest cap, saying they don’t trust Congress to keep the cap there, as long as it could be tweaked to provide more revenue.
“We don’t trust them on the issue,” said Neil Trautwein, vice president of healthcare policy at the National Retail Federation. “They’re not going to take just one bite out of this. Once they’ve breached the principle, they’re going to keep coming and coming and coming.”
It’s an idea that Republicans on Capitol Hill generally like more than Democrats, although liberal health economists including Gruber say it’s a good idea.
Ryan has long advocated for capping the exclusion, even suggesting it in his “Better Way” healthcare proposal released last summer. Newly minted Health and Human Services Secretary Tom Price also has backed the idea. House Ways and Means Chairman Kevin Brady held a hearing on the topic in April.
Steve Wojcik, vice president of public policy at the National Business Group on Health, said he’s hopeful lawmakers will pause before capping the tax benefit since the employer market has remained relatively stable, as the individual market has been roiled by premium spikes and insurer exits.
“I think there’s some concern that some members of Congress that they didn’t want to do anything to upset the employer-based system, because it’s working,” Wojcik said.
