The Republican Study Committee and Rep. Phil Roe, R-Tenn., recently released an Obamacare replacement plan, the American Healthcare Reform Act. While it contains a number of features that are familiar in other replace plans, it also gets rid of the single greatest pre-Obamacare barrier to affordable healthcare: the employer-sponsored insurance tax exclusion.
The employer exclusion has long been a fixture of the healthcare system. It began in 1942 when the Internal Revenue Service decided that employers weren’t required to pay taxes on employee health benefits. Employer-sponsored healthcare became a popular form of compensation after the War Labor Board prohibited companies from raising wages during World War II. Congress later codified the employer exclusion into law through the Internal Revenue Code of 1954.
Since then, this deduction has subsidized employee health benefits at an increasing cost to taxpayers. The Congressional Budget Office estimates that the employer exclusion reduced federal tax revenue by $266 billion in 2016 and $3.6 trillion over the next decade.
But the employer exclusion’s fiscal footprint pales in comparison to its inflationary impact on the broader healthcare system. Since it subsidizes employee premiums on an open-ended basis, employers have a huge incentive to offer coverage with high premiums and low out-of-pocket costs. This type of insurance decouples workers from their medical costs and encourages them to over-utilize benefits that are overpriced and often unnecessary.
According to another report by the CBO, the employer exclusion increases health insurance premiums by 15 percent because “the open-ended nature of the subsidy gives employers and employees an incentive to select more extensive coverage than they otherwise would.”
The high cost of employer coverage is even more outrageous when one considers how unreliable it is for sick people. Individuals who develop chronic diseases, such as heart disease and multiple sclerosis, often lose their insurance after illnesses force them out of work. A 2008 study in Health Affairs found that young adults that acquire high-cost conditions have a “44 percent chance of becoming uninsured … a risk nearly twice as great as it would be if he initially had individual insurance.”
The American Healthcare Reform Act would end the tax code’s subsidy for high-cost, low-quality employer coverage and replace it with a standard deduction to purchase health insurance: $7,500 for individuals and $20,500 for families.
“The Standard Deduction for Health Insurance (SDHI) will give families flexibility to pick coverage that best fits their needs and ensure that the tax benefit for insurance doesn’t go away if you lose or change jobs,” the bill reads. “The SDHI eliminates the current incentive to choose increasingly expensive plans by providing the full value of the deduction regardless of how expensive the plan is.”
Creating a health insurance tax deduction will transform patients from passive beneficiaries into engaged consumers. The standard deduction won’t reimburse healthcare costs on an open-ended basis. Instead, it will provide a lump-sum amount to help individuals and families cost-effectively shop for coverage.
When individuals own their healthcare dollars, they spend them wisely. A groundbreaking study by the Rand Corporation found that patients that pay out-of-pocket for health insurance spend 31 percent less on their healthcare than people with employer-sponsored plans.
Redirecting the tax code’s preference towards individual insurance will also reduce the number of uninsured. When former President George W. Bush proposed replacing the employer exclusion with a standard deduction, the Lewin Group estimated that it would expand health coverage to 9.2 million people.
Unfortunately, interest groups on both sides of the aisle ensured Bush’s proposal went nowhere in Congress. But if today’s Republicans are serious about making healthcare more affordable and patient-driven, they’ll end the tax code’s preference for employer-sponsored insurance.
Charlie Katebi is a contributor to the Washington Examiner’s Beltway Confidential blog. He is an advocate at Young Voices.
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