Death from Taxes

The July 2 announcement of a year-long delay in implementation of the employer responsibility provisions of the Affordable Care Act may have taken a considerable amount of heat off the fears of dire consequences of the coming year, even as it evidenced political blood in the water to conservatives.

But with all the hype associated with that delay, perhaps all of us who care about the future of employer-provided health insurance should be worrying about something else: a grand budget deal between the Administration and Congress that rolls back the employer health benefits exclusion. If you think the Affordable Care Act’s Gordian knot of subsidies and exchanges and mandates will tempt employers to drop coverage, elimination (or major limitations) of tax benefits could send them running toward the exit.

Straight from the mouth of a former Obama White House official, I recently heard the employer health benefits exception would “absolutely” be on the table if any serious fiscal negotiation with Congress takes place this year. After all, the exclusion is considered the top “tax expenditure” in the federal government, costing upwards of $300 billion a year. Judged that way, it’s right behind Medicare ($520 billion) and Medicaid ($420 billion) as the most expensive health entitlement. The exclusion is 66% larger than the deduction for home mortgage interest.

Of course, Washington is as polarized and dysfunctional as ever, unable to reach deals on the simplest of legislative issues, much less a long-term package that addresses debt, entitlements and tax reform. Moreover, the perception that the economy’s getting better—and recent better-than-expected deficit numbers—have diminished the perceived urgency of a grand bargain. But some of the ingredients are there. Consider…

• At some point this fall, the debt limit will again have to be increased or the government could face default.
• President Obama, angering liberals, showed a little leg on entitlement reform in his 2014 budget proposal, calling for a change in the way inflation is adjusted for Social Security beneficiaries
• Senate Finance Committee Chairman Max Baucus is retiring in 2014, and House Ways and Means Committee Chairman Dave Camp will be term-limited from his chairmanship at the end of next year. With both men looking for legacies, both committees have been seriously sifting through the options.
• For the first time in five years, the president seems to be talking to the opposition.

The employer exception could be the issue where the right and the left find common ground. John McCain ran for president on the platform of blowing up the employer-provided group health insurance marketplace. The theory, of course, is one of pure consumer-driven health reform. Here’s conservative commentator Avik Roy, writing recently in Forbes: “The tax exclusion for employer-sponsored health insurance is the number one problem with our health care system. It encourages employers to purchase wastefully expensive health insurance; it divorces individuals from the cost of their own care, preventing them from shopping for value; and it costs the Treasury $300 billion in lost revenues….Ideally, we would transition to a system where we eliminate the exclusion entirely, instead giving a tax credit…to purchase health insurance on the open market, providing instant universal coverage, but allowing Americans the freedom to buy more expensive policies if they so chose.”

In 1984, President Reagan floated the idea of requiring workers to pay taxes on employer contributions to their health insurance exceeding $2,100 a year. Those in favor of change say the tax expenditure is regressive in that its value is greater for wealthier families who are in higher tax brackets. The proponents argue that by favoring groups over individuals the expenditure perpetuates the faults of the employer-based insurance system and widens the gap between the relatively high premiums and relatively low claims of low-risk employees. 

But there’s a major flip side to that coin. Employer-sponsored coverage provides an important pooling mechanism—a way to create large pools of people with predictable distributions of risk. Workers at high risk of having large health expenditures are pooled with other healthier workers, allowing them to access insurance at a reasonable price.

In the non-group market, insurers worry that those seeking coverage may be high-risk individuals. Prices are high and variable, and in most states individuals can be excluded from coverage based on their health status.

“Without the tax exclusion,” says the National Bureau of Economic Research, “employers might cease to offer coverage and individuals might have to turn to the non-group market, where affordable coverage may not be available, particularly for sicker individuals.”

In short, sure, Congress can impose all kinds of limitations on employer tax advantages for providing benefits. Every one of those limitations will have a corresponding increase in the uninsured. Considering the tax exclusion is the lynchpin of the nation’s health insurance framework, capping or eliminating it would erode health coverage and incentivize employers to drop or curtail coverage.

The political flip side is that support for the exclusion will come not only from the business community and organizations like ours. Labor unions, already scarred by the Cadillac Tax provision that takes effect in 2018, will be foaming at the mouth to protect their benefits.

Former Rep. Barney Frank, D-Mass., an unapologetic backer of single-payer healthcare, famously said during the 2009 Obamacare debate that he supported it only because the act would inevitably lead toward a British-style national system. With the elaborate subsidy/exchange (whoops, they’re now “marketplaces,” not “exchanges”) and market reforms of the ACA in place to support millions of lower-income and less healthy participants, the logical next step—if Frank is right—is to cap or eliminate the exception.

Of course, the president says otherwise. Here’s what he said on April 30: “For people with insurance, the only impact of the healthcare law is that their insurance is stronger, better and more secure than it was before. Full stop. That’s it. They don’t have to worry about anything else.”

I don’t find much solace in those remarks. You?