Establishing Office Well being Insurance coverage – The North State Journal

In this file photo dated May 22, 2020, the cathedral of the U.S. Capitol building is visible through thick fog in Washington, DC.
(AP Photo | Andrew Harnik, File)

This is the first part of James Capretta's article on reforming employer-based health insurance.

Employer Sponsored Insurance (ESI) is central to healthcare in the United States. A system that emerged in the post-war period without significant foresight quickly became the expected route to health insurance for working-age Americans and is now an entrenched and dominant feature of the US private insurance system. But it's not without flaws: failure to control costs hurts employees as companies compensate for rising premiums by limiting wage growth. Congress needs to pass reforms to improve the cost-effectiveness and value of ESI to workers.

Establishing job-related insurance is difficult and politically controversial at any political moment, but the years ahead may offer an opportunity to build bipartisan support for sensible reforms for two reasons. First, like most Republicans, President-elect Joe Biden supports ESI. He opposes Medicare for All because it would deprive workers of the option to stick to work-related insurance plans, many of which have been carefully negotiated with unions. Second, Biden and his team are looking for policy levers to accelerate wage growth for middle-income Americans. A slowdown in cost growth at ESI would lead directly to higher pay for workers in cash.

The Congressional Budget Office (CBO) estimates that 155 million people under 65 – or nearly 57% of the non-elderly population – will be enrolled on employer plans in 2020, even after the pandemic has displaced, and thus out of, millions of workers their insurance. In 1998, 67% of the non-elderly US population were enrolled in ESI. CBO predicts it will stay around 57% for the next decade.

ESI is not a guaranteed option for all American workers. The Affordable Care Act (ACA) requirement that employers provide health insurance does not apply to many smaller businesses. In 2018, only 33% of workers with incomes below the federal poverty line were offered by ESI. In contrast, 79% of workers with incomes above 400% of the poverty line were eligible to enroll in a job-related plan.

Employer coverage is expensive. In 2019, according to the Kaiser Family Foundation's annual employer plan survey, companies paid about 74% of the average annual premium of $ 21,300 for family insurance, while employees paid the rest of the cost. This division of the premium burden creates the false impression that employers bear most of the burden. In reality, workers in competitive industries also pay their employers' shares as their wages and salaries are adjusted to make room for insurance costs. As ESI premiums rise, there is less room for cash compensation to grow.

Corporations paid approximately 74% of the average annual premium of $ 21,300 for family insurance in 2019, according to the Kaiser Family Foundation's annual employer plan survey.

This downward pressure on health care wages is not new: it has been around for many years. From 2009 to 2018, total remuneration for middle-income households rose by an average of 2.6%, while wages rose by an average of less than 1% per year over the same period.

Many large companies recognize that their health offerings lack cost discipline and have tried to take corrective action. There have been modest successes. But no single company can repair ESI on its own because it competes for skilled workers against other companies. In addition, the federal tax law encourages companies to be generous with their health care services by exempting employer-paid premiums from employee wage and income tax obligations. Since cash wages are fully taxable, companies and employees have an incentive to emphasize the generosity of health insurance when deciding how to adjust pay levels.

Comprehensive employer coverage contributes to system-wide cost escalation. Hospitals and medical groups organize their operations in part to target workers covered by generous work-related insurance. If this coverage lacks reasonable cost discipline, the entire system becomes more expensive.

A suggestion to cut costs

The solution is to change the federal tax law so that all employers have to deal with cost control. The ACA tried to do this with the “Cadillac Tax”: Workplace-related coverage remained tax-free for employees, but companies with high cost plans should pay a 40% excise tax on premiums above the set thresholds. It was originally supposed to come into force in 2018.

The business community and unions firmly opposed the Cadillac tax both during the initial debate on the ACA and after the law went into effect. Congress responded to that pressure by delaying it twice before finally lifting it in 2019.

To avoid repeating the Cadillac tax saga, Congress should use incentives rather than penalties to launch a new attempt at ESI reform. Based on an AEI whitepaper I recently wrote, such incentives can work.

A company-level tax credit for compliant coverage

CBO estimates the total value of ESI tax subsidy in 2020 to be $ 288 billion, or $ 1,850 per person included in coverage. Congress can pass part of this subsidy on to businesses in the form of a new tax credit without incurring additional costs on workers.

An example of how it could work: As mentioned above, the average 2020 ESI premium for family insurance is expected to be around $ 21,300, with workers paying just over a quarter of the premium ($ 5,800) and companies paying the balance ($ 15,500) USD). The employer's share of the premium is not counted as wages for wage or income tax purposes. This implied tax subsidy is approximately $ 4,600 per year for employees in the 22% tax bracket.

The tax treatment of ESI could be changed to give companies credit for every employee included in the coverage. For example, companies could receive $ 500 annually for employees who choose individual coverage and $ 1,000 for employees who choose family insurance. Companies would need to apply these credits to the premiums workers owe for ESI registration. In addition, companies receiving the loans would have to limit the amount of their bonus payments on behalf of their employees to what they paid in the year prior to this reform taking effect, minus three times the value of the loan, or $ 1,500 for individuals and $ 3,000 for Familys. Introducing such dollar limits on the total amounts employers could contribute to coverage would ensure that the total federal grant to ESI insurance does not increase with the initiation of federal premium credits for ESI plans.

Employers would have to keep their workers harmless by going through the $ 1,500 reduction in premium contributions or $ 3,000 in higher cash wages. Companies in competitive industries will move in that direction even without federal regulation, as compensation must be offered that attracts potential employees. However, making such a commitment will reduce workers' fears that the reform will worsen their finances.

(… To be continued next week. This article was first published in The Bulwark by James C. Capretta, who is a Resident Fellow of the Milton Friedman Chair at the American Enterprise Institute in Washington, DC.)