Last week, the White House finalized a rule that allows employers to fund health reimbursement arrangements (HRAs) that can be used by workers to buy their own coverage on the individual market. This subtle, technical tweak has the potential to revolutionize the private health insurance market.
Today, employer-based health coverage is a defined benefit. If — and only if — an employer buys group coverage for its employees, the value of that benefit is excluded from taxation. The Joint Committee on Taxation estimates this tax break is worth more than $300 billion a year.
A big tax break may sound good, but this one creates perverse incentives. In the employer-based market, not only is a third party — the insurer — paying for health care, but another third party — the employer — is choosing and funding the insurance plan. Call it ninth-party health care.
In this system, workers almost entirely lack the tools they need to shop for low-cost, high-quality health-care services. For the typical worker, 80 percent of health care is paid for through insurance. Without transparency on the price of health insurance, workers lack transparency on the price of health care.
The employer tax exclusion is also highly regressive, because those in higher tax brackets receive a larger benefit from the rule than those in lower ones. Silicon Valley programmers and Manhattan lawyers get a far bigger tax break for health insurance than do cashiers or truck drivers.
In 2008, GOP presidential nominee John McCain proposed replacing the tax exclusion for employer-sponsored health insurance with a fixed, $2,500 credit with which to buy coverage on the open market. The idea was pilloried by then-Sen. Barack Obama, who said it would “tax health benefits for the first time ever, meaning higher income taxes for millions.” (In reality, it was Obama’s Affordable Care Act that introduced the first tax on employer-sponsored health insurance.)
In the decade since, the cost of employer-based coverage has continued to rise. Deductibles have more than tripled since 2008. A new study from the RAND Corp. finds that, on average, hospitals charge those with private insurance 2.4 times what they charge Medicare for the same services.
Enter President Trump and his team at the National Economic Council, led by Larry Kudlow. The council found an elegant way to give employers the opportunity to voluntarily convert their health benefits from a defined benefit into a defined contribution. For example, an employer could fund an HRA for each worker and their family, which they could then use to shop for a plan that best suits their needs.
The administration estimates that as many as 800,000 employers — mostly smaller businesses — will choose this option, expanding health-care choices for 11 million workers in the next decade. These employers will benefit from having fiscal certainty over their health expenditures. And workers will benefit from being able to choose their coverage and take it from job to job.
Furthermore, if those estimates are right, the new rule could dramatically expand the market for individually purchased health insurance, encouraging more plans to enter the market and lowering premiums for all participants. The White House estimates that the rule could expand the number of Americans with health insurance coverage by as many as 800,000.
The Trump HRA rule should be seen as the beginning — not the end — of reforms to improve the quality of private health insurance. Congress also needs to repair the individual market for health insurance by reforming Obamacare-era regulations that punish young and healthy people for buying coverage.
And the White House should consider building on the HRA rule by requiring that all newly incorporated businesses seeking the tax break for employer coverage do so through HRAs. Such a reform would preserve traditional employer-based group health insurance for those who have it, while ensuring that start-ups that evolve into the Googles and Apples of the future deploy the new model.
Together, over time, these changes would give workers more transparency into — and more control over — the health-care dollars that are now spent by other people on their behalf. That transparency and control, in turn, would create a powerful market incentive for health-care payers and providers to lower prices and increase quality.
Some in Washington want to take health insurance choices away from workers and replace them with the diktats of politicians. The Trump initiative moves in the opposite direction, placing health- care choices right where they have always belonged: in the hands of hard-working Americans.