How an Obscure Regulatory Change Could Transform American Health Insurance

Between the election campaign and incidents of terrorism ranging from attempted bombings to a synagogue shooting, an obscure regulatory proposal by the Trump administration has yet to captivate the public’s attention. However, it has the potential to change the way millions of Americans obtain health insurance.

In the United States, unique among industrialized countries, most Americans under age 65 receive health coverage from their employers. This occurs largely due to an Internal Revenue Service (IRS) ruling issued during World War II, which excluded health insurance coverage from income and payroll taxes. (Businesses viewed providing health insurance as one way around wartime wage and price controls.)

The Trump administration’s proposed rule would, if finalized, allow businesses to make a pretax contribution towards individual health insurance—that is, coverage that individuals own and select, rather than employers. This change may take time to have an impact, but it could lead to a much more portable system of health insurance—which would help to solve the pre-existing condition problem.

How Would It Work?

Under the proposed rule, employers could provide funds through a Health Reimbursement Arrangement (HRA) to subsidize the purchase of individual health insurance. Employers could provide the funds on a pretax basis, and—provided that the workers purchase their coverage outside of the Obamacare exchanges—employees could pay their share of the premiums on a tax-free basis as well.

In practical terms, some employers may choose to provide a subsidy for health coverage—say, $300 per month, or $5,000 per year—in lieu of offering a firm-sponsored health plan. Individuals could go out and buy the plan they want, which covers the doctors whom they use, rather than remaining stuck with the plan their employer offers. And employers would get better predictability for their health expenses by knowing their exposure would remain fixed to the sums they contribute every year.

Could Employers Game the System?

The proposed rule acknowledged the possibility that employers might try to “offload” their costliest patients into individual health coverage, lowering expenses (and therefore premiums) for the people who remain. The rule contains several provisions designed to protect against this possibility.

Employers must choose to offer either an HRA contribution towards individual coverage or a group health plan. They cannot offer both options, and whatever option they select, they must make the same decision for an entire class of workers.

A “class” of workers would mean all full-time employees, or all part-time employees, or all employees under one collective bargaining agreement. Hourly and salaried workers would not count as separate “classes,” because firms could easily convert workers from one form of compensation to another. These provisions seek to ensure that firms will offer some employees health insurance, while “dumping” other employees on to individual coverage.

Can Workers Buy Short-Term Coverage with Employer Funds?

Yes—and no. The proposed rule would allow HRA funds to purchase only individual (i.e., Obamacare-compliant) health insurance coverage, not short-term insurance.

However, the rule creates a separate type of account to which employers could contribute that would fund workers’ “excepted benefits.” This term could include things like long-term care insurance, vision and dental insurance, and the new short-term plans the Trump administration has permitted. But employers could only fund these accounts up to a maximum of $1,800 per year, and they could create these special “excepted benefits” accounts only if they do not offer an HRA that reimburses workers for individual insurance, as outlined above.

Will Firms Drop Health Coverage?

Some firms may explore the HRA option over time. However, the extent to which businesses embrace defined-contribution coverage may depend upon the viability of the individual health insurance market, and the status of the labor market.

However, if and when more insurers return to the marketplace, firms may view the defined-contribution method of health coverage as a win-win: employees get more choices and employers get predictability over health costs. Particularly if unemployment ticks upward, or one firm in an industry makes the move towards the HRA model, other businesses may follow suit in short order.

Will the Proposal Cost Money?

It could. The proposed rule should cost the federal government $29.7 billion over the first ten years. That estimate assumes that 800,000 firms, offering coverage to 10.7 million people, will use the HRA option by 2028. (It also assumes an 800,000 reduction in the number of uninsured Americans by that same year.)

The cost, or savings, to the federal government could vary widely, depending on factors like:

  • Whether firms using the HRA option previously offered coverage. If firms that did not offer coverage take the HRA option, pretax health insurance payments would increase, reducing tax revenues. (The rule assumes a reduction in income and payroll tax revenue of $13 billion in 2028.)
  • Whether individuals enrolling in individual market coverage via the HRA option are more or less healthy than current enrollees. If the new enrollees are less healthy than current enrollees, individual market premiums will rise, as will spending on Obamacare subsidies for those individuals. (The rule assumes a 1 percent increase in individual market premiums, and thus exchange subsidies.)
  • The extent to which HRAs affect eligibility for Obamacare subsidies. If some low-income individuals whose employers previously did not offer coverage now qualify for HRA subsidies, they may lose eligibility for Obamacare subsidies on the exchanges. (The rule assumes a reduction in Obamacare subsidies of $6.9 billion in 2028.)

Given the many variables in play, the rule has a highly uncertain fiscal impact. It could cost the federal government billions (or more) per year, save the federal government similar sums, or have largely offsetting effects.

An Overdue (and Welcome) Change

The proposed rule would codify the last element of last October’s executive order on health care. It follows the release of rules regarding both short-term health insurance and association health plans earlier this year.

Ironically, the Trump administration represents but the most recent Republican presidency to examine the possibility of defined-contribution health insurance. While working on Capitol Hill in 2008, I tried to encourage the Bush administration to adopt guidance similar to that in the proposed rule. However, policy disagreements—including objections raised by, of all places, scholars at the Heritage Foundation—precluded the Bush administration from finalizing the changes.

Since I’ve fought for this concept for more than a decade, and included it in a series of regulatory changes the administration needed to make in a paper released shortly before Trump took office, I can attest that this change is as welcome—and needed—since it is overdue. Although overshadowed at the time of its release, this rule could have a substantial effect on Americans’ health insurance choices over time.

This post was originally published at The Federalist.

Obamacare and the Pitfalls of Congressional Legislating

Weeks before Congress embarked on its final push to put Obamacare on the statute books, then-House Speaker Nancy Pelosi infamously stated that Congress had to pass the bill “so that you can find out what’s in it.” But last week, a staffer at the heart of drafting the legislation admitted that Congress itself failed to comprehend the implications of the provisions it imposed upon the American people.

On Friday, a Capitol Hill newspaper published a story outlining the history of Obamacare’s employer mandate and whether the administration might delay its implementation still further. In the article, Yvette Fontenot—a lobbyist who helped write the bill for then-Senate Finance Committee Chairman Max Baucus and later worked on implementing the legislation at the White House—admitted that when Mr. Baucus’s staff drafted the employer mandate, “we didn’t have a very good handle on how difficult operationalizing the provision would be at that time.”

Indeed, the employer mandate has proved difficult to implement. Defining who counts as a full-time employee across a variety of industries and creating databases to track employees’ hours have taxed regulators and companies alike. While the administration has cited these difficulties in twice delaying the mandate’s implementation, the law’s critics take a different view—believing the administration postponed the mandate to avoid potential stories about job losses prior to the 2014 elections.

Likewise, the import of Ms. Fontenot’s admission. Liberals and supporters of a strong executive might argue that her comments highlight the need for agency rulemaking, rather than placing final authority in the hands of inexpert legislators and overtaxed congressional staff—essentially saving Congress from itself. House Speaker John Boehner obviously disagrees. The Ohio Republican views the impending House vote exploring legal action against the administration as one way for the legislature to regain its authority.

But more broadly, conservatives would argue that Ms. Fontenot’s comments highlight the need for a more deliberative—and more humble—Congress, one quicker to acknowledge its own flaws, and change its processes accordingly. Recall that Max Baucus—the prime congressional author of Obamacare—said four years ago that he didn’t want to “waste my time” reading the legislation, because “we hire experts.” But one of those “experts” now says she didn’t understand how one of the major portions of the bill would work. It makes a very compelling argument that Congress, rather than relying on agency employees to resolve its self-imposed problems, should instead revert to the Hippocratic oath, and focus first and foremost on doing no legislative harm.

This post was originally published at the Wall Street Journal Think Tank blog.

Report Reveals Obamacare’s Side Effects: Higher Costs, Fewer Jobs

What will Obamacare mean for American businesses? Higher costs, according to a report released yesterday from consultants at Mercer.

Here are the preliminary results from Mercer’s annual survey of large employers about the impact of Obamacare:

Costs Continue to Rise: Despite the moderating effects of the recession in dampening consumer demand, “employers expect health benefit cost per employee will rise by 4.8 percent on average in 2014.” Recall that then-Senator Obama promised in 2008 that his health plan would lower health costs by an average of $2,500 per family.

Obamacare’s Mandates Hitting Many Businesses: “About a third of all large employer health plan sponsors (those with 500 or more employees) do not currently offer coverage to all employees working 30 or more hours per week, as will be required under the [law] beginning in 2015. Industries that rely heavily on part-time workers will be the hardest hit by this rule. About half of respondents in retail and hospitality currently do not offer coverage to all employees working 30 or more hours per week.”

Obamacare Will Raise Costs by at Least 2 Percent for Majority of Firms: “When asked to consider the impact of higher enrollment and new [Obamacare] fees…about half of the employers surveyed say they will spend at least 2% more on health benefits in 2014 – over and above the normal increase in cost. Another third are unable to predict. Only about a fifth of employers are confident that [Obamacare] will have little or no impact on spending in 2014.” The Mercer consultants also pointed out that Obamacare could impose additional costs on businesses once the delayed employer mandate takes effect in 2015.

More Workers Will See Their Hours Cut: “Some employers will minimize the number of newly eligible employees by cutting back on hours for at least a portion of their workforce – 11% of all large employers say they will do so.”

The impact of Obamacare on the American economy is well-documented, and growing. It’s why Congress needs to stop Obamacare now.

This post was originally published at The Daily Signal.