150 Million Reasons

A GOP Tax Idea Would Upend Health Insurance

Capping the health benefit exclusion would shock the market.

Even by recent standards, February has been an eventful month for health insurance.

Last week brought thwarted mergers, threats by insurers to leave the Affordable Care Act's individual exchanges, and the release of a (very) rough sketch of a possible GOP repeal-and-replace plan for the ACA. 

What's missing in that skeletal outline is how to pay for new initiatives, such as an expanded tax credit to help people buy insurance, while also repealing the new taxes established by the ACA. Some in the GOP are floating one possible solution: capping the federal tax breaks workers and companies get for employer-provided health insurance.

The tax code's exclusion on health benefits is the nearly 80-year-old foundation of America's employer-based insurance system. The idea of capping it is a potentially scary prospect for insurers, raising questions about the future of the employer market, through which about 150 million Americans get insurance. 

On Top

Large health insurers have enjoyed a bigger and longer-lasting Trump bump than the broader market

Source: Bloomberg

Economists like the idea of getting rid of the exclusion. It's the single largest American tax expenditure and is responsible for many of the oddities, distortions, and inequities of employer-based American health care. The exclusion costs the government more than $250 billion a year, and GOP leadership appears to be seriously considering a cap. 

But however compelling their arguments are, economists and GOP sympathizers are substantially outnumbered in this fight. Employees really like getting generous benefits without being exposed to the full cost. And companies get to provide a highly popular benefit without paying taxes on it, effectively paying employees extra without tax consequences.

This would effectively be a large tax hike on corporations and higher-income working people -- not exactly traditional Republican targets. The lobbying against it has already commenced.

Capping this tax exclusion and removing the ACA's employer insurance mandate would be a two-fold blow to the employer market. Businesses will likely be less inclined to provide insurance. And their employees may be less inclined to get insurance through work if they're exposed to higher costs. 

That would be a negative for insurers -- such as UnitedHealth Group Inc., Aetna Inc., Cigna Corp., and Anthem Inc. -- that focus in large part on employers. They will have to adapt to a much-changed market that may take years to mature.  

A Lot to Lose

Some of America's biggest health insurers heavily depend on their commercial business, which is largely focused on employer-based insurance

Source: Bloomberg

These insurers may be able to scoop up lost enrollees in a Trumpcare version of the ACA's individual market. But employers are often able to provide generous benefits as a result of the tax exclusion, while the individual market may trend towards less-expensive plans that offer less coverage. The tax credits proposed in the GOP outline are tied to age rather than income, and may render comprehensive coverage unaffordable for some. 

The GOP proposal would encourage young and healthy patients to buy cheaper insurance plans, leaving only older and sicker patients on employer health plans. That would significantly increase the cost to insurers -- and remember, it was cost overruns that led some insurers to withdraw from the ACA's individual exchanges.

As noisy as the tussle over the ACA and individual exchanges has been, it concerns a relatively small portion of the market. The GOP's proposed shift in tax policy would have a far bigger impact on insurers and employers. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Max Nisen in New York at mnisen@bloomberg.net

    To contact the editor responsible for this story:
    Mark Gongloff at mgongloff1@bloomberg.net

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