Healthcare Business News

Cap on tax exclusion for employer coverage urged

By Jonathan Block
Posted: May 8, 2013 - 4:00 pm ET

A controversial new proposal from the Urban Institute to help curb deficit spending by capping the tax exclusion for employer-sponsored health coverage could save hundreds of millions of dollar annually, but skeptics say the savings would come at the expense of dramatically altering the health insurance market.

The report released today by the institute, with funding from the Robert Wood Johnson Foundation, found that setting a cap on the tax exemption for health insurance benefits at the 75th percentile of the total premiums and other medical benefits and indexing it based on the five-year average of GDP growth rate would produce $264 billion in additional revenue over the next 10 years.

The report notes that the income tax exclusion for employer-provided health insurance benefits reduced federal tax revenue by $268 billion in 2011.

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“Our goal in choosing the level and indexing for the cap was to select a policy that would make a significant contribution to debt reduction, but would be distributionally equitable,” the authors write.

Lisa Clemans-Cope, an Urban Institute senior research associate and one of the authors of the report, said that the cap would not have a major impact on those currently with employer-sponsored coverage, yet would make a huge different on deficit reduction. She added the report suggests a small limitation, and “we're not going to undermine the system … that (is) the largest source of health insurance” for people.

However, Christopher Ryan, vice president of ADP Strategic Advisory Services, sees problems tinkering with the pre-tax exclusion for health benefits, the “bedrock of employer-sponsored coverage as we know it today.”

Ryan, who advised Senate staffers during the crafting of the Patient Protection and Affordable Care Act, said the pre-tax exclusion broadly benefits the middle class and scaling it back could reduce the incentive for employers to sponsor coverage.

“Given that some businesses are struggling to abide by the ACA, stability (of the health insurance system) is critical and this (proposal) could dramatically change the landscape,” he said.

Although the institute's proposal is similar to others that have been floated in recent years, Caroline Pearson, a vice president at Washington-based consulting firm Avalere Health, said the current plan would face huge political obstacles.

“It's politically quite difficult because employer-sponsored insurance is really entrenched and protected” in this country, she says. “It disproportionately impacts both public-sector and unionized workers, so it's difficult for the Democrats to support. On the other hand, it's one of the only proposals that is in discussion that economists agree can reduce healthcare costs.”

Follow Jonathan Block on Twitter: @MHjblock

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