8 through the FSA, m disproportio 50 percent more health care expenses than amount of the prem • To the degree that young and healthy work nately oium eani lder and unhealthy, which w would re ng they are sult in only 75 percent of the not taxed on the am the average population or insured workers. ill d ers leave the em rive up prem ount of m population of single workers at one ium ploym y that is put into the FSA. s in the em ent-based system ployment-based This self , - Statement for the Mr. Chairman and Members of the Committee: selection occurs because COBRA be 150 percen Em system ployers can also m . The em t of FPL receiving coverage. ploym aeke available a prem nt-based system neficiaries will then ium conve tend to be older, less healthy workers who be in a vicious cycle. As prem rsion arrangement as part of the FSA or as iums increase, workers remaining in the system will be disproportionately older and unhealthy, which continue coverage because COBR the youngest/healthiest w part of a caf The findings of Thorpe (1999) are reinforced eteria plan, which allow orkers will A prem smove to the non-group m workers to iums (even at 102 percen pay their share of the by experim arket, l ents driven by T t on an after-tax basis) are eaving relatively older/less premium for employm he Robert Wood ent- will drive up premiums in the system. As premiums increase, the youngest/healthiest The nonpartisan Employee Benefit Research Institute (EBRI) focuses on health and retirement benefits Senate Finance Committee healthy wor Johnson Foundation’s Health Care for the Uninsured based health benefits with pr more affordable than prem kers in the employm ium etax dollars. W s for com ent-based syste parable insurance in the non-group m orkers also do not pay incom m, which will con Program in the late 1980s tinue to drive up p e tax on em arket. that were able to rem ployer iums for workers will move to the non-group market, leaving relatively older/less healthy workers and has done extensive analysis on tax treatment of employment-based health insurance. EBRI, a reduce premium em contributions to FSA’s and HRA’s. ployer coverage. This phenom Under a self s for the self-em -insured health plan there is no ployed and worker enon is known as prem s in sm the “death spiral” because it m ium all f : Em irm ployers pay claim s. Despite premium eans the death s as they are reductions in the employment-based system, which will co ntinue to drive up premiums for employer nonpartisan research institute, does not take policy positions and does not lobby. Its research is available of e ranging from 9 to 60 percent, with most in th incurred. If em mployment-based health benefits as a resu Individuals are able to deduct coverage. T ployers had to va his phenomenon is known as the “d lue health benefits for tax purpos from taxable incom e 25 and 50 percent range, lt of continued and increased adverse selection. eath spiral” because it m e contributi es, would they value the benefit ons m no single site in the ade to a health savings eans the death of online at www.ebri.org Paul Fronstin is director of the Health Research and Education Program at EBRI. 14 account (HSA) if they have health insurance wi at the averag experim Were the employm ent reached 10 p e COBRA equivale ercen ent-based system t of its’ target m nt premium, go into th or would each w arket. th a m Hence, even very generous tax credits ie death spiral, employe nimum o deductible rker be assigned a value of at least $1,100 for rs could eventually employment-based health benefits as a result of continued and increased adverse Dallas Salisbury is president and CEO of EBRI. m drop coverage. Coverage would be dropped for corresponding with his or her actu individual coverage or $2,200 for fa ay not be large enough for a significant porti al or expected use of health mily coverage. on of the low incom a num In order to m ber of reasons. E care services? ake tax-free contributions to an e popul mployers offer health ation to purchase Is the value of “Health Benefits in the Tax Code: The Right Incentives?” selection. Were the employment-based system go into the death spiral, employers could One of the most common statements of economists, when it comes to health insurance, is that “there are 5 health benefits lower for lower-risk individuals than benef HSA, the health plan m health insur its prim ance. arily to be com ust also im petitive in the labor m pose a maximum $5,800 out-of-pocket lim arket. it is for higher-risk i Health benefits are by far the m ndividuals? it for individual If the value ost eventually drop coverage. no employer dollars involved, since in the absence of the health insurance being provided, the worker 6 of the benefit is determ coverage, and an $11,200 lim valued benefit in the workplace ined by it for fam health risk, higher-risk indivi and em ily coverage. ployers offer them Deductibles can be to r duals would be assigned a higher ecruit and r as high as the out-of- etain workers. If would be paid in added salary or wages.” We must respectfully disagree with this statement as it applies value for health benefits, and, all else equal, wo Endnotes pocket m workers dropped health benefits and instea a ximum, which would mean there woul d found coverage on their own in the non-group uld pay higher taxes associ d be no cost sharing above the deductible, ated with the value of July 31, 2008 to the individual, even were it to apply to all covered workers as a group, in terms of aggregate funds. the benefits that is above the excl though there are exceptions for pl market, employers would stop offering coverage usion cap. If the value of the benefit is not associated with risk, ans that include benefits for because they perceived that workers out-of-network providers. There did not Introduction Even then, adjustments would occur over the very long term, not immediately or in even the short term of 215 Dirksen Senate Office Building 1 See Table 1 in http://www.jct.gov/x-66-08.pdf. but instead valued at the community rate, highe are other restrictions as well. Regardless of w value coverage. ho contributes to the acco r-risk individuals would benefit because they unt, annual contributions a decade. Consider Congr Proposals to change the way health benefits ess itself, where the annual salary and health care costs ar increases are determined with little or no e treated under the tax 2 See Table 3 in http://www.house.gov/jct/x-32-08.pdf. This estimate includes the exclusion of employer consideration of what is being spent o would, on average, us are tax-free to the individual who owns the ac As workers leave the employm e more health care s n em ent-based syst ploy ervices ee h count, up to a lim ealth insurance. Consider the than th em for the non-group m e average value it of $2,900 for individual of the benefit. The individual at the arket and drive up code have one thing in common—they would eliminate the current preferential tax treatment for contributions for health care, health insurance premiums, and long-term care insurance premiums. minimum wage, or others, who have health insurance added by their employer. Employer decisions on coverage and $5,800 for fa m prem ethod used to determ iums in the employm ine the value of the health ent-based system mily coverage. Pers , emons ages 55 and older are allowed to m ployers will find coverage less and less benefit may drive adverse selection. If the ake employment-based health benefits and replace it with som e form of a flat tax credit or tax 3 whether or no Catch-up contt to pro ributions v are ide b no enefits are generally t indexed to inflation. made for the full workforce, relative to total cost, and not deduction for all taxpayers with “catch average p affordable and will even -up” contribu remium was used to va tions as well. In 2008, a tually drop that coverage qualifying private health insura lue the benefit, $900 catch lower-risk in . Third, employers are -up contribu dividua nce. From tion was allowed ls would lik already concerned about both a budgetary and ely o,p and is t out of the Submitted by: 4 3 7 on a micro- or individual-worker basis. Large employers that self-insure know that the actual cost of Lyke, Bob. “Tax Benefits for Health Insurance and Expenses: Current Legislation.” CRS Issue Brief for Congress. being phased in to $1,000 by 2009. plan in order to seek less cos the rising cost of health benef tly health insurance on their ow its and som Unspent balances in an HSA grow t e are looking for an excuse to drop those benefits. n. As mentioned above, when lower- ax-free, and political perspective, the tax treatment of employm ent-based health benefits is an almost providing the benefit varies widely across workers as a function of health status, age, etc. Congressional Research Service, Library of Congress, February 23, 2005. distributions from risk ind Equalizing the tax treatm ividuals leave th an HSA are e insurance p ent of e tax-free when used for qualifie mploym ool, the av ent-base erage cost of insurance ris d health benefits and non-group insurance m d medical expenses and certain es for everyone who ay inescapable target. Tax-favored employment-based health benefits accounted for $145.3 billion Paul Fronstin and Dallas Salisbury 5 1 Fronstin, Paul. “The Future of Employment-Based Health Benefits: Have Employers Reached a Tipping Point?” EBRI’ prem rem be the excuse em ains in the pool. The process w ium s ms o. st recent analy ployers use to drop health benef sis of the topic ould continue of today’s heits altogether. Sm aring was published in t until only higher-risk i all eh m ndividuals rem e Septem ployers would likely be ber 2007 ained in EBRI in foregone income tax revenue and $100.7 billion in foregone FICA tax revenue in 2007. Employee Benefit Research Institute (EBRI) EBRI Issue Brief no. 312 (Employee Benefit Research Institute, December 2007). Issue Brief, no. 309: “Health Insurance and Taxes: Can Changing the Tax Treatment of Health Insurance the pool, m the first to d For individuals who do not receive employm arking the insurance plan unsustainable. op benefits because they struggle with affordability m ent-based health benefits ore than large em , total hea ployers. lth care Foregone income tax revenue is predicted to amount to $628.5 billion over the five-year period 6 T-155 Helman, Ruth, and Paul Fronstin. “Public Attitudes on the U.S. Health Care System: Findings from the Health 2 Fix Our Health Care System?” The co-authors are Paul Fronstin and Dallas Salisbury of EBRI. Full text from expenses (in However, large em 2007–2011. Valuing the benef cluding p The tax proposals have far-reaching im ployers have also been struggli remit would also be co iums) are deductible o mpli ncated f ly if they exceed 7.5 percent of AGI, and only ng with the cost of hea or em plications for employer health plan ployers operating in multiple lth benefits, and while Confidence Survey.” EBRI Issue Brief no. 275 (Employee Benefit Research Institute, November 2004). is available online at www.ebri.org/pdf/briefspdf/EBRI_IB_09-20 074.pdf the am locations. E they are generally hesitant to drop benefits if ount that exceeds 7.5 percen mployers with sites in d t of AGI is deductible. This ifferent st their workers will have a difficult tim ates could face multiple v deduction is allowed only when aluations be e getting cause the design, including the viability of many of the newer consumer-driven health plans that use health 7 Christensen, Rachel, Paul Fronstin, Karl Polzer, and Ray Werntz. “Employer Attitudes And Practices Affecting an individual item cost of the benefit package could vary in differe coverage in the non-gro izes deductions on up market, employers ar his or her tax return, and it is nt geographical regions for a num e always looking for a co not widely used. T mpetitive ed ber of reasons. ge, and it he standard reimbursement arrangements (HRAs) or health savings accounts (HSAs) to increase worker Health Benefits And The Uninsured” EBRI Issue Brief no. 250, October 2002. Highlights deduction is larger than the sum The underlying prices for health care service m only takes one large employer to dr of item op health benefits in order to trigger a m ized deduc ay be higher in one part of the country over tions for most taxpayers, and m ovemeo nt st do not have of large 8 engagement and payment responsibility relative to employer payments. The tax proposals also See http://www.cch.com/press/news/2006/20061206h.asp. • Proposals to change the way in which health benefits are taxed have far-reaching deductib another, or dem employers away from le medical expenses that ex ographic differen health benefits. ces in different parts of the country for the sam ceed 7.5 percent of AGI. In 2001, about one-third of all e employer may 9 affect the viability of employment-based health benefits generally and raise questions regarding Fronstin, Paul. “Employment-Based Health Insurance: A Look at Tax Issues and Public Opinion.” in Severing the implications for employer health plan design. They also affect the viability of individual incom affect the valuation of health benefits. the future of Employers m the em e tax returns had item ploym ay drop benefits becau ent-based health benefits system ized de se of the add ductions, but only 17 perc ition . al administrative co ent of these claim sts related to ed a Link Between Health Insurance and Employment, Dallas L. Salisbury (ed.), (Washington, DC: Employee 4 employment-based health benefits generally and raise questions regarding the future of m valuing the benefit. Under proposals to change edical expense deduction, accounting for about 6 percen the tax treatm t of all tax returns. ent of health benefits, em There is one ployers Benefit Research Institute), 1999. the employment-based health benefits system. 10 exception to the 7.5 percent AGI rule, however. C Would Tax Credits Be Effect will be required to value health b ive in Expanding Coverage? enefits and report the va ontributions to an HSA are fully deductible lue of health benefits as imputed Current Tax Treatment of Health Insurance Cunningham, Robert. “Joint Custody: Bipartisan Interest Expands Scope Of Tax-Credit Proposals.” Health Affairs • Currently, employers can deduct from corporate taxable income the cost of providing from incom W taxable incom ee b Ex . While the details of how Tax credits have been on the radar scope of clusive, Sep et and are not subject ember 18, 2002. employers would be able to va to the 7.5 percent AGI threshold. policymakers even before President Clinton lue health benefits would likely The tax treatment of health benefits has been formed in the tax code through a series of 9 11 health benefits as a business expense. proposed comprehensive reform be worked out in regulations, em Armey, Dick, and Pete Stark, “Medical Coverag to the health insurance system. ployers m ea fo y have som r All: The Ulti e choices to m mate Cong Unsuccessful tax credit bills ression ake when it comes to al Odd Couple Weighs In.” laws and rulings that date back to the 1920s. Currently, employers can deduct from corporate Washington Post, 18 June 1999. were introdu valuation, and these choices would likely a • With respect to workers, the am ced by both Democrats and Republicans, and in s ount that em ffect workers and the value they place on ployers contribute towards health benefits is ome cases, bills were co-sponsored Issues With Changing the Tax Treatment o taxable income the cost of providing health bene f Health Benefits fits as a business expense. This means that 12 See Buexcluded, without lim tler, Stuart, M. and David B it, from . Kendal workers’ taxa l. “Expanding Access a ble incom nd Ce h. Em oice fo pl r Heal oyers can also m th Care Consum aers t ke hrough by both. Cunningham employm Com entp -based health benefits. rehensive tax reform as it affects health (2002) describes what has becom inse u the “joint custody” of tax credits rance and health care costs could mean whatever an employer spends on health insurance or health benefits on behalf of workers is 10 Tax Reform.” Health Affairs (Nov/Dec 1999): 45–57. Cunningham, Robert. “Joint Custody: Bipartisan Interest available a premium conversion arrangement as part of the FSA or as part of a cafeteria the end of employm among De Emmocrats ployers provide health benefits either by and Republicans. ent-based health benefits. We Sen. Lloyd Bentsen (D-TX) wa re th purchasing a fully-insured health plan from e current tax trea s a principal architect of tment of health benefits considered a business expense just as wages and salaries are a business expense. In other words, Expands Scope Of Tax-Credit Proposals.” Health Affairs Web Exclusive, September 18, 2002. Fronstin, Paul. plan, which allows workers to pay their share of the premium for employment-based replaced with som the unsucces an insurer, or by self-insuring. Groups that sful health insurance tax e form of a broad-based tax cr credits en are f acted during the first Bush adm u edit o lly insured pay r tax cap that was available either in the an insurer a per-person inistration in employers get the same deduction in calculating taxable business income when they choose to “Employment-Based Health Insurance: A Look at Tax Issues and Public Opinion.” in Severing the Link health benefits with pretax dollars. em 1991. In 1999, House majority leader Dick prem ploym ium,e wi nt-based system or the non-group th an average price that varies by employee population charac Arm market, healthy workers would opt out of ey (R-TX) and ranking Ways and Means teristics and health provide compensation in the form of health benefits as they would were they to provide Between Health Insurance and Employment, Dallas L. Salisbury (ed.), (Washington, DC: Employee Benefit em De care use. Self-insured employers m ploym ocrat Pete Stark (D ent-based coverage for the non-group market. -CA) jointly endorsed ta typically dividx credits on the opinion pa e the total cost of the health plan by the num ge of the Washington ber com •p ensation in the form of wages and salaries For individuals who do not receive employm and should therefore be ent-based health benefits indifferent from , total health ca an re Research Institute), 1999. Miller, M. “Health Care: A Bolt of Civic Hope,” Atlantic Monthly, October 2000, 11 www.theatlantic.com/issues/2000/10/miller.htm (6 August 2002). Post, but the proposal did not go anywhere. of covered employees to derive Insurers m expenses (in ay respond to a broad-based tax cred cluding prem an av iums) are deductib erage “p Also in 1999, Stuart Butler of remium le equivalent.” o it, for exam nly if they exceed 7.5 percent of AGI, This prem ple, by designing health plans the conservative ium equivalent is income tax point of view between providing health benefits or cash wages. 13 to attract the young and/or healthy Heritage Foundation and David Kendall of the (De used to determ Thorpe, and only the am Kennetine COBRA prem h E. “Chanount that exceeds 7.5 ging the Tax ium Tre and the uninsured. They m s in a self-insur atment of percen Healtm ht ed setting. If e Iocratic) Progressive Policy Institute m of AGI is deductib nsurance: Ia m y a pact dvertise the fact that certain m s on t ploye le. This deduction is he I rs were required to nsured and Uninsure ade a d.” in Employers do however get a break on payroll taxes when compensation is provided in the 12 Severing the Link Between Health Insurance and Employment, Dallas L. Salisbury (ed.), (Washington, DC: health p joint proposal, as did Reps. Jim value health benefits for em allowed only when an individual item lans will be “free” in the sens ployee incom McCrery e that th e (R-LA) and Jim and izes deduc e ta tax purposes, the current method that employers x credit would cover o tions on his or her tax return, and it is not McDermott (D-WA) in 2000. r more than cover the form of health benefits instead of wages and salaries. They do not pay the 6.2 percent payroll tax The Employee Benefit Research Institute (EBRI) is a nonprofit, nonpartisan research institute that focuses Employee Benefit Research Institute), 1999. prem use to value prem ium A prim widely used. . The availability of these plans will ary issue with a tax credit is w iums would be beneficial to some workers but not to others. h be a draw to young a ether the tax savings is la nd healthy workers with rge enough to induce the for Social Security for workers whose incomes are below the Social Security wage base, which 14 on health, retirement, and economic security issues. EBRI does not take policy positions and does not W. David Helms, Anne K. Gauthier, and Daniel M. Campion. “Mending the Flaws in the Small-Group Market.” em uninsured to ploym It is clear from ent purchase h -based health benefits. If young wor ee m alth insuran ployer experience with ce. The ability of a tax credit to reduce the uninsured COBRA that the m kers leave employm ee thod used to value nt-based health benefits was set at $102,000 in 2008. They also do not pay • Comprehensive tax reform as it affects health the 1.45 percent payroll tax for Medicare for insurance and health care costs could mean lobby. www.ebri.org Health Affairs, Summer 1992; 11(2): 7–27. f depends heavily on several key design issues, such prem or the indiv iums is beneficial for som idual market, the em e wor ploym kers but not to ent-based sy others. E as the s stem will suf ize of mployers are allowed to require that the tax cr fer from adverse s edit relativ elee to incom ction that e all levels of wages. the end of employment-based health benefits. Were the current tax treatment of health pushes up the cost of the em and incom COBRA be e levels overall. Previous research neficiaries pay 102 percent of the pr ployment-based cove has shown that for single w em rage and em ium for COBRA coverage. Because workers ployers will rethink their role in orkers with income at benefits replaced with so With respect to employees (including the me form of a broad-b self-employed), the am ased tax credit or tax cap th ount that em at was available ployers providing health benefits. 150 percent of the federal poverty le are generally required to pay the full prem vel (FPL), only 48 percent woul ium on an after-tax basis (as opposed to paying a d gain coverage even if the contribute towards health either in the employm benefits and health insurance is gene ent-based system or the non-group m rally excluded, without lim arket, healthy workers would it, from 13 tax cr portion of the prem edit w To the degree that young and healthy worker as set to 79 percen ium on a pre-ta t of the prem x basis while at work), there is ium. In addition, a tax cr s are able to and do in fact leave the a self-selection issue regarding edit equal to the full workers’ taxable incom opt out of employm e. In ent-based c addition, workers whose em overage for the non-group market. ployers sponsor flexible spending th em who takes COBRA. Employers have found that ployment-based system, workers remaining in the em COBRA be ploym neficiaries incur on average about ent-based system will be accounts (FSAs) are able to pay for out-of-pocket health care expenses with pretax dollars Employee Benefit Research Institute, 1100 13 Street, NW, Suite 878, Washington, DC 20005 2 3 4 5 6 1 7