EBRI Issue Brief
What Does the Future Hold for the Employment-Based Health Benefits System?
- The employment-based health benefits system is the most common form of health coverage in the United States, covering 167 million people under age 65 in 2017.Between 2013 and 2017, the percentage of individuals with employment-based coverage has been growing. The increase in employment-based health insurance among workers and their dependents may be due to the increase in the percentage of employers offering such benefits, which may in turn be due to a combination of the strengthening economy, lower unemployment rates, and relatively low premium increases.
- According to the 2018 EBRI/Greenwald & Associates Health and Workplace Benefits Survey (WBS), nearly 60 percent of workers are satisfied with their current mix of health benefits and wages, and most individuals with employment-based health benefits are satisfied with their coverage.
- The employment-based health benefits system has a number of advantages over various alternatives.These advantages may make it difficult to completely move away from the employment-based system.For instance, when it comes to insuring a group of individuals, employment-based groups are often considered “natural groups” in the sense that they were formed for reasons other than the purchase of health insurance. Insurers are more willing to provide insurance for a naturally formed group than for a group that was formed solely for the purpose of buying health insurance because the risks of adverse selection are mitigated. Employers also often act as an advocate for workers during coverage disputes between the insured and insurer, and they frequently involve themselves in matters of quality assessment of care and influencing health care matters in the policy development arena.
- The employment-based health benefits system is far from perfect.One of the shortcomings is that it does not guarantee universal coverage, which a Medicare-for-all system could do.Many employers, especially smaller employers, choose not to offer coverage.Employers that offer coverage also need to continuously justify whether to offer coverage to workers.The percentage of employers offering health benefits ebbs and flows with the economy and other factors.De-linking health insurance from employment may address the shortcomings of the current system.
- Public policies related to the Cadillac tax; Medicare-for-all; proposals that would allow insurance to be purchased in the individual market using employer funding; and market developments, such as the gig economy and high-priced medical advances like specialty medications, may all affect whether there is an employment-based health benefits system in the future.
- The Congressional Budget Office (CBO) estimates that employer and employee contributions toward health coverage will account for $282 billion in forgone tax revenue during FY 2019 and nearly $3.7 trillion over 2019‒2028.In contrast, the FY 2019 mortgage interest deduction is expected to account for $75 billion in forgone tax revenue, while contributions to workplace retirement plans for that same time period are expected to be about $196 billion. The large dollar amounts associated with the tax exclusion of employment-based health benefits makes it an almost inescapable target for policymakers from both a budgetary and a political perspective.
- While employment-based coverage is the largest tax expenditure in the U.S. budget, it is also the least per person when compared to other health-coverage-related subsidies.The average per capita subsidy tax expenditure was $1,722 for individuals with employment-based coverage, compared with an average subsidy of $6,111 among those getting a subsidy in the non-group market and $4,418 among those receiving either Medicaid or coverage through the Children’s Health Insurance Program (CHIP).
- Capping, reducing, or eliminating the tax preference could generate additional tax revenue to reduce the budget deficit and/or pay down the federal debt.Or it could be used to pay for a new round of health reform.For instance, during the 2018 election, many democrats noted their support for “Medicare-for-all,” and reiterated such support with the introduction of the “Medicare for All Act of 2019” on February 27, 2019.In various single-payer or Medicare-for-all bills, employment-based health insurance would cease to exist as we know it.However, in various Medicare and Medicaid buy-in proposals, employers could continue to offer health coverage.Even the administration’s own proposal to expand the use of health reimbursement arrangements (HRAs) could seriously undermine employment-based health benefits.
- The employment-based health benefits system arose not from any deliberate national health care policy but rather from a voluntary, market-driven response by employers to government regulations regarding wages and taxation during World War II. In the absence of more government involvement in health care, employer activism has increased through various types of coalitions. What we do not know is whether employers would trade off more government involvement in health care for less of their own involvement if given the opportunity, especially in a weak economic environment. Thoughtful consideration of policy proposals to expand the number of people with health insurance coverage should not only evaluate their effectiveness in addressing health care costs, quality, and coverage. Policy makers should consider the impact on the voluntary, market-driven, employment-based system.