The Health Exclusion and Employer-Based Insurance

Aug 30, 2013 | Taxes| Health Care

Last week, the Kaiser Family Foundation released its annual survey on health costs, prompting a wide range of reactions from "Health Care Costs Rise Moderately, Survey Says" to "Obama's Affordable Care Act Looking a Bit Unaffordable." However, one of the interesting takeaways is how much higher premiums have risen over the past decade and how employees and employers have shared the burden when it comes to employer-based health insurance. The below graph from the report points out that the employer share of the burden is growing almost as quickly as the employee share. Although health costs have nearly doubled over the last ten years, 72 percent is paid directly by the employer as a form of compensation which is comparable to wages and salaries.

Employees don't see the amount paid for health insurance on their behalf, but most economists agree that they pay through lower wages. From the standpoint of the employer, every dollar spent on benefits is a dollar that could have gone to wages. In fact, the tax code encourages employers to pay higher benefits and lower salaries, by excluding amounts paid for health insurance, child care, and other fringe benefits from taxable income. We've written before about the exclusion of employer-provided health insurance as the largest individual tax expenditure, costing as much as $3.4 trillion over 10 years. Reforming it is not only important for the potential revenue that could be used to lower tax rates and reduce the deficit, but also for the effect it has on the health-care system overall, encouraging higher-efficiency insurance plans. When the Brookings Institution released its framework to bend the health care cost curve down, limiting the health care exclusion was a major source of savings.

Rising health care costs are one of the biggest drivers of our long-term debt. Policies like the health exclusion encourage higher cost health-care. Even without repealing it, many proposals exist to cap or limit the exclusion. There are many ways to address rising health care costs, which is essential to putting our country on a strong fiscal footing.