Hearings Ponder Future of Employer-Provided Health Care

Calls for capping the tax exclusion for employee premium payments triggers debate

By Stephen Miller, CEBS Apr 21, 2016
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updated on 4/25/2016

Congressional hearings on employer-provided health care, held April 14 on Capitol Hill, highlighted the importance of health coverage offered through the workplace, focusing on innovative benefit strategies and the tax exclusion for employer-provided group plans.

The House Subcommittee on Health, Employment, Labor and Pensions (HELP) heard testimony on innovations employers are using to control health care costs and provide higher quality coverage to their employees. The same day, the House Ways and Means Committee held a hearing on the tax treatment of health care.

“Many employers are adopting innovative strategies to improve health benefit offerings to their employees and some are providing tools to help employees be better consumers of health care,” noted Michael P. Aitken, vice president for government affairs at the Society for Human Resource Management (SHRM), in an April 13 letter to the House committee leaders.

“HR professionals have a significant opportunity to impact healthy lifestyle choices through employee education—an added benefit of employer-sponsored health care,” Aitken said. “More can and will be done if Congress reaffirms its support for employer-sponsored coverage and permits employers to have flexibility and continuity in offering valued health coverage to their employees and families.”

Innovative Strategies

“It is essential that policymakers continue to recognize the unique value of employer-sponsored plans, which significantly reduce burdens and costs on public programs and on individuals,” testified Tresia Franklin, director of rewards and employee relations at Hallmark Cards in Kansas City, Mo., speaking before the HELP subcommittee.

Some of the health benefit strategies currently being used or considered by employers, she said, include:

Onsite/near-site health centers. Providing access to medical care on or near the worksite allows employees quick access for work-related injuries and other minor ailments. “Such quick and easy access to care cuts down on employee ‘downtime’ due to medical issues, while allowing employers to provide cost-effective care outside of the traditional confines of the group health plan,” said Franklin, who also serves on the board of the American Benefits Council, representing employers that sponsor employee benefit plans.

Wellness and disease management programs. Because treating certain conditions, such as diabetes and obesity, can be expensive, “helping employees manage such conditions yields positive results for employees in improving their health and quality of life while also driving down health care costs,” Franklin noted.

Telemedicine. Electronic access to physicians or other providers, including via phone and online videoconferencing, has become increasingly popular. “Telemedicine is another ‘win-win,’ offering cost-effective and convenient physician services to employees,” said Franklin.

Centers of excellence. While about 3 percent of U.S. employers are using centers of excellence (high-rated medical providers that specialize in particular clinical services), “that figure is expected to grow dramatically, and could be as high as 73 percent in 2018,” she noted, citing research by consultancy Willis Towers Watson.

High-performance provider networks. Similarly, about 13 percent of employers are currently using narrower networks of high-performance providers that offer lower premiums and better value for in-network coverage, and that figure is expected to rise as high as 56 percent in 2018, Franklin said.

Improving employee engagement via technology. Decision-support tools and other engagement technologies are increasingly popular. For example, according to Willis Towers Watson, 52 percent of employers use technology to enable employees to make better plan selections, and that number could grow to 89 percent in 2018.

Use of private exchanges. “An area of considerable growth in the health care arena has been the use of private exchanges, whereby employees are given the ability to direct the purchase of health care coverage from among a group of insurers selected by the employer and using a defined amount of employer funds,” said Franklin. She told the subcommittee about Hallmark’s decision to move to a private insurance exchange, which has “provided increased choice for employees and provided them with state-of-the-art decision-making tools.”

Franklin urged Congress to continue to support the uniform legal and regulatory framework for health coverage under the Employee Retirement Income Security Act, and to support the bipartisan effort to repeal the 40 percent “Cadillac tax” on high-cost plans—levied on health premiums above the tax’s statutory thresholds, and set to take effect in 2020. “If Hallmark’s plan triggered the Cadillac tax, it could seriously complicate our highly successful benefits and wellness initiatives,” Franklin said.

Premium Tax Exclusion Debated

The Cadillac tax and calls to scale back or eliminate the tax exclusion for employer-sponsored coverage were the focus of the Ways and Means Committee’s hearing.

“The largest subsidy in the tax code is the exclusion from federal income and payroll taxes of premiums for employment-based insurance, which has made it a target for those looking to raise federal revenue,” testified Joseph Antos, a health care analyst at the pro-market American Enterprise Institute in Washington, D.C. “Nearly all premiums paid by employees or their employers are paid out of pretax dollars, which represents a savings of about 30 percent for the typical worker,” he noted. “In 2015, the average premium for family coverage offered through employers was just over $17,500. The exclusion saved the typical worker buying that insurance about $5,250.”

The Cadillac tax discourages employers from offering high-cost health plans, but “Congress should not simply repeal the Cadillac tax without offering a real reform plan,” Antos said. “Capping the [tax] exclusion is a sensible compromise that would be both simpler and fairer than the current system, and could be accomplished without disrupting the way most people purchase health insurance.”

Avik Roy, a scholar at the conservative Manhattan Institute, based in New York City, agreed that a cap on the tax exclusion for group plan premiums would be a more effective and less burdensome way to raise revenues than the Cadillac tax, which he said “contains many exceptions and loopholes, and does not deploy the revenue it raises to aid all those who would like to purchase insurance on their own.” Instead, Congress could design “a cap on the employer tax exclusion that is gradually phased in over time … that raised an equivalent amount of revenue as the Cadillac tax.”

Congress should also consider providing tax relief to those who purchase health coverage on their own by equalizing the tax treatment of employer-purchased and individually purchased coverage, Roy advised.

In response to questions from committee members, Antos clarified that capping the amount of tax-excludable premiums would not affect a business’s ability to deduct, as an ordinary and necessary business expense, the premiums it pays on behalf of employees. “I don’t think anybody’s proposing that the employer’s ability to take off their topline legitimate costs of doing business, which includes their contributions to all forms of compensation for employees, nobody’s talking about capping that or eliminating that in any way,” Antos said. “What we’re talking about is limiting what the employee can essentially exclude from his income taxes, but it’s not going to affect the employer.”

Responded Rep. Jim Renacci, R-Ohio, expressing a view shared by others on the committee in both parties, “That’s even worse. Now you’re going to add taxes to the employee. Again, if the American people hear what you just said, they’re going to be very upset.”

Representing labor, Steven Kreisberg, Washington, D.C.-based director of research and collective bargaining services of the American Federation of State, County and Municipal Employees (AFSCME), testified that his union “is strongly opposed to taxing workers on their health benefits, and polling during the health care reform debate showed that it was a broadly unpopular idea, opposed by more than 70 percent of voters.”

Kreisberg noted, “Eliminating or capping the tax exclusion would undermine employer-sponsored coverage by removing a key incentive that employers have for providing coverage. In addition, taxing benefits would encourage younger and healthier workers to pass up employer-sponsored coverage and seek less comprehensive insurance. The loss of these workers to employer risk pools would drive up the cost of coverage for older and less healthy workers.”

Roy commented that by replacing the Cadillac tax on employers with a cap on the tax exclusion for employees’ premiums, employers would be able to increase employee compensation, since businesses view both direct pay and the cost of benefits together as part of a total employee-cost equation.

“As to whether the employer will keep the money or raise wages, the economic literature is overwhelming in indicating that there is an exact one-to-one correlation” between higher wages and lower benefit costs, Roy said, “because it’s overall compensation that the employer thinks about, and it’s a competitive market. If you want to retain those workers and not lose them to a competing firm, you’ve got to pay them what the market’s paying them. So if the cost of insuring your workers goes down, that gets returned to workers in the form of higher wages. We can be optimistic about that.”

Finally, Roy said that even with a cap on the tax exclusion for their premium payments, “The reason why [employees] would stay in the employer-based system is because of the economies of scale that come from a large employer, or even a smaller employer, purchasing health insurance in bulk for a group of its employees, and having the negotiating power that comes with that,” as opposed to employees shopping individually for coverage.

Employers should be confident of keeping younger, healthier employees in their risk pool, Roy said, by pointing out to them that “if you bought insurance on your own, you wouldn’t get as good of a deal.”

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow me on Twitter.

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