The Future of Employment-based Health Insurance After the Patient Protection and Affordable Care Act

• Publication year: 2021

89 Nebraska L. Rev.885. The Future of Employment-Based Health Insurance After the Patient Protection and Affordable Care Act

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Kathryn L. Moore(fn*)

The Future of Employment-Based Health Insurance After the Patient Protection and Affordable Care Act

TABLE OF CONTENTS

I. Introduction..........................................886

II. Growth of Employment-Based Health Insurance.......887

III. Advantages and Disadvantages of Employment-Based Health Insurance.....................................892
A. Favorable Tax Treatment..........................893
B. Cost..............................................894
C. The Employer As Agent for Its Employees .........896
D. Labor Incentives ..................................898

IV. PPACA's Impact on Employment-Based Health Insurance.............................................902
A. Large Employer "Pay-or-Play" Mandate............ 903
1. Overview of Large Employer "Pay-or-Play" Mandate ...................................... 904
2. Will Employers "Pay" or "Play?"................ 906
B. Tax Credit for Small Employers ................... 912
1. Overview of Tax Credit ........................ 913
2. Likely Effect................................... 914
C. Excise Tax on Cadillac Plans ...................... 917
1. Overview of Cadillac Tax...................... 917
2. Likely Effect................................... 919

V. Conclusion ............................................ 921

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"The future of employment-based insurance is one of the most important issues in health care reform." Bob Lyke, Cong. Research Serv., RL 34767, The Tax Exclusion for Employer-Provided Health Insurance: Policy Issues Regarding the Repeal Debate 11 (2008).

I. introduction

In the United States, unlike in all other advanced industrial states,(fn1) health care is financed principally through employment-based health insurance.(fn2) In 2009, more than 156 million individuals under the age of sixty-five, or 59% of that population, were covered by employment-based health insurance.(fn3)

On March 21, 2010, President Obama signed the Patient Protection and Affordable Care Act (PPACA).(fn4) Described as seminal as the enactment of the Employee Retirement Income Security Act (ERISA),(fn5)PPACA fundamentally reforms the American health care system. PPACA, however, does not eliminate the system's reliance on employment-based health insurance. Instead, it builds on, and arguably

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strengthens, the employment-based system.(fn6) This Article discusses how PPACA is likely to affect employers' willingness to sponsor employment-based health insurance.

The Article begins by providing a brief history of employment-based health insurance in the United States. It then discusses the advantages and disadvantages of this system. In doing so, it focuses on four separate aspects of employment-based health insurance: (1) its favorable tax treatment, (2) its cost, (3) the fact that the employer acts as an agent for its employees when it purchases health insurance, and (4) the labor incentives it creates. The Article then turns to the three incentives PPACA creates with respect to the provision of employment-based health insurance: (1) the large employer "pay-or-play" mandate, (2) the small employer tax credit, and (3) the excise tax on so-called "Cadillac" plans. It describes and discusses how each of these incentives is likely to affect employers' willingness to offer employment-based health insurance. It concludes that, at least in the short run, PPACA is unlikely to change the American health care system's reliance on employment-based health insurance.

II. GROWTH OF EMPLOYMENT-BASED HEALTH INSURANCE(fn7)

The current system of employment-based health insurance is often described as the result of historical accident.(fn8) Prior to World War II,

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some employers offered health insurance to their workers and their families, but these employers were the exception, rather than the rule.(fn9) According to one estimate, about four million Americans, or approximately 3% of the U.S. population, had employment-based coverage in 1930.(fn10)

Employment-based health insurance began to grow rapidly during World War II and is now the principal source of health insurance for most individuals. Commentators often attribute the growth of employment-based health insurance to two principal factors: (1) wage and price controls instituted during World War il and (2) its favorable tax treatment.(fn11) In addition, unions and the military's return to civilian life are also thought to have played a role in the development of employment-based health insurance.(fn12)

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During World War II, the Office of Price Administration instituted wage and price controls in an attempt to deal with inflation.(fn13) Excluded from the definition of wages, however, were fringe benefits, such as employer contributions to health insurance and pension funds.(fn14) As a result, employers sought to compete for scarce labor by enhancing their fringe benefits and offering employees health insurance and pension benefits.(fn15) "Health insurance offered a straightforward way for employers to sweeten their compensation package in a manner that would be quite appealing to potential employees."(fn16)

Employment-based health insurance has long been accorded favorable tax treatment.(fn17) In an August 26, 1943, ruling, the Internal Revenue Service declared that the premiums employers paid on group health and accident insurance policies were excludable from the income of such employees.(fn18) Employers, however, were still entitled to deduct the premiums as ordinary and necessary business expenses and were not required to include the premiums in wages for employment tax purposes.(fn19) As the marginal tax rates during World War II

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could be as high as 85%, the real cost of a dollar of health insurance premiums could be as low as fifteen cents for the employer.(fn20)

The 1943 ruling was withdrawn in 1953,(fn21) but it was quickly replaced with a statutory exemption in 1954.(fn22) Since 1954, section 106 of the Internal Revenue Code has excluded employer-provided health insurance from employees' income,(fn23) and section 105 has excluded benefits received under employer-provided accident and health plans.(fn24) In contrast, individuals who purchase health insurance on their own must pay for the insurance with after-tax dollars. Individual medical care expenses are only deductible if they exceed 7.5% of annual adjusted gross income, and only the amount that exceeds 7.5% of annual adjusted gross income is deductible.(fn25) Although employment-based benefits do not constitute taxable income to employees, employer contributions to fund health insurance remain deductible expenses to the employer,(fn26) and the contributions do not constitute

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wages for purposes of the employment tax.(fn27) The Joint Committee on Taxation has identified the income tax exclusion for employer contributions for health care, health insurance premiums, and long-term care insurance premiums(fn28) as the single largest tax expenditure(fn29) for fiscal year 2009, with an estimated loss of $94.4 billion in tax revenue in 2009 alone.(fn30)

In addition to the wage and price controls instituted during World War II, and favorable tax treatment, unions are often cited as a factor contributing to the growth of employment-based health insurance during the 1940s and 1950s.(fn31) Although initially suspicious of employment-based health insurance,(fn32) labor unions, by the late 1940s, aggressively bargained for health insurance.(fn33) In industries dominated by a few large companies, unions bargained for generous health insurance benefits for their workers.(fn34) In industries consisting of many small employers, "unions organized industrywide labor-management health insurance plans that provided considerable cross-subsidization among firms and among individual employees within firms by charging uniform premiums regardless of expected utilization."(fn35)

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Employers with workforces that were not unionized offered rich health care benefits to discourage employees from joining unions.(fn36)

The return of military veterans to civilian life is also thought to have helped enhance the growth of employment-based health insurance during the 1940s and 1950s.(fn37) During World War II, military personnel grew accustomed to receiving government-issued health in-surance.(fn38) When they returned to the civilian workforce, they sought a similar arrangement.(fn39)

III. advantages and disadvantages of employment-based health insurance

Although World War II and its wage and price controls are long over, and unions are much less powerful than they once were, employment-based health insurance remains the dominant form of health insurance in this country. Moreover, most employees rate health insurance their most important and valuable employee benefit.(fn40) Yet, employment-based health insurance has been the subject of considerable criticism.

This section provides an overview of the advantages and disadvantages of employment-based health insurance and the reasons why employers voluntarily offer health insurance. At the outset, it is important to note that determining the advantages and disadvantages of employment-based health insurance depends, in large part, on the lens through which one views it. To...