Improving Health Insurance Outcomes with Employer Subsidies of State Exchange Health Insurance

Improving Health Insurance Outcomes with Employer Subsidies of State Exchange Health Insurance

Abstract: The Affordable Care Act (ACA) created a path to health insurance coverage for people who did not have offers of employer-based health insurance coverage and for people with pre-existing conditions. However, 15 years after the enactment of the ACA the overwhelming majority of working-age Americans and their families continue to obtain their health insurance through their employer. As a result, working-age individuals and dependents who switch or lose jobs also lose their health insurance coverage and some people with an offer of employer-based health insurance are not eligible for tax credits for state exchange health insurance. The expansion of state exchange health insurance coverage facilitated by employer subsidies of state exchange health insurance instead of health plans tied to the employer could increase the number of people with continuous health insurance coverage, decrease reliance on government programs like Medicaid, and improve health insurance outcomes.

Background:

The Affordable Care Act (ACA) created state-exchange health insurance markets to allow access to health insurance for people with pre-existing conditions and people without coverage throough their employer.

The ACA also maintained long standing tax preferences facilitating the use of firm-specific employer-based coverage. ACA insurance rules included a mandate requiring employer-based insurance for firms with more than 50 employees. The ACA also prevented employees at firms offering affordable employer-based coverage access to a premium tax credit for state exchange health insurance.

The combination of existing tax incentives and ACA rules resulted in employer-based insurance remaining the dominant form of health insurance for working-age Americans and their dependents. (Around 63 percent of working-age Americans get their health coverage through their employers compared to 14 percent through state exchanges in 2024.)

Economists have long favored separating the provision of health insurance from employers. Senator John McCain, in his 2008 campaign favored replacing all employer-based insurance with a market where all individuals would pay insurance premiums with a tax credit. The McCain plan would have provided the same subsidy to all households, which is a fairer outcome than the current system where some employers pay most or all of their worker’s health insurance premium and some workers receive little or no premium subsidy.

The McCain health plan had two shortcomings.

The plan would have increased costs for many Americans at firms with generous subsidies. People with employer-based coverage and generous subsidies like and support the current system and there was little support for abolishing the employer-based system.

The plan did not eliminate problems from restricted access imposed on people with pre-existing conditions. In fact, the combination of an elimination of employer based coverage and lack of access to health insurance for people with pre-existing conditions could have worsened health insurance outcomes.

The ACA did not resolve several problems associated with the continued dominance of employer-based health insurance coverage.

People with employer-based health insurance often lose their health insurance if they are laid off. Theoretically a laid off employee could continue coverage through COBRA; however, COBRA requires the employee pay the entire premium, which is often unaffordable for newly unemployed workers. In addition, workers with Flexible Spending Accounts, which are tied to employers lose all funds in their accounts when they are laid off.

Employers experiencing a Chapter 11 bankruptcy often eliminate coverage or reduce subsidies. Chapter 7 bankruptcy generally results in the termination of all employer-based health insurance including COBRA. State exchange health insurance is unaffected by corporate bankruptcy.

People with employer-based insurance who voluntarily switch jobs and get new insurance from their new employer must meet a new deductible and out-of-pocket limit. Job switchers with employer-based coverage invariably have higher out-of-pocket costs.

Current ACA rules prevent a person with an “affordable” offer of employer-based coverage from accepting a premium tax credit on state exchanges even if the state exchange plan would offer better value. Health insurance choices at many small firms are extremely limited. In 2020, around 75 percent of small firms offering health insurance to their employees offered only one plan. In addition, 42 percent of self-only coverage at health plans offered by small firms had a deductible exceeding $2,000.

Many state exchange markets are not highly competitive. A report by the Kaiser Family Foundation found in 2020 two state exchanges were served by only one insurance company and another fourteen state exchanges had two insurance companies offering products. Research has revealed that health insurance plans offered on state exchanges often lack access to top hospitals or specialists.

A Policy Proposal:

Problems associated with separate employer-based and state exchange health insurance markets would be alleviated by a rule change facilitating or mandating employer subsidies for the purchase of state exchange health insurance instead of the existing tax subsidy for the purchase of firm-specific employer based health insurance coverage.

The new tax rules governing the subsidy for state exchange health insurance would involve:

· Tax free treatment of all premiums for the purchase of 100 percent of the value of the silver plan on state exchanges.

· The employer mandate requiring participation in employer based insurance for firms with more than 50 full time equivalent employees would be applied to the new subsidy.

· Any person without employer subsidized state exchange health insurance would continue to be eligible for the premium tax credit for the purchase of state exchange health insurance.

· Flexible Spending Accounts will no longer be linked to the firm and the use-or-lose stipulation will be abolished, as discussed here.

· A gradual phaseout of employer subsidies for firm-specific employer health plans. (Potentially optional. I believe the subsidies for state exchange health insurance would prove to be superior and would take over the market.)

The merger of employer-based and state-state exchange health insurance markets through subsidies offering the purchase of state-exchange health insurance eliminates problems associated with a system tying health insurance to employment,

People who become unemployed will retain their current health insurance policy and will immediately become eligible for the premium tax credit on state exchange insurance. This will reduce the number of unemployed people who either become uninsured or become dependent on Medicaid.

The elimination in the link of Flexible Spending Accounts to the employer means changes in employment will no longer reduce funds for out-of-pocket health expenses or future health insurance premiums.

People who leave their job for a different position will keep their current health plan and will not have to restart the process of spending on health care until meting a deductible or out-of-pocket expense limit.

The new rules do not bind employees to a firm-specific health insurance plan when a more suitable health plan is offered through state exchanges.

The new rules increase the number of offerings and the amount of competition in state exchange markets.

The new rules maintain an employer mandate, which assures that employers will continue to subsidize health insurance purchases, albeit, through state exchanges instead of firm-specific plans. People who lack an employer subsidy because they are employed by a small firm not offering health insurance or are self-employed could continue to claim the premium tax credit for state exchange health insurance.

Concluding Thought: Affordability remains a major concern. The next essay considers changes in policies to improve affordability and the impact of these policies on households, employers, insurance firms and taxpayers.

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