Congress is currently considering healthcare reform proposals that would eliminate or place a cap on the employer-tax exclusion for health insurance. Eliminating the exclusion would eliminate most of the advantages of employer-sponsored insurance, while capping it would degrade the benefit and serve as a tax increase for middle-class Americans.
The employer-based system is highly efficient at providing American workers and their families with affordable coverage options through group purchasing and its associated economies of scale by spreading risk and avoiding adverse selection. The success of this system is possible because of the preferential tax treatment of employer-sponsored insurance coverage, where employer-paid contributions for an employee’s health insurance are excluded from that employee’s compensation for income and payroll tax purposes. More than 175 million Americans currently receive their coverage through the employer-based system.
Eliminating the exclusion would eliminate most of the benefits of employer-sponsored insurance. Employers and individuals would lose many group purchasing efficiencies, and there would no longer be a potent means for spreading risk among healthy and unhealthy individuals and maintaining stable coverage. Workers would be less likely to have their employer as an advocate in coverage disputes, and employers would be less likely to involve themselves in matters of quality assessment and innovation for their employees. Employers need a healthy workforce and the uncertainty of employee coverage could affect worker productivity.