As we rapidly approach the inauguration of President-elect Donald Trump, many are speculating on the specifics of how campaign promises will manifest into policy changes. Over the last several weeks we have seen evidence of a President Trump who may be both more moderate and pragmatic than the rhetoric of his campaign suggests. If this trend continues, how might his pragmatism affect the much-ballyhooed changes to the Affordable Care Act? One answer might be found in the confluence of tax reform and ACA repeal and replace.
President-elect Trump has promised that reform of the tax code will be one of his key priorities. While all the specifics have not been published, some key themes are: 1) reduction in the corporate tax rate, 2) provision for the repatriation of foreign earnings without taxation, and 3) reduction in individual tax rates for all. These aggressive tax reductions will be met by resistance by some of the budget “hawks” in the Republican Party. Trump may have to offer some “offsets” to get these aggressive tax reforms through Congress.
Also see: “2016’s best places to work, part 1.”
One of the sources of offsets would be the elimination of “loopholes” currently in the tax code. Depending on your perspective, loopholes are either a legitimate way to lower your tax burden or a source of lost revenue for the federal government. In any case, the largest loophole is exclusion of employer-provided health benefits from payroll and income taxes. The estimated value of this exclusion is estimated to be more than $216 Billion in 2016.
Another interesting aspect of this exclusion is that is regressive in nature. In other words, it provides more value to higher income individuals than lower income individuals. Elimination of this type of tax exclusion would benefit the lower and middle classes at the expense of the wealthiest Americans. Of course, if the purpose of the elimination is to fund an overall reduction in marginal rates from 39% to 20%, much of this lost value would be restored back to the households who pay the most taxes and benefitted the most from the health insurance exclusion. Another attractive feature of this type of move would be that it “simplifies” the tax code — also a promise of Republicans.
What does repeal and replace really mean?
But how does this relate to the promise to “repeal and replace” the ACA, a promise recently reinforced by Trumps’ appointment of Tom Price as Health Secretary. Employer-provided benefits are one of the key sources of insurance under the ACA. In fact, a key objective of the Employer Shared Responsibility provision was to expand the number of employees who have access to affordable health insurance.
The data suggests that this provision did not have a major impact on the estimated 20 million individuals who gained coverage under the ACA because most employers who would have been impacted by this proposed expansion could operate within the broad parameters of the ACA without significant increases in employee enrollment. The one ACA provision that did expand employer-provided coverage was the mandatory inclusion of dependent children up to age 26, which led to 2.6 million new individuals covered. (A provision President-elect Trump has said he would like to maintain.)
But what would happen if many of the employer provisions of the ACA were repealed and the special treatment for employer-provided benefits were also eliminated? Would this not lead to the massive reductions in the number of insured Americans? Perhaps not. One of the things we learned over the past several years is that the primary indicator of whether an individual would seek out health insurance in the future was their previous experience with health insurance.
Also see: “The year in wellness.”
The migration of millions of Americans from employer-sponsored insurance to the individual market may also have some other positive effects. First and foremost, it would serve to stabilize this market for the private insurance companies that have exited many locales. This would be appealing to both the insurance companies and to a President Trump who is loath to remove the elimination of medical underwriting — a very popular provision of the ACA. (Of course, another promise of the Trump administration is to let individuals buy insurance across state lines, reducing the impact of local market exits.)
Second, if the tax subsidies in the individual market under the ACA were retained, their progressive nature would tend to benefit lower and middle class families more than the employer-based tax exclusion. Finally, employers might be inclined to move some of the cost of employer-provided health insurance into compensation increases. This would increase take home pay in the short run, improving the perception of employees on how the Trump administration impacted their household economics.
While a revolutionary change to employee benefits based on tax reform and the repeal of the ACA is certainly possible, it is just as likely that a gradual implementation of tax reform will be the preferred alternative. It is also important to remember that nothing will change overnight. Revolutionary change, while possible, is difficult. Perhaps tax reform starts with a gradual reduction in the deductibility of employer-provided group coverage at certain income levels. Perhaps the erosion of employer-provided health insurance starts by allowing small employers to implement premium reimbursement plans for employees going to the individual market.
What is the future role of the employer in employee health and wellness?
So, where does this leave the employer-driven benefits market we know today? As health insurance moves from an employer-chosen plan that is enrolled in to an individually-selected plan that is purchased, leading employers will be forced to reevaluate their role in helping their employees with their overall financial wellness — of which health insurance will still be a foundation.
Additionally, the early experiments with private exchanges indicate that when employees have more choices, they choose lower value plans with lower premiums. This trend will increase the value of supplemental and ancillary insurance plans, which still work much better in a group environment. As the economy grows and labor markets tighten, employer fringe benefit programs will increase in importance regardless of the role of health insurance in employer benefit programs.
Whether “repeal and replace” amounts to a revolution or a gradual series of rollbacks without a clear direction, the continued pressure of healthcare inflation, regulatory compliance, and tightening labor pools will force both employers and benefit consultants to apply innovative and creative strategies for employee benefits. In any event, the landscape will not change overnight. The passage of Obamacare took two years. In the meantime, strategic delivery of these benefit programs will remain critical to their overall effectiveness.
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