The Unintended Consequences Of Ending The Tax Preference For Employer-Sponsored Health Insurance

The Incidental Economist’s Don Taylor embraces some parts of Stephen Parente’s so-called grand bargain on the debt ceiling — which includes 1) ending the tax preference of employer paid insurance, 2) transitioning Medicare to defined contribution program for those under age, 3) block granting Medicaid, 4) adjusting several aspects of the ACA (lessen subsidy triggers, end taxes imposed on device makers, etc.) — noting it probably makes a lot sense to end the huge government subsidy to employer sponsored coverage. “Capping or ending the tax exclusion would greatly improve the cost-saving potential of the newly passed reform. And such a policy is flexible, and would work well alongside any imaginable change (either to the right or left) to the framework enacted by the Senate bill,” he writes.

A lot of people would agree that tying health care coverage to employment is probably not the most efficient way to pay for services and results in all kinds of inefficiencies and economic costs. But the fact of the matter is that most Americans still receive coverage through their jobs — and will continue to do so even after the Affordable Care Act is fully implemented. And even though I see the argument which says that the exchanges are a better structure for connecting people to insurance, I’d argue that this kind of change should probably be put off until after the exchanges are up and running. You want to give states and the federal government an opportunity to work out all of the kinks in the new system before you end a subsidy that encourages employers to provide stable and quite satisfactory (if you ask them) policies to their employees and force those employees to look elsewhere for insurance.

After all, if you want to learn about the consequences of sudden change, look no further than the 2003 Medicare Modernization Act, which established Medicare Part D. During the initial enrollment period, “there was confusion about which prescriptions would be covered by the enormous number of plans from which an enrollee could choose” while the “intricacies of choosing a plan and the transition of medical information overwhelmed the government computers,” which was never actually tested prior to the transition.

As a result, “Sacramento resident Randi Sanford, 50, who has cystic fibrosis, had to go without the antibiotic infusions she needed to fight an infection because the new Part D prescription drug benefit would not cover the procedure when administered at home.” “Patricia Franks, 69, of Gerber in Tehama County had to borrow blood pressure medication from a brother-in-law after her pharmacist refused to fill her prescriptions,” and “San Francisco’s Johnny Wilson, 49, who is HIV-positive, had his medication only because he had laid in a three-month supply before the new program started.” By the time he got his Medicare drug card, however, “he was down to his last pills.”

You can see these kinds of problems occurring with any sudden change of benefits, especially with something as large as the phasing out or eliminating the employer tax credit for health insurance.