Ryan’s latest offering, unveiled in a speech a week ago at Stanford University’s conservative Hoover Institution, is nothing less than a blueprint for replacing the Affordable Care Act with a consumer-driven model that would eliminate the current tax-exempt treatment of employer-paid health insurance. Is Ryan right? Or wrong?
Ryan believes that exempting health care benefits from employee income tax leads to insurance choices that are unnecessarily costly (since they are effectively subsidized), insufficiently tailored to employee needs (since few choices are offered), inadequately valued (since the employee isn’t paying), and unreasonably tie employees to their jobs (since they may not be able to move without switching insurance). He also believes the present system is unfair: higher-paid employees get a greater tax advantage, while employees of smaller businesses have fewer (or no) options at higher prices than their peers in larger corporations.
He’s right! Common sense says that people are likely to choose the most generous coverage available if it is free or offered at a very low price, while employers—especially those who must negotiate union contracts—see tax-subsidized health insurance as a “better buy” than salary payments.
Ryan proposes to tackle the issue in dramatic fashion, discouraging employer-paid health insurance by taxing it as ordinary income and balancing this with new tax credits to offset individuals’ own purchases of coverage, in the belief that this will result in greater sensitivity to health care costs, more cost-effective insurance purchasing decisions, more portability of coverage, and a more equitable system than today’s.
He’s wrong (at least as indicated by the details in his Stanford speech)! While his proposal has a certain elegant simplicity, there’s no certainty that employers would replace health care benefits by pay increases to cover the employees’ costs of coverage. Tax credits, presumably funded by taxing wage increases to replace employer-paid insurance, won’t cover more than a fraction of the cost of individual coverage. Many employees would likely fail to purchase insurance and potentially create huge debts for themselves, while marginal small businesses will find themselves pressured to increase wages so that their employees can pay for coverage.
Even with these problems, Ryan’s proposal is an interesting starting point. One intriguing comment in his Stanford speech characterized it as a defined contribution plan. If this was simply a way of describing tax credits, the “contribution” is sadly inadequate by typical benefits standards. On the other hand, a true defined contribution version of Ryan’s proposal could avoid the risks of employers failing to compensate their workers for their increased expenses and of employees failing to purchase coverage.
Here’s one way in which this might work. Employers above a certain size would be required to contribute a fixed dollar amount for employees to use to buy coverage through an employer plan (if offered) or from an exchange. This basic contribution would be enough to purchase relatively modest coverage and would be tax-free to the employee and a pre-tax deduction for the employer. Any employer contributions above this level would be taxable to the employee. Tax credits would be available to smaller businesses and to employers with high percentages of older workers. Employees could “trade up” to more generous coverage by adding their own money to the employer contribution, but no tax advantage would result. Individuals who failed to purchase coverage would simply be assigned to the lowest cost available health plan.
This true defined contribution approach may have less appeal to the red-blooded Darwinians in the Ryan camp, but it would far better protect employees from being shortchanged by their employers—or themselves. And, like Ryan’s version, it puts responsibility for coverage choice where it belongs—with the individual insured—something that is more likely to lead to better-value choices.
(In a recent blog post Beltway consultant Bob Laszewski slams defined contribution plans as having failed to control costs over the past twenty years. However, Laszewski lumps the typical percentage-of-premium plans into the “defined” category, thereby confusing plans in which there is little cost incentive for the employee to choose “value” with those where the entire excess of premium over a defined dollar amount must be paid out-of-pocket.)
None of this discussion is relevant, of course, unless Republicans are able to win the presidency and control both houses of Congress. However, if we do find ourselves with a Republican administration determined to scrap the Accountable Care Act, it might be an advantage to have a proposal that would work and actually benefit both employers and employees.