In the 2018 midterm elections, a plurality of voters (41 percent) named health care as the number one issue. Undoubtedly, health care will once again be the number one issue in 2020, although the country is deeply divided on solutions.
Candidates on the far left support Medicare for All, which, by their own admission, would replace private health insurance options (and even today’s public programs) with one government program for everyone. President Trump’s healthcare agenda is diametrically opposed to this direction. He has instead focused on offering more affordable private health insurance options and letting Americans choose.
The administration’s latest move, a rule expanding Health Reimbursement Accounts (HRAs), exemplifies this principle. The rule will allow employers to fund tax-free HRAs for their workers, which they can use to pay for health insurance plans they choose in the individual market, and/or for other medical expenses.
Importantly, this rule begins to tackle one of the oldest, deepest flaws in the American health insurance market, namely, that our distorted, dysfunctional market centers on employers rather than on patients.
After World War II, Congress created a tax exclusion for health insurance plans offered by employers, which became popular benefits during the war due to wage controls. Providing insurance was a way to compensate valued employees without officially raising their pay. Fast forward a few decades, and employer-sponsored health insurance plans have become the most popular form of insurance. Employer plans insure fully 180 million American lives today, comprising the majority of privately-insured Americans.
Although this model is popular with many people, it has some serious, systemic downsides. First, it’s regressive. People with good-paying, full-time jobs are most likely to have on-the-job benefits like health insurance, so they benefit from the tax exclusion while people who are out of work, work for themselves, work part time or in the gig economy do not. These folks (if they do not qualify for Medicaid or Medicare) have to buy insurance on their own, often without any tax break.
Second, employer plans don’t offer employees much choice. About 80 percent of employers pick one plan and the only choice workers get is whether or not to enroll. A more competitive market for health insurance would have more decision-makers. If each worker could choose his or her own insurance plan, this would force insurers to create and market their products to the preferences of those many consumers, rather than creating plans for large groups with a standard set of covered expenses.
Third, our employer-centric health insurance market affects our labor market. The cost of employer plans has grown significantly in recent years and has eaten up much of employers’ resources – resources that should have gone into wage growth or hiring. So, instead of getting raises, many of Americans have simply continued to get health insurance at work, a benefit with increasing costs.
Finally, employer-centric health insurance works against people with “pre-existing conditions.” Basically, job-based insurance makes it harder to stay continuously covered because the insurance plan doesn’t move with the worker when his or her employment situation changes. This precipitated bad policy “fixes” in this area.
President Trump and members of his administration are not the first people to recognize these downsides with our employer-centric health insurance market. Sen. John McCain campaigned for president in the 2008 election cycle with a healthcare plan that would have limited the tax exclusion for employer plans, instead offering a tax credit for health insurance people purchased on their own. He was roundly criticized for attempting to tax people’s on-the-job health benefits, and ultimately lost the election, never having a chance to implement his plan.
But the latest HRA rule should point the way forward: Without taking benefits away from anyone, the Trump administration has opened the door to a new option. Employees whose bosses move to the HRA model will now have more choice in their insurance plan, and some employers who heretofore have not offered any health benefit may choose to start offering HRAs.
To maximize the impact of this HRA rule, we ultimately need Congress to act to scale back some of the Affordable Care Act’s costly and counterproductive regulations on health insurance. This would allow for a wider variety of insurance plans, greater competition, and lower costs.
The HRA rule isn’t a total fix for the longstanding distortion favoring employer plans, but it’s an important step in the right direction, and it should give Americans hope that there is a way forward for fixing the flaws in American health care without introducing the host of new problems that would come with socialized medicine.