Health Insurance and Taxes: Can Changing the Tax Treatment of Health Insurance Fix Our Health Care System?

Source: Paul Fronstin and Dallas Salisbury, Employee Benefit Research Institute, Issue Brief no. 309, September 2007

From the press release:
Proposals to change the tax treatment of health insurance could mean the end of employment-based coverage as it now exists in the United States, according to a study released today by the nonpartisan Employee Benefit Research Institute (EBRI).

Currently, the vast majority of U.S. residents with health insurance receive coverage through an employer. The most recent data show that about 62 percent of workers and their dependents (161.7 million individuals under age 65) had some form of employment-based health benefits, while about 7 percent (17.7 million) bought insurance directly from an insurer, and 18 percent (46.5 million) were uninsured.

Of the various options to change the way health benefits are taxed, the EBRI report identifies the proposed “tax cap” on the health insurance exclusion that workers currently receive as most likely to cause the end of employment-based health benefits. This change would be likely to prompt younger and healthier workers to drop out of the employment-based system, causing adverse selection in the remaining pool of older and less healthy workers, thereby resulting in a so-called “death spiral” that makes employment-based group health insurance unsustainable.

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