Does PPACA Contain a Surprise?

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One of the reasons that employer-based healthcare is so prevalent in the United States is that it’s a good deal: unlike the normal income they recieve, employees don’t have to pay taxes on their healthcare benefits. A $5,000 policy costs $5,000. Conversely, if your employer simply paid you a cash wage in lieu of healthcare benefits, you’d have to receive, say, $6,000 in order to buy the same policy. Why? Because you have to pay taxes on the $6,000 and still have $5,000 left over to pay the premium.

This difference in tax treatment is something that wonks on both left and right generally oppose, though in somewhat different ways and as part of somewhat different overall structures. Still, pretty much everyone opposes it. And guess what? Thanks to the healthcare reform bill, it might be going away. The details are complex, but Austin Frakt provides the gist:

PPACA may make it possible for workers to get the same tax break for purchasing health insurance on the individual market (via an exchange or otherwise) as they would if they bought their employer-sponsored plan (if they’re offered one). If this is the case, it removes one huge incentive for maintaining employer-sponsored coverage. With respect to taxation, it levels the playing field between the group and non-group (individual) markets.

There’s still the issue that until 2017 only employees of firms with fewer than 100 workers are eligible for exchange coverage. Beginning in 2017, states can open exchanges to employees of larger firms. Workers of firms of any size could buy coverage on the individual market that is outside the exchange, they just can’t obtain federal subsidies for them. Still, it’s the tax subsidy that makes employer-based coverage so valuable to workers. If it can be applied in the non-group market it would hasten the erosion of employer-based coverage (which is not a bad thing, necessarily).

This all depends on a particular interpretation of provisions in PPACA, but if regulators write the enabling rules properly it might well allow individuals to buy insurance on the exchanges with pretax dollars. This would reduce the cost of insurance substantially for anyone using the exchange. It’s worth keeping an eye on.

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