I learned something important from a recent paper in Inquiry by Mark Hall and Amy Monahan, “Paying for Individual Health Insurance Through Tax-Sheltered Cafeteria Plans.” In some states it is possible to purchase health insurance policies on the individual market with pre-tax dollars, thus benefiting from a privilege I thought only available to purchasers of employer-sponsored plans. This is a big deal, as I’ll explain below. First, the abstract:
When employees without group health insurance buy individual coverage, they do so using after-tax income—costing them from 20% to 50% more than others pay for equivalent coverage. Prior to the passage of the Patient Protection and Affordable Care Act (PPACA), several states promoted a potential solution that would allow employees to buy individual insurance through tax-sheltered payroll deduction. This technical but creative approach would allow insurers to combine what is known as “list-billing” with a Section 125 “cafeteria plan.” However, these state-level reform attempts have failed to gain significant traction because state small-group reform laws and federal restrictions on medical underwriting cloud the legality of tax-sheltered list-billing. Several authorities have taken the position that insurance paid for through a cafeteria plan must meet the nondiscrimination requirements of the Health Insurance Portability and Accountability Act with respect to eligibility, premiums, and benefits. The recently enacted Patient Protection and Affordable Care Act addresses some of the legal uncertainty in this area, but much remains. For health reform to have its greatest effect, federal regulators must clarify whether individual health insurance can be purchased on a pre-tax basis through a cafeteria plan.
Are you getting this? Let me make it clear. The 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).