President Obama’s healthcare reform initiative is in the national spotlight these days, as officials scramble to fix the website data hub at the heart of the Affordable Care Act.

But behind the scenes another healthcare reform project is underway, part of an effort to reduce America’s unsustainable $17 trillion public debt—the highest since World War II as a share of the economy. While an agreement to cut government spending and raise additional tax revenue is unlikely right now, Capitol Hill budget experts have targeted tax policy for employee health benefits as among the best options for reducing Uncle Sam’s gargantuan debt burden.

The Congressional Budget Office, in a November paper, Options for Reducing the Deficit: 2014-2023, identified the present law tax “exclusion” for employer-provided health coverage as the most expensive revenue loser in the U.S. tax code.

More specifically, CBO concludes that exempting employer and employee payments for health insurance from income and payroll taxes “costs the federal government about $250 billion in foregone revenues each year.” (Italics added)

Little wonder then that the search for new sources of government revenue to reduce federal budget deficits could impact today’s tax-free treatment of employer-provided health coverage. Indeed, it’s almost impossible to conceive of a bipartisan deficit reduction package that would not involve in some way curtailing the present law exemption. Read more.

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Healthcare Reform: The Sequel?

Mon Dec 9, 2013

President Obama’s healthcare reform initiative is in the national spotlight these days, as officials scramble to fix the website data hub at the heart of the Affordable Care Act.

But behind the scenes another healthcare reform project is underway, part of an effort to reduce America’s unsustainable $17 trillion public debt—the highest since World War II as a share of the economy. While an agreement to cut government spending and raise additional tax revenue is unlikely right now, Capitol Hill budget experts have targeted tax policy for employee health benefits as among the best options for reducing Uncle Sam’s gargantuan debt burden.

The Congressional Budget Office, in a November paper, Options for Reducing the Deficit: 2014-2023, identified the present law tax “exclusion” for employer-provided health coverage as the most expensive revenue loser in the U.S. tax code.

More specifically, CBO concludes that exempting employer and employee payments for health insurance from income and payroll taxes “costs the federal government about $250 billion in foregone revenues each year.” (Italics added)

Little wonder then that the search for new sources of government revenue to reduce federal budget deficits could impact today’s tax-free treatment of employer-provided health coverage. Indeed, it’s almost impossible to conceive of a bipartisan deficit reduction package that would not involve in some way curtailing the present law exemption.

One big complication, of course, is the Affordable Care Act provision—scheduled to take effect in 2018—that will impose a 40% excise tax on high-value employee health plans. Obviously, a change in the tax law affecting employer-sponsored coverage would need to take account of this new excise tax.

In its new paper CBO presents two alternatives: The first builds on the ACA excise tax by moving up its effective date and expanding its impact. Specifically, CBO suggests “accelerating” the excise tax start date to 2015 from 2018 and lowering the threshold for “high value” health plans—hitting “Chevrolet” plans instead of only “Cadillac” plans.

This option would reduce federal budget deficits by $240 billion between 2015 and 2023, which is the good news. But this option would also dramatically affect employer-provided health coverage decisions, possibly pushing employers to offer only low-premium, high-deductible health plans for workers and their families. And some employers would be likely to drop coverage entirely, sending more households to the new health insurance exchanges.

The second CBO alternative would eliminate the ACA 40% excise tax and replace it with “a limit on the extent to which employer-paid health insurance premiums and contributions to FSAs, HRAs and HSAs could be excluded from income and payroll taxation.”

Specifically, this option would cap the total amount of employer and employee contributions for health insurance and out-of-pocket health costs that can be excluded from taxation at $6,420 a year for individual and $15,620 for family coverage. CBO says this alternative would decrease federal deficits by over $500 billion between 2015 and 2023, a huge contribution to cutting America’s out-of-control public debt.

Needless to say, alternative two would completely disrupt our understanding of employer-sponsored health coverage as it has existed for some 70 years. More families would enroll in ACA exchange plans and employer coverage would essentially be redefined as consumer-directed, employee-managed health insurance. And, of course, unless offset by a new health insurance tax credit of some kind, it would be hard not to see this as a big tax increase.

To be sure, CBO in this paper is meeting its responsibility to put policy options for deficit reduction before our elected representatives. Congress may disregard or modify these two and has many other alternatives to reduce annual budget deficits and the public debt burden passing to future generations.

But the CBO paper makes one thing perfectly clear: healthcare reform is not over; President Obama’s Affordable Care Act is not the last word. That law is sure to be amended going forward and new tax-related initiatives are sure to appear that could further disrupt employee health benefits. The healthcare reform genie is out of the bottle.