Is it time to merge employer-based and state-exchange insurance markets?

The Affordable Care Act (ACA) created state-exchange health insurance markets to allow access to health insurance for people with pre-existing conditions, link premiums to age instead of health status, and provide subsidies for low-income households. The ACA also maintained long standing tax preferences provided to employer-based insurance and includes rules favoring employer-based coverage over state exchange coverage. Currently around 11 million Americans obtain health insurance from state exchanges compared to around 157 million who obtain health insurance from their employer.

The continued dominance of employer-based health insurance has resulted in several problems leaving many Americans uninsured or underinsured. Many of these problems could be fixed by changes to regulations and tax laws which have employers subsidize the purchase of health insurance on state exchanges and have the government, through a tax credit, share part of the cost of premium payments.

Economists have long favored separating the provision of health insurance from employers. Senator John McCain, in his 2008 campaign favored replacing all employer-based insurance with a market where all individuals would pay insurance premiums with a tax credit. The McCain plan would have provided the same subsidy to all households, which is a fairer outcome than the current system where some employers pay most or all of their worker’s health insurance premium and some workers receive little or no premium subsidy. However, people with employer-based coverage and generous subsidies like and support the current system and there was little support for abolishing the employer-based system.

The idea discussed here allows for direct contributions from employers for health insurance on state exchanges rather than having each employer select and administer a health plan exclusively for its own employees. The employer contribution towards health insurance premiums would be deductible to the employer and untaxed to the household as in current law. Part of the cost of state exchange health insurance would be funded with an individual tax credit. Also, low-income people without employer contributions for health insurance or with an employee contribution that did not cover the entire premium could continue to claim the existing premium tax credit available for the purchase of state exchange insurance.

These revised rules alleviate several problems impacting participants in U.S. health insurance markets.

The partial separation of the responsibility of providing health insurance to employers greatly benefits workers who become unemployed or experience a job transition. Potential benefits from a system which keeps people enrolled in their health insurance plan after becoming unemployed are vividly demonstrated by the current economic situation. A recent study by the Economic Policy Institute found that around 9.2 million people have lost their health insurance due to the COVID pandemic. Many of these people will be unable to maintain their current health insurance coverage, either because COBRA, the program used to continue coverage is unaffordable to many newly unemployed individuals, or the coverage is unavailable in a bankruptcy situation.

People with employer-based health insurance who become unemployed can maintain health insurance coverage through COBRA, however, they are responsible for the entire insurance premium plus a 2 percent administrative fee. By contrast, people with state exchange health insurance could claim the premium tax credit if their income fell below 400 percent of the federal poverty line and any newly created tax credit as advocated in this proposal. Also, there would be no administrative costs or fees for simply maintaining coverage.

Employers experiencing a Chapter 11 bankruptcy often eliminate coverage or reduce subsidies. Chapter 7 bankruptcy generally results in the termination of all employer-based health insurance including COBRA. State exchange health insurance is unaffected by corporate bankruptcy.

The migration of all employer-subsidized health insurance to state exchanges would benefit all people going through a job transition, not just the unemployed. People switching jobs would maintain the same insurance plan and would not have to meet a new deductible in the middle of the year prior to receiving new insurance benefits.

Several other problems with the U.S. health insurance system could be alleviated through the merger of ACA and state exchange insurance markets and the creation of additional subsidies separate from the employer for insurance premiums.

Current ACA rules prevent a person with an “affordable” offer of employer-based coverage from accepting a premium tax credit on state exchanges even if the state exchange plan would offer better value. The affordability rule is complex and as written leads to unaffordable outcomes for many households seeking family coverage. Some health care reform proposals include a provision changing the definition of affordable in the statute to reduce burdens on households needing family coverage. The creation of a single health insurance market would allow households to accept premium tax credits and choose the appropriate health plan if the employer contribution did not result in the health plan being affordable.

Currently, health insurance choices at many small firms are extremely limited. In 2020, around 75 percent of small firms offering health insurance to their employees offered only one plan. In addition, 42 percent of self-only coverage at health plans offered by small firms had a deductible exceeding $2,000. A large single market serving all people with or without an employer subsidy would increase choices for many people with employer-based coverage, especially employees of small firms.

Many state exchange markets are not highly competitive. A report by the Kaiser Family Foundation found in 2020 two state exchanges were served by only one insurance company and another fourteen state exchanges had two insurance companies offering products. Research has revealed that health insurance plans offered on state exchanges often lack access to top hospitals or specialists. A larger market serving people both with and without employer-based subsidies would increase competition among insurance firms and would offer consumer more and better choices.

The large single market would include current protections for people with pre-existing conditions. Current state exchange markets are adversely impacted by people who delay the purchase of health insurance until they become sick. The repeal of fines for the individual mandate has led to litigation, which could abolish protections against pre-existing conditions. A new tax credit funding part of the cost of health insurance premiums, which would only be available to people with health insurance would serve the same function as an individual mandate. Regardless, people foregoing health insurance because of cost would likely have a negligible impact on the larger combined market serving the entire working-age population than they currently do in the small state exchange markets.

Currently, many small firms with low-income workers cannot afford and do not provide employer-based coverage for their employees. The proposed premium tax credit for part of the cost of premiums will could result in more small firms subsidizing health insurance for their employees.

The new tax credit for and existing premium tax credits would only be available for people obtaining health insurance on state exchanges and would not be available for people obtaining health insurance at firms that self-insure. Firms that self-insure are exempt from government regulations including protections against surprise medical bills. The use of state exchange markets rather than self-insurance could improve consumer protections for many households.

The current premium tax credit phases out at 400 percent of the federal poverty (around $50,000 for a person seeking individual coverage) leaving many self-employed workers and workers without an offer of employer-based insurance without tax subsidies for the purchase of health insurance. The proposed tax credit for part of the health insurance does not phase out with income guarantees that all people have a partial subsidy for the purchase of health insurance.

The combination of marginal tax rates which increase with income and a premium tax credit that decreases with income results in both health insurance costs and taxes increasing with income for many middle-income people. A new tax credit that does not phase out would reduce the premium tax credit and the increase in health insurance costs caused by people working more and earning more.

The combination of a merger of state exchange and employer-based health insurance markets and new tax credits for the purchase of health insurance will not make health insurance affordable to all Americans. The achievement of universal coverage requires more ambitious actions, perhaps the creation of a robust public option coupled with automatic enrollment for people who cannot afford private health insurance. The merger of employer-based and state exchange markets and the additional tax credits proposed here will assist many middle-income people and is a good first step toward improving the affordable care act.

David Bernstein is a retired economist, formerly employed by the U.S. Treasury. He resides in Denver Colorado with his family, is working on a book on health insurance policy, and is author of a policy primer Defying Magnets: Centrist Policies in a Polarized World.

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