Why repealing the employer tax exclusion keeps failing

Repealing the employer health insurance tax exclusion is one of the worst ideas in health policy, and it keeps coming back. Michael F. Cannon and Liz Fowler are making the case again this week, on KFF Health News' What The Health.

Fowler and Cannon are strange bedfellows. One helped write the Affordable Care Act. The other has spent sixteen years trying to repeal it. Two people from opposite ends landing in the same place sounds like settled wisdom. It isn't.

Their case has two parts. The exclusion is a huge federal expenditure, and it leaves people overinsured. The first part is true. It's one of the largest tax expenditures in the code. But big isn't the same as wasteful.

Look at what the money buys. About $300 billion a year in foregone revenue supports coverage for 165 million people. Here's how that cost per covered life compares, most recent full-year data:

Employer exclusion: about $1,800 per person
ACA marketplace subsidies: about $5,700 per person
Medicaid and CHIP: about $8,000 per person
Medicare: about $13,600 per person

It's the cheapest coverage the government funds, per covered life, by a wide margin.

Now the notion of "overinsured." Who, working with these plans every day, thinks that's the problem? The problem driving cost is price, and repeal doesn't touch it.

Cannon's fix is Large HSAs. Raise the limits to $8,000 and $16,000, let people own the accounts, and trust price-sensitive patients to discipline the market.

But most people have nothing to put in the account. The average worker contributes about $2,000 a year, under even today's lower limit, and a third pull out more than they save. A higher ceiling helps people who could already max it and nobody else.

Then there's price. An individual has no power to discipline a market that builds $7,000 of rebate extraction into an $8,000 drug list price. A debit card means nothing when the local hospital has bought every physician in town.

Prices are high and climbing for a number of reasons. Some are unavoidable, others are places the government can act. Antitrust enforcement, consumer protection, and patent reform are all meaningful places to lower the cost of care. And it's the cost of the care that drives the cost of insurance.

Taxing workers more doesn't fix that. Prerending it can distracts from the real issues.

Treat the cause, not the symptom.