The Twilight of Employer-Sponsored Health Insurance?

There are a lot of new proposals to deal with health insurance costs, including some that would take employers out of the picture.

In Tuesday’s State of the Union speech, President George W. Bush brought up no fewer than three approaches to making health insurance more affordable for individuals and small business. The governors of California and Pennsylvania are following Massachusetts with state mandates for universal, employer-supplied health insurance and other states are looking at similar legislation. Senator Edward Kennedy (D.-Mass.) is talking about a federal system based on the new Massachusetts model. Senator Ron Wyden (D.-Ore.) is floating a proposal to create a national health insurance system. Meanwhile, an unlikely coalition of business, labor, healthcare and social advocacy groups has endorsed a combination of federal aid and tax incentives to help cover the estimated 47 million uninsured Americans.

Does this mean that lawmakers, business leaders and policymakers will finally do something meaningful about the No. 1 issue for small business owners--out-of-control health insurance costs?

Probably not. At least not soon. The politics are too dicey to predict how a clean solution might emerge yet. But behind all the grandstanding and initiatives, something serious is under way. Forces from the left, right and center are coming together to fix--or replace--the system of employer-supplied health insurance that has provided most Americans families with coverage for 60 years.

The system itself is more historical accident than public policy. During World War II, when wages were frozen, companies began offering health insurance as a benefit to attract scarce civilian labor. In the post-war boom, the practice became standard in Corporate America and small employers found that they had to offer health benefits, too. Congress, which had rejected national health insurance (an unfulfilled goal of the New Deal), officially encouraged the practice in 1954 by making sure that health benefits could not be taxed as income.

For a while, American healthcare was the envy of the world. But starting in the 1980s, when healthcare premiums soared, the system began to fray. Small businesses got squeezed as rates for small group plans rose faster than premiums for big employers. Over the past decade, small businesses began dropping coverage. Now, just 60% offer medical insuarnce, according to the Kaiser Family Foundation and the National Federation of Independent Businesses (NFIB) says less than half its members do. All told, 27 million working Americans have no coverage and most of them are believed to be employed by small businesses.

President Bush’s newest proposal is a tax credit designed to encourage the uninsured to buy policies on their own. The tax break would be paid for by taxing health care benefits when they exceed a certain value, which the President says will control premium inflation by discourage “gold-plated” coverage.

In Washington, this proposal is regarded as dead on arrival. “I would call the chances of passage negative,” says Michael Fronstin, senior research associate at the Employee Benefits Research Institute, an industry group. Beyond the awkward politics of suddenly taxing a cherished employment benefit enjoyed by millions of middle-class voters, Fronstin says the plan is flawed; it would leave millions of Americans to fend for themselves in the “dysfunctional” very-small-group and individual health insurance market, where rates are high, buyers have no leverage and insurers can deny coverage. It might also, he says, encourage employers to stop offering insurance altogether. “This proposal, if adopted, would be the beginning of the end of employee-based health coverage as we know it,” he says.

The same might be said for the universal health insurance plans coming from the left. Wyden’s bill, for example, would immediately place all Americans in the same single-payer program used by members of Congress. The senator claims a range of supporters including Andy Stern, president of the powerful Service Employees International Union, Steve Burd, president of Safeway stores, and Mike Roach, an Oregon small business owner who says he’s a 30-year member of the NFIB.

However, like Bush’s consumer-driven plan, Wyden’s government-based proposal has no chance of becoming law, says Amanda Austin, legislative manager for the NFIB. (For the record, NFIB would be “supportive” of the Bush proposal, Austin says).

While getting employers out of the health insurance business might be a boon to its members who feel disproportionately burdened by premium inflation, Austin says the NFIB continues to favor fixing the employer-based system, rather than scrapping it. “We’re not going to say we want employer-based health insurance to go away, “ she says. “A lot of our guys like providing health insurance because they are close to their employees. Even if they didn’t offer health insurance to compete with larger companies, I think they’d do it anyway.”

The small-business solution that the NFIB was pushing last year, association health plans that would allow small businesses to join buying pools to acquire coverage at large-group rates, looks like another non-starter in the Democratic Congress. A mention of the plan by President Bush drew loud applause on Tuesday night. But, Fronstin points out, a bill that didn’t make it through the GOP-controlled 109th Congress is not likely to fly in the new 110th.

The President also got warm applause when he asked for expansion of another NFIB-favored solution, Health Savings Accounts. But Democrats have blasted HSAs, because they require high-deductible health plans, which critics say raise costs for ordinary workers while providing another tax-advantaged savings vehicle for the wealthy.

In the last days of the 109th Congress, the outgoing GOP majority sweetened the HSA deal by increasing contribution limits and allowing one-time rollovers from Individual Retirement Accounts. For participants who can build up balances in HSAs, these vehicles offer a unique triple tax-free opportunity, notes Natalie B. Choate, an estate attorney and retirement expert at Bingham McCutchen LLP. HSAs are the only vehicle that Congress has created that start with pre-tax contributions, allow earnings to pile up tax-free, and does not tax distributions. For a summary of the new rules, please click here.

So, what will happen to employer-sponsored health insurance? Austin says, the NFIB is looking across both aisles for reforms that will help small business. “We are very open-minded at this point,” she says. The organization, however, is on record against the Massachusetts setup, which requires all employers to provide coverage or pay a fee for every uninsured worker. The NFIB has not spoken out on California's plan, but lobbied against universal healthcare proposals before Governor Schwarzenegger signed on to the proposal for a universal plan that would levy a tax on small businesses that don’t offer coverage. “We just can’t have that,” says Austin. “Small businesses are the folks who have been paying more per employee than anybody else already. Why should they be the ones to pay this tax?”

With so many forces focused on the issue, 2007 could be a breakthrough year in healthcare reform. If not, business may have to wait until after the 2008 elections for relief. But, Fronstin says, by 2010 Congress will have to do something. That’s when the Medicare “trust fund” starts to go into the red.

Austin says she’s hopeful about 2007. “There are a lot of Republicans and Democrats who will want to see something done for small business this year.”