Thinking Outside the Box (12): The Benefits of Increased Transparency in Employer-Sponsored Health Insurance for the 180 Million Insured

Abstract

Economists have long noted that the tax exclusion of employer-sponsored insurance (ESI) caused workers to purchase health plans that differ in price and other characteristics from those they would otherwise choose for themselves. We explore the short-term and long-term benefits of giving workers better control over ESI funds. To measure near-term benefits, we execute a simulation in which employees in large group plans capitalize on a new opportunity to use tax-advantaged Health Reimbursement Arrangements (HRAs) to control the full ESI contribution. Employees would deduct for income tax purposes the amount used for health insurance and, if they spend less than the amount of their ESI funds, take the remainder as taxed income. Our calculations adjust for adverse selection by providing a cross-subsidization holdback from the ESI funds. We find that employees increase annual after-tax household income between $101–$252 billion and that federal income tax revenues would increase by $39–$163 billion. Lower- and middle-income households gain proportionately more income. Long-term benefits include the increased take-up of new policies that reduce net spending, spillover benefits to governmental health care programs, and innovative educational and navigational services. We compares these results to those in nations with similar consumer–driven health care systems. The U.S. results rest on offering workers HRAs newly integrated with health plans, adequate plan choice, and transparency about plan actuarial values and ESI contributions. Our policy recommendations include expanded transparency in Box 12 of IRS Form W-2, currently the only required source of employee information about their ESI.