The Perilous Politics Of The Health Insurance Tax Break : Shots - Health News Economists say that excluding the value of employer-sponsored health insurance from federal taxes makes no sense. But many worry that changing the tax code could mean higher taxes or that employers would push down the value of the health insurance they provide.

The Perilous Politics Of The Health Insurance Tax Break

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From NPR News, this is ALL THINGS CONSIDERED. I'm Audie Cornish.


I'm Melissa Block.

And we turn this hour to the major focus here in Washington these days: how to avert big tax hikes and budget slashing at the end of the year. As the White House and Congress mull the options, we're going to look at two key areas: health care and Social Security.

CORNISH: First, health care. There are, of course, the two enormous health programs - Medicare and Medicaid - but the federal government also spends hundreds of billions of dollars a year on a health-related tax break. It doesn't tax the value of health insurance provided by employers to their workforce. Here's NPR's Julie Rovner on why the largest single expenditure in the tax code has become almost too hot to touch.

JULIE ROVNER, BYLINE: When it comes to health care, people don't agree on much, but that's not the case when it comes to the idea of letting people not pay taxes on the value of the health insurance their employers provide. From liberal to conservative, nearly every economist thinks this is a bad policy, says MIT health economist Jonathan Gruber.

DR. JONATHAN GRUBER: It just doesn't make sense. And it's important to emphasize, in this world where economists seem to agree about nothing, this is something where there's just broad and universal agreement.

ROVNER: There are several reasons for that. One is that it's expensive: It costs the federal government nearly $250 billion a year. Another is that it's regressive: It benefits people with higher incomes more than those who earn less. And finally, says Gruber, the tax benefit encourages people to take more of their compensation in health insurance. That, in turn, encourages them to use more and more health care.

GRUBER: Here's another way to think about it. We have a system where we bribe you to get employer-sponsored insurance, and the richer you are, the bigger bribe you get.

ROVNER: So if everyone agrees this tax break is such a wrongheaded policy, how come it's still around? One word, Gruber says: inertia.

GRUBER: It's very hard to get rid of it. It's very hard because people view it as a tax increase. And as hard as economists try to explain that, no, it's just ending a tax subsidy, people just say, don't increase the taxes on my health insurance.

ROVNER: Key among those people are members of organized labor. They've spent years negotiating for better benefits rather than higher wages.

VALERIE CASTLE-STANLEY: We're not rich. We're average middle-class Americans. We need quality health care.

ROVNER: Communications union member Valerie Castle-Stanley(ph) came to Washington from southwest Virginia back in 2009. She was part of a protest against taxing the most generous health plans to help pay for the federal health law.

CASTLE-STANLEY: When I heard some of our senators want to tax our health care, I just couldn't believe it.

ROVNER: The health law, in the end, did include that so-called Cadillac health plan tax, although it doesn't take effect until 2018. But Tom Leibfried of the AFL-CIO warns it's not just union workers who'll be impacted when that tax kicks in, or if Congress decides to tax employer-provided health insurance sooner. He says what's likely to happen is that employers across the board will push down the value of their coverage.

TOM LEIBFRIED: And their insurance plans will simply cover less. So their deductibles will be higher. Their copays with each visit will be higher.

ROVNER: Leibfried says that's based on the idea that people have too much insurance and use too many health services.

LEIBFRIED: But I have yet to meet anyone who has come forward to say that they feel like they're over-insured.

ROVNER: And it's not just those representing workers who are resistant to changing the tax treatment of health insurance. Jim Klein heads the American Benefits Council, which represents large employers who offer health insurance to their workers. He says it's backwards to say that the tax break is regressive and benefits the wealthier more.

JIM KLEIN: For whom would it be more difficult to obtain coverage if not from their employer? You know, Warren Buffett or his secretary? The benefit is very progressive. It means much more to a lower-paid person than to a higher-wage individual.

ROVNER: Employers also don't want to see the tax treatment of health insurance changed right now because the health insurance system is already in the middle of so many other changes due to the federal health law, all of which has made the health care tax break relatively untouchable. But is it more untouchable than Medicare and Medicaid if budget negotiators are forced to find billions in health care savings? That's the $250 billion question. Julie Rovner, NPR News, Washington.

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