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

83 Pages Posted: 16 Dec 2019

See all articles by Regina Herzlinger

Regina Herzlinger

Harvard University - Business School (HBS)

Barak D. Richman

Duke University, School of Law

Date Written: December 11, 2019

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.

Keywords: After-Tax Income, Consumer-Driven Health Care, Health Care Costs, Health Insurance, Income Inequality, Tax Policy

JEL Classification: I13, I18, H24, J33

Suggested Citation

Herzlinger, Regina and Richman, Barak D., Thinking Outside the Box (12): The Benefits of Increased Transparency in Employer-Sponsored Health Insurance for the 180 Million Insured (December 11, 2019). Duke Law School Public Law & Legal Theory Series No. 2020-4, Available at SSRN: https://ssrn.com/abstract=3498366 or http://dx.doi.org/10.2139/ssrn.3498366

Regina Herzlinger (Contact Author)

Harvard University - Business School (HBS) ( email )

25 Harvard Way
Baker Library 171
Boston, MA MASSACHUSETTS 02163
United States
6174956647 (Phone)

Barak D. Richman

Duke University, School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States
919-613-7244 (Phone)
919-613-7231 (Fax)

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