The Consequences of Taxing Healthcare Benefits

As efforts to repeal and replace the Affordable Care Act (ACA) move through Congress, a new survey of Lockton employer clients shows overwhelming opposition to taxing employer-provided healthcare benefits.

In fact, more than 92 percent of those responding to the survey are against any policy that would tax workers, their families and employers on a portion of health plan premiums.

Policy makers have been considering imposing additional income and payroll taxes on employees and payroll taxes on employers. These taxes would apply to at least a portion of health insurance premiums. Recent drafts of the ACA repeal and replace legislation now moving through Congress included such a tax. The current version of the bill does not, but there are concerns Congress might resurrect the tax in pursuit of additional revenue.

More than 177 million Americans receive health insurance through an employer, and employers pay more than $668 billion annually to insure their employees. Under current tax law, those benefits are provided without employers or employees paying any income or payroll taxes on them.

Some lawmakers and think tanks argue that taxing group health plans will drive down overall health costs because it will decrease consumer demand for healthcare. They also argue that employers - if they reduce benefits to avoid the tax - will increase wages to make up for the reduction in health benefits.

The Lockton survey results do not support those arguments. Here are the key findings:

- Three quarters of respondents said they would definitely reduce benefits or consider it, to avoid triggering new taxes on health benefits. Nearly 90 percent indicated they would avoid increasing benefits if it meant triggering a tax.

- Taxing health insurance is unlikely to lead to higher wages. Of more than 800 Lockton survey respondents, the majority said they would definitely or probably not increase wages as a result. Only 6 percent said they would increase wages to make up for a reduction in benefits.

"With healthcare costs steadily rising, this survey indicates that taxing employer-provided benefits would cause millions of American workers and their families to take it on the chin," said Bob Reiff, President of Lockton Benefit Group.

"They'd suffer either through a shift in healthcare expenses, like higher deductibles and other out-of-pocket costs, or they would pay higher taxes. Taxing families on their group health insurance seems inconsistent with sound and effective policy."

Nor is taxing health insurance likely to reduce consumption. An analysis of Lockton clients' claims data shows 82 percent of claims costs are incurred by just 13 percent of members, typically those with acute or chronic illnesses.

"If, as the think tanks say, Americans consume too much healthcare, it's not because employer-provided health insurance is overly generous," said Reiff. "It's because our nation is facing a health crisis, and employers – through wellness programs tied to their health insurance plans – are the only group systematically addressing the problem."

More than 80 percent of employers offer some type of wellness program that helps manage population health and increase the efficiency of healthcare delivery.

Lockton is the world's largest privately held insurance broker, and has been monitoring changing healthcare policy on behalf of its employer-clients.

More information on the employer survey results can be found at http://www.lockton.com/Resource_/PageResource/MKT/Compliance/HRAP_Survey_Results_flyer.pdf.

About Lockton: More than 6,000 professionals at Lockton provide 50,000 clients around the world with risk management, insurance, and employee benefits consulting services that improve their businesses. From its founding in 1966 in Kansas City, Missouri, Lockton has attracted entrepreneurial professionals who have driven its growth to become the largest privately held, independent insurance broker in the world and 9th largest overall. For eight consecutive years, Business Insurance has recognized Lockton as a "Best Place to Work in Insurance." To see the latest insights from Lockton's employee benefits experts, check the Lockton Health Reform Blog, the Lockton Health Risk Solutions Blog, the Lockton Benefits Communications Blog or the Lockton HR Technology Blog.