Expert Recommendation: Limiting Unlimited Federal Income Tax Exclusion for Employer-Sponsored Health Benefits to Improve U.S. Healthcare System Efficiency

A group of health policy experts at the Paragon Health Institute, a think tank known for its strong Republican ties, believe that limiting the unlimited federal income tax exclusion for employer-sponsored health benefits could improve the U.S. health care system. In a new paper written by Theo Merkel and Brian Blasé, both former White House National Economic Council members during the Trump administration, they recommend capping the health benefits tax exclusion at 125% of the national average cost of health coverage, adjusted for age and location.

The experts argue that the current health benefits tax exclusion, which costs the federal government $345 billion in tax revenue each year, distorts the U.S. health care market by driving up prices and insulating health plan enrollees from the true cost of care. They suggest that focusing on improving health savings account and health reimbursement arrangement programs, along with reducing taxes overall, could give workers more flexibility with their extra cash instead of relying on employer-sponsored insurance with unlimited tax exclusions.

Merkel and Blasé also estimate that around 500,000 people likely have health coverage through individual coverage health reimbursement arrangements or qualified small employer health reimbursement arrangements. This proposal and estimation provide insight into potential changes that could impact the U.S. health care system and the way individuals receive and pay for their health care services.

According to Merkel and Blasé, capping the current unlimited federal income tax exclusion for employer-sponsored health benefits could potentially improve the U.S. healthcare system by making it more efficient and affordable.

Health policy specialists at Paragon Health Institute believe that limiting employer-sponsored insurance’s unlimited federal income tax exclusion is a necessary step to improve US healthcare system efficiency.

The experts argue that focusing on improving healthcare savings account and reimbursement arrangement programs would give workers more flexibility with their extra cash instead of relying on employer-sponsored insurance with unlimited tax exclusions.

In addition to this proposal, Merkel and Blasé estimate that around 500,000 people have coverage through individual coverage HRA or qualified small employer HRA.

Overall, this paper provides insight into potential changes in US healthcare system structure while highlighting how individuals receive and pay for their healthcare services’ implications.