Mass. Math Underscores Importance Of Tax Exclusions For Health Coverage

By Cyril Tuohy

InsuranceNewsNet

The “Massachusetts experiment” in health care reform shows the importance and value of federal tax breaks in providing incentives for businesses to offer employees coverage, according to health care policy experts.

“Businesses really need to sit down and look at that math because it is so significant,” Ceci Connolly, managing director of the PricewaterhouseCooper (PwC) Health Research Institute, said. Connelly co-authored a report on the Massachusetts health care experience.

The report, titled “The Massachusetts Experience: Employer-Sponsored Health Insurance Post Reform,” found that employer-based coverage in Massachusetts went up by 1 percentage point between 2005 and 2011, while employer-based coverage went down by 5.7 percentage points nationally over the same period.

Published in two parts, the report is being released shortly before employers make important decisions about health coverage options over the summer, in advance of signing employees next fall.

“What was striking was that coverage rose when it fell nationally during a recession and premiums were at the highest levels in the country,” Connolly said. This at a time when the state was up against “real headwinds,” in the form of the Great Recession and galloping health care cost increases, she said.

By Jan. 1, 2014, everyone in the U.S. will be required to have health insurance under the Affordable Care Act (ACA). Employers that don’t provide health coverage will be subject to penalties.

“The federal tax exclusion has not gotten enough attention, and it does deserve a closer look,” Connolly said in an interview with InsuranceNewsNet. Digging into the math shows why coverage in Massachusetts went up.

A $52,000-a-year salaried employee who signs up for an employer-sponsored family plan that costs $15,000 — with $12,000, or 80 percent, borne by the employer and $3,000, or 20 percent, by the employee — will take home $37,000 of net wages. Combined with the $40,000 of income brought home by the spouse, and this family of three takes home $77,000, according to a PwC webcast.

In this scenario, the employer and the family benefit from federal tax policy that exempts contributions to employer-sponsored health insurance. Because of the exemptions, the family pays $11,536 of payroll and income taxes, for a net take-home amount of $65,465, according to the study. With the company paying $2,831 in payroll taxes, the net cost for this employee and head of household comes to $35,640.

Take the same example with an employer that doesn’t offer insurance, and with the same family — who this time will not qualify for subsidies to reduce the cost of coverage because, with two incomes, they earn too much — fares a little differently.

To comply with the ACA, the family of the $52,000-a-year employee buys coverage on the state’s health insurance exchange for $15,000. Because they must include on their taxable income the outlay for their health insurance, they owe more in taxes, and the family’s net take home pay falls to $62,367, or $3,098 less than if the family were under the employer-sponsored plan.

The employer has to pay more in federal payroll taxes under the ACA, and a penalty of $2,000 for not offering insurance. After accounting for corporate tax deductions, the net cost of employing the worker climbs to $38,386, or $2,746 more than if he or she were covered under the employer-sponsored plan.

Multiply that $2,746 difference over 10 employees and it’s clear that employers and employees still have incentive to sign up for the employer-sponsored plan. Tax deductibility of the coverage makes it worthwhile for employers to sign up workers, according to the PwC report.

For businesses, it doesn’t come down to a choice between paying the penalty for bypassing coverage or paying the $12,000 for their share of the health coverage, Connolly said.

Other variables — the quality and makeup of the workforce and the competitiveness of the industry — will determine adoption percentages in other states, so it’s not fair to extrapolate the Massachusetts experiment to the other 49 states, Connolly said.

Education campaigns about the importance of being covered through the employer or the individual market are going to be key. “When it comes to the size of the state and to issues with outreach and enrollment, bigger states will have a much bigger challenge,” she said.

The second part of the report, which examines the reforms from the perspective of insurers and hospitals, will be published in the next few weeks, PwC said.

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at Cyril.Tuohy@innfeedback.com.

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at cyril.tuohy@innfeedback.com.