Employers Could Drop Group Health Insurance / under Reagan Tax Plan

By Wolfe, Lou Anne | THE JOURNAL RECORD, September 19, 1985 | Go to article overview

Employers Could Drop Group Health Insurance / under Reagan Tax Plan


Wolfe, Lou Anne, THE JOURNAL RECORD


Employers could decide to drop group health insurance coverage for their employees if an administration tax provision to treat the benefits as earned income is passed, insurance agents say.

President Reagan's tax reform proposal, Treasury II, would also eliminate the present tax exemption on the inside cash value of permanent life insurance policies.

The provisions will have a profound effect on consumers and the industry alike, and insurance officials believe that elderly and lower-income Americans will be hardest-hit.

Paperwork and extra bookkeeping could lead employers to decide that providing health insurance benefits just does not pay off, officials say.

"Currently, health insurance is reported by the firm and is tax deductible," noted Bill Weston of A. Aaron and Associates, Ltd., 3909 N. Classen Blvd.

"If you make it prohibitive to an employer, he may cease to offer it," added Bill Birchall of Birchall and Hampton, 3601 N. Classen Blvd.

If passed, "a tremendous amount of pressure" will be placed on social security programs from plans now provided by private insurance companies, Weston said.

Under present conditions, he added:

- Eighty percent of outpatient services are paid by insurance companies and the federal government.

- Ninety-five percent of hospitalization services are paid by insurance companies and the federal government - "We're just about splitting the hospitalization bill with the government," he noted.

- Three-fourths of outpatient care is paid for by the insurer.

Under the Treasury II proposal, Weston said, as many as 35 percent to 50 percent of employers will likely cease to offer group health insurance plans if the proposal is passed.

"In a plan, 75 percent of the people have to participate before an insurance company will insure that group," he said. Taxing the benefit as earned income will probably result in anti-selection, meaning those younger, healthier employees will elect not to participate.

Those left could be mainly the frail or elderly people to whom health insurance is a necessity, raising the cost to a company of offering the plan.

As a result, the private sector will bear the additional cost, he said, specifically insurance companies and consumers who continue to buy health insurance.

"Many workers who have health insurance will give them up, so that part of health care costs paid by the private sector will be shifted to the patients that have health insurance or those that can afford to pay.

"Many who give up benefits," he explained, "will do so out of economic necessity, and they will be unable to pay a hospital bill."

Weston estimated that if the proposal to tax health care benefits is passed, health insurance will cost twice as much.

"It will take awhile to work through the system," he said, "but we're guessing that health insurance for those who maintained it would go up 100 percent."

The federal government, Weston added, has drawn a line on the amount of health care costs it will pay, leaving a larger portion to be absorbed by insurance companies.

"When insurance companies start paying larger hospital bills, their rates will have to be increased, creating an additional hardship on employers and employees who have maintained their health insurance benefits," he said.

"It won't shift the cost to the government as much, but it will shift the cost to the private sector - those who have insurance and can afford to pay."

The prospect of taxing health insurance benefits as earned income could cause some employees to choose not to participate in a company's group benefit plan, noted Birchall.

Employees with health problems, however, would most likely remain on the plan, he said. Adverse selection could result, creating a situation where more policy claims are submitted than premiums paid. …

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