The brouhaha over liberals demanding that members of Congress turn down their congressional health insurance if they campaigned against Obamacare is misguided, but it does provide a teaching opportunity that could be very helpful in advancing the right policy solutions.
Members of Congress are employees of the federal government, and they get their health insurance through their jobs – just as 160 million other Americans do. The system is set up to make that the most attractive option for employees, primarily because workers get a huge tax break if they get their health insurance through their employers.
Some members, including Rep.-elect Mike Kelly of Pennsylvania and Rep.-elect Bobby Schilling of Illinois, have already said they plan to turn down the congressional insurance policy. They haven’t said how they will get coverage, but let’s say they purchase it in the individual market — like about 14 million other Americans do. In some states, like Pennsylvania, policies are very affordable; in others, like New York, it is horribly expensive because of the mountain of state rules that have regulated these markets nearly to death. Teaching opportunity #1.
And members would also have to use after-tax dollars to purchase this coverage. Teaching opportunity #2. Here is how it works: Since World War II, the federal government has excluded the value of health insurance from the taxable income of workers as long as they get their health insurance through their employer.
That wouldn’t make any sense for a whole lot of reasons, but nonetheless, that is the system we have for health insurance. It’s been around so long that most people don’t even question why they get health insurance at work.
But this means that employer-based health insurance dominates the market, providing major economies of scale for people who work for large employers. Small businesses benefit less, which is why they were clamoring the loudest for health-care reform that reduced their costs.
Members of Congress who decide to buy their own insurance would have an added incentive to make changes in federal policy to help those who must buy health insurance in the individual or small group markets. Teaching opportunity #3.
The Utah Health Exchange provides a working model, and other states are considering following its lead. Utah has created an electronic marketplace where people can shop for health insurance and aggregate payments on a pre-tax basis from employers, individuals, and even subsidies from the state to pay premiums.
Having the value of health insurance excluded from the taxable income of workers is a big tax break for workers. Workers save nearly $300 billion a year in taxes by having that part of their compensation package exempt from taxes. (The value of this “tax exclusion for employment-based health insurance” is actually worth much more in tax savings than the mortgage interest deduction.)
The full value of a job-based health insurance plan next year will be about $14,000 for a family. The federal government pays about 72 percent of the value of an average plan.
So that means that new members of Congress would be leaving $10,800 on the table — the $10,800 in compensation that their employer, i.e., the federal government, expects to pay for their health benefits — in addition to their $174,000 salary.
Rep.-elect Kelly and Rep.-elect Schilling should demand the extra money in added wages, just as any other worker who turns down health insurance at work should do. Teaching opportunity #4.
Employees should demand the option of getting that part of their compensation dedicated to health insurance as wages so they can buy their own insurance. They should be able to get the same tax break whether they buy it on their own or get insurance through their employer. And members of Congress should provide direct refundable tax credits for people who don’t make as much money as they do to help purchase the private health-insurance policy of their choice.
This will create more price transparency in the cost of health insurance, it will encourage people to be smarter shoppers to seek the best value, and it will force insurers to be more competitive in offering better benefits and more affordable premiums.
Then we would be on the road to real health-care reform.