The most significant healthcare reform of Donald Trump’s first term may have been letting businesses give their workers pre-tax funds to buy their own health insurance. But few firms have opted to embrace this option. A modest regulatory reform could soon change that.
Tax incentives have made employers the main purchaser of health insurance in America. But employer-sponsored insurance plans poorly fit individual workers’ needs and typically overpay for medical care. Although a 2019 reform allowed firms to give their workers pre-tax funds to purchase their own health insurance, this new arrangement is being held back by overregulation.
The purchase of healthcare benefits by employers doesn’t work well. Just when staff have begun to understand their insurance plans, human resource departments tell them that everything is about to change. Employers don’t enjoy the experience either. The cost of covering a family has risen from $9,950 to $25,572 over the past two decades, and Starbucks now spends more on healthcare for its staff than it does on coffee.
Businesses struggle to get a good deal purchasing health insurance for their employees. This is because workers resist curbs on access to unnecessary services and higher out-of-pocket costs for visiting costlier providers. Patients bear the associated inconvenience, but typically believe that the resulting savings accrue to their employers rather than to themselves.
While individuals care about having their own doctor, local hospital, and a few other key medical providers in their health insurers’ networks of preferred providers, employers must satisfy workers spread across different neighborhoods who use a wide variety of providers. That makes it very difficult for group health plans to negotiate good rates by threatening to leave costly medical systems out of their networks – encouraging expenses to spiral upwards.
The collective purchase of health insurance by employers also causes benefit packages to be needlessly expansive. One study estimated that workers would be willing to forego 10% to 40% of the funds their receive from employers, to control of the choice of their health insurance plans.
Nonetheless, employers purchase most private health insurance because it allows them to compensate staff without bearing income or payroll taxes. To redress this distortion, the first Trump administration from 2019 permitted firms to give staff pre-tax funds to purchase their own insurance from the individual market by establishing Individual Coverage Health Reimbursement Arrangements (ICHRA). Yet, in 2024, fewer than 1% of workers received health benefits through ICHRA style accounts.
Until recently, the appeal of ICHRA was inhibited by the woeful state of the individual market’s risk pool. But this has since been redressed: whereas Gold-tier individual market plans in 2018 cost 19% more than the average employer contribution to similar group insurance, in 2023, Gold-tier individual market premiums averaged 13% less.
As a new Manhattan Institute report notes, this development gives ICHRA benefits potentially widespread appeal – which is now being held back only by a regulatory prohibition on employers giving staff a choice between group health benefits and funds to purchase their own insurance.
This regulation is designed to stop firms from designing their benefits to selectively dump employees with the costliest medical needs on the individual market. But this approach prevents businesses from allowing any workers to benefit from a switch, unless they are willing to force all workers off their current plans. That makes offering ICHRA benefits a big leap for human resource departments, and an unpalatable option for firms.
The Trump administration could maintain this anti-dumping safeguard much less onerously, by reforming ICHRA’s regulations. It should simply require that ICHRA contributions exceed minimum standards and that associated group plans conform to the same benefit requirements as those which apply to the individual market.
Doing so would allow firms to give each of their staff the choice to control their own health insurance. This would allow them to opt for plans which better meet their needs at lower cost – a development which would benefit employers and employees alike.
Chris Pope is a senior fellow at the Manhattan Institute.
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