When President Trump took office, small businesses and hard-working, middle-class families were finding it increasingly difficult to afford health insurance. The Trump administration has already taken significant steps to help, and Thursday we took another one. A new Trump administration rule will provide an estimated 800,000 businesses a better way to offer coverage and millions of workers a better way to obtain coverage, through the expansion of Health Reimbursement Arrangements (HRAs).
HRAs are employer-funded arrangements that workers use to pay for medical expenses. The Obama administration forbade workers in the individual insurance market to use HRAs to pay for coverage — significantly impeding employer flexibility and worker choice. Trump’s new rule undoes this misguided restriction.
Starting on January 1, 2020, employers will be able to offer their workers HRAs to buy individual market coverage for themselves and their families. The administration’s new rule addresses a major inequity by, in effect, providing the same tax advantage that traditional employer-sponsored group plans receive — exclusion of premiums from federal income or payroll taxes — to coverage that workers in the individual market purchase from an HRA.
The rule will significantly expand worker options since 80% of firms that provide insurance currently offer only one type of plan. Now, workers will be able to use tax-advantaged money from their employers to buy coverage of their choosing. This new flexibility will allow people to maintain their coverage when they switch jobs.
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In particular, this new rule should help small business workers by making it possible for employers to fund coverage with less hassle and cost than maintaining a traditional group health plan. Between 2010 and 2018, the proportion of workers at firms with three to 49 workers covered by an employer plan fell by more than 25%. This rule should help reverse that decline. The rule also makes it easier for small businesses to compete with larger businesses for talent.
It will take roughly five years for the full impact of the rule to hit — at which point, we expect 11 million workers and family members to use HRA funds to obtain individual coverage. The HRA rule may increase the size of the individual market by upwards of 50%, and should spur a more competitive market that drives insurers to deliver better options to consumers.
In addition to enhancing employer flexibility and worker choice, the HRA rule has the potential to reduce wasteful health care spending. The rule will make coverage costs more transparent, which should put downward pressure on insurance costs and lead employers to offer higher wages. Moreover, the rule allows employers to offer compensation arrangements that many workers will prefer, meaning that over time it should boost work and the economy.
While some recklessly claim that the administration has been sabotaging the individual market, this rule makes clear we have been focused on expanding affordable options through choice and competition in all possible venues. We aim to deliver better results than previous policies centered on mandates and a “Washington-knows-best” mentality. Obamacare’s many mandates still keep individual market premiums too high in many parts of the country, but this rule may spur necessary deregulatory reforms as more stakeholders now stand to benefit from a more competitive and free individual market.
Today’s action follows other significant Trump administration health care accomplishments. The president signed legislation to zero out the individual mandate penalty — freeing people to pay for their health care in ways that work best for them. The administration finalized a rule to open up another pathway for businesses, including many sole proprietors, to join together to obtain more affordable coverage through Association Health Plans (AHPs). (This rule is not currently in effect, and is under review in the courts.)
The administration also finalized a rule to expand consumers’ ability to purchase short-term plans, a much more affordable option for many since they are exempt from numerous federal mandates. The Council of Economic Advisers estimates that Americans will receive nearly $50 billion of net economic benefit per year from the elimination of the individual mandate penalty, combined with the expansion of AHPs and short-term plans. Moreover, the HRA rule, combined with the rules for AHPs and short-term plans, is projected to result in nearly two million more people insured on net.
Although Congress has largely failed to fix problems with the nation’s health care system, the president has created a freer, improved market. This rule is another important step by the Trump administration to offer businesses, particularly small businesses, and their employees greater options and control over their health coverage.