Editor’s Note: A new rule from the IRS and other federal agencies could kick off the same kind of transformation for employer-sponsored health insurance that turned traditional pension plans into employee-directed 401(k)s. In a new article for The Hill, summarized below, Manatt Health looks at whether 2020 will be the beginning of the end for employer-sponsored health plans—and the dramatic consequences of the potential changes ahead. Click here to read the full article.


Beginning in January 2020, any employer can give employees pretax compensation to buy individual market health insurance instead of providing a traditional employer-sponsored group health plan. Although thinkers from across the political spectrum have long decried the uniquely American phenomenon of tying health benefits to employment, two factors have generally preserved the status quo, with about half of Americans in employer-based coverage:

  1. Until the Affordable Care Act (ACA) was implemented, the individual market for health insurance was not functional in many places, leaving employers few options if they wanted to ratchet back their health benefits.
  2. Employers have a significant incentive to provide generous health benefits, because employer spending on a health plan is not treated as taxable income for employees, effectively increasing the value of this form of compensation. This incentive was strengthened by the ACA’s requirement that large employers share in the responsibility for providing health coverage to employees, as well as by Obama-era rulings interpreting that the ACA precluded employers from contributing to the costs of individual coverage obtained by employees. 

The ACA solved the first issue but exacerbated the second. The new federal rule now solves the second by permitting employers to fund health reimbursement arrangements (HRAs) for employees to buy individual market health insurance. Employees do not have to pay tax on amounts employers contribute to the HRA.

The major remaining constraint on the 401(k)-ization of employer health benefits will be the pressures of the labor market. Will employees accept jobs that don’t guarantee them particular health benefits—and will employers be willing to test the labor market?

The federal government estimates that within five years about 11 million people will receive individual market coverage funded through an HRA, but those people will be spread across 800,000 employers, meaning only about a dozen employees will get healthcare this way from each participating employer. The Internal Revenue Service (IRS) admits this estimate is highly uncertain. As with other disruptive innovations, it is entirely plausible that what begins in the low end of employers will take over the entire sector.

The Consequences of the Change

The consequences of moving away from traditional employer-sponsored health insurance could be dramatic. Today, reimbursement by employment-based health plans is the fuel that drives many sectors of the health economy—including physicians, hospitals, drug and device makers, and other providers who may receive lower reimbursement for Medicaid and Medicare patients and nothing for uninsured patients. In addition, at least for today, the individual market coverage that the HRA would buy is quite different than employment-based coverage, often with fewer providers, lower reimbursement rates, no out-of-network benefits except for emergencies, and higher deductibles and other enrollee cost sharing.

If millions more people join the individual market through HRAs, these plan design features may change to look more like employment-based coverage—or HRAs may further incentivize lower-premium, less comprehensive plans. Either way, each sector of the healthcare system will need to think about the implications. Hospitals and doctors will need to continue their focus on collecting payments from patients with high-deductible plans—and all providers could face lower reimbursement and higher enrollee cost sharing. Brokers and tech vendors will need to help employees navigate increasingly complex coverage decisions. Insurers may need to adjust to higher administrative costs.

The change also could affect political realities. A significant hurdle to “single payer” healthcare reform is the general satisfaction with employment-based insurance, which covers 60% of nonelderly adults. If people are shifted to plans with higher deductibles and narrower provider networks—and forced to comparison shop each year—a single-payer system could look more attractive.