A tax hike that misses the mark

Compromise is the backbone of legislative success. But in the Senate, the search for votes could undercut the potential of reform to lower health spending.

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By Jeanne Sahadi, CNNMoney.com senior writer

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NEW YORK (CNNMoney.com) -- Getting health reform passed and getting health reform right are two very different things.

Both are hard. But in the current environment, the pursuit of votes in Congress involves proposals that would weaken key reform elements that hold the most promise for reducing overall health spending.

A lot is at stake: Health care reform, to succeed, must not only help more people get coverage but also slow the growth in health costs and spending.

The balancing act is now being led by Senate Majority Leader Harry Reid, D-Nev.

Reid is trying to craft a final Senate bill that blends health reform bills from two Senate committees. The combined bill must garner support not only in the Senate, but also in the House, which passed a different version of a health reform bill earlier this month.

To that end, Reid is reportedly considering an increase in the Medicare tax on high-income workers to help pay for the cost of reform.

The tax certainly could raise revenue. But experts say it would not curtail spending as could a tax proposal approved in October by the Senate Finance Committee.

The problem is the Senate Finance proposal, known as the Cadillac tax, has drawn political opposition.

Under the Senate Finance bill, a 40% excise tax would be imposed on insurers that offer benefits in employer health plans for which the cost of individual coverage exceeds $8,000 and the cost of family coverage exceeds $21,000.

Opponents say the excise tax would effectively get passed down to workers.

But supporters say it holds the promise of reducing the growth in health spending over time. Why? As more and more plans become subject to the tax, employers will instead opt for lower-cost options to avoid the tax.

A hike in the Medicare tax, on the other hand, holds no such promise, experts said.

"A higher Medicare payroll tax rate for upper-income people would provide no incentive at all to reduce costs or spending on health care," said Stuart Butler, vice president of economic policy at the conservative Heritage Foundation.

Nor for that matter would a surtax on the wealthy - which is a major revenue raiser in the House-passed reform bill.

Reid isn't necessarily going to get rid of the Cadillac tax altogether. He may keep it but raise the thresholds that determine whether a plan is subject to the tax. If that's the case, the tax would not reduce health spending as quickly because fewer employers would be subject to it initially.

"It sort of just delays things a little bit," said Paul Fronstin, director of the health research program of the Employee Benefit Research Institute.

Excise tax a shadow of original proposal

Of course, as with most elements of the health reform effort, there's plenty of uncertainty about how well the excise tax would work in reducing health spending over time.

But what is certain is that the excise tax is a far weaker version of what health policy experts and some lawmakers originally proposed: To eliminate or at least limit the tax-free nature of the health care subsidies that workers get from their companies.

Currently, the portion of premiums paid by employers is treated as tax-free compensation, and there is no limit on how much employers may contribute.

A cap would mean workers might have to pay income tax on some portion of their employer's contribution to their health care.

And when that happens, the thinking goes, workers would instead choose lower-cost plans to escape the added tax.

That idea never took flight for the same reason that the excise tax isn't winning popularity contests: Workers would pay.

Hence its more contorted cousin: the excise tax on high-cost health plans.

And even the excise tax was watered down before it hit Reid's desk. Critics complained the original thresholds were too low, and thereby would catch too many plans. So the thresholds were raised before the Finance Committee voted through its health reform bill.

Of course, the reshuffling and tweaking of health reform provisions is very far from over.

For starters, Reid is waiting for preliminary cost estimates from the Congressional Budget Office, which could come this week.

If the CBO concludes the Reid proposals would increase the federal deficit or jack up health care spending or costs, there will likely be a lot more massaging of the proposals before a final Senate bill emerges for debate on the floor. To top of page

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