Congress may find it difficult to finance universal coverage unless it limits to some extent the exclusion of employers' health insurance payments from employees' income and payroll taxes, according to a new study from the Center on Budget and Policy Priorities in Washington.
"There are a huge number of ways to raise additional revenues," said Paul Van de Water, a senior fellow at the center, who authored the report. "At least in theory, one could pay for health reform without limiting the employer exclusion. But, when we go through the individual options one by one and think about all of the objections that are raised to them, we think as a practical matter that it may be very hard to pay for health reform without doing something to limit the employer exclusion."
The issue, in various forms, has been discussed by the Senate Finance Committee as a way to pay for coverage under healthcare reform. So until other alternatives are identified and settled, "we shouldn't rule this or anything else off the table," said Van de Water, who previously served as vice president for health policy at the National Academy of Social Insurance and as deputy assistant director for budget analysis with the Congressional Budget Office.
The current exclusion is poorly designed, which gives a greatest benefit to those with higher incomes, according to the report. The higher exclusion can provide an incentive for employers and individuals to select more generous or costly coverage, which in turn could lead to an increase in healthcare service demand that pushes up prices.
In a way, limiting tax exclusions could push in the direction of greater efficiency in the healthcare system, Van de Water noted. Those with higher benefits might end up seeking more economical plans that use resources more effectively.
"It's not a perfect tool, but clearly we're going to have to do a lot of different things to drive the system to be more efficient. This is one that would run in the right direction," he said.
It's unlikely that Congress will choose to move toward making employer sponsored insurance totally taxable. "That clearly doesn't seem to be in the cards," Van de Water said. Instead, other options could be considered, such as basing limits on household incomes, basing limits based on the value of insurance, or basing limits on both incomes and insurance value.
Any proposal, though, to cap the tax exclusion that is based on insurance value must specify separate limits for each type of coverage, the study said. If the limits fail to reflect the differences in the cost of insurance, the exclusion could end up affecting a greater proportion of those with family coverage than those with individual coverage--or vice versa.
Attention also will be needed to modify tax exclusions for companies whose premiums are high because workers are in an area with higher healthcare spending or have employers who are older or sicker--causing premiums to be higher.
As for acceptance by the White House, it's probably wait and see. The president, during his campaign, said he opposed taxing insurance benefits. "I think our feeling is that at the end of the day, the White House has clearly said that they believe that health reform needs to be paid for," Van de Water said. "Health reform is important, but we also think that equally important it should be done in a way that doesn't add to the deficit."
The administration is likely to reject a health reform plan that is not paid for, "but I don't think they are going to reject something that is paid for in a way that wasn't their first choice," Van de Water said.