Jill Wechsler

Peter Orszag, head of the White House Office of Management and Budget (OMB), insists that health reform will not increase the federal deficit, but has to cover its costs. "The package we put together will be deficit neutral over 10 years," Orszag stated at a conference at the Brookings Institution last month. "We need to address the moral imperative of covering the uninsured—and pay for it."

To begin the process of funding health reform, the administration will seek $200 to $300 billion in savings in Medicare and Medicaid. Reductions in payments to MA plans, changes in formulas for paying providers and beneficiary cost-sharing are on the list.

But much of the money will come from changes in the tax system. The Senate Finance Committee has examined a number of options related to healthcare: Repeal the current tax deduction for certain large medical expenses; and reduce tax benefits on flexible savings accounts and health reimbursement accounts.

More popular are new sin taxes. Increasing the excise tax on alcohol could raise $5 billion annually, and imposing a new tax on high-sugar drinks has the double benefit of generating $10 billion annually and potentially improving public health by reducing obesity.

The most prominent potential source of money to pay for reform is to limit the tax-free treatment of employer-provided health insurance. Under current law, health insurance benefits that 175 million Americans receive from employers are not taxed as income, a so-called loophole that costs the government $200 billion a year. Analysts say that this encourages the purchase of high-cost coverage as well as excessive healthcare spending. It's also unfair to those who pay for health insurance individually and receive no tax benefit.

Conservative Republicans tend to favor a complete end to the tax break, replacing it with a refundable tax credit that would help individuals pay insurance premiums. While more equitable, the change runs the risk of employers dropping health benefits altogether.

Another option is to reduce the exclusion only for those with very high incomes (over $200,000 for individuals, $400,000 for a couple). This approach doesn't raise much money—only $100 billion over 10 years. Lowering the floor would boost revenues but end up hitting middle income workers.

A cap on the deductibility of employer provided health benefits that exceed a certain level is also up for consideration. The tricky part is determining where to set the cap. One approach would link it to the national average premium for comprehensive policies, which runs about $13,000 a year for family coverage. That strategy would yield savings of about $600 billion over 10 years. Employees with policies exceeding that value would be taxed on the difference, a policy that would be felt most by workers in high-cost regions who pay higher premiums.

Employers don't like the idea of taxing health benefits, nor does organized labor, which tends to have fairly generous plans. Employers fear that taxing worker health benefits could prompt young, healthy workers to drop coverage, raising premiums for those who continue coverage. The change ultimately could undermine the employer-based benefits system and push more individuals into government-run programs.

Jill Wechsler, a veteran reporter, has been covering Capitol Hill since 1994.