The jury's still out on whether or not the health care reform legislation sent to the president will seek financing through taxing employees' health benefits, but if leading Republicans could have their way, it would.

The Patients' Choice Act of 2009, co-sponsored by Sens. Tom Coburn, (R-Okla.) and Richard Burr (R-N.C.) and Reps. Paul Ryan (R-Wis.) and Devin Nunes (R-Calif.), could raise billions of dollars to help fund reform efforts by ending the preferential treatment of employee health benefits and taxing them as income, says Grace-Marie Turner, president of The Galen Institute.

"The tax break for employment-based health insurance is worth upwards of $300 billion dollars a year," she says.

The congressional Joint Committee on Taxation puts the number at $246 billion, and says employers spend about $518 billion a year on their employees' health benefits. No matter what the final numbers are, "there's no way that you can think about seriously finding money to do health reform without looking at that tax break," says Turner.

The Republicans' legislation proposes to create a $5,700 tax credit to families and a $2,300 credit for individuals to offset the added cost of paying taxes on workplace health care benefits.

"The current tax treatment of health care, which is a relic of World War II, discriminates against the self employed, against the unemployed and against those people who do not get health coverage at their jobs," said Nunes during a May press conference to promote the legislation. "The key question that ought to be addressed in any health reform legislation is are we going to continue job lock, or are we going to allow individuals more choice and affordability to fit the 21st century workforce?"

Contentious issue

Critics of the proposal say it will run into strong opposition by shifting the insurance market away from employer-based coverage.

The employee tax exclusion equates to less than 10 percent of America's annual health expenditures, according to the National Association of Health Underwriters.

"The current exclusion is simple, straightforward and unambiguous," says Janet Trautwein, executive vice president and chief executive officer of NAHU. "It is not subject to political whims."

In a statement, Sen. Max Baucus (D-Mont.), chairman of the Senate Finance Committee, addressed similar concerns.

"Where I part ways with this proposal is in eliminating the tax incentives for employer-provided health care benefits, which would destroy the employer-based health care system we have today," he says. "I want Americans to be able to keep the plan they have if they choose to do so, and eliminating those incentives could erode that choice."

While James Klein, president of the American Benefits Council, feels taxing health care benefits was once a "foregone conclusion," he believes a May Senate Finance Committee hearing on the topic has left room for compromise.

"We hope that lawmakers now see the holes in that proposal," he says. "In that sense, the debate is moving forward ... there is still plenty of time for compromise and to reach a sensible solution."

Baucus and Sen. Chuck Grassley (R-Iowa) proposed several possible solutions for financing reform in a recent policy paper that include the option to tax employee benefits above a certain level. The tax-free status of employer-provided insurance "encourages employers to offer 'Cadillac plans,' or overly generous health care plans that promote the overuse of health care services and drive up health care costs," said the Senate Finance Committee leaders in a joint statement.

The senators' proposals to change the tax structure include capping the exclusion based on the value of the health insurance policy, income level of the employee, or both. Another option is to convert the employer tax exclusion to an individual tax deduction or credit, as the Patients' Choice Act proposes. But that's not the way to save health care costs, says Klein.

"The place to find savings in health care is within the existing system, by improving quality and affordability. Eliminating or capping the employee tax exclusion should be a last resort option, not something to be included at this time," he says. "As we said in our testimony to the Senate Finance Committee, disturbing this tax exclusion would destabilize employer-sponsored health coverage and the benefits that workers value very highly."

Position softening

Meanwhile, after a June 2 White House meeting between President Barack Obama and Democratic senators, Baucus told reporters that Obama said he "might consider" taxing at least some employer-provided health care benefits.

"Yeah, it's something that he might consider," Baucus said. "That was discussed. It's on the table."

The White House responded to Baucus' comments by saying it's not the president's first choice for funding, but that he would not rule out the possibility, according to The Washington Post.

"The president made it clear during the campaign that he has serious concerns about taxing health care benefits, and he has introduced his own revenue proposal, which he reiterated in today's meeting," spokesman Reid Cherlin said.

The Post reports that Congress has already called the president's 2010 budget proposal to raise revenue by reducing itemized deductions such as charitable contributions and mortgage payments for the wealthiest Americans "a non-starter."

The prospect of taxing employee health benefits is a thorny issue for the president, who called out Sen. John McCain (R-Ariz.) for his campaign promise to do so.

In September 2008, Obama said: "For the first time in American history, he wants to tax your health benefits. Apparently, Senator McCain doesn't think it's enough that your health premiums have doubled. He thinks you should have to pay taxes on them, too."

Where's it going?

The Patients' Choice Act would also make employer-sponsored health insurance portable, but Paul Fronstin, senior research associate with the Employee Benefit Research Institute, says it's misleading to say the plan would allow those currently covered under their employer's insurance to keep it, because it assumes that employer coverage will remain available.

"The fact is, once you extend the tax credit to the non-group market, healthy people are going to opt-out of employer-based coverage and they're going to buy coverage on their own," he says.

Not necessarily so, says Turner. "An employer can decide that, 'If you work here, you take our health insurance. That's part of the deal,'" she says. "And if [the employer] wants to really make it attractive to people to work there, then that's going to [give the employer] more of an incentive to make the health insurance really have value."

While Fronstin believes the Democratic majority makes it "hard to imagine that this is going to be taken seriously by the leadership in Congress," Republican leaders say the point of the Patients' Choice Act is to keep Republican ideas in the health care reform conversation.

"The advantage of the Burr-Coburn proposal in the Senate along with that of the members of the House is it injects powerful, different ideas into the debate," says Sen. Lamar Alexander (R-Tenn.), ranking member of the Appropriations Committee. "This puts Republican ideas into the fight ... and we hope Democrats are impressed by the power of the ideas."

At press time, Baucus and the Finance Committee had yet to release an official proposal, but a first draft of legislation circulated by the office of Sen. Edward Kennedy (D-Mass.), chairman of the Health, Education, Labor and Pensions Committee, includes a requirement that every American have health insurance and mandates that employers contribute to employees' coverage. It is unclear whether or not such provisions will make it through a HELP Committee markup session scheduled through June 26. Meanwhile, Kennedy's legislation makes no mention of taxing employee health benefits - or any other way to pay for reform.