The desperate search continues.

Shortly after the July 4th congressional recess, Senate Majority Leader Harry Reid effectively killed the idea of placing a cap on the amount of employer-paid premiums that can be paid on behalf of a worker and still remain tax free. Unions have always been vehemently opposed to any limitation on the tax-preferred status of job-based plans, and imposition of a dollar cap on tax free employer-paid premiums would also have violated President Obama’s already shaky promise (see the House-passed “cap and tax” bill) to not raise taxes on households with incomes below $250,000 per year.

Senator Reid’s firm opposition sent Finance Committee Chairman Max Baucus back to the drawing board. He had been counting on the $320 billion raised over a decade from the “tax cap” idea to partially pay for his reform plan. He has now spent the better part of two weeks rummaging around for ideas that can plug the $300 billion hole in a politically safe way that also unites all Democrats on the committee and a Republican or two. Let’s just say it’s not likely to be a very long list.

Congressional Budget Office (CBO) Director Doug Elmendorf complicated matters further with his assessment of the bills under consideration in the House and the Senate Health, Education, Labor, and Pensions (HELP) Committee. Elmendorf told the Senate Budget Committee last week that these bills don’t go nearly far enough to change the financial incentives which are driving up costs. He also noted that an important way to emphasize cost control would be to put into the bills a limitation on the tax-preferred status of expensive job-based plans — exactly the idea which Senator Reid had rejected only days before. Indeed, it is not a coincidence that the one reform with the most potential to instill some much-needed financial discipline into the health sector without overbearing governmental regulation is also the one change senior congressional Democrats most vigorously oppose.

Which brings us to the idea du jour. In private negotiating sessions taking place in the Finance Committee, Senator John Kerry has apparently floated an alternative taxation idea. Why not tax the insurance companies which are selling expensive policies instead of taxing the job-based benefits of workers?

Sounds great, right? A tax on for-profit health insurers. Really, what’s not to like?

As is often the case in Washington, this is not a new idea either. It was proposed by Senator Bill Bradley during the debate on the Clinton health care plan in 1994 for the very same reasons it is being considered today. It has superficial political appeal — for a day or two. No one likes insurers anyway. Perhaps unions and the broader public can go along with a tax that seemingly hits distant and despised companies and not them. And maybe the CBO Director will look as favorably on this kind of tax in terms of potential cost-control as he does the traditional “tax cap” idea.

But, of course, the reason why a tax on insurance might actually have a beneficial impact on the pace of rising health care costs is that insurers will never pay it.

For starters, such a tax couldn’t be structured to apply only to insurance companies. Many employers, especially large ones, self-insure rather than purchase insurance for their workers directly from other companies. To raise any significant revenue at all, and to treat all health insurance equally, the Kerry-Baucus-Obama insurance tax would have to apply to self-insuring employers too. That fact, by itself, is likely to reduce its political appeal in coming days.

Furthermore, no insurer or employer will pay a new tax on insurance and simply reduce their profits by a like amount. If the federal government imposes such a tax, insurers and employers who would otherwise have to pay it will make adjustments to their plans and products to bring costs down and avoid the tax. That’s the point, anyway, even according to the proponents. But that means higher deductibles for the plan’s enrollees. More cost-sharing when patients see their physicians or fill prescriptions. More restrictive networks of preferred providers. There’s no way around the fact that it’s the plan’s enrollees who will pay more, not the insurers or the employers.

Of course, in a competitive labor market, if employers cut their health costs, they can pay their workers more in cash wages, and that’s what CBO is very likely to assume would occur with the Kerry-Baucus-Obama tax. That means a substitution of taxable wages for tax-free fringe benefits. Federal tax collections will indeed go up, but it’s workers who will be paying more, even as they get less expansive health insurance. Indeed, there is no way around the fact that any effort to get Americans into less expensive insurance will increase costs for the middle class, and that’s exactly what would happen with this proposal too.

But that won’t stop Senate Democrats from trying to have it both ways. They want CBO to give them credit for adopting incentives for large-scale enrollment in less expensive health insurance, even as they also proclaim that no middle class family will pay more taxes or more for health care either. That contention — that they have somehow found the health-care free lunch — won’t stand up to even modest scrutiny. Indeed, that’s why the Bradley tax didn’t break the logjam in 1994. No one was fooled. And they won’t be this time either.

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