By Shailagh Murray and Lori Montgomery
Washington Post Staff Writers
Thursday, August 6, 2009

Senate negotiators are inching toward bipartisan agreement on a health-care plan that seeks middle ground on some of the thorniest issues facing Congress, offering the fragile outlines of a legislative consensus even as the political battle over reform intensifies outside Washington.

The emerging Finance Committee bill would shave about $100 billion off the projected trillion-dollar cost of the legislation over the next decade and eventually provide coverage to 94 percent of Americans, according to participants in the talks. It would expand Medicaid, crack down on insurers, abandon the government insurance option that President Obama is seeking and, for the first time, tax health-care benefits under the most generous plans. Backers say the bill would also offer the only concrete plan before Congress for reining in the skyrocketing cost of federal health programs over the long term.

Three Democrats and three Republicans from the Senate Finance Committee will brief Obama on Thursday about the progress of their sometimes arduous talks, which are now set to extend through the August recess. The negotiators are holding the details close as they continue to debate key issues, and it could be a challenge for them to meet the Sept. 15 deadline set by the committee's chairman, Max Baucus (D-Mont.), for a deal.

Even if the partnership does not result in legislation, Democratic leaders are already contemplating ways to preserve much of what it produces as they look to unite their party and pick up Republican votes when the health-care debate moves to the Senate floor in the fall. The Finance Committee coalition is seeking compromise on some of the most complex issues facing Congress, including how to compel employers to continue providing insurance to their workers; how to more fairly distribute government subsidies for coverage; and who and how many should be allowed to remain uninsured.

Negotiators are even crafting provisions that would limit their own authority over Medicare by empowering an independent commission to extract savings from the program.

Many of their ideas were previewed for the first time to Senate Democrats in a closed-door meeting Wednesday afternoon. Sen. Evan Bayh (D-Ind.), a centrist who spent the early part of the day with Obama at a rally in Elkhart, Ind., before hearing the briefing, said he supports reform but is worried about how it will be financed. He backs the Finance Committee's proposal to tax insurance providers and businesses, preferring that approach to taxing the wealthy households that are targeted in a competing measure in the House.

"Call me an optimist in spite of all the evidence, but I think the chances are, you know, better than 50-50 that we'll get this done," Bayh told reporters after the session. "But it's tough, it's complex. It's taken a little time, which is not surprising."

Still, as the six senators continue their talks, the political debate over health-care reform has become increasingly polarized. Liberal Democrats are incensed that the Finance Committee has rejected a government-run health insurance plan in favor of a network of member-owned cooperatives -- a needless concession, they believe, given the Democrats' 60-vote majority in the Senate. Meanwhile, many Republicans view blocking health-care reform as a smart political strategy that will help their party draw a sharp line with congressional Democrats in the 2010 elections.

Democrats also suspect that GOP lawmakers are wary about supporting reform at the risk of attracting conservative primary opponents. One potential target: Sen. Charles E. Grassley (Iowa), the lead Republican health-care negotiator, who will run for reelection next year.

Despite his close relationship with Baucus, Grassley told Iowa reporters on Wednesday that the talks may still fall apart. "Who knows, we may not have a product," he said. "But sometimes that's the result of negotiations."

Committee negotiators say the outstanding issues include how to structure a Medicaid expansion to make it fair to individual states; how to establish subsidy levels to maximize assistance to the uninsured; and how to squeeze savings from Medicare without imposing an undue burden on seniors or compromising the quality of care.

Another flashpoint is whether government insurance subsidies could be used to pay for abortions. Baucus on Wednesday described "active discussions underway with all sides to try to put something together that would be acceptable."

The group is closer to resolving other major questions and has already agreed to about $500 billion in changes to existing federal health programs, including Medicare and Medicaid. For example, negotiators would require wealthier seniors to pay more for prescription drug coverage under Medicare, and they would charge co-payments for clinical lab procedures. The lab co-pays are potentially lucrative, raising about $20 billion over 10 years.

Other new sources of revenue include penalties on individuals who do not obtain health insurance, and a "free-rider" provision that would require employers that currently offer health insurance to continue to do so, or to reimburse the federal government for workers who switch to subsidized coverage through an insurance exchange. Both provisions could yield about $43 billion over 10 years.

The rest of the additional revenue -- about $250 billion -- would come from new taxes, primarily from an excise tax of up to 35 percent on insurance companies that sell extremely generous policies worth at least $21,000 a year for family coverage or $8,000 a year for individuals, according to aides involved in the discussions. About 7 percent of taxpayers hold such policies.

Lawmakers said insurance companies are likely to pass the cost of such a tax to policyholders, raising the price of those plans. That would create a strong incentive for employers to stop offering them, thus driving down overall health-care costs. With employers paying less for insurance, tax analysts predict, they would pay workers more in wages, increasing income tax collections by as much as $180 billion over the next decade.

The Finance Committee proposal is also likely to contain a number of much smaller tax provisions, including a $2,000 cap on flexible savings accounts -- which are currently unlimited -- and a plan to improve tax compliance by requiring businesses to tell the Internal Revenue Service when they pay corporations for services.

"We've got options on the table that will pay for this fully," said Sen. Kent Conrad (D-N.D.), one of the negotiators. "It's a matter of choosing which pieces and how much of each piece is selected."

The excise tax is one of five provisions designed to slow the soaring trajectory of federal health spending, which is on track to bankrupt the country by the middle of the century absent significant reform, according to the Congressional Budget Office. Spurred by the CBO director's startling assertion last month that measures drafted by other committees would not bend the "cost curve," negotiators on the finance panel are also studying a plan to fine insurance companies that do not pay providers electronically, a plan to reduce payments to providers to force them to increase efficiency and a plan to study the comparative effectiveness of various medical treatments.

Finance Committee negotiators also want to set a target for savings through those reforms. If the target is not met, they would create a panel, called the Medicare Preservation Commission, that would recommend ways to obtain additional savings.

Baucus said preliminary estimates from the CBO, the nonpartisan arbiter of the cost of legislation, show that an early version of the plan would not only pay for itself but would begin to reduce projected budget deficits by 2019.

Staff writer Paul Kane contributed to this report.