Health Care Law Reform : Health Care Lawyer & Attorney : McDermott Will & Emery Law Firm : Managed Care, Product Regulations

The Facts

President Obama signed historic health reform legislation on March 23, 2010, P.L. 111-148.  A week later, the president signed a package of amendments to health reform, the Health Care and Education Reconciliation Act of 2010, H.R. 4872.  Following are highlights of the most significant revenue raisers organized by the year in which they will begin under health reform legislation, as amended by the reconciliation package.

2010

• Imposes a 10 percent excise tax on individuals using tanning services
• Adds provision to disqualify unprocessed fuels, including so-called black liquor, from the section 40(b) cellulosic biofuel credit starting in 2010
• Codifies the economic substance doctrine and imposes penalties for transactions that lack economic substance

2011

• Imposes non-deductible annual flat fees on pharmaceutical manufacturers and importers based upon relative market share
• Conforms the definition of qualified medical expenses for health savings, health flexible spending accounts and health reimbursement arrangements to the definition used for the itemized deduction
• Increases the penalty for distributions from health savings accounts prior to age 65 not used for qualified medical expenses from 10 to 20 percent

2012

• Imposes a 2.3 percent excise tax on sales of most medical devices by manufacturers, producers or importers
• Requires information reporting for businesses that pay corporate providers of property and services any amount more than $600  

2013

• Increases the Medicare payroll tax from 1.45 percent to 2.35 percent for individuals with wages of more than $200,000 and $250,000 for joint filers
• Imposes a new 3.8 percent tax on investment income referred to as “unearned income” for individuals with wages of more than $200,000 and $250,000 for joint filers
• Imposes non-deductible annual flat fees on health insurance providers and clinical labs based upon relative market share
• Limits the amount of contributions to health flexible spending accounts to $2,500 per year
• Eliminates the deduction for the Medicare Part D subsidy for employers who maintain prescription drug plans for eligible retirees
• Increases the floor for deductible medical expenses from 7.5 percent of adjusted gross income to 10 percent
• Caps the amount of deductible executive compensation for health insurance companies at $500,000

2014

• Increases the estimated corporate tax payments for firms owing at least $1 billion in payments due in July, August and September 2014 by 15.75 percentage points

2018

• Imposes a 40 percent excise tax on insurance companies and plan administrators for health insurance plans above the threshold of $10,200 for individual coverage and $27,500 for family coverage

What’s at Stake

• Individuals earning over $200,000 and $250,000 for joint filers will pay a higher payroll tax and an excise tax on investment income.
• Insurance coverage limits may be reduced to avoid the 40 percent excise tax. 
• The costs of pharmaceutical drugs, insurance lab work and medical testing fees could increase as a result of the new fees imposed on these companies.
• Transactions must satisfy the economic substance doctrine to avoid the imposition of penalties. 

Steps to Consider

• Affected entities should carefully evaluate the impact of the proposed new taxes and fees.  
• Individuals will want to consider planning for the new taxes on “unearned income.”

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The Facts

The Patient Protection and Affordable Care Act (Pub. L. No. 111-148) includes four primary adjustments to the federal income tax exemption requirements for nonprofit hospitals.  Under the act, tax-exempt hospitals must take the following actions:

• Conduct a community health needs analysis at least once every three years, soliciting input from the communities that they serve
• Make widely available their financial assistance policies, which must specify eligibility criteria and, for discounted care, how they determine amounts that are billed to patients
• Notify patients of financial assistance policies through “reasonable efforts” before initiating various collection actions or reporting accounts to a credit rating agency
• Restrict charges of uninsured, indigent patients to those amounts generally charged to insured patients

The act imposes penalties on hospitals that fail to timely conduct their community health needs assessments.  Under the act, the Internal Revenue Service must review the exempt status of hospitals every three years.  In addition, the act requires the U.S. Department of the Treasury, in consultation with the U.S. Department of Health and Human Services (HHS), to prepare an annual report for the U.S. Congress on charity care, bad debt expenses, certain unreimbursed costs and costs incurred for community benefit activities.  In five years, Treasury and HHS must also provide Congress with a report on community benefit-related trends.

What’s at Stake

In light of a recent Illinois Supreme Court decision denying property tax exemption to a nonprofit hospital, these new standards contribute to the ongoing dialogue with respect to whether and to what extent nonprofit hospitals are distinguishable from for-profit hospitals and deserve federal income tax exemption.  These provisions can be viewed as requirements that will differentiate tax-exempt hospitals and improve transparency of how they fulfill their charitable, patient-care missions.

Steps to Consider

Tax-exempt hospitals should quickly consider how to comply with the act’s new requirements for federal income tax exemption.  While most of the act’s provisions have postponed effective dates, the tax-exempt specific requirements for hospitals will be effective very soon, perhaps as soon as tax years beginning April 1, 2010.

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The Facts

The White House’s recent health care plan includes a proposal that would increase the Medicare tax on wealthy individuals.  Under the current system, all employees, regardless of how much they earn, pay 1.45 percent into the Medicare system every paycheck.  Employers chip in an additional 1.45 percent, to bring the total Medicare tax to 2.9 percent per employee.  The tax is strictly a payroll tax and does not affect “unearned income” from investments. 

The president’s proposal introduces a progressive element into the tax:  individuals earning more than $200,000 and couples earning more than $250,000 will pay an additional 0.9 percent surcharge in each paycheck, bringing their total payroll Medicare tax to 2.35 percent. 

Perhaps more importantly, the White House has proposed changing the Medicare funding system from a purely payroll tax to an income tax, by expanding it to cover unearned income.  Individuals earning in excess of $200,000 and couples earning more than $250,000 will be taxed at a 2.9 percent rate on unearned income from interest, dividends, annuities, royalties, and rents and capital gains.  The changes, if approved by Congress, would take effect in 2013.

What’s at Stake

The Medicare tax on businesses will remain at 1.45 percent, regardless of the employee’s salary.  High-earning employees, however, will face a 0.9 percent increase to their Medicare tax.  Furthermore, wealthy individuals who receive at least some of their wealth through unearned income will now have to pay a 2.9 percent tax on that income (equivalent to the amount paid jointly by the employer and employee through the payroll system). 

Steps to Consider

Individuals will want to monitor the White House’s proposal, particularly as to whether unearned income will be taxed at the 2.9 percent rate.  Individuals may want to adjust their investment strategies to minimize the impact of the tax.

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The Facts

On January 14, 2010, congressional leaders and the White House announced that they had reached a compromise with labor unions to proceed with the excise tax on so-called Cadillac, or high-cost, health plans. The excise tax was included in the Patient Protection and Affordable Care Act (H.R. 3590) passed by the Senate. The provisions of that bill called for a 40 percent excise tax on insurance companies and plan administrators for any employer-sponsored health coverage whose value exceeded $8,500 per year for individuals and $23,000 for families. The tax was to take effect in 2013.

The compromise reached last week with the labor unions dictates that the thresholds for the tax will be slightly higher than in the Senate bill—$8,900 for individuals and $24,000 for families. These threshold levels would be increased based upon age, gender and geography to prevent the tax from disproportionately affecting people in high-cost groups. Additionally, starting in 2015, dental and vision coverage will not contribute to the thresholds. Most importantly for the labor unions and their employers, the new compromise exempts collectively bargained health plans and state and local government employees from the tax until 2018. This exception was made to accommodate for the fact that many unions negotiated better health benefits for their members at the expense of wage increases.

The tax is expected to raise $90 billion in revenue over the next 10 years. By contrast, the original Senate bill would have raised $149 billion over 10 years.

What’s at Stake

Businesses with high-cost health care plans hiring non-union employees would feel the effects as early as 2013 under this compromise proposal. Businesses with collectively bargained health care plans are likely to benefit from the exemption from the excise tax until 2018, which gives unions time to renegotiate their agreements with employers.

Steps to Consider

Businesses should evaluate their health care plans to determine to what extent they will be affected by this tax. Insurers should assess the impact of the tax on the coverage they offer.

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The Facts

Both the recently passed Senate and House health care reform bills contain provisions that affect retiree health benefits. Both bills remove the tax exemption for Medicare Part D subsidies received by employers who provide retiree prescription drug coverage. In addition, the House bill prohibits employers from changing a retiree’s available benefits once the individual has retired, and the Senate bill contains a 40 percent excise tax on retiree health benefits that exceed certain thresholds ($9,850 for single coverage and $26,000 for family coverage). Both bills decrease the Medicare prescription drug coverage gap by $500 (with the House bill completely eliminating the gap by 2019) and provide a 50 percent discount on brand-name drugs to retirees affected by the coverage gap.

What’s at Stake

These provisions have the potential to decrease employer-provided retiree health and prescription drug benefits. Employers will find it much more expensive to provide these benefits without the tax exemption for the prescription drug coverage subsidy and with the threat of a 40 percent excise tax on health coverage beyond the stated threshold. This extra cost may serve as a deterrent to providing such benefits. In addition, the inability to alter the benefits offered to retirees provides an incentive to decrease or eliminate retiree benefits so employers are not obligated to provide such coverage indefinitely. Further, the reduction in the Medicare coverage gap and discount on drugs will influence employers to eliminate prescription drug coverage because these increases bring the Medicare drug benefit to a level closer to that of employer-provided coverage. 

Steps to Consider

• Review the progress of the proposals to determine next steps, such as plan redesign.
• Consider weighing in with your congressional delegation explaining the impact of the various provisions and indicating your views on them.     
• Evaluate the impact of the final law on retiree health and prescription drug benefits, and consider adjusting benefits accordingly.

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The Facts

While the reform plan unveiled on November 18, 2009, by Senate Majority Leader Harry Reid (D-NV) contains revenue-raising provisions that closely track those of the Senate Finance Committee bill put forth by Chairman Max Baucus (D-MT), the Reid bill also includes new revenue raisers not seen in earlier versions of either Senate or House reform proposals. Like the Senate Finance bill, Reid’s bill relies most heavily on a 40 percent excise tax on “Cadillac” policies. By contrast, the House bill would impose no such excise tax, instead relying primarily on a 5.4 percent income tax hike on high-earning individuals. Reid’s bill incorporates all three sector excise taxes from the Senate Finance bill, with annual levies of $2 billion on medical device manufacturers, $6.7 billion on health insurers, and $2.3 billion on branded pharmaceutical manufacturers. By contrast, the House bill imposes only a 2.5 percent excise tax on medical devices. The Reid Bill has several provisions in common with both the House and Senate Finance bills:

• Placing new restrictions on Health Savings Accounts, including capping them at $2,500 per year
• Eliminating the deduction for expenses allocable to Medicare Part D prescription drug plans for retirees
• Requiring information reporting on most payments over $600 to corporations

Reid’s bill adds several new revenue raisers present in neither the Senate Finance nor the House bills: 

• A 0.5 percent increase in the Medicare tax rate on taxpayers earning over $200,000 (or $250,000 for joint-filers)
• A 5 percent excise tax on elective cosmetic surgery
• Denying a deduction for compensation exceeding $500,000 for executives at insurers

Unlike the House Bill, the Reid bill lacks provisions codifying the economic substance doctrine, repealing the reform of interest allocation for multinationals, limiting tax treaty benefits or excluding “black liquor” from the cellulosic biofuel tax credit.

What’s at Stake

The tax impact of the Senate bill will fall mostly on health-care-related sectors, while the House bill would have more effect on businesses far removed from health care. 

Steps to Consider

All businesses should carefully monitor the progress of the health reform debate and consider the possible impact of competing revenue raising proposals.

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The Facts

On November 7, 2009, the House of Representatives passed H.R. 3962, the Affordable Health Care For America Act. Unlike the Senate Finance bill, which would fund reform largely with excise taxes on “Cadillac” insurance plans and on various health care sectors, the House bill would raise much of its new revenue—$739 billion over 10 years—through tax law changes largely unrelated to health care. Notable provisions include the following:

• Imposing a 5.4 percent surtax on adjusted gross income of individuals earning over $500,000 ($1 million for joint filers), raising $460.5 billion over the next decade
• Excluding “black liquor” from the biofuel producer tax credit, saving $23.9 billion over the next seven years 
• Requiring reporting to the Internal Revenue Service of most business-to-business payments over $600, a provision that is also included in the Senate Finance bill and is expected to increase revenues by $17.1 billion over 10 years
• Limiting treaty benefits for some foreign multinationals, raising $7.5 billion over the next decade
• Repealing the planned reform of interest allocation by multinationals, raising $6.0 billion over the next decade
• Codifying and tightening the common-law economic substance doctrine, with corresponding increase in penalties, raising $5.7 billion over 10 years

The House bill would also raise revenue through several health-care-related tax provisions that would affect businesses across sectors:

• A new payroll tax on employers that do not offer coverage, raising $135 billion over 10 years
• Imposing limits and higher penalties on health flexible spending accounts, raising nearly $20 billion over the next decade

What’s at Stake

Businesses in sectors far removed from health care may experience adverse tax changes and new reporting burdens. As the focus now moves to the Senate, additional changes, possibly including new revenue raising proposals, are likely.

Steps to Consider

Entities outside the health care sector should monitor the progress of the health reform debate for tax changes having an impact beyond their employees’ health care.

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The Facts
The Baucus Bill contains a specific section dedicated to tax exempt hospitals. The section "Additional Requirements for Section 501(c) (3) Hospitals" would establish a series of four new requirements for hospital tax exempt status, which are in addition to the core requirements for tax exempt status currently established under the controversial "Community Benefit Standard,” and include:

• Performance of a periodic community needs assessment
• The adoption, implementation and publicizing of written policies on financial assistance and providing emergency care
• Limitations on bills to patients who qualify for financial assistance
• Prohibition of "extraordinary collection actions" (even those permitted by law)

The Bill also provides for increased reporting and disclosure requirements with respect to Form 990, and for continuing governmental oversight of community benefit related indicators.

What's At Stake
This portion of the Baucus Bill serves as a supplement to, rather than a replacement of, the Community Benefit Standard for hospital tax exempt status under the Internal Revenue Code. It excludes the controversial excise tax and minimum patient charity care standards originally proposed by the Senate Finance Committee last May. In many respects, this may be perceived as a moderate alternative to other, more significant proposals to revise or replace the entire Standard. However, what presently remains unclear are the long-term implications of the proposals relating to mandated IRS review of the Schedule H information, financial statement disclosure and the ongoing Health and Human Services study and review of community benefit expenditures.

Steps to Consider

• Plan for the preparation of a community needs assessment as a tax exemption requirement
• Evaluate the sufficiency of existing policies and procedures on financial assistance, emergency room access and patient billings
• Anticipate clear internal policies prohibiting aggressive collection practices

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The Facts

The most recent markup of the health care reform plan put forth by Senator Max Baucus (D-MT), Chair of the Senate Finance Committee, contains a new $6.7 billion annual sector fee imposed on health insurers. Starting in 2010—well before the individual coverage mandate would go into effect—each affected insurer would pay a portion of the sector fee corresponding to its market share, measured by net health insurance premiums.  The fee would hit not only traditional for-profit insurers, but also tax-exempt organizations, such as fraternal beneficiary societies, that provide health insurance.  Only two forms of health insurance would be exempted:  insurance directly offered by government entities, and businesses’ self-insurance of their employees’ health risks.

What’s at Stake

• The costs of private insurance would likely increase as a result of this fee and other features of the proposed legislation, such as the proposed tax on high-priced "Cadillac" policies.   
• The fee would not be tax deductible, thus magnifying its after-tax effect.
• Businesses that currently buy private insurance for their employees may find it more cost-effective to self-insure.

Steps To Consider

Affected entities should carefully evaluate this fee’s potential impact.  In particular, insurers should consider their current and projected market share, as well as their elasticity of demand, which would determine their ability to pass on this fee.

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The Facts
The health care reform plan put forth September 16, 2009, by Senator Max Baucus (D-MT), Chair of the Senate Finance Committee, contains revenue raising proposals, along with savings from Medicare and Medicaid, that together would finance the expected $774 billion cost of reform over 10 years. Following are highlights of the revenue raising provisions in the Baucus plan: 

• Impose an excise tax of 35 percent on insurance companies and plan administrators for health insurance plans above the threshold of $8,000 for individual coverage and $21,000 for family coverage, to raise $214.9 billion over 10 years.
• Limit the amount of contributions to health flexible spending accounts to $2,000 per year, to raise $16.5 billion over 10 years.
• Eliminate the deduction for the subsidy for employers who maintain prescription drug plans for their Medicare Part D eligible retirees, to raise $4 billion over 10 years.
• Conform the definition of qualified medical expenses for health savings, health flexible spending accounts and health reimbursement arrangements to the definition used for the itemized deduction, to raise $5.4 billion over 10 years.
• Increase the penalty for distributions from health savings accounts prior to age 65 not used for qualified medical expenses from 10 to 20 percent raises $1.3 billion over 10 years.
• Require information reporting for businesses that pay corporate providers of property and services any amount over $600, raises $17.1 billion over 10 years.  
• Impose non-deductible annual flat fees on pharmaceutical manufacturers and importers, health insurance providers, clinical labs and medical device manufacturers based upon relative market share, to raise $93.2 billion over 10 years.

What’s at Stake

• Insurance coverage limits may be reduced to avoid the 35 percent excise tax. 
• The costs of pharmaceutical drugs, insurance lab work and medical testing fees could increase as a result of any new fees imposed on these companies. 

Steps to Consider

• Affected entities should carefully evaluate the impact of the proposed new taxes and fees. 
• In addition to the revenue raisers included in the Chairman’s mark, additional revenue raisers will likely be offered during Finance Committee consideration of the legislation as any amendments offered must included offsets to pay for the cost of the amendment. 
• The financing mechanisms selected by the Finance Committee merit serious review. The mechanism contained in the House health reform bill (an income tax surcharge on families with incomes above $350,000 and individuals with incomes about $280,000) will likely be significantly scaled back, giving more prominence to the Finance Committee’s proposals. 

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The Facts

Health care reform legislation introduced in the House, the America's Affordable Health Choices Act of 2009, provides key details on financing health system reform. Significant revenue-raising proposals include the following:

• A surcharge on high-income individuals of 1 percent on adjusted gross income between $350,000 and $500,000 (married filing a joint return), a 1.5 percent surcharge on incomes between $500,000 and $1 million, and a 5.4 percent surcharge on income in excess of $1 million, to raise $543.9 billion over 10 years
• Corporate and international tax proposals that have narrow application or were widely expected by the business community, or both, including a further delay in the application of worldwide interest allocation rules relevant to U.S.-based multinationals for foreign tax credit purposes, denial of treaty benefits for groups parented by non-treaty country entities, and the long-anticipated codification of the economic substance doctrine applicable to a wide range of taxpayers, to raise $37.2 billion over 10 years

What's at Stake

As the House and Senate seek to pay for health system reform, it is expected that one-third to one-half of the cost of reform will be paid for through increased revenue from the tax code. Certain companies and high-income individuals may see significant increases in their tax liability. The Senate Finance Committee is considering a range of revenue-raising options. If the Senate selects different revenue-raising provisions, then the House and Senate will have to reconcile their differences in Conference, which could make passage of a bill more difficult.

Steps to Consider

• Watch the Senate Finance Committee, which is working to craft its own revenue raising proposals for health reform. It is expected that the Senate will turn to revenue-raising provisions not included in the House bill.  
• Small businesses should pay close attention to the surcharge proposal because many small businesses report profits on individual tax returns. Some members of the House are clamoring for changes to the surtax prior to House floor action. 
• Thus far, tax writers have indicated that the more controversial corporate and international revenue-raising provisions in the president’s budget will not be considered as part of health care reform, but companies should monitor the situation. 

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The Facts
In May 2009, the leadership of the Senate Finance Committee announced a set of options for financing a mammoth health care reform proposal, including capping the exclusion from income for health insurance, reducing the tax benefits of flexible spending accounts and health savings accounts, and limiting the definition of qualified medical expenses. Under current tax laws, employer contributions towards health insurance and health care for active and retired employees are excluded from an individual’s income and employment taxes. The Senate Finance Committee proposals would limit these tax exclusions in several important ways:

• Place a cap on the income tax exclusion for employer provided health insurance based on various indices, with some proposals phased out for taxpayers with high adjusted gross incomes (AGI)
• Repeal the Code Section 213 deduction for medical expenses in excess of 7.5 percent of AGI
• Eliminate the exclusion from income and employment taxes for contributions made through health flexible spending accounts and health reimbursement arrangements

What’s at Stake
The Congress’ Joint Committee on Taxation estimated that as stand-alone proposals, each of the proposals would result in a reduction in the number of people receiving employer sponsored health insurance in the range of 10 to 12 million people based on a full repeal of the tax exclusions, and in the range of one million people if the tax exclusions for health insurance were to be capped. Of course, the outcome could be different if the tax proposals were included as part of a comprehensive reform of the health care system. 

Steps to Consider
Employers should analyze the impact of these proposals on the group health plans they sponsor for employees. Employers should also consider analyzing the effect of these proposed tax changes on additional employee income and employment taxes. 

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The Facts
On June 19, 2009, Democrats from three key House committees released a draft health reform bill that sheds light on plans to use the Internal Revenue Code to incentivize individuals to obtain, and employers to provide, adequate health care. The bill, however, leaves out details on the major sources of revenue needed to finance the health care expansion. Key tax provisions in the bill to date include:

• Imposing 2 percent tax on the income of individuals without “acceptable coverage,” with tax limited to national average premium
• Providing limited exceptions to 2 percent tax on individuals (e.g., nonresident aliens, religious conscience)
• Requiring providers of acceptable coverage to provide annual information reports to the IRS describing the names and types of coverage of each covered individual and other information that the IRS requires
• Imposing excise tax on employers that elect to help satisfy the health coverage participation requirement but that later fail to meet the requirement
• Imposing excise tax equal to 8 percent of wages paid on employers that elect not to help satisfy the health coverage participation requirement
• Providing 50 percent tax credit for employee health coverage expenses of small businesses providing employee coverage, with phaseouts for average employee compensation (greater than $20,000) and employee headcount (more than 10)
• Authorizing IRS disclosure of taxpayer information to determine whether individuals are eligible for affordability credits

What’s at Stake
With a promise by President Obama and key members of Congress to fully fund health care reform, which is anticipated to cost $1 to 2 trillion or more over 10 years, progress will require filling in the details on the revenue-raising provisions. Approximately half of the money needed to pay for health care reform is expected to come from changes in the tax law.

Steps to Consider

• Stay tuned for revenue-raising tax proposals, which may include significant amendments to the international tax rules
• Continue to monitor any additional guidance on required information reporting by employers to show they meet the health coverage participation requirements

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