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

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
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

Among the many changes that would be wrought by the health system reform bill introduced today by Senator Baucus is a proposal having little to do with health system reform, but nonetheless drawing significant attention from hospitals and physicians alike. Under the Senate bill, a physician would be prohibited from referring Medicare beneficiaries to a hospital in which he or she has an ownership interest. Hospitals that have physician ownership and a Medicare provider agreement by November 1, 2009, would be grandfathered, subject to significant restrictions that would prohibit most qualifying hospitals from expanding operating room and bed capacity.

The Senate restriction differs from its House counterpart in at least two key respects. First, to qualify for grandfather protection, a hospital must have physician ownership and a Medicare provider agreement in place by November 1, 2009, rather than January 1, 2009, as is the case in the House bill. Second, there may be some additional latitude on the growth restrictions. While the proposal would severely limit a hospital’s ability to expand its bed inventory, the limit on bed capacity for the first time references “licensed” beds, rather than simply beds. In the absence of this clarification, prior iterations of this restriction have generally been understood to mean beds as defined by Medicare under 42 C.F.R. § 412.105(b), which is often different from and less than a hospital’s licensed bed count. 

What’s at Stake

Hundreds of physician-owned hospitals and planned physician-hospital ventures would be affected by these provisions. Existing physician-owned hospitals that have complained about restrictions on growth may see some opportunity in this revised language.

Steps to Consider

Physician-owned hospitals should examine the language carefully to gauge the impact of the proposed changes, and those that would struggle under growth restrictions should examine whether a threshold based on licensed beds provides any relief. Physician-owned hospitals might explore increasing licensed bed capacity before the legislation is enacted.

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The Facts

Senate Finance Committee Chairman Max Baucus (D-MT) put forth his much-anticipated Framework for Comprehensive Health Reform on September 8, 2009. The Framework outlines a plan for consideration by the Finance Committee’s “Gang of Six” bipartisan negotiators and includes policies that reflect the work of the committee throughout the summer. In addition to other areas of health reform, the Framework includes policies specific to both “transparency and program integrity” and “fraud, waste and abuse”:

• New enrollment process for providers and suppliers, including an application fee
• Data matching and data sharing across federal health care programs
• Increased civil monetary penalties
• Increased authority to suspend payment during credible investigations of fraud
• New procedures to disclose and repay overpayments
• Limitations on physician-owned hospitals
• Requirements for drug, device and biologic manufacturers to report any payments or transfers of value, with limited exceptions, made to a physician or teaching hospital
• Requirements for drug manufacturers and authorized drug distributors to report the type and amount of drug samples requested and distributed to practitioners 

Additional details about these provisions will be contained in the Chairman’s Mark of the bill, which will be made available prior to committee markup, which is expected later this month. Importantly, similar provisions are contained in the House health reform bill, America’s Affordable Health Choices Act of 2009. The Senate Health, Education, Labor and Pensions Committee (HELP) bill also includes provisions related to fraud and abuse enforcement.

What’s at Stake

Each health reform proposal to date includes provisions designed to prevent or deter fraud and abuse. Furthermore, reducing the rising cost of health care is a goal shared by lawmakers on both sides of the aisle, and reduction in fraud, waste and abuse is generally viewed as an area of significant savings. The health sector should expect that increased fraud and abuse scrutiny and enforcement will be included in any health reform package passed by Congress.

Steps to Consider

Evaluate the impact of fraud and abuse proposals in pending legislation. Assess how current compliance programs, policies and procedures will need to be updated to address requirements common to health reform proposals.

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The Facts

Neither the House nor the Senate will pass health reform legislation before adjourning for the summer recess.  Despite a breakthrough deal yesterday with fiscally conservative Democrats that allowed the House Energy and Commerce Committee to resume markup of its health reform bill on July 30, 2009, health reform legislation will not be considered on the House floor until September, at the earliest, according to House leadership.  Meanwhile, Senate Majority Leader Harry Reid (D-NV) announced July 23, 2009, that health reform legislation also will not be considered on the Senate floor until after the summer recess.  The Senate delay is intended to give a bipartisan group of Senate Finance Committee members additional time to negotiate a bipartisan health reform proposal.  Finance Committee Chairman Max Baucus (D-MT) announced July 29, 2009, that the group of six Finance Committee senators working behind closed doors are nearing an agreement.  Chairman Baucus hopes for a near-term agreement from the bipartisan talks, which could allow for a public committee markup of the agreement the week of August 3, 2009, the final week the Senate is scheduled to be in session prior to recess.

What’s at Stake

Passage of systemic health reform, which is expected to make sweeping changes to the health sector, is at stake.  While the president had earlier pressed for passage by the House and Senate before the August congressional recess, the president's rhetoric has recently recalibrated and now both he and congressional leaders speak of passing health system reform by the end of the year.  However, these delays will make completion of health reform legislation this year a challenge.  An enormous amount of work remains before a bill can be ready for the president's signature, and there now will be a short amount of time in which to complete that work.

Steps to Consider

Watch for the emerging Finance Committee bipartisan agreement and evaluate how its concepts would affect your operation.  Contrast the impact of the bill approved by the Senate HELP Committee and House committees and the expected Finance bipartisan agreement.  Assess the impact of the bills working their way through the House.

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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 May 11, 2009, Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Charles Grassley (R-IA) released the second of three health reform options papers.  The options seek to expand health insurance coverage to the nation’s 46 million uninsured through insurance market reform, a new public health insurance plan, expansion of public programs, insurance coverage mandates on both employers and individuals, and new premium subsidies and tax credits.

A Health Insurance Exchange would facilitate the purchase of coverage through a web portal on the internet.  Initially, only individuals and “micro-groups” would be able to purchase insurance through the exchange. 

Plan options would include:

• Medicare Like Program – Operated by the U.S. Department of Health and Human Services and offered through the exchange 
• TPA Administration – Public plan administered through regional third-party administrators (TPAs) 
• State-Run Public Plan – Flexible state plans that may allow individuals to purchase coverage available to state employees

Individuals ages 55 though 64 who do not have employer-sponsored insurance or Medicaid coverage could enroll in Medicare and pay a premium. Medicaid eligibility would be standardized, with parents, children and pregnant women with income below 150 percent of the Federal Poverty Level ($33,000 a year for a family of four) eligible for coverage. 

Individuals would have a “fair share” responsibility to purchase health care coverage, with certain exemptions.  Employers must offer qualified coverage to full-time employees or provide coverage that is the actuarial equivalent to the lowest coverage option.  Employers with total annual payroll of less than $250,0000 would be exempt.

Premium subsidies would be available on a sliding scale for individuals with incomes under 400 percent of the Federal Poverty Level.  These subsidies would take the form of a tax credit used to purchase health coverage through the exchange.  Tax credits would be available for small businesses with less than 25 workers and average employee earnings of $40,000.

What’s at Stake
The Finance Committee is proposing transformative changes to the health care sector in order to expand health insurance coverage to all Americans. The requirements on individuals to purchase coverage and the obligations of employers to provide coverage are key along with the creation of the exchange.

Steps to Consider

• Insurers should examine the impact of a Medicare-like public plan option on provider payments and the ultimate competitiveness of private plans.
• Insurers should also examine the concept of the exchange and assess the business impact of the proposed new rating rules and benefit structure.
• Employers should carefully monitor “pay or play” proposals and prepare to adapt to potential requirements.

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