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

On November 18, 2009, Senate Majority Leader Harry Reid of Nevada put forth the Democrats’ health reform plan, the Patient Protection and Affordable Care Act.  The more than 2,000 page bill was crafted by merging, tweaking and augmenting health reform legislation approved by the Senate Finance Committee in October and the Senate Committee on Health, Education, Labor and Pensions in July.  Set forth below are some of the bill’s principal provisions. 

• Requires most legal residents to obtain health insurance or pay a penalty of $95 in 2014, $350 in 2015 and $750 in 2016
• Imposes a $750 per employee penalty on firms with more than 50 workers that do not offer coverage if any of the firm’s employees obtain subsidized coverage through the new health insurance exchange 
• Requires coverage of prevention and wellness benefits and exempts these benefits from deductibles and other cost-sharing requirements
• Implements insurance market reforms including disallowing lifetime and annual limits and prohibiting preexisting condition exclusions
• Substantially reduces the growth of Medicare payment rates for many services (as compared to growth rates under current law)
• Creates a new independent Medicare advisory board, which could recommend payment reductions
• Seeks to promote the quality and efficiency of health care by linking payment to better quality outcomes
• Imposes a 40 percent excise tax on employer-sponsored health insurance with annual premiums above $8,500 for single coverage and $23,000 for family coverage 
• Imposes annual flat fees of $2.3 billion on the pharmaceutical manufacturing sector, $2 billion on the medical device manufacturing sector and $6.7 billion on the health insurance sector
• Imposes a 5 percent excise tax on voluntary cosmetic surgical and medical procedures
• Increases the Medicare payroll tax rate from 1.45 percent to 1.95 percent on individuals earning over $200,000 and couples earning more than $250,000
• Sets up health insurance exchanges through which approximately 25 million people are estimated to purchase health insurance coverage
• Creates a new public plan – the Community Health Insurance Option (states could opt out, and the government would negotiate payment rates with providers)

What’s at Stake

Given the sweeping nature of the bill, every aspect of health care in the United States would be affected.

Steps to Consider

• Carefully evaluate the impact of the provisions. 
• Assess the cost of compliance with the new provisions. 
• Examine ongoing business decisions in light of the direction health reform is taking.
• Consider working to impact the shape of health reform legislation.

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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 health care fraud provisions in the Affordable Health Care for America Act (H.R. 3162), the House health reform bill released last week, are largely the same as those in earlier proposals (click here and here for more information), and similar to those included in the Senate Finance Committee Bill, signaling clear potential for these provisions to become part of any final health reform package. The latest House bill now includes a provision requiring the Secretary of HHS to establish a self-disclosure protocol to enable health care providers and suppliers to disclose actual or potential violations of the physician self-referral law (Stark Law). Additional provisions from the Senate Finance Committee bill that overlap with the latest House bill include the following:

• “Physician Payment Sunshine” provisions require drug and device manufacturers to report certain payments to physicians and other health providers. 
• Physicians are required to document referrals to programs at high risk of waste and abuse, such as durable medical equipment or home health services, as well as face-to-face encounters with patients prior to certifying eligibility for home health services or ordering durable medical equipment. The Secretary may apply this requirement to any other service upon a finding that it would reduce the risk of fraud waste and abuse. 
• Medicare and Medicaid overpayments must be returned within 60 days of identification of overpayments. Failure to return overpayments constitutes a false claim for purposes of the False Claims Act.

What’s at Stake

The fraud and abuse provisions in both the House and Senate health reform bills are quietly moving through the health reform process. It is likely that any health reform package passed by Congress will include significant fraud and abuse provisions. In addition to increased scrutiny, these provisions will require additional commitment and resources for compliance efforts. 

Steps to Consider

Providers should closely monitor these proposals and consider how current compliance programs, policies and procedures will need to be updated to address requirements common to the health reform proposals.

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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

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

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
President Obama is driving an extremely ambitious effort to achieve comprehensive health reform by October 2009.  House and Senate leaders are responding with an aggressive timeline for developing legislation to be on the president’s desk this fall.

Heeding lessons learned from the failed Clinton health reform efforts, the president has until now resisted imposing his views directly on Congress.  Now visibly engaged, the president enunciated his policy preferences in a June 2, 2009, letter to Congress:

• A public health insurance option
• A health insurance exchange
• Allowing individuals to keep their current coverage
• Promoting best practices to improve health quality
• Paying for the full cost of health reform (estimated at $1.2 – $1.5 trillion) through a combination of reducing Medicare and Medicaid spending and raising revenue

The president also indicated a willingness to consider individual and employer mandates as well as an enhanced role for the Medicare Payment Advisory Commission.  Click here for a copy of the president’s letter.

Senate Finance Committee senior Republican Charles Grassley (R-IA) and eight of his nine Republican colleagues on the Finance Committee (all but Senator Olympia Snowe of Maine) responded with a joint letter to the president on June 5, 2009, that notes concern with the president’s expression of support for a public plan because a public plan is “one of the more divisive issues in the health care reform debate.”  Click here for a copy of the senators’ letter.  Clearly, as legislators move from options to concrete legislative proposals, it will be increasingly difficult to keep Republicans at the table in the Senate. 

Click here for the tentative timeline for achievement of health reform. 

What’s at Stake
Congress and the president are determined to overhaul the nation’s health care delivery system. Every aspect of the health sector will be affected. 

Steps to Consider
Providers, insurers, employers, drug and device makers, and every other entity in the health sector should closely examine the legislative proposals, assess their impact, and develop a course of action to maximize the positive impact of health system reform and minimize the negative impact.

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The Facts
On May 18, 2009, the Senate Finance Committee released the last of its three anticipated health reform option papers.  The proposals under consideration would make significant changes in the obligations of tax-exempt hospitals to provide charitable patient care, as well as changes in Medicare provider payments, beneficiary cost-sharing and taxability of employer-sponsored health benefits.

Charity Care Obligations of Tax-Exempt Hospitals
Tax-exempt hospitals could be required to do a periodic community needs analysis, provide minimum amounts of free care to the poor, not refuse services to patients who are unable to pay and adhere to restrictions in patient collection practices.  Senator Charles Grassley (R-Iowa) has justified these proposed new requirements because making health insurance coverage available to everyone should, in theory, minimize the amount of hospital uncompensated care.  Under this proposal, in addition to revoking federal tax-exempt status, the Internal Revenue Service could impose significant excise taxes (intermediate sanctions) on exempt hospitals that fail to comply with these new requirements.

Click here for the comment letter from McDermott partner Douglas Mancino outlining reasons to reject the Finance Committee's proposals to require tax-exempt hospitals to regularly conduct a community needs analysis and to provide a minimum annual level of charitable patient care.  This letter includes a copy of the new schedule H for tax-exempt hospitals and Mr. Mancino's article, "The Charity Care Conundrum for Nonprofit Hospitals."

Payments to Providers and Drug Manufacturers
Medicare would propose “spending reductions in [regional] areas...above a certain threshold compared to the national average.”  Medicare would reduce graduate medical education or disproportionate share payments.  Physician payments could be tied to outcomes and productivity, and reduced by a panel of experts if determined to be “misvalued.”  There would also be adjustments made to beneficiary cost-sharing, including a single annual maximum or other combined approach.  Beneficiaries would also face higher Part D prescription drug premiums, perhaps based on income.  Prescription drug makers could be subject to higher Medicaid rebate requirements.  Home health agencies would also face significant reductions in their Medicare payments.

Taxability of Employer-Sponsored Health Benefits
Various proposals were advanced for eliminating deductions for, as well as taxing the value of, employee health benefits, for all or just higher-income taxpayers.  The taxable amount could be the full value of the benefits or just their value above a benchmark basic plan such as the Federal Employees Health Benefits Program.

What’s at Stake
Tax-exempt hospitals may be required to provide substantial additional amounts of free and heavily discounted care to patients who cannot afford to pay, or risk punitive excise taxes. Providers and pharmaceutical companies would face a wide variety of payment adjustments, which are likely to be adverse in many if not most cases.  Higher-income employees and perhaps all employees would face the elimination, in whole or in part, of the current tax exclusion for health benefits.

Steps to Consider

• Tax-exempt hospitals should examine their current approaches to charitable patient care and consider the financial impact of being required to expand their current federally mandated emergency room services obligations to include non-emergency care.
• Employers should carefully monitor taxable health benefits proposals and prepare to adapt to the elimination or reduction of the current tax exclusion

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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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The Facts
On April 29, 2009, the Senate Finance Committee released the first of three anticipated health reform option papers. The Committee’s white paper includes four proposals to “promote quality, efficiency and care management” in the Medicare Advantage (MA) Program: modifying the MA Plan payment system, increasing payments for chronic care management, linking payment to quality and simplifying the supplemental benefits offered to Members.

What’s at Stake
The Committee sets out two alternate reform proposals for the MA Plan payment system that would take effect beginning in 2012. One approach would reduce the existing benchmarks to which MA Plan bids are compared, and the other would change the methodology by which the benchmarks are determined to that used in the Medicare Part D Program. The Committee also proposes to pay bonuses for evidence-based care management programs for chronic conditions. A Medicare Advantage Organization (MAO) that does not currently target chronic illnesses with care management activities should consider implementing such programs now so that it only has to incorporate adjustments to receive the bonus payment. Finally, the Committee proposes to tie a portion of MA Plan payment rates to quality performance. An MAO would need to ensure that its processes for collecting and submitting data are refined to capture all relevant data that may affect quality measures, and thus payment. 

Steps to Consider
The changes are proposed to take effect in 2012, meaning MAOs would have to position themselves to respond to the changes in time for the June 2011 bid submission deadline. In anticipation of these or similar reforms, an MAO should begin to analyze its plan benefit packages, provider payment arrangements and member population, and to discern the extent to which the MAO can modify its operations and/or develop and implement new initiatives. Health care providers can identify those MA Plans that represent a material portion of the providers’ patient population and initiate a dialogue to explore potential new areas of collaboration that will help improve quality outcomes while managing costs.

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The Facts
The proposals under consideration in the Senate Finance Committee’s first of three anticipated health reform option papers, released on April 29, 2009, would impose new transparency obligations on physicians, hospitals, nursing homes and pharmaceutical manufacturers. Transparency proposals include amending the Stark Law in-office ancillary services exception to require physicians to disclose financial interests in certain imaging services; eliminating the Stark Law “whole hospital” and rural provider exceptions with limited grandfather provisions; requiring manufacturers to disclose financial relationships with physicians; and requiring nursing homes to disclose ownership information, implement employee compliance programs and report staffing data. The Committee also proposes to strengthen compliance requirements and enforcement activity by increasing funding to federal enforcement programs, strengthening the screening process for Medicare program provider applications, requiring providers to implement compliance programs as a condition of participation in Medicare and Medicaid, and amending the Civil Monetary Penalties (CMPs) Law to increase penalties and extend the use of CMPs for certain violations.

What’s at Stake
The federal government may increase enforcement activities bolstered by easier access to publicly available information on existing arrangements and relationships. Providers could face increased penalties or suspension of payment for compliance failures. 

Steps to Consider

• Assess and audit current approaches to management of financial relationships, and closely evaluate the implications of publicly disclosing the details of these relationships.
• Evaluate the additional investment of time and resources to meet the proposed transparency requirements.
• Review and update compliance plans.

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The Facts
The proposals under consideration in the Senate Finance Committee’s first of three anticipated health reform option papers, released on April 29, 2009, would make significant Medicare payment changes. Value-based purchasing would result in Medicare paying hospitals, home health agencies and skilled nursing facilities based on their actual performance against quality measures, rather than being paid for providing services and reporting on quality measures and activities, as they are now. Accountable care organizations would be established as a vehicle for groups of providers to voluntarily meet quality thresholds and share in cost savings achieved for the Medicare program. Bonus payments for primary care physicians and general surgeons of up to 5 percent of fee schedule amounts would be provided to physicians who furnish at least 60 percent of their services in specified ambulatory settings or practice in rural scarcity areas.

What’s at Stake
Providers will face increasing demands to shift the paradigm of patient care from a model based on fee-for-service payments to one oriented to quality measurements and care coordination. Providers also will be competing on the basis of quality and may experience changes in reimbursement individually, but the total pool of funds will not generally increase for many of the proposed reforms.

Steps to Consider

• Examine current approaches to patient care and consider internal and external steps necessary to manage the impending shift from traditional fee-for-service payments to payments based on quality measurements and care coordination.
• Explore relationships with management companies or better performing partners who can improve overall quality.
• Consider new relationships with physicians to invest doctors in quality outcomes.
• Continually evaluate ongoing business decisions in light of the direction and quick pace health reform is taking.

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