Funding health care reform, which the Congressional Budget Office (CBO) has estimated will carry a $1 trillion price tag, will involve both cost saving measures and tax increases according to Prescription for Change: Tax Issues in Health Care Reform, prepared by the Tax Policy Group of Deloitte Tax LLP in Washington, D.C., under the direction of Clint Stretch, managing principal, tax policy, and Bart Massey, senior manager. The report does not define the debate or predict the outcome, but identifies areas where tax issues will arise.
Tax options directly related to health care have been prominent in the debate so far, but President Obama suggested tax reforms unrelated to health care as sources for funding reform in his FY2010 budget, and the funding debate may extend beyond taxing for health care. “If Congress abandons any nexus to health care in its search for funding options,” the Deloitte report predicts, “then business and individual tax issues could be drawn into the discussion.”
Daunting as the prospect of reform may be, the case for health care reform is strong, the authors say. The CBO estimates that health care costs will reach 20 percent of the gross domestic product by 2017. The costs of Medicare and Medicaid alone, which consumed more than 20 percent of the federal budget in 2007, will “represent a serious threat to the fiscal health of the country.” Forty seven million American are uninsured and 25 million are underinsured.
In broad terms, the debate will revolve around expanding health insurance coverage, securing the Medicare and Medicaid programs, reducing health care costs, reining in federal tax expenditures, and closing any remaining budget gap. The Deloitte report highlights specific cost saving proposals and tax related issues related to these major topics.
Expanding health care coverage
Expanding “basic” coverage to all Americans could include six broad categories of potential action. Four are nontax but could be linked to or overlap with tax strategies:
1. Creation of a new government plan
2. Establishment of a Health Insurance Exchange or private Consumer Owned and Oriented Plan (CO-OP)
3. Expansion of current government plans
4. Requiring open enrollment in existing insurance offerings to encourage universal coverage or further expanding COBRA rights
Two additional strategies that directly involve taxes are:
1. Tax credits – for individuals -- a refundable tax credit for low-income taxpayers who purchase their health insurance through a new Health Insurance Exchange. The credit, which would be paid in advance, would subsidize the premium for purchasing health insurance based on the taxpayer’s modified adjusted gross income (AGI). For businesses -- The House committees working on reform have proposed a tax credit based on a percentage of the qualified employee health coverage expenses during the year. The Finance proposal would provide a credit for each full-time employee covered and would equal 50 percent of the average total premium cost paid by the employer for coverage in that state.
2. Pay-or-play proposals – New taxes on employers or individuals for failing to provide or obtain health insurance. The House bill, just released, includes “pay-or-play” mandates for both individuals and employers.
Securing the entitlement programs raises the possibility of an increase in the health insurance tax component of FICA and SECA or a legacy tax that would be imposed to close gaps created by prior underfunding of these programs.
The Medicare component of the FICA and SECA taxes is uncapped, and any increase would be significant for high-income taxpayers.
Cost savings and controlling expenditures – nontax options
Cost-cutting measures can be grouped into two major categories: nontax proposals and proposals to reduce current tax expenditures.
Nontax proposals include
- Reduced government payments to providers and sanctions on excess costs. Among the options are
· Outcome-based fees that would provide reimbursements on the treatment results,
· The use of bundled payments (episode-based payments),
· Suspension of the sustainable growth rate model used to adjust payments to providers.
- Application of a comparative effectiveness model for determining covered treatments
- Medicare entitlement costs could be reduced by raising the age for Medicare retiree eligibility.
Other nontax options under consideration focus on making improvements in the areas of: (1) ensuring appropriate payment; (2) capturing productivity gains; (3) reducing geographic variation in spending; and (4) modifying beneficiary contributions.
Cost savings options -- tax credits
Tax credits and incentives to encourage adoption of cost-saving measures including IT spending may be part of a reform bill. Electronic health records have been proposed as a means to reduce medical errors and administrative costs.
According to the Congressional Budget Office, about 90 percent of doctors and 70 percent of hospitals will adopt health IT by 2019, saving the government more than $12 billion over 10 years through reduced spending on Medicare and Medicaid programs. During a recent roundtable discussion, the authors say, several Senate Finance Committee members voiced their support for a shift to broader health IT usage through additional incentives, which could also include tax credits.
Closing the budget gap – tax increases and new taxes
Cost cutting measures will not be enough to expand health care coverage and secure Medicare and Medicaid. Congress could ultimately be forced to find revenue through broad-based tax increases such as income tax rate hikes or a new revenue source such as a consumption tax, the authors say.
But additional funding options for health care reform that have been part of the initial discussions have attempted to tie tax increases to health care directly or indirectly. Most of these options would increase the tax burden on individuals.
Exclusion for employer-provided health care – taxing health care benefits
Modifying the exclusion for employer-provided health insurance has featured prominently in the discussion of new taxes. The related reduction in payroll taxes exceeded $280 billion dollars for 2008 and according to recent estimates by the Joint Committee on Taxation staff and the Congressional Budget Office, the Deloitte report says, limiting the exclusion could raise as much $1.17 trillion over 10 years, depending on which option is chosen.
Senator Max Baucus (D-MT) chairman of the Senate Finance Committee has said that he opposes eliminating the exclusion altogether but he would consider a limit or a cap on the exclusion, which would mean that the value of some health care benefits would be included in an employee’s wages. Without indicating a preferred method, the Senate Finance Committee is considering a number of ways to limit the exclusion, including:
· Limits based on the actuarial value of a benchmark plan, such as the Federal Employees Health Benefit Plan, resulting in a dollar limit to the exclusion from the employee’s income. The dollar amount would apply to all taxpayers.
· An exclusion limited to taxpayers under a certain AGI threshold – for example, $200,000 for unmarried taxpayers and $400,000 for joint filers. When AGI exceeds the threshold the exclusion would either be reduced or eliminated.
· An exclusion applicable to all taxpayers, but limited to a percentage of the total premium for health insurance coverage provided by the employer.
Changes to tax expenditures related to health care
Beyond modifications to the employer exclusion, the Senate Finance Committee is considering the following changes to existing tax law, according to their May 20 report:
· Limiting the itemized deduction for medical expenses.
· Changes to a number of additional tax expenditures related to health savings accounts (HSAs), flexible spending arrangements (FSAs), and health reimbursement arrangements (HRAs) (for example, limits on the amount of money eligible for deduction.
· Changing the FICA tax exception for students.
· Changing the treatment of tax-exempt hospitals – The section 501(c)(3) classification as a charitable organization is not specific for hospitals, and a possible modification could provide clear definitions of eligibility under that code section.
· Extending the Medicare payroll tax to all state and local government employees, and provide credit toward Medicare eligibility based on their covered earnings.
The report provides a chart that estimates the potential revenue from these options where analysis is available.
Other options discussed include the imposition of so-called “lifestyle” taxes on alcohol and certain sugar-sweetened beverages.
Non health care-related taxes
President Obama’s FY 2010 budget package calls for nearly $1 trillion in nonhealth care revenue raisers, including tax increases for businesses and upper-income individuals, reform of international tax rules, and closing of perceived corporate loopholes. Senator Baucus cited these in his May 20 financing options report as potential sources to help pay for health care reform. The administration’s proposal to limit the benefit provided by itemized deductions of high-income taxpayers has come under fire from congressional Democrats and Republicans, leaving its fate uncertain, the authors say.
A broad-based consumption tax has also been part of the discussion.
Support for removing the exclusion for health care benefits from income has been criticized in Congress, and while the House bill submitted on Tuesday, July 14, reportedly calls for increases in taxes on upper incomes, the Senate committees have not yet released their final proposals, making it less certain that Congress will meet the President’s deadline for a final bill.
But Stretch and Massey write in their conclusion, “For now, uncertainty lingers about the exact tax financing options; but with congressional action imminent, the major tax components will emerge quickly. As Congress develops legislation, experience suggests that disagreement and seeming failure will be part of the process. Lawmakers may well consider and reject various reform and revenue options only to return to them in a later compromise.”