US Tax: Baucus circulates health care reform proposal

Still attempting to reach a bipartisan health care reform deal, Senate Finance Committee Chair, Max Baucus, D-Mont, on September 8 circulated a discussion draft based on closed-door negotiations of the "Gang of Six" – a small group of Democratic and Republican senators. The incomplete draft includes an excise tax on so-called "Cadillac plans" – high-cost plans offered by insurance companies; a corporate information reporting provision; a host of revenue provisions targeting health-related industries; and new requirements for nonprofit hospitals. The committee has indicated that meetings are ongoing and the draft is subject to change. No revenue estimates were provided with the discussion document.


Obama to speak

Baucus released his draft just one day before President Obama will deliver a speech on health care reform to a joint session of Congress. The President is expected to provide more details on his preferred reform plan.


Revenue provisions

High-cost insurance excise tax – Thought to be the plan's most significant revenue raiser, the draft proposes a 35 percent excise tax on insurance companies and insurance administrators that offer plans valued at more than $8,000 for individuals and $21,000 for families. The excise tax would apply to self-insured plans and plans sold in the group market, but not to plans sold in the individual market. The tax would be applied to the amount of the premium in excess of the threshold. The threshold would be indexed for inflation. In the 17 highest-cost states, a transition period would be allowed. The threshold would be raised by 20 percent in the first year, 10 percent in the second year, and 5 percent in the third year in those states.


Information reporting on payments to corporations – The proposal would modify existing rules on the reporting of payments made to corporations. It would require a business to file a Form 1099 to report payments made to a corporation totaling $600 or more in a calendar year.

New fees – Health-related industries would face a range of new fees, although it is unclear whether the fees would be administered through the tax code. The draft proposes to impose annual fees on health insurance providers ($6 billion), the medical device manufacturing sector ($4 billion), the pharmaceutical manufacturing sector ($2.3 billion), and clinical laboratories ($750 million). According to the summary, each fee would begin in 2010 and would be allocated by market share.

Nonprofit hospitals – Nonprofit hospitals would be subject to new requirements. While the draft provides little detail on the nature of the proposal, it calls for periodic assessment of the services provided by tax-exempt hospitals. In the past, the Finance Committee leadership has scrutinized whether nonprofit hospitals are fulfilling specified charitable missions.

Other provisions in the discussion draft pertaining to current health care benefits include:

Standardized definition of qualified medical expenses – The bill would revise the definition of qualified medical expenses for Health Savings Accounts (HSAs), Flexible Savings Accounts (FSAs), and Health Reimbursement Arrangements to conform to the definition used for itemized deductions. An exception would provide that over-the-counter medicine obtained through a prescription would still be eligible as a qualified medical expense.

Higher penalties for HSAs and FSAs – The proposal would impose new penalties on withdrawals from HSAs not used for qualified medical expenses. The 10 percent penalty under current law would be increased to 20 percent for ineligible withdrawals made before age 65.

FSA contributions – The proposal would also limit annual contributions to FSAs to $2,000.

Exclusion for Part D Subsidy – The draft proposes to eliminate the subsidy for employers that provide prescription drug plans for retirees who would otherwise be eligible under Medicaid Part D.


Small businesses and individuals

The plan would subsidize insurance costs for small businesses and low-income individuals. The proposal would provide an immediate tax credit to small employers. A small employer would be defined as having 25 or fewer employees and an average annual salary of $40,000 or less. In 2011 and 2012, small employers may be eligible for a 35 percent tax credit to assist with the purchase of insurance. A permanent program would be implemented after December 31, 2012, to provide a maximum credit of 50 percent.

The bill would provide tax credits to low-income individuals to assist with the purchase of health insurance. The credits would be made available in 2013 for families between 134 percent and 300 percent of poverty. In 2014, those living at 100 percent of poverty would be provided a tax credit. The value of the credit would be provided along a sliding scale.


Shared responsibility provisions

The plan would impose a mandate on individuals to obtain and maintain a minimum level of health insurance beginning in 2013. Existing health plans would be grandfathered. A fee would be imposed on individuals failing to obtain adequate coverage. It is unclear whether the fee would be imposed through the tax code. It is also unclear whether the proposal would include a reporting requirement that utilizes tax returns.

The proposal would not mandate that employers provide coverage. Employers that do not provide health coverage would be charged a fee of up to $400 per employee. The fee would be based on the amount of the tax credit the employee received.

An employer with 200 or more employees must provide automatic enrollment for new employees. Individuals with other acceptable coverage may opt out of an employer-provided plan. It is unclear whether the employer fee would be levied through the tax code.