Bridging Business & Healthcare : Healthcare Management Consultants for Dispute Resolution, Valuation & Clinical Compliance

On March 23rd, President Obama signed into law the Patient Protection and Affordable Care Act (the "Act").  Though this Act has been signed into law, a second piece of legislation, the Reconciliation Agreement ("Agreement"), continues to be debated at this time.  If signed, the Agreement could alter some aspects of the Act as detailed below.

In summary, the Act imposes penalties on businesses that do not provide health coverage, adds credits for small businesses that do provide coverage, and changes some reporting and compliance items.

Penalties

After December 31, 2013, employers that either do not provide health coverage or offer unaffordable coverage and have at least 50 full-time employees could be subject to a penalty of $750 per full-time employee, as an inducement for employers to provide health coverage.  This penalty will only apply if an employee becomes entitled to a tax credit (as described in the March 24th summary), meaning they otherwise have coverage on the individual market or through a health insurance exchange.

If an employer does offer health coverage and an employee obtains a tax credit, the penalty is increased to $3,000 for each employee that obtained the credit, but in no case more than the company would have paid if it did not offer insurance coverage.

Possible changes from the Reconciliation Agreement, if passed, would exclude the first 30 employees from the penalty calculation, but increase the penalty to $2,000 per full-time employee on employers that do not offer insurance coverage.

Small Business Health Coverage

Small businesses that make contributions towards employee health benefits will be eligible for a credit that offsets a portion of the cost of coverage.  To qualify, the business must have no more than 25 full-time employees, provide qualifying medical coverage and pay average annual wages of less than $50,000 per employee.  For years 2010 through 2013, the credit is equal to 35% of the lesser of the employer’s non-elective contributions for premiums paid for coverage or the average premium for the small group market in the employer state.  This credit is effective for amounts paid after December 31, 2009 with the credit increasing to 50% in 2014.

Reporting and Compliance Changes

The Act adds a requirement for employers related to Form W-2 reporting.  The value of employer-sponsored health benefits must be disclosed on Forms W-2 for years beginning after December 31, 2010.
 
Also, the Act extends the filing of Forms 1099 to include services provided by corporations, where before corporations have been exempt from reporting, and to include amounts paid for property in addition to services. These changes are effective for amounts paid after December 31, 2011.
 
Please note that the Reconciliation Agreement items described above have not been signed into law by the President at this time and are subject to change.  If you would like more information on this new legislation, please contact Doug Yoakley or Heather Martin at (800) 270-9629.

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On March 23rd, President Obama signed into law the Patient Protection and Affordable Care Act.  Though this Act has been signed into law, a second piece of legislation, the Reconciliation Agreement, continues to be debated at this time.  If signed, the Agreement could alter some aspects of the Act as detailed below.

In summary, the Act requires that most individuals obtain health insurance, provides a refundable healthcare premium tax credit (to help affordability), and increases the adoption credit, but adds limits on health-related accounts and reimbursements and increases the threshold for claiming medical expenses as an itemized deduction.  A large portion of revenue raised to offset the cost of the Act will come from an additional Medicare tax on higher-income individuals.   

Medicare Tax Changes

Effective for wages paid after December 31, 2012, the Act imposes an additional 0.9% Medicare payroll tax on earnings and wages exceeding $200,000 ($250,000 for individuals filing jointly), thus raising the rate from 1.45% to 2.35%.

In addition, the Reconciliation Agreement proposes an additional Medicare tax on unearned income for tax years beginning after December 31, 2012.  If the Agreement is passed, an additional 3.8% surtax will be imposed on interest, dividends, capital gains, annuities, royalties, and rents from passive activities that exceed the earning thresholds mentioned above.

Health Insurance Requirement

Under the Act, beginning in 2014, most individuals will be required to obtain minimum essential health insurance coverage or pay an annual penalty.  “Minimum essential coverage” includes coverage under an employer plan, governmental plan, or any plan offered on the individual market.  To encourage individuals to obtain coverage, the Act includes a number of provisions intended to increase the availability and affordability of coverage. 

The penalty will be phased in starting in 2014 and will reach the greater of $750 or 2% of income by the year 2016, with a cap of $2,250 per family.  Exceptions to the penalty include individuals in transition between plans and low-income individuals.  If passed, the Reconciliation Agreement would slightly decrease this penalty structure.

Refundable Healthcare Premium Tax Credit

For tax years after 2013, the Act provides a refundable tax credit to individuals who purchase healthcare coverage on the individual market or through the newly-established health insurance exchanges.  This credit is available to those with income ranging from 100 – 400% of the poverty line ($43,420 for an individual or $88,200 for a family of four).  Some advance payments of this credit will be provided to help individuals pay for coverage.

Health-Related Accounts and Reimbursements

For tax years after 2010, the Act limits medical reimbursements from FSAs, HSAs, HRAs and MSAs to prescribed medicines, drugs and insulin, thereby eliminating over-the-counter medication (unless prescribed by a doctor).  The Act also increases penalties on non-qualified distributions from HSAs and Archer MSAs (from 10-15%) to 20% for tax years after 2010. 

The itemized deduction threshold for deducting un-reimbursed medical expenses will increase from 7.5% to 10% of the taxpayer’s adjusted gross income for tax years beginning after December 31, 2012.  For taxpayers over the age of 65, the threshold remains at 7.5%.

The Act also limits the amount of salary reductions that can be deducted under a flexible savings account to $2,500 beginning in years after 2010.  The Reconciliation Agreement would postpone the flexible savings limit to years beginning after December 31, 2012. 

Adoption Credit

The Act increases the child adoption tax credit and adoption assistance exclusion from $12,070 to $13,170, extends the credit through 2011, and makes the credit refundable.

 
Please note that the Reconciliation Agreement items described above have not been signed into law by the President at this time and are subject to change. 
 

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On a recent trip to speak to a group of physician leaders, I had the privilege of sitting next to a retired commercial pilot. I travel frequently and my usual routine on the plane is not very conversational, as I use that time as catch up time for work. However, it always gives me a lot of comfort to sit next to a pilot because if they are willing to fly, I have no worries.

Wanting to get to know him a bit better, I struck up a conversation. In short order he found out that I was a physician executive and shared with me that his daughter was a physician as well. As we continued to talk, he shared with me the struggles his daughter was having making it as a primary care physician. And, she had recently been sued over a very frivolous issue. Although she was not found guilty of any wrongdoing, the cost and disruption to her practice were significant.

He then looked at me and said, “You know, pilots have the same risks. We have people’s lives in our hands every day, but we do handle it a lot differently than doctors.” Intrigued, I asked him to explain. He told me that even if a pilot has an untoward outcome, every airline has a hold harmless clause in the pilot’s contract that assumes all of liability for damages. He then looked at me and said something that really stuck, “How else could we get anyone to do this job? You’d think doctors could get together to do something like this.”

I don’t write this to lament the necessity of tort reform, but to highlight the need for partnership and alignment for physicians if we intend to survive. Pilots have figured it out. They have partnered with their industry on many of the issues they can’t solve on their own, allowing them to focus on the safety and well being of those they are entrusted to care for.

We as physicians have long insisted on our need for autonomy and individualism, considering them not only privileges but rights. We have long resisted the pull of aligning with one particular health system partner, fearing that we would somehow lose control. The sea of change is now upon us, however, and the powers that be in healthcare reform are designing models that will force us, not lead us, to partnering around reimbursement. If we as physicians wish to keep our place at the table in healthcare today, we must find new and innovative ways to partner with our industry. Although we risk losing some of our autonomy, the reward of being able to focus on the safety and well being of those we are entrusted to care for far outweighs the risk of keeping the status quo.

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Over the past several years, our firm has experienced a tremendous increase in the demand for fair market value assessments of physician compensation.  Because of recent governmental interest, an interesting offshoot of this work has developed involving whether the underlying arrangements are “commercially reasonable.” 

We have followed recent litigation and regulatory opinions [PDF], focusing almost exclusively on the commercial reasonableness of arrangements and not necessarily the value of the dollars exchanged. In one instance, the government challenged a hospital’s medical director agreement is not based on value but on the fact that the hospital did not need various separate medical directors given its circumstances. [PDF]

Because of these developments, we began to take a closer look at our clients’ physician-hospital arrangements. Simply because these arrangements may result in fair market value dollars does not indicate that they are commercially reasonable. We have encountered several examples:

• A hospital paying a cardiologist specialty compensation rates for administrative work requiring only a primary care physician;
• A health system maintaining medical director agreements at two of its facilities which contained duplicative protocols and policy responsibilities; and,
• A hospital failing to maintain proper oversight of the effectiveness and necessity of its physician services arrangements.

In each of these situations, we could easily determine fair market value rates given the specific facts and circumstances provided by our clients. But in calculating a fair market value rate, we were assessing the range of dollars only and not necessarily questioning the overall reasonableness of the arrangement. Healthcare entities should be careful of this pitfall, given that failure to ensure reasonableness may invoke liability under the False Claims Act.

Because the government has recently focused on this issue, we are starting to rethink how our clients can ensure that their arrangements meet the standard of commercially reasonable. Determining reasonableness may require our clients to consider a broad range of facts, and we have constructed a five-part analysis to help simplify the process. These clients have already begun to use this analysis including detailed discussions with legal counsel or as part of existing fair market value assessments. In our experience with commercial reasonableness evaluations, a carefully organized analysis becomes manageable even among complex circumstances. PYA's complete five-part analysis includes the following components:

1. business purpose analysis
   
2. provider analysis
   
3. facility analysis
   
4. resource analysis
   
5. independence and oversight analysis

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Hospitals are increasingly entering into “buy and employ” transactions with key physicians as part of their strategy to provide high quality patient care and grow market share. This buy and employ model is where the hospital acquires the medical practice and then employs the physician(s) – generally under some type of productivity based compensation arrangement. Although these transactions often make good business sense for both the hospital and physician(s), there are a number of important issues that must first be addressed in order to successfully achieve the desired outcomes. Some of the more significant issues include:

1. Structuring the deal
2. Performing financial and operational due diligence
3. Determining the “fair market” value of the physician’s practice
4. Assuring the transaction is commercially reasonable to the hospital
5. Structuring the physician’s post acquisition employment arrangement

Deal Structure

Of the above list of issues, the deal structure will normally be the simplest with which to “deal.”  Generally speaking, acquisition transactions are structured as either “stock” (i.e. equity) or “asset” transactions. With stock transactions, the acquiring hospital buys the outstanding shares of the practice entity and gets everything owned or owed by it (known or unknown); whereas, with assets transactions, the buyer acquires only agreed upon assets and assumes only agreed upon liabilities.

Sellers normally prefer stock transactions due to the tax benefits (capital stock is considered a capital asset subject to the 15% capital gains tax as opposed to the much higher ordinary income tax rates that would likely apply to the underlying assets). Buyers on the other hand usually prefer asset transactions because 1) there is usually less risk of inheriting undisclosed/unknown liabilities of the seller, and 2) the ability to “step up” the tax basis in the underlying assets for future depreciation purposes.  

However, aside from these general preferences, the ultimate deal structure will be significantly influenced by the organizational structure of the acquiring hospital and physician practice. For example, if the acquiring hospital is organized as a non-profit entity, it probably won’t be very concerned about the additional depreciation deductions available from the stepped up tax basis of the assets, and therefore may be more willing to do a stock deal.

Another concern from the physician practice perspective is the possibility of double taxation that can result from asset transactions when the practice is organized as a corporation.  Asset acquisitions, in such cases, should generally be structured such that the hospital acquires only certain assets (e.g. the tangible fixed assets). The physicians would retain the remaining assets (including accounts receivable) and, to the extent possible, distribute the net proceeds as compensation.   

Obviously, there are many other factors that will need to be considered in connection with structuring the transaction; however, the point is that the deal structure can have a significant impact on the ultimate outcomes from the transaction, and therefore, should be planned accordingly.

We’ll take a closer look at the other issues over the next several posts.

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