Winners and Losers – Corporate tax overhaul would have very different effects for various healthcare sectors

Corporate tax overhaul would have very different effects for various healthcare sectors
By Beth Kutscher

Posted: April 13, 2013 – 12:01 am ET

Tags: Cover Story, Finance, Healthcare Reform, Income, Insurers, International, Investor-Owned, Legislation, Payers, Suppliers, Top Stories

Hospital chains, health insurers and retail pharmacy groups are likely to wind up big winners in any shakeup of the corporate tax code, while pharmaceutical companies and medical-device makers may find themselves fighting tooth and nail to keep the status quo.

In his 2014 budget plan unveiled last week, President Barack Obama laid out his desire to pursue revenue-neutral corporate tax reform in the coming year. The idea, which is being pushed by business groups in Washington upset that the U.S. now has the world’s nominally highest corporate tax rate, is gathering bipartisan support on Capitol Hill. Given the divided Congress and the president’s urge to rack up some second-term achievements, Washington insiders say the pieces may be falling into place for the first major overhaul of the nation’s complex and convoluted tax code since 1986.

However, any overhaul means there will be winners and losers in corporate America, and nowhere is that more true than in healthcare. Corporate tax reform, at its core, would lower the federal statutory tax rate while closing loopholes and eliminating certain deductions. But whether that benefits or hurts a company’s bottom line depends on how well it is faring under the current system.

If the idea of corporate tax reform takes hold, interests are likely to align in two camps. Opposition may come from companies that are most deftly exploiting the current loopholes and credits in the code. Proponents are likely to be those firms that benefit most from a lower overall tax rate, largely because they use fewer write-offs.

While corporate tax reform is still a big “if,” the discussion came back into focus with the president’s budget plan, which revisited previous tax-overhaul proposals.

But the idea also found bipartisan support two days earlier when Sen. Max Baucus (D-Mont.), chairman of the Senate Finance Committee, and Rep. Dave Camp, (R-Mich.), chairman of the House Ways and Means Committee, penned a joint op-ed in the Wall Street Journal headlined, “Tax reform is very much alive and doable.”Support in the healthcare industry for a revamping of the tax code is likely to fall along a fault line that pits companies that perform substantial research and development and have sizable overseas operations against those that are strictly domestic services and retail businesses.A Modern Healthcare analysis of the current effective tax rates in the healthcare industry for 2012 found investor-owned hospital chains, health insurers and retail and wholesale pharmacy companies paid the highest effective tax rates, often hovering close to the 35% federal statutory tax rate for large corporations.

Pharmaceutical, biotechnology and medical device companies, on the other hand, paid significantly lower rates—often below 25%—as they took advantage of tax breaks related to the depreciation of plants and equipment, research and development and domestic manufacturing. The key distinction between the two groups is that many drug and device makers are multinational conglomerates with a number of subsidiaries in other countries, many of which have lower tax rates than the U.S. “They’re able to shift a lot of their profits overseas and into tax havens,” said Martin Sullivan, chief economist at Tax Analysts.

In his budget, the president called for six specific changes in the corporate tax code that suggest the direction he would like to see corporate tax reform go. Two would be most relevant to research-intensive healthcare companies.

The first would help them. A change to the research and experimentation tax credit would raise the base credit rate to 17% from 14% and provide an estimated $99 billion in research incentives over the next 10 years.

But the second targets international tax havens and cracks down on opportunities for companies to shift profits on intellectual property to countries with lower tax rates. This tactic is frequently deployed by the pharmaceutical industry.

The proposal also would eliminate deductions for moving production overseas and implement a new tax credit when production is brought back to the U.S. It estimates that the latter reforms would raise $157 billion over 10 years.

As it stands now, pharma companies can enter into cost-sharing agreements with their own overseas entities and then move assets—including valuable patents—into these subsidiaries. If the government limits the ability to shift profits out of the U.S., Sullivan said, “that would seriously hurt the pharmaceuticals, the biotechs and the medical device manufacturers.”

A spokeswoman from trade group Pharmaceutical Research and Manufacturers of America said the group does not have any comment on the specific proposals under Obama’s corporate tax reform plan. A representative from the Advanced Medical Technology Association, which represents medical device manufacturers, was not available to comment at deadline. The group represents major leading medical device players such as Medtronic (17.6% effective tax rate for its fiscal year that ended last April), which have been on the front lines seeking repeal of the 2.3% medical device tax used to support healthcare reform.

When drug and device companies are excluded from the mix, healthcare companies are paying some of the highest effective tax rates among Fortune 500 companies—even higher than retailers, an industry that has been one of the most vocal proponents of tax reform.

“Healthcare companies as a whole don’t seem to be benefiting as much” from current deductions and loopholes, said Matthew Gardner, executive director of the Institute of Taxation and Economic Policy, which conducted an analysis of tax rates among Fortune 500 companies.

Obama has proposed lowering the statutory income tax rate to 28% while House Republicans would prefer a deeper cut to 25%.

But in setting a lower rate, the real question is what companies will have to give up in order for tax reform to be done in a revenue-neutral manner, said Annette Nellen, a professor of tax and accounting at San Jose State University.

Nellen pointed, for instance, to the code section 199 deduction, which relates to domestic production activities, as well as credits for conducting research. Both are used by the pharmaceutical industry and would have a significant impact if they were on the chopping block.
Under “plain-vanilla tax reform,” healthcare providers would likely be the clear winners, Tax Analysts’ Sullivan said. “They don’t get a lot of deductions.”

The dynamic in the healthcare industry parallels the broader divide among businesses, with service providers and retailers on one side and manufacturers and high-tech companies on the other. “It’s very much in the interest of the service providers to push for classic tax reform,” he said.

Yet even among healthcare providers, there are exceptions. Gardner noted that three healthcare companies—Tenet Healthcare Corp., Health Management Associates and Omnicare—stood out as paying no federal income tax at least once over the past three years, instead choosing to defer their tax liabilities.

Effective tax rates also can vary widely year to year. Pfizer, for instance, which paid an effective tax rate of 21.2% last year, had a tax rate as high as 31.8% in 2011 and as low 12.2% in 2010, according to its annual report.

The latest budget proposal isn’t the first time Obama has come out in favor of eliminating special-interest loopholes, including the ability to shift profits outside of the U.S.. While the president was roundly criticized for that plan a few years ago, a number of factors have coincided to make such reforms more attainable.

Camp has singled out overseas tax shelters, and the Organization for Economic Cooperation and Development similarly has been under pressure to address base erosion and profit-sharing—or what happens when profits are allocated to locations different from where business is conducted. “They’re all in a flurry about this,” Sullivan said. “It’s now mainstream. There’s a lot of progress in attitude—but not necessarily on Capitol Hill.”

The greater challenge will be reaching consensus on lowering the individual tax rates, Nellen said, and she didn’t think one type of tax reform could be accomplished without the other.

And the healthcare industry is likely to be the subject of the tax debate in another way, once the costs and penalties of complying with the Patient Protection and Affordable Care Act become clearer next year.

The medical device industry already is lobbying hard to eliminate the tax on their products, which was included in the Affordable Care Act as the sector’s contribution to the overhaul. More fights over the many reform-related taxes, Nellen said, could divert attention from discussions on meaningful tax reform.

TAKEAWAY: Corporate tax reform would be a boon to many healthcare companies, but drug and device makers may prefer the code they have now.

Using Shared Savings to Foster Coordinated Care for Dual Eligibles

Richard G. Frank, Ph.D.

January 2, 2013 DOI: 10.1056/NEJMp1214155

There are 9.2 million people who are eligible for both Medicare and Medicaid. They’re eligible for both programs either because they are younger than 65 years of age, disabled, and poor or because they are 65 or older and are poor or have exhausted their nonhousing assets paying for health care. These dually eligible program participants make up about 20% of Medicare beneficiaries and about 17% of Medicaid beneficiaries and account for 29% and 39% of Medicare and Medicaid spending, respectively.1 New federal policy initiatives are promoting organizations that integrate and coordinate care to meet the complex needs of this vulnerable population. The hope is that if beneficiaries are encouraged to enter into such arrangements, costs will fall and quality of care will improve.

From a clinical perspective, dually eligible beneficiaries are more likely than others to have multiple chronic conditions or a severe mental disorder or to have functional limitations and cognitive impairments. Organizing care and support for this population is complicated because they frequently rely on income support, social supports, housing assistance, and long-term care that are administered and paid for by different state and local government agencies.

Financing health care for dually eligible people is also challenging because they require support from the state-run Medicaid program and the federal Medicare program. These two programs have provisions, payment rules, and regulations that often align poorly with one another, which results in high-cost, low-quality care. For example, a nursing home that cares for a long-stay Medicaid patient is economically advantaged when it transfers one of its residents to an acute care hospital for treatment of, say, a urinary tract infection. When this happens, the nursing home avoids devoting resources to treatment of the infection, it receives a payment from Medicaid to hold the bed for the hospitalized resident, and it gets paid a higher per diem rate by Medicare than it would from Medicaid for a period after the patient returns because he or she qualifies for Medicare-financed post-acute care.

The fragmentation in organization and financing of care for dually eligible people is seen by federal and state policymakers as a problem that can be remedied. Many policymakers believe that greater coordination of care for the dually eligible population that uses a strong care-management system under a unified budget can lead to both savings and improved care. To address this issue, the Affordable Care Act established the Federal Coordinated Health Care Office within the Centers for Medicare and Medicaid Services. The Bowles–Simpson Commission projected that between 2015 and 2020, we could save $13 billion by moving dually eligible people into managed-care plans. Others have proposed enrolling dual eligibles in state-designed care coordination entities (CCEs). Such a move was projected to save $126 billion over 10 years, according to the most optimistic estimate.2 Twenty-six states are pursuing demonstration projects aimed at better coordinating care for dual eligibles.

Because state Medicaid programs pay for most or all of a dually eligible beneficiary’s premiums and cost-sharing obligations, it has been very difficult to lure these beneficiaries away from uncoordinated, fee-for-service arrangements to more structured arrangements of care. To foster the transition, nearly all states are putting in place so-called passive-enrollment methods to expand participation in coordinated-care arrangements.

Passive enrollment involves automatic enrollment of eligible beneficiaries into a CCE with the ability to opt out. The assignment method generally uses information on a beneficiary’s needs to match him or her to a CCE’s capabilities. Passive-enrollment techniques have gained considerable credence because they have been successful in increasing participation rates in employer-sponsored 401(k) retirement plans. In those cases, natural tendencies toward inertia are exploited to get people to save for retirement. In this case, the beneficial effects of passive enrollment are clear: people get financial contributions from their employers toward their retirement. Failure to join a 401(k) plan leaves money on the table and the nonparticipant worse off.

The use of passive enrollment into CCEs would most likely produce higher rates of enrollment, enabling states to establish CCEs for a critical mass of enrollees. For beneficiaries who are dually eligible, however, the benefits may be less apparent. Many of these people may have established a set of relationships with providers so that their care is effectively managed within the fee-for-service system. Since coordinated care under a set global payment (e.g., capitation) or variants of that approach can create incentives to restrict services, there are risks of undertreatment. Some beneficiaries may therefore experience the transition to coordinated care as a loss to them.

How can state policymakers promote self-determination for vulnerable populations and offer them a reason to engage with a new care delivery system with coordinated-care arrangements? Coordinated care for dually eligible people is built on a financing structure known as shared savings, in which three of the parties involved — the federal and state governments and the CCE — share any financial gains from coordinating care. Including patients in shared savings could create a positive reason to engage with a CCE. How might such an approach work? A share of the expected savings could be set aside into an “account” for each dually eligible person enrolled in a CCE. The funds in the account could be directed by the patient and could be used to purchase supplemental services and supports such as transportation, home modifications, and personal assistance with activities of daily living. Similar types of accounts have been successfully used for some disabled Medicaid beneficiaries.3

These accounts are designed to have two aims. First, offering extra benefits creates an incentive for participants to engage with the CCEs in a way that promotes self-determination. Second, the additional funds can be used to compensate for gaps in services offered by CCEs in a way that helps in meeting individual needs (cushioning the risk the participant incurs by joining a CCE). Medicaid’s cash and counseling program, like other self-directed consumer programs, creates “cash-equivalent accounts” for purchasing services and supports. These accounts are overseen by a financial intermediary and provide counseling and help in decision making to support both independence and program integrity. This approach would enable beneficiaries to extend the benefits of Medicare and Medicaid in a personally tailored fashion without increasing their total costs.

One could also couple options for shared savings with an active choice mechanism whereby beneficiaries are forced to choose among options rather than defaulting into either a CCE or the status quo. Experimental research shows that this approach might also result in greater enrollment in CCEs than an opt-in system would.4,5 It would mean presenting beneficiaries with an explicit choice, without a no-action default, in which the CCE option would entail sharing in savings. It is important to advance program designs that have the potential to improve care and save money, but we need to do so in a way that promotes self-determination and the exercise of real options.

Disclosure forms provided by the author are available with the full text of this article at

This article was published on January 2, 2013, at


From the Department of Health Care Policy, Harvard Medical School, Boston.


State lawmakers gird for battle over Medicaid expansion

By N.C. Aizenman, Published: December 2

As state legislatures prepare to meet in January, lawmakers across the country are girding for a battle over whether to sign on to the health-care law’s expansion of Medicaid.

“This is the number one issue,” said state Sen. Michael Lamoureux (R), incoming president of the Arkansas Senate. “And in 10 years this is by far the most difficult one we’ve ever dealt with.”

The national implications loom just as large. No provision is more central to achieving the health-care law’s aim of extending coverage to the uninsured than its expansion of Medicaid. Under the new rules, beginning in 2014 eligibility for the program would be opened to people with incomes up to 133 percent of the federal poverty level, or about $30,657 for a family of four.

The law calls for the federal government to foot the the entire bill for covering the newly eligible for the first three years. After that the federal match phases down slightly, reaching 90 percent by 2020.

Arkansas state Sen. Cecile Bledsoe (R) questions whether the federal government can be counted on to maintain such a high match rate in perpetuity. With all the budget pressures facing Congress members, said Bledsoe, how can she be sure they won’t shift more of the burden to states down the road?

Last August Obama officials sought to allay such concerns by clarifying that states are free to drop out of the Medicaid expansion at any time. But Bledsoe, a key leader in the Arkansas Senate on health issues, said that’s not a realistic option.

“We’re not going to put more than 250,000 people on our Medicaid rolls, then pull them off,” she said.

Bledsoe said she will not feel confident about the federal commitment at least until after Obama concludes negotiations with congressional Republicans over avoiding the “fiscal cliff.”

“At this point I don’t see anyone willing to take a chance on what the federal government might or might not do,” she said.

With barely a year before the expansion is scheduled to begin, only 14 states seem certain to join in. About 13 states seem likely to opt out because the GOP has a lock on both the governors’s office and the legislature and many of these Republicans are dubious of expansion. But even here the outcome is often in doubt. For instance, Florida’s Gov. Rick Scott (R) has been one of the most scathing critics of expanding Medicaid. But in an interview shortly after the election, Scott suggested he was open to trying to “get to yes” on the issue.

Meanwhile, in more than a third of states, governors and state lawmakers have been so vague about their intentions, or so at odds, that it is impossible to predict how the debate will play out.

In Colorado, where Democrats hold both the legislature and the governor’s mansion, the challenge is less ideological than practical. State revenue is not expected to rise fast enough to cover the extra cost of enlarging Medicaid in coming years. And the state constitution prohibits lawmakers from raising taxes without a voter referendum.

They could find that the only way to make up the difference is through unpopular cuts to spending on education — one reason Gov. John Hickenlooper (D) has so far been noncommittal.

“We’re in a fiscal straitjacket,” concedes Rep. Claire Levy (D), the House’s point person on budget matters.

The Supreme Court teed up these conflicts last June, when it ruled that states can’t be penalized for opting out of the Medicaid expansion.

This effectively threw the decision to each state’s general assembly: Because Medicaid is partly funded by states, one way or another lawmakers will be forced to address the issue when crafting their budgets for 2014.

Arkansas Gov. Mike Beebe (D) has pushed hard for his state to participate in the expansion. But he always faced a tough sell in his state, one of three where a super-majority is required to pass budget bills. And the hurdle has only gotten higher since last month’s elections, when Republicans won control of Arkansas’s General Assembly for the first time since Reconstruction.

Even if the federal match rate for Medicaid is left untouched during the current fiscal cliff talks, Lamoureux, the incoming Arkansas Senate president, said he worried his state will be unable to afford its share of the cost of expansion.

The nonpartisan Kaiser Family Foundation estimates the additional charge to Arkansas will be almost $1 billion from 2013 through 2022. And, although Arkansas’s Medicaid director, Andrew Allison, suggests the administrative costs of expansion will be modest, and it could actually save the state money on uncompensated care for the uninsured, Lamoureux wants more detailed numbers.

“We don’t even have an agreed upon set of facts that we can fight over yet,” he said.

Like many state lawmakers, Lamoureux also argues that his state’s governor could negotiate with Obama officials for permission to do only a partial expansion of Medicaid — getting the full federal match to insure people with incomes only up to 100 percent of poverty, for instance, with the remainder getting coverage through the law’s federal subsidies to buy private plans.

However, health-care experts question whether Obama officials have the legal authority to authorize partial expansions — let alone whether they would agree to them.

“There is almost no reason whatsoever for the administration to want to do this,” said Matt Salo, executive director of the National Association of Medicaid Directors.

“And I think the only thing that would change that calculus is if you have a significant number of states that are really dead serious that if you give them the choice between full expansion or nothing, they will choose nothing.”

That may explain why the administration has yet to declare whether partial expansion is, or is not, an option, Salo added.

Yet paradoxically, by keeping the idea on the table, Obama officials may only be prolonging the debate — particularly since there is no formal deadline by which states must opt in to the Medicaid expansion, and states would probably need only weeks rather than months to prepare.

“Right now you have the states and the federal government kind of circling each other warily,” Salo said. “No one is quite ready to tip their hand.”


DC to merge individual insurance market with small businesses under new health care law

By Associated Press, Published: October 6

WASHINGTON — Small businesses in Washington will be required to buy employee health insurance through a city-run exchange beginning in 2014.

The District of Columbia is combining its health care exchange markets for individuals and small businesses that have fewer than 50 employees. The D.C. Health Benefit Exchange Authority voted unanimously Wednesday to combine the health exchanges, despite opposition from businesses. Some said the exchange will lead to higher costs.

D.C. officials say the decision was based on the city’s small individual-insurance market. The city has few uninsured people. So D.C. Councilmember David Catania says the merger will create a sufficient pool for the health care exchange to bring down costs.

One state, Vermont, is taking a similar approach. Other states have more uninsured people and larger populations.

Copyright 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.



Federal government likely involved in 37 health insurance exchanges

By Kelley L. Allen

Posted: October 3, 2012

 More states than expected likely will involve the federal government in setting up health insurance exchanges, according to a report released Oct. 2.

 The deadline for states to report plans is Nov. 16; Washington, D.C. and 13 states have announced plans to run their own exchanges. PwC’s Health Research Institute’s report, Health Insurance Exchanges: Long on Options; Short on Time, projects that most of the remaining 37 states will have the federal government directly involved in setting up the plans. Eight have already chosen to have a federally facilitated exchange, while three have elected to divide duties in a state-federal partnership, according to the report.

The exchanges mark the biggest insurance expansion since Medicare in 1965, and represent a major business opportunity for the insurance industry. The market will translate to a $205billion in premiums by 2021 with 12 million Americans expected to begin enrollment in the exchanges next year, according to the report.

The analysis also found that almost one-third will gain coverage under Medicaid, 45% will shop on the exchange and almost a quarter will enroll in employee-sponsored plans. Most will enter the system relatively young, with a median age of 33 and a median income of about 166% of the federal poverty level.

Many of the newly insured likely will cycle between Medicaid and subsidized exchange coverage, which makes continuum of care a challenge, the report noted.

The size of the market will vary based on each state’s decision on whether to expand Medicaid eligibility to 138% below the federal poverty level.

The report also notes that insurers on the exchange likely will initially compete based on price. As the exchanges mature, health plans will have to differentiate themselves beyond price to retain and attract consumers.



Dual-eligibles are happy with Medicare Part D, survey finds

About 90% of seniors, including dually eligible Medicare andMedicaid beneficiaries, are happy with Medicare’s prescription drug program, a new survey reveals.

McKnight’s Staff

October 04, 2012

 Ninety-five percent of those eligible for both Medicare and Medicaid report being satisfied with the program, according to the survey, which is conducted annually by Medicare Today, an initiative of the Healthcare Leadership Council, and KRC Research. HLC is a coalition of executives primarily from acute-care healthcare systems and pharmaceutical companies. Dual eligibles typically have multiple chronic illnesses and notably make up a large percentage of nursing home residents.

The 90% mark signifies a gain of 12 percentage points over the seven-year life of the Medicare Part D benefit. KRC Research randomly called 2,400 people 65 or older with landlines from Aug. 31 to Sept. 10 and interviewed just more than 800 with Medicare Rx plans.

“It’s very rare to get nine out of 10 people to agree on anything, but Medicare Part D has sustained that level of acceptance and popularity. Beneficiaries view Part D as affordable, reliable and user-friendly,” Mary R. Grealy, Chairman of Medicare Today and president of the Healthcare Leadership Council, said in a statement.

A report released in June from the Department of Health and Human Services’ Office of the Inspector General found that the vast majority of medications used by dual eligibles are available through Part D formularies.


Source: McKnight’s Long Term Care