Professor John Jacobi has informed us well regarding the donut hole to be created for the uninsured who would have been eligible for Medicaid under the ACA expansion of Medicaid in states that choose not to sign on to expanded Medicaid, but apparently there’s another level of donut hole awaiting low- and middle-income Americans potentially ineligible for tax credits and government subsidies for procurement of health insurance. This donut hole revolves around the definition of “affordable,” and Robert Pear in The New York Times does a more than able job of explaining it under the meaning of the word as promulgated by the I.R.S.:
Under the law, most Americans will be required to have health insurance starting in 2014. Low- and middle-income people can get tax credits and other subsidies to help pay their premiums, unless they have access to affordable coverage from an employer.
The law specifies that employer-sponsored insurance is not affordable if a worker’s share of the premium is more than 9.5 percent of the worker’s household income. The I.R.S. says this calculation should be based solely on the cost of individual coverage for the employee, what the worker would pay for “self-only coverage.”
Critics say the administration should also take account of the costs of covering a spouse and children because family coverage typically costs much more.
In 2011, according to an annual survey by the Kaiser Family Foundation, premiums for employer-sponsored health insurance averaged $5,430 a year for single coverage and $15,070 for family coverage. The employee’s share of the premium averaged $920 for individual coverage and more than four times as much, $4,130, for family coverage.
Under the I.R.S. proposal, such costs would be deemed affordable for a family making $35,000 a year, even though the family would have to spend 12 percent of its income for full coverage under the employer’s plan.
Which means, of course, that although health insurance could be deemed “affordable” for an employee– thus making that employee ineligible for tax credits and subsidies– his or her family coverage could amount to a very large portion of income, but still remain ineligible for tax credits and subsidies. I would suggest that it is these kinds of financial dilemmas in cash strapped families that have led so many to eschew health insurance in the past.
Perhaps just as interesting though is that the determination is based on “household income.” In families with children in which one parent works full time and the other works part time, it is not hard to envision a scenario in which the supplemental income of the part time earner serves to increase the household income just enough to make the cost of health insurance for the individual full time employee less than 9.5% of household income–creating a classic disincentive to work among families in dire need of income.
On November 30, the Food Safety Modernization Act (Senate Bill 510) passed the Senate with a 73-25 vote. Despite bipartisan support for the bill, on November 29, the Senate rejected two amendments to repeal Form 1099, a measure which likewise carries bipartisan support.
Form 1099 is an informational return required of any business that pays a vendor or contractor more than $600 in a tax year. Pursuant to the Patient Protection and Affordable Care Act, all corporations must fill out one Form 1099 for each qualifying payment relationship beginning in 2012. The tax requirement has been criticized as an onerous and burdensome requirement for small businesses.
Although both proposed amendments would have repealed the new rules, the bipartisan agreement was limited to that single issue. Democrats and Republicans have not decided how to offset the loss of approximately $20 billion over ten years that will result from repeal of the Form 1099 reporting requirements. Senate Finance Committee Chairman Max Baucus’s (D-Mont) amendment (S. Admt. 4713) did not include any budgetary offset, an omission which appears to have sunk the amendment. The Baucus amendment failed in a 44-53 vote.
The competing amendment (S. Admt. 4702) was offered by Senator Mike Johanns (R-Neb) and would likewise repeal the Form 1099 requirements. In addition, it would have offset the cost of repeal by permanently rescinding $39 billion in discretionary non-defense spending. The Johanns amendment garnered more support, but ultimately failed in a 61-35 vote (the amendment required 67 votes to pass).
According to BNA, Senators Baucus and Johanns spoke after the vote and have agreed to work together on a bipartisan solution. Senator Baucus told BNA, “We will probably need to find a revenue bill, but our desire is to get this done. We will do whatever works.”
Senator Chuck Grassley (R-Iowa), also a member of the Senate Finance Committee, stated that negotiations had begun on November 30 to solve the Form 1099 reporting problem. According to Grassley, the two main issues are (1) how to pay for the repeal and (2) what bill will serve as a legislative vehicle. “I assume there’s going to be at least one tax bill this year and if there isn’t, there’s something wrong … so some sort of tax bill has to go and you can put it on that.”
Lawmakers still have time to work out these two issues, since the Form 1099 requirements do not go into effect until 2012.
Interesting article by Timothy Noah over at Slate on the enforceability (read, “collection”) of taxes assessed for failure to procure insurance under the individual mandate contained within the new Health Reform law.
Noah, working with some posts from Prof. Timothy Jost and some recent comments from the IRS Commissioner, Douglas Shulman, notes provisions within the bill that will make enforcement difficult. They are worth noting.
As the failure to procure assessment is a tax, the IRS is charged with its collection. Verification will be done through a form similar to the 1099 for bank interest, but this form will be received from one’s insurance company. You will then attach that form to your tax return. And if you don’t and do not pay the either $695 or 2.5% of your income–whichever is higher? The Health Reform law imposes fairly stringent restrictions upon the form that collection efforts may take. From Noah:
What if your failure to obtain health insurance means you owe the penalty but you nonetheless refuse to pay it? That’s where things get tricky. The IRS can’t throw you in jail, because the health reform law explicitly states (on Page 336): “In the case of any failure by a taxpayer to timely pay any penalty imposed by this section, such taxpayer shall not be subject to any criminal prosecution or penalty with respect to such failure.”
Nor can the IRS seize your property, because the law states (also on Page 336) that the health and human services secretary may not “file notice of lien with respect to any property of a taxpayer by reason of any failure to pay the penalty … or levy on any such property with respect to such failure.”
So without the ability to prosecute, penalize, or file a notice of lien–what’s left? As Noah notes, Tim Jost points out that most people, desirous of obeying the law generally, will do so in this matter particularly. And many who do not have health insurance–often the self-employed or independent contractors of some sort or another with long complex and deduction riddled tax returns–will be prudently averse to raising the red flag of civil disobedience.
According to Commissioner Shulman (again via Noah who took the time to transcribe Shulman’s press conference in its pertinent parts),
“People will get letters from us. We can actually do collection if need be. People can get offsets of their tax returns in future years, so there’s a variety of ways for us to focus on things like fraud, things like abuse, and we’re gonna run a balanced program.”
Noah then asks a rather interesting series of questions:
But if the IRS owes you a refund, isn’t that refund in effect your property? And if the IRS decides to withhold part or all of that refund because you didn’t pay your tax penalty for not obtaining health insurance, doesn’t that amount to seizure of your property? Or was Shulman just talking about people who might claim they paid the penalty but really didn’t, or who might claim that one of the law’s exemptions applied to them when it really didn’t, or who might engage in some other form of conscious duplicity that violated some other statute? (Is that what Shulman meant by “things like fraud, things like abuse”?) I’m not certain Shulman’s reply addressed the scenario Jost envisioned, wherein a civilly disobedient citizen would forthrightly tell the IRS: Yes, under this law I owe you $695, but I refuse to pay it. What are you gonna do about it?
First things first, I would argue that fraud and duplicity are separate from merely not paying or refusing to pay. Congress enjoined the prosecution or the levy of liens for a failure to pay–that does not include, in my estimation, a similar proscription against prosecuting tax fraud– which is what such “conscious duplicity” would entail. Separate matter, separate punishment– which I think the Commissioner alludes to in the above quote.
As for the withholding of a refund? It is, I believe, a valid exercise of the office. It may, however, for analysis, be easier to think of the practice as “an offset,” not a withholding of refund. It’s an important distinction under these circumstances and the Commissioner spoke in terms of “offset.” The IRS will not so much be keeping your refund from you, as they will be merely utilizing the money withheld for its explicitly intended purpose: to pay a valid tax. In the scheme of things it would not be proper to say that the IRS owed you a $1000 refund, but then deducted $695 tax from your refund for your failure to have health insurance, and thereby left you with a refund of only $305.
They never owed you $1000 to begin with. Because you didn’t have health insurance, you owed an additional $695 in tax. You never had $1000 coming from the IRS. They only ever owed you $305; the “refund” being that which remains after all your tax has been paid. The other $695, by law, was always theirs and they have merely used the money set aside (for most people, incrementally through each paycheck) in the manner for which it was intended: to pay a valid tax. It is not “seizure,” merely appropriate allocation.
Nonprofit Hospital Tax Exemptions Worth $638 Million, Exceed “Community Benefit” by $373 Million for 10 Nonprofit Hospitals in Massachusetts
Filed under: 501(c)(3), Hospital Finances, IRS, Nonprofit Hospitals
In recent posts we’ve pointed out some of the questionable characterizations of “community benefit” by nonprofit hospitals under 501(c)(3), a portion of the Internal Revenue Code which garners tax exemptions for those entities, such as nonprofit hospitals, which it harbors. In particular, we’ve focused on how matters such as “bad debt,” Medicare “shortfalls,” and even Private Insurer “shortfalls” have often been construed by nonprofit hospitals to constitute the conveyance of a community benefit. A “shortfall” may be deemed to have occurred when although the hospital receives the amount it had agreed to with a Private Insurer, or which was designated by the government through Medicare, that amount is less than the hospital’s “list price” for such a services.
Despite this rather lax standard, Kaiser.org reports that an in-depth review by the Boston Globe determined that “the value of abundant tax exemptions extended to Massachusetts General Hospital, and other private non-profit hospitals, ‘far exceeds the amount the state’s leading hospitals spend on free care for the poor and other community benefits.’”
Kaiser reports that in Massachusetts
The ten biggest hospitals in the state benefited from $638 million in tax breaks in 2007, but reported only $265 million in “community benefits” provided that year, the Globe found.
Even if one accepts the questionable characterizations of community benefits, that still leaves an excess of $373 million in tax exemptions–for merely 10 hospitals–in only one state.
Grassley and Baucus Seek to Further Define the Difference Between Charity Care and Bad Debt for Nonprofit Hospitals. As a Matter of Collections Timing?
Filed under: 501(c)(3), Hospital Finances, IRS, Nonprofit Hospitals
According to Inside ARM, an accounts receivable management online magazine, the Senate Finance Committee is presently contemplating imposing strictures upon nonprofit hospitals regarding when those hospitals may outsource the collection of unpaid bills and, presumably, the definition of “bad debt” as it relates to “community benefit.” Inside ARM states that “The proposal is meant to provide more free care and make not-for-profit hospitals more accountable for their tax-exempt status.”
Details of the initiative are said to be scant at this point, but according to Inside ARM, “Committee Chairman Max Baucus of Montana and Chuck Grassley of Iowa, the committee’s top ranking Republican, propose requiring not-for-profit hospitals to follow certain procedures before initiating collection actions against patients.” Sen. Grassley has sought to require nonprofit hospitals to justify their tax exemptions since 2005, the year in which he sent what pretty much amounts to interrogatories to the nation’s leading nonprofit hospitals regarding billing practices and questionable characterizations of “community benefit.”
Although without detail, the new timing distinction for collections seems to be based upon the amount owed being designated as “bad debt,” or that which is essentially deemed “uncollectable.” The prospective prohibition would seem to require the amount owed to be deemed “uncollectable” or “bad debt” before it can be placed with a collection agency. A prospect the nation’s collectors, who generally work on commission, do not relish. But one hopes this provision is but one small piece of further defining “community benefit” in terms of actual charitable care.
Many nonprofit hospitals have characterized their uncollected receivables as a fulfillment of the ill-defined requirement that they offer a “community benefit” in exchange for the tax exemption they receive under 501(c)(3). Senator Grassley has said that “Neither the IRS nor Congress has done a very good job when it comes to establishing the criteria for enjoying this tax status since the IRS scrapped charity care for its community benefit standard in 1969″ (New York Times, 2/13/09).”
He has a point. But unless the prospective timing provision for outsourcing only “bad debt” is coupled with a prohibition upon characterizing mere “uncollected receivables” and payor “shortfalls” as “community benefit,” it is hard to see what effect this bad debt collections distinction will have–besides the expansion of in house hospital collection departments. One hopes that the pointed questions Senator Grassley asked of the nation’s leading nonprofit hospitals in ’05 will play a substantial role in the Senate effort to reform and redefine the obligations of tax exempt nonprofit hospitals now. I believe Mr. Grassley would well agree that a mere shift in the locus of collection activities will not constitute reform worth the name.
Perhaps some background is in order. As we posted here a little while back in “The IRS, Nonprofit Hospitals, and the Meaning of “Community Benefit,” the IRS recently published the results of a two year study of nonprofit hospitals functioning under 501(c)(3), a portion of the Internal Revenue Code which garners tax exemptions for those entities it harbors. For those of you who have not yet read our post on the topic, I’ve excerpted it here below (if you have already read the piece, you can scroll down to the paragraph before Grassley’s numbered questions for the concusion to this post). The excerpted post describes how uncompensated care, bad debt and “shortfalls” in payments from Medicare and even Private Insurers can, and often are, characterized as somehow providing a “community benefit” which justifies a tax exemption for nonprofit hospitals:
Under the strictures of 501(c)(3) nonprofits are confined to paying executives “reasonable compensation” and supplying “community benefit.” Unfortunately, neither of these terms are particularly well defined. In the study’s executive summary, the IRS puts it so:
“The community benefit standard is the legal standard for determining whether a nonprofit hospital is exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code.”
“Observations. Both the community benefit and reasonable compensation standards have proved difficult for the IRS to administer. Both involve application of imprecise legal standards to complex, varied and evolving fact patterns.”
These limitations may be seen in the characterizations of “community benefit” available to the hospitals in the study. Bad debt and Medicare payment shortfalls may be construed as “community benefit.” As the debt, the credit injury, and the collection calls all inure to the community member who received treatment but could not pay, one might question if the “community benefit” involved in a failure of collection practices might be distinguishable from the “community benefit” involved in intentional charitable care. In addition, there simply is no set criteria to determine the appropriate amounts to be charged as “community benefit.” The IRS study poses the following under the heading of
“Limitations: …although the IRS designated the general categories of activities that could be reported as community benefit for purposes of the study, determining what was treated as community benefit (for example, bad debt or Medicare shortfalls) and how to measure it (cost versus charges) was largely within the respondents’ discretion.
Which is to say that those being monitored (nonprofit hospitals) to gauge the amount of money spent– to justify their tax exempt status– were free to characterize their contributions in the manner they thought best.
Medicare shortfalls: So… if a non-profit hospital has a fee schedule rate of $100 for a procedure, and Medicare has a reimburse rate of $80 for that procedure, if a “charge” rate of measurement is used then there has been a $20 “community benefit” if the federally designated tax exempt nonprofit hospital accepts as payment the federally designated and predetermined Medicare reimbursement amount. Significantly, 19% of the hospitals also claimed “shortfalls” in payment from private insurers as uncompensated care/community benefit (See Chart: “Figure 82,” p. 105, full report).
Cost vs. Charge: So… if a procedure has a cost to the hospital of $80 and a fee schedule [or "chargemaster"] rate of $100, and the recipient of the procedure does not pay and the hospital categorizes the non-payment as “bad debt,” it has the ability to count as “community benefit” not only the cost of its unintended largesse, but also the amount it had expected as profit.
Perhaps even more telling than this latitude in characterization are the amounts actually submitted to the IRS as community benefit. Here are a few of the findings:
- The average and median percentages of total revenues reported as spent on community benefit expenditures were 9% and 6%, respectively.
- Uncompensated care accounted for 56% of aggregate community benefit expenditures reported by the hospitals in the study. Read more