By John Goodman
National Center for Policy Analysis, August 17, 2011

An example of an IDN (Integrated Delivery Network) that is already doing what the Obama administration wants to try out with expensive pilot programs is IntegraNet of Houston, an organization with a network of about 1,200 doctors. Every Medicare patient has a medical home. The physicians follow evidence-based practices. Care is integrated and coordinated. Electronic records are being introduced. It appears that quality is higher and costs are lower than in conventional Medicare.

So what’s not to like? If the folks at CMS had any sense, they would camp out in Houston and try to find out how all this works. Instead, they have been spending their time and your tax dollars producing a 427-page book of rules on what Accountable Care Organizations (ACOs) have to look like….

In the meantime, there is no doubt in my mind that IntegraNet doesn’t satisfy all the government’s requirements by a long shot. For one thing, it pays its doctors fee-for-service. The Obama folks are convinced fee-for-service payment is the problem, not the solution. For another, IntegraNet intentionally pays doctors more than Medicare’s standard rates. Yet the administration’s Plan B for cost control is squeezing provider payments, not increasing them.

A third problem is that it is producing a medical loss ratio (MLR) of 70% or less for its insurance company clients. As previously reported that is 10 percentage points less than the minimum MLR the Obama administration thinks insurers should have. But that extra 10 percentage point profit (shared by the IDN and the insurer) is the whole reason IntegraNet is in business. No one is going to take risks and try new things if they can only get a regulated-utility rate of return.

(Understandably, John Goodman would prefer that excerpts from his articles not be read out of context. The entire article can be accessed at this link.)

http://healthblog.ncpa.org/health-policy-schizophrenia/

Selected responses:

Don McCanne says:
August 17, 2011 at 3:38 pm

With health care costs for a family now averaging over $18,000, not including insurer administrative costs (Milliman Medical Index), how can one justify adding another 43 percent to those costs (the administration and profit add-on for 70 percent MLR plans)?

The Affordable Care Act isn’t a whole lot better since it allows 18 to 25 percent add-on for qualified private plans.

We now have a new report from the IG of HHS that shows an important difference between private and public health care purchasing. When quality is controlled, government administered pricing is much lower than private sector pricing. Specifically, the government Medicaid program was able to obtain a 45 percent price reduction in brand-name drugs whereas the private Medicare Part D intermediaries were able to negotiate only a 19 percent reduction for those same drugs of identical quality.

Health care costs are now an issue for 80 percent of Americans. We can no longer afford to waste our funds catering to superfluous, intrusive, outrageously expensive, private sector insurance bureaucracies.

Since risk pooling remains an imperative, we do need some form of insurance, but without these wasteful private bureaucracies. It is no wonder that so many conservatives warn that we’ll end up with a single payer system. It seems inevitable.

Larry Wedekind says:
August 18, 2011 at 10:08 am

John, well said..thanks for the recognition of our efforts at IntegraNet.

To Dr. Mittler (the author of another response not reproduced here),

The nature and benefit of competition is that private companies develop unique and better methodologies or products and in our free market they can become proprietary for awhile – this aspect of our society has produced many lasting benefits that would never have existed without the ability to patent or service mark unique ideas and products. I can tell you though that IntegraNet has not been able to keep our proprietary methodologies private very long due to the fact that physicians, Health Plan partners and our patients all experience our methods quickly and so they become public quickly. Its also very difficult to service mark our methods for the same reason.

Note also that insurance companies and IDN’s do not make any extra money in our Shared Risk/Savings Model unless the physicians make a lot of extra money. This is a unique feature of the Medicare Advantage Model that is easily forgotten. Why would you loath insurance company executives receiving more money for their wisdom in promoting the Shared Risk Model when physicians are paid the extra money first for their efforts?

Don McCanne says:
August 18, 2011 at 10:41 am

To Larry Wedekind,

Let’s see. The formula for success at IntegraNet is to use secret methods to reduce spending on actual health care (70% MLR) and keep more of the premiums so that “physicians make a lot of extra money”? With our outrageously expensive health care system, unique to the United States, can we really afford to perpetuate that kind of thinking, celebrating it as free market competition of private companies?

Value is what we should be striving for. In this model, the supposedly free market is being used to destroy value. When free markets fail in providing value for essential needs, it’s time for the government to step in. That might not appeal to those ideologically opposed, but one thing we can say: single payer systems do provide much better value in health care.

Larry Wedekind says:
August 18, 2011 at 11:16 am

To Don: I’m sorry, but you are very confused about the MA (Medicare Advantage) system. The fact that IntegraNet and other IDN’s consistently reduce the MLR to below 70% means that great value has accrued to the Medicare beneficiaries! To suggest otherwise is simply ignorant. Why? When a Health Plan experiences a 70% or less MLR because of the Care Coordination efforts of their IDN partner, this nearly always means that the beneficiaries are healthier and need the hospital less frequently. I submit to you that it is impossible to have a 70% or lower MLR without healthier patients.

This extra profit derived from the low MLR that is shared with the doctors in the IDN empowers the doctors to then spend even more time with their beneficiaries; this empowering the beneficiaries even more.

Remember that, due to the transfer of complete financial risk to the HMO and IDN, we have almost complete freedom to care for our beneficiaries under the MA Program the way we deem best. There is very little interference from CMS in our methods for caring for our beneficiaries under the MA Program.

The MA/IDN Risk Sharing model is actually the best example of free market competition within the healthcare market yet.

http://healthblog.ncpa.org/health-policy-schizophrenia/

Comment: 

By Don McCanne, MD

As John Goodman said in this same article in an entirely different context, “It’s so bizarre that not even J.K. Rowling could make up a story like this.”

Health Policy Schizophrenia

By John Goodman
National Center for Policy Analysis, August 17, 2011

An example of an IDN (Integrated Delivery Network) that is already doing what the Obama administration wants to try out with expensive pilot programs is IntegraNet of Houston, an organization with a network of about 1,200 doctors. Every Medicare patient has a medical home. The physicians follow evidence-based practices. Care is integrated and coordinated. Electronic records are being introduced. It appears that quality is higher and costs are lower than in conventional Medicare.

So what’s not to like? If the folks at CMS had any sense, they would camp out in Houston and try to find out how all this works. Instead, they have been spending their time and your tax dollars producing a 427-page book of rules on what Accountable Care Organizations (ACOs) have to look like….

In the meantime, there is no doubt in my mind that IntegraNet doesn’t satisfy all the government’s requirements by a long shot. For one thing, it pays its doctors fee-for-service. The Obama folks are convinced fee-for-service payment is the problem, not the solution. For another, IntegraNet intentionally pays doctors more than Medicare’s standard rates. Yet the administration’s Plan B for cost control is squeezing provider payments, not increasing them.

A third problem is that it is producing a medical loss ratio (MLR) of 70% or less for its insurance company clients. As previously reported that is 10 percentage points less than the minimum MLR the Obama administration thinks insurers should have. But that extra 10 percentage point profit (shared by the IDN and the insurer) is the whole reason IntegraNet is in business. No one is going to take risks and try new things if they can only get a regulated-utility rate of return.

(Understandably, John Goodman would prefer that excerpts from his articles not be read out of context. The entire article can be accessed at this link.)

http://healthblog.ncpa.org/health-policy-schizophrenia/

Selected responses:

Don McCanne says:
August 17, 2011 at 3:38 pm

With health care costs for a family now averaging over $18,000, not including insurer administrative costs (Milliman Medical Index), how can one justify adding another 43 percent to those costs (the administration and profit add-on for 70 percent MLR plans)?

The Affordable Care Act isn’t a whole lot better since it allows 18 to 25 percent add-on for qualified private plans.

We now have a new report from the IG of HHS that shows an important difference between private and public health care purchasing. When quality is controlled, government administered pricing is much lower than private sector pricing. Specifically, the government Medicaid program was able to obtain a 45 percent price reduction in brand-name drugs whereas the private Medicare Part D intermediaries were able to negotiate only a 19 percent reduction for those same drugs of identical quality.

Health care costs are now an issue for 80 percent of Americans. We can no longer afford to waste our funds catering to superfluous, intrusive, outrageously expensive, private sector insurance bureaucracies.

Since risk pooling remains an imperative, we do need some form of insurance, but without these wasteful private bureaucracies. It is no wonder that so many conservatives warn that we’ll end up with a single payer system. It seems inevitable.

Larry Wedekind says:
August 18, 2011 at 10:08 am

John, well said..thanks for the recognition of our efforts at IntegraNet.

To Dr. Mittler (the author of another response not reproduced here),

The nature and benefit of competition is that private companies develop unique and better methodologies or products and in our free market they can become proprietary for awhile – this aspect of our society has produced many lasting benefits that would never have existed without the ability to patent or service mark unique ideas and products. I can tell you though that IntegraNet has not been able to keep our proprietary methodologies private very long due to the fact that physicians, Health Plan partners and our patients all experience our methods quickly and so they become public quickly. Its also very difficult to service mark our methods for the same reason.

Note also that insurance companies and IDN’s do not make any extra money in our Shared Risk/Savings Model unless the physicians make a lot of extra money. This is a unique feature of the Medicare Advantage Model that is easily forgotten. Why would you loath insurance company executives receiving more money for their wisdom in promoting the Shared Risk Model when physicians are paid the extra money first for their efforts?

Don McCanne says:
August 18, 2011 at 10:41 am

To Larry Wedekind,

Let’s see. The formula for success at IntegraNet is to use secret methods to reduce spending on actual health care (70% MLR) and keep more of the premiums so that “physicians make a lot of extra money”? With our outrageously expensive health care system, unique to the United States, can we really afford to perpetuate that kind of thinking, celebrating it as free market competition of private companies?

Value is what we should be striving for. In this model, the supposedly free market is being used to destroy value. When free markets fail in providing value for essential needs, it’s time for the government to step in. That might not appeal to those ideologically opposed, but one thing we can say: single payer systems do provide much better value in health care.

Larry Wedekind says:
August 18, 2011 at 11:16 am

To Don: I’m sorry, but you are very confused about the MA (Medicare Advantage) system. The fact that IntegraNet and other IDN’s consistently reduce the MLR to below 70% means that great value has accrued to the Medicare beneficiaries! To suggest otherwise is simply ignorant. Why? When a Health Plan experiences a 70% or less MLR because of the Care Coordination efforts of their IDN partner, this nearly always means that the beneficiaries are healthier and need the hospital less frequently. I submit to you that it is impossible to have a 70% or lower MLR without healthier patients.

This extra profit derived from the low MLR that is shared with the doctors in the IDN empowers the doctors to then spend even more time with their beneficiaries; this empowering the beneficiaries even more.

Remember that, due to the transfer of complete financial risk to the HMO and IDN, we have almost complete freedom to care for our beneficiaries under the MA Program the way we deem best. There is very little interference from CMS in our methods for caring for our beneficiaries under the MA Program.

The MA/IDN Risk Sharing model is actually the best example of free market competition within the healthcare market yet.

http://healthblog.ncpa.org/health-policy-schizophrenia/

As John Goodman said in this same article in an entirely different context, “It’s so bizarre that not even J.K. Rowling could make up a story like this.”

Office of the Inspector General
Department of Health and Human Services, August 2011

Prescription drug rebates reduce the program costs of both Medicare Part D and Medicaid. Medicaid rebates are defined by statute; additional rebates are required when prices for brand-name drugs increase faster than inflation. Unlike the Medicaid program, Part D sponsors (or contractors acting on their behalf) negotiate rebates with drug manufacturers without any statutory requirements on rebate amounts. In fact, the law establishing the Part D program expressly prohibits the Government from instituting a price structure for the reimbursement of covered Part D drugs.

In this review, we found that Part D sponsors and State Medicaid agencies paid pharmacies similar amounts for most brand-name drugs under review. However, statutorily defined Medicaid unit rebate amounts for brand-name drugs exceeded Part D unit rebate amounts by a substantial margin. As a result, Medicaid collected nearly two-thirds as much as Part D in rebates for the 100 brand-name drugs ($2.9 billion vs. $4.5 billion), despite having only about one-fourth of the expenditures ($6.4 billion vs. $24 billion).

Overall, rebates reduced Part D expenditures by 19 percent for the 100 brand-name drugs under review (from $24 billion to $19.5 billion) in 2009. Medicaid rebates accounted for a substantially higher percentage of total expenditures, reducing Medicaid spending for the 100 drugs under review by 45 percent (from $6.4 billion to $3.5 billion).

http://oig.hhs.gov/oei/reports/oei-03-10-00320.pdf

Comment:

By Don McCanne, MD

We are inundated with nonsense about how private health insurance competition in the marketplace brings us higher quality at lower costs when compared with government-administered programs. This study by the Inspector General of Health and Human Services provides an enlightening test of that theory by controlling for quality while measuring the differences in cost. Both Medicaid (government) and Medicare Part D (private) use the same brand-name drugs with identical quality, so cost becomes the sole variable.

Our government-run Medicaid program has been able to negotiate a 45 percent discount on these brand-name drugs, whereas the private Medicare Part D sponsors or contractors have been able to extract only a 19 percent discount on these same drugs. Clearly, when quality is controlled, the private sector brings us much higher prices than does the government.

Under a single payer national health program – an improved Medicare for All – these highly wasteful middlemen would be eliminated and the government would use its monopsonistic buying power to get the prices right. Payment would be based on actual costs, including legitimate research, plus fair profits.

Having to change the rhetorical framing of the dialog from “markets and competition” to “social solidarity” is a small price to pay for achieving the efficient use of our health care dollars. Thinking about that, being able to dump the ideology behind the intrusive, wasteful middlemen is not a price that we would be paying, but a superb benefit that we would be gaining.

Higher Rebates for Brand-Name Drugs Result in Lower Costs for Medicaid Compared to Medicare Part D

Office of the Inspector General
Department of Health and Human Services, August 2011

Prescription drug rebates reduce the program costs of both Medicare Part D and Medicaid. Medicaid rebates are defined by statute; additional rebates are required when prices for brand-name drugs increase faster than inflation. Unlike the Medicaid program, Part D sponsors (or contractors acting on their behalf) negotiate rebates with drug manufacturers without any statutory requirements on rebate amounts. In fact, the law establishing the Part D program expressly prohibits the Government from instituting a price structure for the reimbursement of covered Part D drugs.

In this review, we found that Part D sponsors and State Medicaid agencies paid pharmacies similar amounts for most brand-name drugs under review. However, statutorily defined Medicaid unit rebate amounts for brand-name drugs exceeded Part D unit rebate amounts by a substantial margin. As a result, Medicaid collected nearly two-thirds as much as Part D in rebates for the 100 brand-name drugs ($2.9 billion vs. $4.5 billion), despite having only about one-fourth of the expenditures ($6.4 billion vs. $24 billion).

Overall, rebates reduced Part D expenditures by 19 percent for the 100 brand-name drugs under review (from $24 billion to $19.5 billion) in 2009. Medicaid rebates accounted for a substantially higher percentage of total expenditures, reducing Medicaid spending for the 100 drugs under review by 45 percent (from $6.4 billion to $3.5 billion).

http://oig.hhs.gov/oei/reports/oei-03-10-00320.pdf

We are inundated with nonsense about how private health insurance competition in the marketplace brings us higher quality at lower costs when compared with government-administered programs. This study by the Inspector General of Health and Human Services provides an enlightening test of that theory by controlling for quality while measuring the differences in cost. Both Medicaid (government) and Medicare Part D (private) use the same brand-name drugs with identical quality, so cost becomes the sole variable.

Our government-run Medicaid program has been able to negotiate a 45 percent discount on these brand-name drugs, whereas the private Medicare Part D sponsors or contractors have been able to extract only a 19 percent discount on these same drugs. Clearly, when quality is controlled, the private sector brings us much higher prices than does the government.

Under a single payer national health program – an improved Medicare for All – these highly wasteful middlemen would be eliminated and the government would use its monopsonistic buying power to get the prices right. Payment would be based on actual costs, including legitimate research, plus fair profits.

Having to change the rhetorical framing of the dialog from “markets and competition” to “social solidarity” is a small price to pay for achieving the efficient use of our health care dollars. Thinking about that, being able to dump the ideology behind the intrusive, wasteful middlemen is not a price that we would be paying, but a superb benefit that we would be gaining.

By John Nichols
The Nation, August 13, 2011

The individual mandate was always a bad idea. Instead of recognizing that healthcare is a right, the members of Congress and the Obama administration who cobbled together the healthcare reform plan created a mandate that maintains the abuses and the expenses of for-profit insurance companies — and actually rewards those insurance companies with a guarantee of federal money.

Those who think that the for-profit (or even not-for-profit) insurance industry has to control any healthcare reform initiative have every right to be upset with the 11th Circuit’s ruling — which almost certainly will send the case of the Obama healthcare plan to the US Supreme Court.

But those of us who have no desire to perpetuate the insurance industry can and should recognize that the proper — and entirely constitutional — reform is an expansion of Medicare to cover all Americans.

While Medicare is exceptionally popular, polling shows that the individual mandate is not — according to recent surveys, roughly 60 percent of Americans oppose it.

It also passes constitutional muster.

As former Labor Secretary Robert Reich notes: “[No] federal judge has struck down Social Security or Medicare as being an unconstitutional requirement that Americans buy something. Social Security and Medicare aren’t broccoli or asparagus. They’re as American as hot dogs and apple pie.”

“So if the individual mandate to buy private health insurance gets struck down by the Supreme Court or killed off by Congress,” says Reich, “I’d recommend President Obama immediately propose what he should have proposed in the beginning — universal health care based on Medicare for all, financed by payroll taxes.”

The insurance companies would, of course, scream.

But let them complain.

Americans don’t need mandates. They need healthcare.

And they have every right to ask, as activists with Physicians for a National Health Program have, that Medicare be expanded to cover all Americans — affordably, efficiently, capably and constitutionally.

http://www.thenation.com/blog/162765/can-we-have-health-reform-without-individual-mandate-yes-its-called-medicare-all

Comment: 

By Don McCanne, MD

Americans overwhelmingly support Medicare, yet an unequivocal majority oppose a government requirement to purchase private health insurance. Why should we have to wait until we’re 65 to have Medicare, while in the interim being required to buy something we don’t want? Let the Supreme Court rule that the individual mandate is unconstitutional, and then maybe we can convince a newly elected Congress to pass the reform that we really need.

We are pleased that Washington correspondent John Nichols of The Nation has joined with Physicians for a National Health Program and the growing chorus of other enlightened voices who call for a vastly superior model of reform that actually would pass constitutional muster – an improved Medicare, expanded to include everyone.

Can We Have Health Reform Without an Individual Mandate? Yes, It’s Called ‘Medicare for All’

By John Nichols
The Nation, August 13, 2011

The individual mandate was always a bad idea. Instead of recognizing that healthcare is a right, the members of Congress and the Obama administration who cobbled together the healthcare reform plan created a mandate that maintains the abuses and the expenses of for-profit insurance companies — and actually rewards those insurance companies with a guarantee of federal money.

Those who think that the for-profit (or even not-for-profit) insurance industry has to control any healthcare reform initiative have every right to be upset with the 11th Circuit’s ruling — which almost certainly will send the case of the Obama healthcare plan to the US Supreme Court.

But those of us who have no desire to perpetuate the insurance industry can and should recognize that the proper — and entirely constitutional — reform is an expansion of Medicare to cover all Americans.

While Medicare is exceptionally popular, polling shows that the individual mandate is not — according to recent surveys, roughly 60 percent of Americans oppose it.

It also passes constitutional muster.

As former Labor Secretary Robert Reich notes: “[No] federal judge has struck down Social Security or Medicare as being an unconstitutional requirement that Americans buy something. Social Security and Medicare aren’t broccoli or asparagus. They’re as American as hot dogs and apple pie.”

“So if the individual mandate to buy private health insurance gets struck down by the Supreme Court or killed off by Congress,” says Reich, “I’d recommend President Obama immediately propose what he should have proposed in the beginning — universal health care based on Medicare for all, financed by payroll taxes.”

The insurance companies would, of course, scream.

But let them complain.

Americans don’t need mandates. They need healthcare.

And they have every right to ask, as activists with Physicians for a National Health Program have, that Medicare be expanded to cover all Americans — affordably, efficiently, capably and constitutionally.

http://www.thenation.com/blog/162765/can-we-have-health-reform-without-individual-mandate-yes-its-called-medicare-all

Americans overwhelmingly support Medicare, yet an unequivocal majority oppose a government requirement to purchase private health insurance. Why should we have to wait until we’re 65 to have Medicare, while in the interim being required to buy something we don’t want? Let the Supreme Court rule that the individual mandate is unconstitutional, and then maybe we can convince a newly elected Congress to pass the reform that we really need.

We are pleased that Washington correspondent John Nichols of The Nation has joined with Physicians for a National Health Program and the growing chorus of other enlightened voices who call for a vastly superior model of reform that actually would pass constitutional muster – an improved Medicare, expanded to include everyone.

By Timothy Jost
Health Affairs Blog, August 13, 2011

On August 12, the Departments of Health and Human Services and Treasury (Internal Revenue Service) issued three notices of proposed rulemaking (NPRM) as part of their continuing effort to implement the Affordable Care Act (ACA).

This post will describe the Treasury NPRM, the shortest of the NPRMs but also the one that deals with the most complex and unsettled issues.

The Basic Rules Regarding The Tax Credit

The consequences of underpayments and overpayments.

Although the tax credit is paid on a monthly basis, the actual amount of the credit will in fact be finally determined based on the household’s income as determined on the annual income tax return.  At that point “reconciliation” must occur.   If over the course of the year household income turns out to have been greater or less than projected, or if household composition or compliance with other eligibility requirements has changed, the final tax credit may turn out to be greater or less than the amount already paid. If the taxpayer turns out to have been eligible for more than had been paid, the taxpayer gets a refund.

If, however, the government has paid more than the taxpayer in fact turns out to be entitled to, the taxpayer must pay the money back. There are limits to this liability for taxpayers with household incomes up to 400 percent of the FPL (which have been amended twice since the ACA was adopted to increase liability), but the amount owed back can be substantial (up to $2500 for families at the upper ranges), and if final income exceeds 400 percent of poverty, even by one dollar, the entire premium tax credit must be paid back.

No help for those who owe money back because of overpayments.

A taxpayer must file a return to claim a tax credit, even though the taxpayer otherwise has no obligation to file a return.  As noted above, at the time the return is filed, the tax credit will be reconciled with actual reported household income and the taxpayer will have to pay the IRS if there was an overpayment in tax credits.  Overpayments in fact will be common, not only because income and household composition will change over the course of a year, but also because a person who loses or gains a well-paying job over the course of the year may end up with a high end-of-the year income even though, at the time the taxpayer applied, the credit was accurate for the taxpayer’s then-current income level. A taxpayer with income under 400 percent of poverty level could receive a credit through out the year based on anticipated income, but then receive an end-of-year bonus putting the taxpayer over the 400 percent limit and have to pay back the entire credit for the entire year.

Consumer advocates hoped that Treasury would use its statutory rule-making authority to meliorate these consequences, but Treasury does not believe it has the authority to do so and offers no mercy.

http://healthaffairs.org/blog/2011/08/13/implementing-health-reform-premium-tax-credits/

Department of the Treasury – Proposed regulations for the Health Insurance Premium Tax Credit:
http://www.ofr.gov/OFRUpload/OFRData/2011-20728_PI.pdf

Comment: 

By Don McCanne, MD

Throughout the reform process Professor Timothy Jost has been very helpful in clarifying the impact of the Affordable Care Act, especially on health care consumers. As one example, here he shows how an individual who appropriately receives monthly premium tax credits for purchase of a plan through an insurance exchange could be required to pay back the entire credit for the entire year merely because of a year-end bonus that lifted income over the 400 percent poverty level. For most individuals, this could create a severe financial hardship.

As another example, if the employee’s premium contribution for an employer sponsored plan is over 9.5 percent of income, then the employee is free to accept the tax credit and purchase a qualified plan through the insurance exchange. However, the employee’s contribution to the premium for the family does not count. Thus the employee, with an individual contribution under 9.5%, could have to pay much more than 9.5 percent of income to insure the entire family, and yet not be eligible for the option of accepting a tax subsidy for an exchange plan. Again, family coverage could create a significant financial hardship for the employee.

There is a profusion of complexities in the Affordable Care Act that adversely impact patient-consumers, many of which Professor Jost has described in this and other articles. Although, as an academic, he has limited his advocacy to supporting rules that benefit patients, we don’t have to limit our own advocacy so narrowly.

The Affordable Care Act is an abomination of inequitable and unjust administrative complexities and waste that can never achieve an equitable health system that serves everyone. Let’s continue to do our best to make sure that everyone understands this and understands that health care justice for all is achievable by the adoption of a single payer national health program.

In the meantime, the IRS does not believe that it has the authority to alter the provisions of the Affordable Care Act and thus offers no mercy. Mercy is left in the hands of us would-be reformers.

Implementing Health Reform: Premium Tax Credits

By Timothy Jost
Health Affairs Blog, August 13, 2011

On August 12, the Departments of Health and Human Services and Treasury (Internal Revenue Service) issued three notices of proposed rulemaking (NPRM) as part of their continuing effort to implement the Affordable Care Act (ACA).

This post will describe the Treasury NPRM, the shortest of the NPRMs but also the one that deals with the most complex and unsettled issues.

The Basic Rules Regarding The Tax Credit

The consequences of underpayments and overpayments.

Although the tax credit is paid on a monthly basis, the actual amount of the credit will in fact be finally determined based on the household’s income as determined on the annual income tax return.  At that point “reconciliation” must occur.   If over the course of the year household income turns out to have been greater or less than projected, or if household composition or compliance with other eligibility requirements has changed, the final tax credit may turn out to be greater or less than the amount already paid. If the taxpayer turns out to have been eligible for more than had been paid, the taxpayer gets a refund.

If, however, the government has paid more than the taxpayer in fact turns out to be entitled to, the taxpayer must pay the money back. There are limits to this liability for taxpayers with household incomes up to 400 percent of the FPL (which have been amended twice since the ACA was adopted to increase liability), but the amount owed back can be substantial (up to $2500 for families at the upper ranges), and if final income exceeds 400 percent of poverty, even by one dollar, the entire premium tax credit must be paid back.

No help for those who owe money back because of overpayments.

A taxpayer must file a return to claim a tax credit, even though the taxpayer otherwise has no obligation to file a return.  As noted above, at the time the return is filed, the tax credit will be reconciled with actual reported household income and the taxpayer will have to pay the IRS if there was an overpayment in tax credits.  Overpayments in fact will be common, not only because income and household composition will change over the course of a year, but also because a person who loses or gains a well-paying job over the course of the year may end up with a high end-of-the year income even though, at the time the taxpayer applied, the credit was accurate for the taxpayer’s then-current income level. A taxpayer with income under 400 percent of poverty level could receive a credit through out the year based on anticipated income, but then receive an end-of-year bonus putting the taxpayer over the 400 percent limit and have to pay back the entire credit for the entire year.

Consumer advocates hoped that Treasury would use its statutory rule-making authority to meliorate these consequences, but Treasury does not believe it has the authority to do so and offers no mercy.

http://healthaffairs.org/blog/2011/08/13/implementing-health-reform-premium-tax-credits/

Department of the Treasury – Proposed regulations for the Health Insurance Premium Tax Credit:
http://www.ofr.gov/OFRUpload/OFRData/2011-20728_PI.pdf

Throughout the reform process Professor Timothy Jost has been very helpful in clarifying the impact of the Affordable Care Act, especially on health care consumers. As one example, here he shows how an individual who appropriately receives monthly premium tax credits for purchase of a plan through an insurance exchange could be required to pay back the entire credit for the entire year merely because of a year-end bonus that lifted income over the 400 percent poverty level. For most individuals, this could create a severe financial hardship.

As another example, if the employee’s premium contribution for an employer sponsored plan is over 9.5 percent of income, then the employee is free to accept the tax credit and purchase a qualified plan through the insurance exchange. However, the employee’s contribution to the premium for the family does not count. Thus the employee, with an individual contribution under 9.5%, could have to pay much more than 9.5 percent of income to insure the entire family, and yet not be eligible for the option of accepting a tax subsidy for an exchange plan. Again, family coverage could create a significant financial hardship for the employee.

There is a profusion of complexities in the Affordable Care Act that adversely impact patient-consumers, many of which Professor Jost has described in this and other articles. Although, as an academic, he has limited his advocacy to supporting rules that benefit patients, we don’t have to limit our own advocacy so narrowly.

The Affordable Care Act is an abomination of inequitable and unjust administrative complexities and waste that can never achieve an equitable health system that serves everyone. Let’s continue to do our best to make sure that everyone understands this and understands that health care justice for all is achievable by the adoption of a single payer national health program.

In the meantime, the IRS does not believe that it has the authority to alter the provisions of the Affordable Care Act and thus offers no mercy. Mercy is left in the hands of us would-be reformers.