Drug companies seek billion-dollar tax deductions from opioid settlement

https://www.washingtonpost.com/business/2021/02/12/opioid-settlement-tax-refund/?arc404=true

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Four companies that agreed to pay a combined $26 billion to settle claims about their roles in the opioid crisis plan to deduct some of those costs from their taxes and recoup around $1 billion apiece.

In recent months, as details of the blockbuster settlement were still being worked out, pharmaceutical giant Johnson & Johnson and the “big three” drug distributors — McKesson, AmerisourceBergen and Cardinal Health —all updated their financial projections to include large tax benefits stemming from the expected deal, a Washington Post analysis of regulatory filings found.

In one example, Dublin, Ohio-based drug distributor Cardinal Health said earlier this month it planned to collect a $974 million cash refund because it claimed its opioid-related legal costs as a “net operating loss carryback” — a tax provision Congress included in last year’s coronavirus bailout package as a way of helping companies struggling during the pandemic.

The deductions may deepen public anger toward companies prosecutors say played key roles in a destructive public health crisis that kills tens of thousands of Americans every year. In lawsuits filed by dozens of states and local jurisdictions, public officials have argued that the companies, among other corporate defendants, flooded the country with billions of highly addictive pills and ignored signs they were being steered to people who abused them.

Under the terms of the proposed settlement — which is being finalized and will ultimately be subject to federal court approval — the four companies would pay between $5 billion and $8 billion each to reimburse communities for the costs of the health crisis. Plaintiffs who support the proposal say it will resolve a highly complex litigation process and make funds available to communities and individuals still struggling with addiction.

Others including Greg McNeil, whose son became addicted to opioids and died from an overdose, have said $26 billion is only a small fraction of the epidemic’s financial toll and argue the proposal doesn’t include what many family members of opioid victims want the most: an admission of guilt.

All four firms disavow any wrongdoing or legal responsibility. The companies have said they produced government-approved prescription pills, distributed them to registered pharmacies and took steps to try to prevent their misuse.

U.S. tax laws generally restrict companies from deducting the cost of legal settlements from their taxes, with one major exception: Damages paid to victims as restitution for the misdeeds can usually be deducted. Still, Congress has placed stricter limits on such deductions in recent years, and some tax experts say the Internal Revenue Service could challenge the companies’ attempts to deduct opioid settlement costs.

Harry Cullen, a Brooklyn-based activist who has worked to hold drug companies accountable for the epidemic, said it is “incredibly insulting” that companies would try deduct the settlement payments. “As if they are donating it to these people who they harmed in the first place.”

Erich Timmerman, a spokesman for Cardinal Health, said in a statement that the company’s tax deductions are permissible under federal law. He also pointed to a statement chief executive Mike Kaufmann made in November, when he said Cardinal takes its role in the pharmaceutical supply chain seriously and remains “committed to being part of the solution to this epidemic.”

AmerisourceBergen declined to comment on its taxes but said in a statement the company takes steps to mitigate the diversion of prescription drugs, including by refusing service to customers it sees as a risk and by making daily reports to federal drug officials.

Johnson & Johnson declined to comment on the opioid settlement and tax deductions beyond its regulatory filings.A spokeswoman for McKesson did not respond to multiple requests for comment.

Cardinal Health’s use of the “carryback” tax break draws attention to what some see as a shortcoming of the $2 trillion U.S. coronavirus bailout known as the Cares Act. In their haste to funnel cash benefits to businesses facing economic peril, lawmakers made billions of dollars in tax breaks broadly available to any company, regardless of whether it suffered during the pandemic.

Cardinal, a company with a $15 billion market capitalization and $4 billion in available cash, surpassed Wall Street expectations for its most recent earnings period. Last week, CEO Kaufmann told investors a rebound in medical treatments and procedures had revived demand for Cardinal’s health devices and drugs. He said the company was boosting its investment in sophisticated supply-chain technology.

On the same day, Cardinal said it was filing for a tax break using the Cares Act provision and expected a nearly $1 billion cash refund from the IRS within the next 12 months. The company plans to pay $6.6 billion in the settlement.

Francine J. Lipman, a tax professor at the University of Nevada at Las Vegas, said Cardinal Health appears to be “getting a bit of a windfall from laws that Congress intended to help companies that are suffering due to a pandemic.”

The “carryback” tax break permits any company that lost money in 2018, 2019 or 2020 to apply those losses to previous, more profitable years. Some form of this provision has been permitted by the U.S. tax code for over a century to help businesses that face ups and downs to even out their taxes.

The Cares Act raised the limit on the amount of losses companies can use to offset taxes and permitted them to apply those losses to earlier periods. Because the corporate tax rate was higher before 2018, companies with recent losses can increase tax refunds they received before that year by up to 67 percent.

Cardinal estimated in August it expected to deduct $488 million from the expected opioid legal settlement. But in its Feb. 5 filing, the company said the amount probably would be higher in part because the Cares Act permitted it to carry back losses related to the opioid litigation to previous years when the tax rate was higher.

UNLV’s Lipman said Cardinal’s decision to apply for a tax refund before any legal settlement has been finalized could face scrutiny from the IRS. Deductions must be made against business expenses that are shown to have “economic effect,” she said, which may preclude deductions against future, unpaid legal settlements.

Timmerman, Cardinal’s spokesman, said the company has already recorded a loss related to the opioid litigation because Cardinal insures itself through a wholly-owned insurance subsidiary. The opioid litigation caused a loss to the insurance company’s reserve, and that is the loss that Cardinal is deducting, he said.

“Tax and accounting rules applicable to insurance companies, including self-insurance companies, require recognition of loss when an insurance reserve is set, thus establishing economic effect, even if the underlying settlement is not final,” Timmerman said.

The three other companies involved in the $26 billion settlement have estimated the tax benefits of the deal but have not filed for tax refunds. They all said the tax benefits could be lower if courts or regulators determined some or all of the payments are not tax-deductible.

McKesson, which expects to pay $8.1 billion in the settlement, said in a Feb. 2 filing that the actual cost of the deal would be $6.7 billion after taxes, implying a $1.4 billion tax benefit. The company also said $497 million in tax benefits were “uncertain” because of the “uncertainty in connection with the deductibility of opioid related litigation and claims.”

AmerisourceBergen, which anticipates a $6.6 billion settlement payment, said in November it expects a $1.1 billion tax benefit. The company said an additional $371.5 million tax benefit was possible but “uncertain.”

“A settlement has not been reached, and, therefore, we applied significant judgment in estimating the ultimate amount of the opioid litigation settlement that would be deductible,” the company said.

Matthew Gardner, a senior fellow at the nonprofit Institute on Taxation and Economic Policy, said these disclaimers suggest the companies are making conservative estimates. “That’s one way of saying they are likely going to claim even bigger tax benefits in their tax returns than they are showing on their financial statements,” he said.

Whether the payments will be deductible may hinge on specific word choices in the final terms of the settlement. Though recent changes to the tax code have attempted to close loopholes that permit companies to deduct taxes when they have committed wrongdoing, many companies now push to make sure their settlements include a “restitution” payment for victims — the “magic word” that often qualifies them for deductions, Gardner said.

In previous opioid-related settlements local governments reached with McKesson, Purdue Pharma and Teva Pharmaceuticals, the companies admitted no fault and agreed to restitution payments that appeared to qualify them for tax deductions, USA Today reported in 2019.

Johnson & Johnson has said it expects it could deduct as much as 21.4 percent of its $5 billion share of the settlement, which would mean a roughly $1.1 billion tax benefit. However, the company said last summer that the deductible amount may be lower if a regulation proposed by the IRS last year came into effect.

The rule, which did take effect Jan. 20, requires companies to meet a long list of specific criteria to qualify government settlements for tax deductions.

Faces on pills are seen at the Provocative Opioid Memorial in 2018 in Washington, D.C. There are 22,000 pills that represent the number of people who died of an opioid overdose in 2015. 

In 2019, The Post analyzed a database maintained by the Drug Enforcement Administration that tracks the path of every pain pill sold in the United States. The database shows that America’s largest drug companies distributed 76 billion oxycodone and hydrocodone pain pills across the country between 2006 and 2012 as the nation’s deadliest drug epidemic spun out of control.

McKesson, Cardinal Health and AmerisourceBergen distributed 44 percent of the nation’s oxycodone and hydrocodone pills — the two most abused prescription opioid drugs — during that time.

An investigation by The Post last year found that near the peak of U.S. opioid production, a Johnson & Johnson subsidiary was manufacturing enough oxycodone and hydrocodone to capture half or more of the U.S. market. The company also lobbied for years to help persuade regulators to loosen a narcotics import rule, allowing Johnson & Johnson’s U.S. subsidiary to produce rising amounts of opioids out of potent poppies harvested by its Tasmanian subsidiary, The Post found.

Attorneys for Johnson & Johnson have said its opioid-producing subsidiaries did not cause the United States’ addiction crisis, that the companies were heavily regulated, and that such companies play only a “peripheral role in the multibillion-dollar market for prescription opioids.”

PPP loan forgiveness could result in big tax bills

https://www.cfodive.com/news/ppp-loan-forgiveness-tax-IRS/584431/?utm_source=Sailthru&utm_medium=email&utm_campaign=Issue:%202020-09-01%20CFO%20Dive%20%5Bissue:29408%5D&utm_term=CFO%20Dive

Dive Brief:

  • Businesses that received Paycheck Protection Program (PPP) loans are anxiously eyeing an IRS ruling that could affect whether they apply for loan forgiveness. In a notice this spring, the IRS said it had ruled out tax deductions for wages and rent paid with forgivable PPP loans in order to prevent a “double tax benefit.”
  • The ruling means contractors cannot write off these types of expenses if they were paid for with PPP loan funds, leaving many wondering whether it will cost more in taxes than to pay the loan back.
  • According to the U.S. Chamber of Commerce, a forgiven PPP loan is tax-exempt but using the loan can also reduce how much a construction firm can write off on its business taxes. Usually, expenses like payroll, rent and utilities are deductible from normal taxable income, but without the deduction, a business may owe more taxes than it normally pays, the Chamber said.

Dive Insight:

Some elected leaders are pushing back on the IRS ruling. The Small Business Expense Protection Act introduced in the Senate in early May would reverse the IRS decision and make the expenses deductible. According to Forbes, there has been pushback on the legislation.

“Earlier this summer, the bill seemed likely to pass, but that is hardly certain now,” Forbes contributor and tax expert Robert W. Wood wrote.

Joseph Natarelli, leader of the national Construction Industry Practice group at accounting firm Marcum LLP,  said some contractors are unaware of the tax implications of PPP forgiveness on their businesses if the ruling is not reversed.

“Using simple numbers, the contractor who decided to borrow $9 million to keep their people employed is now going to owe,” he said. “If you’re in a 50% tax bracket, that’s $4.5 million dollars, so where are you going to get that money from?”

Many of Natarelli’s clients are considering not applying for PPP forgiveness in order to avoid a hefty tax bill, he said.

“They’re saying, ‘If I knew then what I know now, then I wouldn’t have taken the loan and I would have had to lay people off,'” he said.

The bottom line for contractors, Natarelli said, is to check with their accountants about tax implications before applying for loan forgiveness.

“It’s an issue that contractors need to be aware of and I think people took PPP loans that don’t even know it’s taxable now, which is scary,” he said.

 

 

 

 

Employers face liability under payroll tax deferral guidance

https://www.cfodive.com/news/employers-liability-payroll-tax-deferral-guidance-IRS/584434/?utm_source=Sailthru&utm_medium=email&utm_campaign=Issue:%202020-09-01%20CFO%20Dive%20%5Bissue:29408%5D&utm_term=CFO%20Dive

The onus to collect and pay back deferred payroll taxes, under guidance the IRS has released on President Trump’s executive order, falls on employers.

Trump signed the order last month after Congress failed to agree on extending COVD-19-related stimulus benefits. It directs participating employers not to withhold the 6.2% payroll tax that employees owe each pay period to cover their portion of Social Security taxes.

The absence of withholding gives employees a bigger paycheck, although they still must repay the deferred withholdings next year, unless Congress waives the liability. 

The benefit applies to employees earning less than $4,000 every two weeks, or about $104,000 a year. It’s in effect for paychecks issued between September 1 and the end of the year.

Effectiveness in doubt

Under the IRS guidance, liability for paying back the uncollected taxes could ultimately fall on employers; there’s no language explaining how deferred taxes will be returned to the Treasury if an employee quits between now and the end of the year or otherwise can’t pay the deferred taxes.

“You could give [the tax deferral] to the employee, but then a year from now you might be on the hook for the money,” University of Chicago law professor Daniel Hemel told CNBC.

“Liability is going to stick to the employer like flies to flypaper,” Marianna Dyson, a lawyer at Washington firm Covington & Burling, told The Wall Street Journal.

Low participation

Many employers may choose not to participate, which would dampen the stimulus impact.

“Many [employers could] decline putting the extra money in workers’ paychecks — blunting any potential economic or political boost Trump had hoped to reap,” an Accounting Today/Bloomberg News analysis said.

The last-minute revamping of systems to administer the change could also deter participation.

“The programming changes are substantial in scope,” the National Payroll Reporting Consortium said in an August 20 statement

The deferral is also not a clear win for employees, who could face double withholdings when taxes must be repaid early next year.

“It’s not clear employees will want to take it, even if they qualify.” Pete Isberg, vice president of payroll processing company ADP, told the Washington Post.

 

 

 

 

A Scalpel Instead Of A Sledgehammer: The Potential Of Value-Based Deductible Exemptions In High-Deductible Health Plans

https://www.healthaffairs.org/do/10.1377/hblog20200615.238552/full/?utm_campaign=HASU+6-21-20&utm_medium=email&utm_content=COVID-19%3A+Face+Mask+Mandates%2C+Immigration+Detention+Facilities%2C+Symptom+Monitoring%3B+Treatment+Of+Opioid+Use+Disorder%3B+Supreme+Court+LGBT+Decision%3A+Implications+For+The+ACA&utm_source=Newsletter

UM V-BID Center (@UM_VBID) | Twitter

High-deductible health plans (HDHPs) covered more than 30 percent of enrollees in employer-sponsored plans in the United States in 2019, up from 4 percent in 2006. In 2020, the Internal Revenue Service defines HDHP as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family. An HDHP’s total yearly out-of-pocket expenses (including deductibles, copayments, and coinsurance) cannot be more than $6,900 for an individual or $13,800 for a family. However, this limit does not apply to out-of-network services.

The growth of HDHPs is driven by the pursuit of reduced health care spending and premiums for both employees and employers through channeling elements of consumerism and managed care. Often, HDHPs are offered along with a savings option (health savings account or health reimbursement arrangement) in a consumer-directed health plan.

Recently, however, there have been concerns about the out-of-pocket cost burdens imposed on patients by HDHPs and other plans. Reducing these costs has been the focus of major policy proposals, including prescription drug bills from both the House and the Senate; forthcoming plans for the Center for Medicare and Medicaid Innovation to test value-based insurance models following the president’s executive order 13890 on Protecting and Improving Medicare for Our Nation’s Seniors; and H.R. 2774, the Primary Care Patient Protection Act of 2019, which would create a primary care benefit for all HDHP holders, allowing for up to two deductible-free primary care office visits each year.

It is becoming increasingly clear that HDHPs’ indiscriminate reductions in care usage may not be the best way to contain health care costs. In this post, we suggest that combining the principles of HDHPs and value-based insurance design (VBID), by offering deductible exemptions for high-value services, could provide nuanced incentives with potential to preserve access to the most important services while reducing use of only more wasteful care.

Why Did HDHPs Fail To Deliver Their Intended Consequences?

The intended premise of HDHPs is that beneficiaries facing the full costs of health care services during the deductible phase will engage in price shopping and subsequently choose care commensurate with expected benefits of that care. The hope is that the combination of lower prices and a different mix of services could increase the value of health care used while also reducing costs. Unfortunately, evaluations of HDHPs suggest that consumers neither price shop nor can they discriminate between high- and low-value care when facing high deductibles; accordingly, they reduce use of both essential and inessential services. Not only is this behavior likely to lead to worse health for beneficiaries, but short-term savings for both the beneficiary and the insurer may be offset by increased long-term spending associated with preventable adverse health events. The lack of the hoped-for response to HDHPs (price shopping and reduction in unnecessary care only) may stem from a lack of price transparency, inability to pay for essential care during the deductible phase, or inadequate information about the value of alternate health care services and technologies.

The evidence on HDHPs should not be surprising. It matches older evidence from the RAND Health Insurance Experiment, where cost sharing caused people to reduce consumption of both appropriate and inappropriate care. The RAND experiment demonstrated that consumers may not have enough information available freely to them to address uncertainty and make rational choices about which services to purchase and which to forgo. For this reason, we suggest a variation on VBID, in which deductible exemptions for established high-value services would inform and incentivize beneficiaries to use the most valuable care, while disincentivizing low-value options. Such recommendations have been made in different forms in the literature but have not been widely adopted.

Tying-In Value Conversations Within HDHPs

VBIDs have developed over the past 15 years on the premise that when everyone is required to pay the same out-of-pocket amount for health care services whose benefits depend on patient characteristics, there is enormous potential for both underuse and overuse of care. It is also true that health services can be underused and overused when there are differential health-related returns across services, but patients are unaware of the differences. VBIDs have been used by insurers as a mechanism to address this information problem, by signaling the value of alternative health care technologies to consumers through variable cost sharing.

To date, most applications of VBID have focused on applying such designs to copays but not to deductibles. Moreover, most applications have applied reduced cost sharing for targeted high-value drugs, and only a few have also implemented concomitant increased cost sharing for low-value drugs. This means that the cost differences that the consumers faced between high- and low-value products continued to be small. Consequently, results of such applications show the promise of VBID, but to a limited scale, owing to the relative inelasticity of demand for care related to small copay variation. Tying value-based cost sharing within deductibles could generate a bigger “nudge” to align use with value.  

Only one study evaluated the application of VBID on cost sharing within an HDHP plan. This research analyzed Kaiser Permanente of Northern California, where patients were switched to HDHPs, but some of them were offered free chronic disease medications. Resulting improvements in adherence due to zero cost sharing for chronic disease medications were shown to offset the HDHP-associated adherence reduction, especially for patients with poor adherence at the start. Importantly, adherence improvements did not occur for more clinically complex patients, or patients living in poorer neighborhoods. The inclusion of active counseling in VBID plans has potential to address these limitations.

In another example of VBID, a not-for-profit health plan in the Pacific Northwest implemented a formulary that tied drug copays to cost-effectiveness. Researchers found larger shifts in demand within drug classes in which copays were simultaneously reduced for high-value treatments and increased for low-value treatments, compared to drug classes in which the copays only moved in one direction. The overall effect of the VBID implementation was welfare-increasing but small, perhaps because the price dispersion faced by the patient between high-value and low-value alternatives was still too low to alter demand.

Other applications of VBID, where cost sharing was removed for primary care visits, were found to reduce total spending, mainly due to reductions in use of emergency department (ED) and other outpatient services. A plan that bundled copays for back pain physical therapy found reductions in ED use, in addition to eventual reductions in primary care use, and better adherence to care guidelines.

Value-Based High-Deductible Plans

We suggest that value-based high-deductible plans (VHDP), which combine the principles of HDHPs and VBID, and have been suggested as “a natural evolution of health plans,” could provide a robust alternative in insurance markets and achieve the goals of both low costs and high value of health care delivery. Our enthusiasm for such designs stems from the dispersion of price-elasticities observed when a value-based system was implemented on copayments. We expect such dispersion can be expanded substantially when VBID is applied to develop VHDPs. Specifically, VHDPs would nudge consumers toward high-value technologies (for example, preventive medications) by exempting their costs from the deductibles, while also providing consumers with transparency on the full costs of low-value services (for example, MRI for back pain or headache), and disincentivizing their use. This would generate a more elastic demand for low-value services, which in turn could move the markets for insured health care services toward more efficient outcomes.

In health care, where we know that both quality and value are at least partially unobservable to the patient, efficient outcomes are typically not attainable, especially when cost sharing indiscriminately alters prices. A VHDP would provide nuanced cost sharing to influence behavior in a manner similar to prices in traditional markets, therefore resolving information asymmetries for low-value services, reducing distortions, and increasing social welfare. In addition, such a policy could improve equity by ensuring that all beneficiaries have access to the highest-value services, even in the deductible phase of a benefit package. Such plans are certainly in line with the spirit of the recent bipartisan legislation (signed by President Donald Trump under executive order 13877) that allows health savings account eligible high-deductible health plans the flexibility to cover essential medications and services used to treat chronic diseases prior to meeting the plan deductible.

Challenges To Adoption Of Value-Based HDHPs

While value-based pricing improves beneficiaries’ ability to observe value, and therefore reduces the information asymmetries inherent in health care markets, the definition of “value” is an open question. Current legislative options being considered by both political parties in Congress aim to regulate and reduce drug pricing. While these efforts are important, and reduced prices would likely factor into premiums and out-of-pocket costs for consumers, these policy proposals do not necessarily tie price reductions to the value of drugs. That is, they are not tied to any specifically desired outcome of care. As mentioned, earlier VBID applications have been designed to impact health outcomes by using cost-effectiveness in formulary design to signal value. However, many other attributes of care, in addition to cost-effectiveness, should be considered by payers (both public and private) in determination of deductible-exemption status in a VHDP. These attributes include if a service has positive externalities (such as vaccinations) and if a service is unlikely to have moral hazard consumption (such as trauma care or chemotherapy). These, and other elements of value, could be included in decisions about which services should be exempt from the deductible. The decision of which elements to consider in this decision will depend on the stakeholders and perspectives (for example, payer, health system, employer, societal).

A potential downside of VHDPs is plan complexity, but improved communication (perhaps through health plan stewards) could address this limitation; active counseling has already been effective for this purpose in VBID. It would be relatively straightforward to incorporate the cost-sharing design of VHDPs to a value-based tiering system, now widely used in cost sharing.

Qualitative studies of VBID have identified additional barriers to VBID implementation. For example, patients are skeptical of value-based tradeoffs, do not necessarily trust the information provided by their plan, and may resist changes in care delivery. Payers tend to be skeptical of the clinical significance of adherence improvements from VBID and have expressed concern over low return on investment and administrative and information technology hurdles. Finally, providers are concerned about changes to patient behavior that puts their practice at financial risk.

These concerns are important, but potentially addressable with education and carefully planned implementation, to allow VHDPs to strike a nuanced balance between reducing moral hazard consumption of care and adequate risk protection. Such a balance is critical to controlling health spending while maintaining access to the highest-value services and reducing financial uncertainty.

 

 

 

 

New IRS rules target nonprofit hospital exec pay

https://www.beckershospitalreview.com/compensation-issues/new-irs-rules-target-nonprofit-hospital-exec-pay.html?utm_medium=email

Those distinctive brown signs outside federal buildings in D.C. ...

The Internal Revenue Service has issued guidance that implements a change in the 2017 tax overhaul that imposed a 21 percent excise tax on compensation paid to executives at some nonprofit organizations, according to Bloomberg Tax.

Under the 2017 law, there’s a tax on a nonprofit organization’s five highest-paid employees earning at least $1 million. The tax, paid by the organization, has been in effect since 2018, but the new guidance provides details on how to calculate employee wages and other compensation to determine if the tax applies, according to the report.

Under the proposed rule, any deferred compensation or retirement bonus not vested before the first taxable year beginning after Dec. 31, 2017, is subject to the tax, according to the American Hospital Association

The AHA urged Congress to provide an exception for existing contracts or nonqualified deferred compensation plans for tax-exempt healthcare organizations. 

Access the full Bloomberg Tax article here.

 

 

 

 

California accuses healthcare sharing ministry of misleading consumers

https://www.healthcaredive.com/news/california-accuses-healthcare-sharing-ministry-of-misleading-consumers/573900/

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Dive Brief:

  • The California Department of Insurance issued a cease and desist order to a major Christian group Wednesday for misleading consumers about their health insurance plans and acting as a payer without proper certification, joining a handful of other states scrutinizing the limited coverage.
  • Deceptive marketing by Aliera Healthcare, which sells health ministry plans, and Trinity, which runs them, led to roughly 11,000 Californians belonging to the unapproved “lookalike” plans that don’t cover pre-existing conditions and other required benefits, with no guarantees their claims will be paid, the state’s insurance regulator said.
  • Healthcare sharing ministries (HCSMs) are organizations where members share a common set of religious or ethical beliefs and agree to share the medical expenses of other members. They’re increasingly controversial, as policy experts worry the low-cost insurance attracts healthier individuals from the broader insurance market, creating smaller and sicker risk pools in plans compliant with the Affordable Care Act.

Dive Insight:

Aliera, founded in 2011 and based in Georgia, and Trinity allegedly trained sales agents to promote misleading advertisements to consumers, peddling products that don’t cover pre-existing conditions, abortion, or contraception. The shoddy coverage also doesn’t comply with the federal Mental Health Parity and Addiction Equity Act and the ACA.

The deceptive advertising could have pressured some Californians to buy a health sharing ministry plan because they believed they missed the deadline for buying coverage through Covered California, the state’s official insurance marketplace.

“Consumers should know they may be able to get comprehensive coverage through Covered California that will protect their health care rights,” California Insurance Commissioner Ricardo Lara said in a statement.

HCSMs, which began cropping up more than two decades ago as a low-cost alternative approach to managing growing medical costs, operate either by matching members with those who need help paying medical bills or sharing costs on a voluntary basis. They’re often cheaper than traditional insurance, but they don’t guarantee payment of claims, rarely have provider networks, provide limited benefits and usually cap payments, which can saddle beneficiaries with unexpected bills.

About 1 million Americans have joined the groups, according to the Alliance of Health Care Sharing Ministries.

At least 30 states have exempted HCSMs from state regulation, according to the Commonwealth Fund, meaning the ministries don’t have to comply with health insurance requirements. California does not exempt the religious-based groups from the state insurance code.

In January, Aliera and its subsidiaries, which includes Trinity, were banned from marketing HCSMs in Colorado after being accused of acting as an unlicensed insurer. One month later, Maryland issued a revocation order against Aliera for trying to sell an unauthorized plan in the state. Earlier this month, Connecticut issued a cease and desist order for conducting an insurance business illegally.

Aliera argues states are limiting the choices available to consumers, telling Healthcare Dive it was “deeply disappointing to see state regulators working to deny residents access to more affordable programs.”

“We will utilize all available opportunities to address the false claims being made about the support and management services we provide to Trinity HealthShare and other health care ministries we represent,” Aliera said.

However, Aliera and Trinity don’t meet the Internal Revenue Code’s definition of a health sharing ministry, according to California’s cease and desist, meaning their beneficiaries don’t meet California’s state individual insurance mandate.

The state can impose a fine of up to $5,000 a day for each day the two continue to do business, along with other financial penalties.

 

 

 

 

Why Are Nonprofit Hospitals So Highly Profitable?

Image result for WHY ARE NONPROFIT HOSPITALS SO HIGHLY PROFITABLE?

These institutions receive tax exemptions for community benefits that often don’t really exist.

“So, how much money do you guys make if I do that test you’re ordering for me?” This is a question I hear frequently from my patients, and it’s often followed by some variant of, “I thought hospitals were supposed to be nonprofit.”

Patients are understandably confused. They see hospitals consolidating and creating vast medical empires with sophisticated marketing campaigns and sleek digs that resemble luxury hotels. And then there was the headline-grabbing nugget from a Health Affairs study that seven of the 10 most profitable hospitals in America are nonprofit hospitals.

Hospitals fall into three financial categories. Two are easy to understand: There are fully private hospitals that mostly function like any other business, responsible to shareholders and investors. And there are public hospitals, which are owned by state or local governments and have obligations to care for underserved populations. And then there are “private nonprofit” hospitals, which include more than half of our hospitals.

Nearly all of the nation’s most prestigious hospitals are nonprofits. These are the medical meccas that come to mind when we think of the best of American medicine — Mayo Clinic, Cleveland Clinic, Johns Hopkins, Mass General.

The nonprofit label comes from the fact that they are exempt from federal and local taxes in exchange for providing a certain amount of “community benefit.”

Nonprofit hospitals have their origins in the charity hospitals of the early 1900s, but over the last century they’ve gradually shifted from that model. Now their explosive growth has many questioning how we define “nonprofit” and what sort of responsibility these hospitals have to the communities that provide this financial dispensation.

It’s time to rethink the concept of nonprofit hospitals. Tax exemption is a gift provided by the community and should be treated as such. Hospitals’ community benefit should be defined more explicitly in terms of tangible medical benefits for local residents.

It actually isn’t much of a surprise that nonprofit hospitals are often more profitable than for-profit hospitals. If a private business doesn’t have to pay taxes, its expenses will be lower. Additionally, because nonprofit hospitals are defined as charitable institutions, they can benefit from tax-free contributions from donors and tax-free bonds for capital projects, things that for-profit hospitals cannot take advantage of.

The real question surrounding nonprofit hospitals is whether the benefits to the community equal what taxpayers donate to these hospitals in the form of tax-exempt status.

On paper, the average value of community benefits for all nonprofits about equals the value of the tax exemption, but there is tremendous variation among individual hospitals, with many falling short. There is also intense disagreement about how those community benefits are calculated and whether they actually serve the community in question.

Charity medical care is what most people think of when it comes to a community benefit, and before 1969 that was the legal requirement for hospitals to qualify for tax-exempt status. In that year, the tax code was changed to allow for a wide range of expenses to qualify as community benefits. Charitable care became optional and it was left up to the hospitals to decide how to pay back that debt. Hospitals could even declare that accepting Medicaid insurance was a community benefit and write off the difference between the Medicaid payment and their own calculations of cost.

An analysis by Politico found that since the full Affordable Care Act coverage expansion, which brought millions more paying customers into the field, revenue in the top seven nonprofit hospitals (as ranked by U.S. News & World Report) increased by 15 percent, while charity care — the most tangible aspect of community benefit — decreased by 35 percent.

Communities are often conflicted about the nonprofit hospitals in their midst. Many of these institutions are enormous employers — sometimes the largest employer in town — but the economic benefits do not always trickle down to the immediate neighborhoods. It is not unusual to see a stark contrast between these gleaming campuses and the disadvantaged neighborhoods that surround them.

In some communities, nonprofit hospitals are beloved institutions with a history of caring for generations of families. In other communities, the sums of money devoted to lavish expansions, aggressive advertising and eye-popping executive compensation are a source of irritation.

The average chief executive’s package at nonprofit hospitals is worth $3.5 million annually. (According to I.R.S. regulations, “No part of their net earnings is allowed to inure to the benefit of any private shareholder or individual.”) From 2005 to 2015, average chief executive compensation in nonprofit hospitals increased by 93 percent. Over that same period, pediatricians saw a 15 percent salary increase. Nurses got 3 percent.

A number of communities that think nonprofit hospitals take more than they give back have started to sue. The University of Pittsburgh Medical Center fought off one lawsuit from the city’s mayor to revoke its tax-exempt status. Last year it faced another from the Pennsylvania attorney general, alleging that the medical center, valued at $20 billion, did not fulfill “its obligation as a public charity” (the lawsuit was dismissed).

Morristown Hospital in New Jersey lost most of its property-tax exemption because it was found to be behaving as a for-profit institution. The judge in the case wrote that if all nonprofit hospitals operated like this, then “modern nonprofit hospitals are essentially legal fictions.”

It’s important to recognize the extreme variance in hospitals’ financial status. Many nonprofit hospitals, especially in rural areas, struggle mightily; scores of rural hospitals have closed — and hundreds more are teetering — leading to spikes in local death rates. At the other end are hospitals that earn several thousand dollars in profit per patient.

The most profitable nonprofit hospitals tend to be part of huge health care systems. Consolidations are one of the driving forces behind the towering profits, because monopoly hospitals are known to charge more than nonmonopoly hospitals.

Should these highly profitable institutions be exempt from the taxes that pay for local roads, police services, fire protection and 911 services? Should local residents have to pay for the garbage collection for institutions that can afford multimillion-dollar salaries for top executives?

Tax exemption needs to be redefined. Low-impact projects such as community health fairs that function more like marketing shouldn’t be allowed as part of the calculation. Nor should things that primarily benefit the institution, like staff training.

Additionally, hospitals should not be allowed to declare Medicaid “losses” as a community benefit. While it’s true that Medicaid typically pays less than private insurance companies, Medicaid plays a crucial role for private insurance markets by acting as a high-risk pool for patients with severe illness and disability. Hospitals benefit mightily from this taxpayer-funded arrangement. These large medical centers also enthusiastically accept taxpayer money for research, something that burnishes their image and bolsters their rankings. That enthusiasm needs to be mandated to extend toward Medicaid patients and the face value of their insurance.

The I.R.S. states that charitable hospitals “must be organized and operated exclusively for specific tax-exempt purposes.” Thus charitable care should be front and center. Spending on social determinants of health can also be a legitimate community benefit, but the community that is footing the tax break needs to have a forceful say in how this money is spent, rather than leave it solely up to the hospital.

As many policy scholars have noted, tax exemption is a blunt instrument. For struggling hospitals, particularly in communities with a shortage of health care resources, tax exemption can make sense. In medically saturated areas, where profits and executive compensation approach Wall Street levels, tax exemption should raise eyebrows.

If society decides that tax exemption is a worthwhile means to improve health — and it certainly can be — then our regulations need to be far stricter and more explicitly tied to community health. As the United States continues to fall behind its international peers in terms of health outcomes in local communities, there is certainly no lack of opportunity.

 

 

 

What Makes A Non-Profit Hospital?

What Makes A Non-Profit Hospital?

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What are non-profit hospitals and what is the community benefit standard?

Recently, several news outlets including ProPublicaKaiser Health News, and Wall Street Journal have published stories on non-profit hospitals’ medical debt collection practices and the effects on low income patients. These news stories prompted me to take a closer look at non-profit hospitals, their tax-exempt status, the community benefits they must fulfill to qualify for it, and the impact on care.

This is the first piece of two posts that consider the requirements that non-profit hospitals need to fulfill to qualify for their tax-exempt status and the impact of these standards on non-profit hospitals and the communities they seek to serve.

Has the definition of a non-profit hospital evolved over time?

Short answer: yes.

To date, non-profit hospitals have significantly benefited from their tax-exempt status, saving $24.6 billion in taxes in 2011. Originally, hospitals were granted tax-exempt status because of affiliations with religious institutions and for serving a charitable purpose. It wasn’t necessarily related to medical care. However, in 1956, the Internal Revenue Service (IRS) implemented the charity care standard requiring hospitals to offer uncompensated care to patients unable to pay in order to qualify as a charitable organization under Internal Revenue Code 501c3.

Many believed charity care would no longer be necessary after the implementation of Medicare and Medicaid in 1965. Policymakers assumed the two programs would ensure insurance coverage for most people, obviating the need for a charity care standard. This wasn’t the case, and over the next decade, two events led to the elimination of the charity care standard and the introduction of its successor, the community benefit standard, in 1969.

First, the House of Representatives released a report citing concerns about the execution of the charity care standard and its effectiveness. Second, a hospital that did not provide free or discounted health care mounted a legal challenge. The hospital asserted that, because it had an emergency room open to all community members, it was already providing a charitable service and should qualify for non-profit, or 501c3, status. The courts agreed with the hospital, stating that the provision of an open-access emergency room promoted the health of the community. This fulfilled a charitable purpose according to its legal definition. Ultimately, the IRS agreed with the court’s decision and deemed it necessary to change the charity care standard to accommodate this decision.

Consequently, the IRS issued Ruling 69-545, introducing the community benefit standard. From its implementation and onwards instead of being judged solely on the provision of free or discounted care, a hospital’s 501c3 status would be based on whether it “promoted the health of a broad class of individuals in the community,” including but not limited to just providing free or discounted care.

In 2010, additional requirements were included in the community benefit standard. Non-profit hospitals are now required to perform a community health needs assessment every three years and have both an accessible Financial Assistance Policy and Emergency Medical Care Policy (a charge limit for people who qualify for financial assistance and a billings) and a collections system that determines if individuals are eligible for financial assistance prior to engaging in extraordinary collection actions (applies to all emergency and medically necessary care).

What does non-profit status mean for hospitals?

Short answer: tax-exempt with charity donations required.

Most hospitals in the United States are recognized as charitable organizations, with 78 percent qualifying for 501c3 status. This means they are exempt from most taxes and benefit from tax-deductible charity donations and tax-exempt bond financing but they must meet general Internal Revenue Code requirements, including the community benefit standard aimed at improving the health of the surrounding community.

A variety of activities qualify as community benefits. Some examples are charity care, unreimbursed costs through means-tested programs (Medicaid, Medicare, CHIP, etc.), unreimbursed health professions education, unfunded research, and cash and in-kind contributions for community benefits. Hospitals must submit IRS Form 990 Schedule H annually to demonstrate their community benefit expenditures and maintain their 501c3 designations.

Are non-profit hospitals behaving like their for-profit counterparts?

Short answer: often times, yes.

Seven of the ten most profitable hospitals in the country are non-profits. Many of these exhibit for-profit characteristics such as being part of a larger hospital system, being located in urban areas, and not having a teaching program.

But these aren’t the only features of non-profit hospitals that resemble for-profits.study conducted by the Kellogg School of Management found that non-profits regularly behaved like for-profits after financial shocks. In response to financial crises, non-profits cut back on unprofitable services to offset losses instead of increasing prices. This is not what we expect; the study authors argue that we should expect them to do the latter — forgoing financial gain by starting with lower prices with room to increase in times of financial stress. That they don’t suggests that non-profits are already maximizing profits, similar to for-profit hospitals.

While it is unusual for non-profit hospitals to experience large financial profits, it does happen. The question is whether these gains are then reinvested into the hospital’s charity care and community health and wellbeing initiatives.

How much of a non-profit hospital’s revenue goes back into care and its community?

Short answer: some.

Herring, et al. found that, on average, 7.6 percent of non-profit hospitals’ 2012 total expenses were community benefit expenditures, 3 percent were unreimbursed Medicaid costs, and about 2 percent were charity care. (These findings are consistent with past studies.)

In some cases, non-profit hospitals receive tax benefits that far outweigh their community benefit investments. For example, in fiscal year 2011-2012, the University of Pennsylvania Medical Center made approximately $1 billion in profits, spent less than $20 million on charity care, and received $200 million in tax benefits. Cases like these have increased public scrutiny on hospitals’ non-profit status and whether current 501c3 requirements go far enough to ensure that hospitals provide sufficient charity care and community benefits.

Non-profit hospitals maintain their tax exempt status through the fulfillment of the community benefits standard. In the next piece we will look at the impact of these standards on the hospitals and the communities they serve.

 

Grassley Renews Probe of Nonprofit Hospitals

https://www.healthleadersmedia.com/grassley-renews-probe-nonprofit-hospitals

The Iowa Republican has asked the IRS for data on how many of the nation’s approximately 3,000 tax-exempt hospitals are in compliance with charity care requirements.


KEY TAKEAWAYS

Grassley asked for information about whether tax-exempt hospitals are meeting the statutory requirements laid out in section 501 of the Internal Revenue Code.

The lawmaker is renewing his probe of tax-exempt hospitals after hearing reports that ‘at least some of these tax-exempt hospitals have cut charity care, despite increased revenue.’

Senate Finance Committee Chairman Chuck Grassley has renewed efforts to ensure that nonprofit hospitals are earning their tax-exempt status by providing enough services for low-income people.

In a letter to Internal Revenue Service Commissioner Charles Rettig, the Iowa Republican asked for data on how many hospitals are in compliance with the requirements for tax-exempt status and the status of IRS examinations of those not in compliance.

“Making sure that tax-exempt hospitals abide by their community benefit standards is a very important issue for me,” Grassley said in his letter.

“As chairman of the Senate Judiciary Committee, I oversaw an investigation into the billing practices of the Mosaic Life Care hospital. That investigation resulted in debt relief of almost $17 million for thousands of low-income patients.  This issue is still just as important to me now that I am chairman of the Senate Finance Committee,” Grassley wrote.


The Mosaic Life inquiry examined the billing and debt collection practices at the health system after news reports indicated it had sued low-income patients who should have qualified for charity care.

Grassley told Rettig that he was renewing his probe of tax-exempt hospitals after hearing “reports” that “at least some of these tax-exempt hospitals have cut charity care, despite increased revenue, calling into question their compliance with the standards set by Congress.”

He asked Rettig for information about whether tax-exempt hospitals are meeting the statutory requirements laid out in section 501 of the Internal Revenue Code, and he cited in his letter an article in Politico that suggested nonprofit hospitals were profiting from the Affordable Care Act while simultaneously cutting their charity care.

In February 2018, Grassley sent a letter to the IRS to inquire about how the agency reviews nonprofit hospital compliance.

Acting Commissioner David J. Kautter responded in April 2018 that the IRS reviews the status of about 1,000 U.S. tax-exempt hospitals each year by reviewing Forms 990, hospital websites, and other information in order to identify the hospitals with the highest likelihood of noncompliance.

Kautter said the IRS assigns either a compliance check or examination to those hospitals that appear to be most at risk of noncompliance.

Melinda Hatton, general counsel for the American Hospital Association, said her organization was confident that nonprofit hospitals are meeting their mission.

“In 2015, an AHA analysis of Schedule H filings reported that 13.3% of tax-exempt hospitals and health systems total expenses were devoted to community benefits programs, and that half of that spending was attributable to expenditures for providing financial assistance to needy patients and absorbing losses from Medicaid and other means-tested government program underpayments,” she said.

Hatton said an analysis by Ernst & Young for the AHA found that hospitals’ and health systems’ community benefit activities outweigh the value of their federal tax exemption by a factor of 11 to one. “According to the report, non-profit hospitals in 2013 were exempt from an estimated $6 billion in federal taxes and provided an estimated $67.4 billion in community benefits,” Hatton said.

“Making sure that tax-exempt hospitals abide by their community benefit standards is a very important issue for me.”