PPACA your bags, we're headed to Taxes

Now that the Patient Protection and Affordable Care Act (PPACA) has been signed into law, what, specifically, does PPACA do, tax-wise? Let's take a look at the so-called "individual mandate".

Very briefly, under PPACA, you (generally) will be subject to a financial "penalty" if you don't buy or otherwise get health insurance. Some people are not happy about this. Let's look at the law first, and then what people are saying about it.

What the law actually does

Under the current (pre-reconciliation) version of PPACA, specifically, § 1501, which will add § 5000A to the Internal Revenue Code, starting in 2014, for each month you do not have health insurance you must pay a nominal "penalty" of about $8 a month, ramping up to $62.50 per month in 2016 and thereafter. Generally insurance premiums are much higher than that, so this does not provide much incentive to purchase insurance coverage.

Fortunately, PPACA § 10106 addresses that problem: "Section 5000A(b)(1) of the Internal Revenue Code of 1986, as added by section 1501(b) of this Act, is amended to read as follows...." Pardon me? Instead of enacting what you meant to enact, you enact something else, then amend it? In the same piece of legislation? We'll get to that later.

I'll summarize to spare you the pain of reading it yourself: Under PPACA's amendment to its own new § 5000A of the Internal Revenue Code, you would pay either the average nationwide monthly premium, or the greater of a fixed dollar amount or 2% of your income (fully phased in in 2016), if that amount is less than the average nationwide monthly premium. (HR 4872 would make further adjustments to this formula). In fake algebra: penalty = lesser of (average premium or (greater of (fixed dollar amount or percentage of income))).

Alternatively, you could just buy health insurance and not worry about it; if you can't afford insurance, you're likely eligible for a subsidy.

Without ascribing any motive to Congress, there are some potentially interesting things happening here. If Congress is adding a new legal provision, why add the provision in full, then amend it in the same bill? Doesn't this approach just double or triple (or more) the work of someone trying to find out what the law is? Briefly: Yes.

At least one benefit is that this approach conveniently embeds the legislative history within the Act itself, which can aid future inquiries into congressional intent should any litigation arise. Perhaps it could also allow an offending provision to be more easily severed in case of a constitutional or other legal issue. As for other benefits, it could help prepare people for the frustration and confusion of driving in Washington, D.C., or serve as a component of cognitive stimulation therapy—I'm guessing they weren't intentionally headed in those directions, though....

Another potentially interesting issue is Congress's choice to impose a "penalty" under the tax code for failing to purchase insurance, rather than impose a tax and exempt people from that tax if they purchase insurance. Potato, potahto, you might say—it is the same result. That is, unless you are a red-State Attorney General up for reelection this year. Which brings us to....

What people claim the law does

The New York Times recently published an article describing how various State Attorneys General plan to sue to enjoin implementation of provisions of PPACA that these officials allege force people to buy insurance. (See also the Washington Post's opinion piece). The Times article indicates that various constitutional law scholars suggest that these challenges will "amount to no more than a speedbump" on the way to implementing PPACA for a variety of reasons, one of which is that the penalty payment is tied Congress' taxing power authorized by the Constitution.

For the originalists out there, the 16th Amendment to the U.S. Constitution reads:

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

The Times article describes legal scholars' views that the Supreme Court has very broadly construed Congress's "power to lay and collect taxes". Congress has been doing this for Medicare for more than 40 years: If you're employed by someone else, you currently pay a 1.45% tax on your income from that employment; if you're self-employed, it's about 2.9%. Under PPACA, if you make more than $200,000 in employment income per year (or $250,000 if you file a joint return), you will pay an extra 0.5% of your income, starting in 2013.

Clearly, that is a tax, and it funds insurance (Medicare Part A). It differs from the PPACA penalty in several respects: 1) This is a mandatory payment to the government; and 2) there's no guarantee that you'll actually become a beneficiary of the system (you and the Medicare program both need to survive until you're 65 or sufficiently disabled). Apparently, these Attorneys General have no problem with Medicare. They seem to accept that the government can make you pay taxes to support a government insurance program that you may never use, but they don't seem to accept that the government can give you a choice: pay tax penalties or purchase private insurance that you could use today.

What is the reasoned basis for this objection? I don't have an answer, but PJ O'Rourke asks a similar question, implying that if the Attorneys General (he singles one out, but I won't) wanted to be ideologically consistent, they would be pushing for a single-payer health care system, like the one we had for sailors more than 200 years ago.

I do not pretend to know enough about the intricacies of the Internal Revenue Code or income tax jurisprudence to opine on Congress's motives for implementing this provision via a "penalty" rather than a "tax", however, based on the plain text of the bill itself and the other provisions surrounding it, imposing a penalty under the tax code does not seem substantially different from directly imposing a tax. Admittedly, neither "tax" nor "penalty" appear to be explicitly defined within the Internal Revenue Code or the Constitution—although we can all agree that both are money that must be paid to the government and are not attached to a criminal offense (i.e., they are not fines).

In case of any doubt about the penalty's status as a "tax", enter the Commerce Clause (U.S. Const. Art. 1 § 8 cl. 3): Congress explicitly incorporated "findings" (see PPACA § 1501) indicating that health insurance and health care services constitute "interstate commerce", and that the penalty is a way to regulate that commerce. So, not only is it a "tax", but it also regulates interstate commerce (at least, Congress intends for it to do so). Belt with suspenders, anyone? If you're curious, U.S. v. Morrison, 529 U.S. 598, 608-09 (2000), presents a good overview of Congress's (very) broad power to regulate interstate commerce; I am no Constitutional scholar, but the penalty provision seems to be well within that power.

The Post's opinion piece (see above) does raise an interesting point, however: "the individual mandate extends the commerce clause's power beyond economic activity, to economic inactivity".

It would be a more interesting point if it did not rest on such shaky ground: 1) The penalty is functionally indistinguishable from a "tax" (see above), and thus, does not necessarily emanate from the Commerce Clause; and 2) the statement incorrectly assumes that people who don't buy insurance don't have an economic effect on health care. For example, if an uninsured person goes to an emergency room to get primary care treatment, and doesn't pay the bill (PDF), that person is engaging in economic activity by causing the emergency room to incur expenses, which then get passed on to paying customers (patients, rather). Sounds like commerce to me. The "penalty" imposed by PPACA is designed to discourage or offset that negative economic activity. Similarly, if the uninsured person does pay, clearly, that is economic activity. Perhaps I'm missing something, but does anyone see a legitimate Constitutional issue here?

Thoughts, comments?

© 2010 Alex M. Hendler. All Rights Reserved.

Health care reform: Cost savings, but at what cost?

On March 11, 2010 the Congressional Budget Office released an “Updated Estimate of Budgetary Impact” for the Senate-passed version of H.R. 3590. Some highlights and analysis follow.

“CBO and JCT [the Joint Committee on Taxation] now estimate that, on balance, the direct spending and revenue effects of enacting H.R. 3590 as passed by the Senate would yield a net reduction in federal deficits of $118 billion over the 2010–2019 period.”

How does it do that? According to the CBO’s analysis, the bill would cut Medicare Fee-for-Service payments by about $186 billion over the next 9 years, reduce Medicare Advantage payments by about $118 billion, and reduce Medicare and Medicaid DSH payments by about $43 billion over the same period, plus about $82 billion in other savings.

OK, so the government is going to spend less money, but that won't cover all the costs. According to the CBO's analysis, the bill would also substantially increase government revenue through a set of taxes and fees, including an excise tax on certain high-cost health insurance plans (good for about $149 billion through 2019), federally-based reinsurance and risk-adjustment "collections" ($106 billion), "fees" from "certain manufacturers and insurers" ($101 billion), "additional hospital insurance tax" ($87 billion), "other" revenue provisions ($77 billion), penalty payments ($39 billion), and what appears to be a halo of "associated effects of coverage provisions on revenues" ($57 billion).

This is an incomplete list of all the budgetary impacts, but there are other non-government costs that could be significant.

The CBO has provided a very handy itemized section-by-section list of projected budgetary impact, and has projected very little (if any) budgetary impact for the "quality improvement" (i.e., the goal of spending less money for better care) and "program integrity" (i.e., reductions in fraudulent or "abusive" payments under Medicare and Medicaid) provisions of the bill.

Of particular interest to some entities may be new administrative reporting requirements. The CBO is projecting that Title VI, Subtitle A of the bill (§§ 6001–6005) would have little (if any) impact on government revenues. What the CBO has not—and indeed, cannot have—accounted for is the likely burden that these requirements may place on health care providers. Section 6001 would introduce rather complex conditions that must be met to ensure a physician's compliance with the "Stark Law" (Social Security Act § 1877/42 U.S.C. § 1395nn) if the physician has had (as of February 1, 2010) an ownership or investment interest in a hospital. This provision is applicable to physicians who treat Medicare patients.

Section 6002 would require drug, device, biological, or medical supply manufacturers to publicly disclose on a government-run website any "payment or other transfer of value" to physicians by the manufacturers. Manufacturers and "group purchasing organizations" would also need to report any physician "ownership or investment interest" in such entities. With penalties of between $1,000 and $10,000 for each untimely unreported "ownership or investment interest" or "payment or transfer of value" (capped at $150,000 "with respect to each annual submission of information"), and between $10,000 and $100,000 for a "knowing" failure to submit the information (capped at $1,000,000 "with respect to each annual submission of information"), manufacturers and group purchasing organizations should take notice. Furthermore, it appears that the annual caps are applicable only to each physician or covered individual or entity whose interest must be reported, rather than the total of all reportable interests or payments. So if an entity has many physician investors, the penalties could multiply rather quickly: all the more reason to scrupulously report the information. Again, this provision is applicable to entities that sell product/services to Medicare patients.

Section 6003 would require a physician subject to the Stark Law, when making certain referrals for radiology services, to "inform the individual in writing at the time of the referral that the individual may obtain the services for which the individual is being referred from [someone other than the prescribing doctor or group practice] ... and provide such individual with a written list of suppliers ... who furnish such services in the area in which such individual resides". If this provision goes into effect, physicians with in-house radiology capabilities should very carefully review their radiology referral/prescription forms and procedures. They would likely also need to build (or access) a geographical database of radiology providers, likely by zip code, to facilitate the "written list" component of the provision. Free? Not for the physician. Applicable to Medicare patients? Of course.

These are just a few examples. The bill would also introduce other significant administrative reporting requirements for distributors of drug samples, pharmacy benefit managers, and nursing homes, all of whom provide services to (are you seeing a pattern here?): Medicare patients.

Although all this reporting will likely increase the transparency of some of the more opaque institutions in the health care world, there can be no doubt that these new provisions would increase administrative costs. No one in the history of health care has responded to increased administrative costs by voluntarily lowering fees charged to patients.

However, because the health care providers subject to these reporting provisions are by definition providing Medicare services, and Medicare services are the biggest item on the chopping block, these providers would by law almost certainly receive less for each unit of care provided to their patients. It is a rare person who happily does more of the same work for less money, so how much would this really cost? In other words, would there be fewer doctors or nursing homes willing to take on Medicare patients? Probably. How many fewer? How would this affect the quality of care? That depends on the quality and efficiency of the systems available to help Medicare providers comply with these requirements. What would this do to the cost of care provided to other patients? The money to pay for this has to come from somewhere.

Comments? Questions?

© 2010 Alex M. Hendler. All Rights Reserved.

Brace yourself for "dense reading of the most tortuous kind"

Well, not here, I hope, but I thought I should warn you about it. With reports coming in that the House may pass the Senate health care bill with a simple majority and move it to reconciliation in the Senate for a simple majority vote, it seems that meaningful debate on the big issues is essentially over (though the partisan sniping shows no signs of letting up); there may be a few minor tweaks here and there, and some issues may be carved out and addressed separately.

If the bill is going to survive in roughly the same form in which the Senate passed it (i.e., likely its best hope for survival), then it is going to present a number of challenges to those who want to understand and implement it, as suggested in a previous post.

The first step in analyzing it is looking at the current laws that it would amend. Among the laws the bill would amend is the Social Security Act, which, among other things, governs Medicare and Medicaid. The bill would make significant changes to how Medicare and Medicaid are funded and reimburse for services. The U.S. Court of Appeals for 4th Circuit has characterized this body of law rather colorfully:

There can be no doubt but that the statutes and provisions in question, involving the financing of Medicare and Medicaid, are among the most completely impenetrable texts within human experience. Indeed, one approaches them at the level of specificity herein demanded with dread, for not only are they dense reading of the most tortuous kind, but Congress also revisits the area frequently, generously cutting and pruning in the process and making any solid grasp of the matters addressed merely a passing phase.

Rehabilitation Ass'n of Va. v. Kozlowski, 42 F. 3d 1444, 1450 (4th Cir., 1994)

"Surely," you might think, "this must be judicial hyperbole." I can assure with great confidence that it is not.

For example, below is a simplified (and rather incomplete) 1-degree semantic map of the term "physician" as it appears in Section 1861 of the Social Security Act, based upon analytical information available on the ontolawgy™ platform. By "1-degree", I mean that the map tracks only direct relationships among element within a system, i.e., A -> B and relationships that A and B share with other elements.


On the right are the terms that require understanding of the term "physician" or that one must understand to understand the term "physician". On the left are the legal provisions—only within Section 1861—that are in some way related to the term "physician". Each of the lines in this diagram represents not only that a relationship exists between elements in the system, but also actually describes what the relationship is. Think of each line as a thought that a lawyer would need to have—consciously or not—in order to actually understand what a term or statutory provision means.

In some instances, it may require 4 or 5 "thoughts" to fully understand the relationship among the elements. The ontolawgy™ platform tracks those thoughts and places them into a searchable database.

If that's a "simplified" map, what does an unsimplified map look like? Well, because you asked so nicely, here's a 2-degree map; it tracks relationships beyond the first degree. For example, A -> B is a 1-degree relationship. A -> B -> C is a 2-degree relationship; the map also tracks common relationships among A, B, or C:


If these diagrams don't look particularly helpful to navigate or understand the law, don't worry: They're not supposed to be (at least not when presented as static images). They are supposed to represent the complexity and interconnectedness of elements of the law and to demonstrate the difficulty that a mere mortal lawyer might encounter when researching Medicare and Medicaid issues.

Now before you jump to any conclusions about the intellectual prowess of lawyers, remember that this diagram just relates to the term "physician" as used in Section 1861 of the Social Security Act. It does not address the term as it may appear in the other 108 sections of Title XVIII of the Social Security Act, nor does it address the term as it might be used in the context of Medicaid, nor in any of the millions of words (no exaggeration) of regulations, rules, Medicare and Medicaid manuals, and other statements of official policy. It may also help to bear in mind that Medicare and Medicaid regulate considerably more than just physicians.

I submit that anyone who can keep track of all of this in his or her head either has a beautiful mind or an unusual affinity for toothpicks. Let's just say that I don't have a little shed out back and I eat with a knife and fork....

© 2010 Alex M. Hendler. All Rights Reserved. No claim to original government works.