21st Annual Health Sciences Tax Conference : budget realities, legislative risks and a maze of new regulations 5 December 2011
Disclaimer Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Page 2
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Presenters Anne Phelps Ernst & Young LLP 1001 Pennsylvania Avenue NW Washington, DC 20004 +1 202 467 8416 anne.phelps@wc.ey.com Heather Meade Ernst & Young LLP 1001 Pennsylvania Avenue NW Washington, DC 20004 +1 202 467 8414 heather.meade@wc.ey.com Page 4
Budget Control Act in review the headlines The Deficit Deal That Wasn t: Hopes Are Dashed New York Times, November 21, 2011 The supercommittee failed because Republicans refused to compromise Rep. Chris Van Hollen, Washington Post, November 26, 2011 The supercommittee failed because Democrats insisted on $1 trillion in new taxes Sens. Jon Kyl, Rob Portman and Pat Toomey Reps. Jeb Hensarling, Fred Upton and Dave Camp Washington Post, November 26, 2011 Page 5
Budget Control Act of 2011 (BCA) The BCA created the Joint Select Committee on Deficit Reduction (Joint Select Committee), a bipartisan, bicameral panel of 12 members with a goal of developing legislation by November 23, 2011, to reduce the federal deficit by $1.5 trillion. Congress failure to act triggers an automatic process to reduce spending, including sequestration. Sequestration of funds begins on January 2, 2013. Page 6
Calculating the spending reductions Calculation of reductions required in defense, non-defense spending if automatic spending reduction process is triggered (billions of dollars) Description of calculation Joint Select Committee bill is not enacted (i.e., no deficit reduction) Budget goal $1,200 Subtract amount of deficit reduction in Joint $1,200-0 = $1,200 Committee bill, if enacted Multiply difference by 18% to determine amount $1,200 * 0.18 = $216 attributable to debt service Subtract the 18% to account for debt service $1,200-216 = $984 savings Divide by nine to determine spending cuts for $984/9 = $109.3 each year, FY 2013 2021 Divide by two to allocate between defense and $109.3/2 = $54.7 non-defense spending Source: Congressional Research Service, The Budget Control Act of 2011 (August 19, 2011). Page 7
Sequestration: impact on Medicare Spending reductions to Medicare and certain health care programs would be capped at 2% per fiscal year. The Congressional Budget Office estimates that Medicare will face $123 billion in cuts from sequestration in fiscal years 2013 2021. Sequestration will apply to: Individual payments under Medicare Parts A (hospital insurance) or B (insurance for doctors services, outpatient care, home health services and other medical services). Monthly payments under contracts under Medicare Parts C (Medicare Advantage) or D (Medicare prescription drug coverage). Social Security, Medicaid, refundable tax credits and programs of economic recovery are exempt from sequestration. Page 8
Health care spending remains a challenge Projected federal spending in 2020 Net interest 14% Defense 16% Other spending 22% Social Security 21% Federal health care spending 27% Medicare, 14% Medicaid, 10% Other health programs, 3% Source: The Budget and Economic Outlook: An Update, Congressional Budget Office, August 2011. Page 9
Moving into 2012: tax and entitlement reform Potential health care tax expenditures at risk: Individual exclusion for employer-provided coverage Changes to the charitable deduction for individuals and corporations Changes to the tax-exempt status of not-for-profit hospitals and other providers Potential entitlement changes: Raise the Medicare eligibility age Convert Medicare to a premium-support model Reform payments for physicians, hospitals and other providers Expand Medicaid managed care Extend Medicaid drug rebates to dual eligibles under Part D Page 10
Patient Protection and Affordable Care Act regulatory agenda Major pending regulations on employer requirements under the law affecting your tax liability: Definition of full-time employee Affordability and minimum value standards Reporting requirements Employer interaction with state insurance exchanges Imposition of tax penalties Form W2 reporting Other health and tax issues: Industry fees and taxes Page 11
Supreme Court The Supreme Court has agreed to take up the Florida lawsuit challenging PPACA. Twenty-six states have joined the lawsuit. The Court will address the following issues: Individual mandate Severability Anti-Injunction Act Expansion of Medicaid Arguments will likely be heard in March, and a decision is expected by June. The Court could uphold the law, strike down the individual mandate, strike down the expansion of Medicaid, strike down the entire law or punt! Page 12
2012 elections and health care Outcome of Supreme Court case will fuel election debates. Repeal of the entire law by Congress remains exceptionally difficult. Elections will have a significant impact on: Efforts to repeal specific provisions of the law or make significant changes to the law Regulatory implementation Congressional oversight Page 13