Earlier today, President Obama signed the Senate healthcare reform bill, the Patient Protection and Affordable Care Act, into law.  The Senate bill and the Reconciliation Act of 2010 (together referred to here as the Acts) were passed by the House of Representatives on March 21, 2010.  The following overview identifies the major revenue-raising provisions of the Acts as identified as such by the Joint Committee on Taxation and assumes that the Senate will pass the Reconciliation Act of 2010 and that President Obama will sign it into law.  It should be noted that the Acts contain numerous tax credits and subsidies that “expend” revenues through the Internal Revenue Code and otherwise involve the Internal Revenue Service.  Those aspects are not discussed in this overview.  The revenue provisions covered here are estimated to increase taxes or impose new fees of $437.8 billion for the period 2010 through 2019. [All fiscal notes are from the Joint Committee on Taxation’s JCX-17-10 dated March 22, 2010.]

In the effort to gain popular support for the Acts, the health insurance industry was demonized. Through these Acts, the health insurance industry and its policies are assessed taxes and fees of  $94.6 billion.  [Taxes and fees described in  paragraphs 3, 5 and 10 total  $94.6 billion.]  Some other segments of the healthcare industry believed to benefit from the Acts were also “charged.”  Prescription drugs and medical devices will have a new taxes and fees of $47 billion. [Taxes and fees described in paragraphs 8 and 9 total $47 billion.]  These taxes and fees aggregating $141.6 billion will increase health insurance costs as they will be paid for by health insurance benefits or charged to the insurance companies and passed on to the policyholders.   The tax costs to individuals for out-of-pocket healthcare expenses are increased $29.6 billion. [The limit on the use of certain plans to only pay for prescription drugs as described in paragraph 4, the flexible plan benefit limit described in paragraph 6,  and the increase in the threshold for itemized deductions for medical expenses described in paragraph 12 total $29.6 billion]  Sponsors of retiree prescription drug benefits will have an additional tax cost of $4.5 billion. [Loss of tax deduction to certain plan sponsors is described in paragraph 11.]  Those defined as “high income earners” (individuals with high compensation and those with high modified adjusted gross income, but including trusts and estates with income above $11,150) are also required to pay $210 billion in higher taxes.  Most of the remainder of the taxes involve the paper industry’s loss of the biofuel credit, economic substance tax requirements, and tanning beds for another $30.8 billion. [See paragraphs 16, 17 and 15 respectively for description of the taxes.]      


1.  Broadened Medicare Hospital Insurance Tax Base of “High-Income Taxpayers.”  Currently, taxpayers are subject to a 1.45% hospital insurance (HI) tax on all remuneration for employment (including benefits, cash and non-cash items) and the employer is subject to the same tax – the self-employed are subject to both taxes.  The HI tax totals 2.9%. The Act increases the employee portion of the HI tax by 0.9% of covered compensation (which may be greater than taxable income) in excess of $250,000 for married filing jointly ($125,000 for married filing separately) and $200,000 for all others. The total HI tax rate will be 3.8% on this income with the employee’s portion increased from 1.45 to 2.35% or a 62% increase in the employee’s HI tax on the “excess income.”   The employer is only required to withhold from remuneration it pays in excess of $200,000.  The taxpayer is liable for the tax on all covered remuneration from all employers and in the case of a joint return, each of the spouse’s incomes.  Therefore, there will be many cases in which the withholdings will not cover the tax (for example both spouses make less than $200,000 but combined more than $250,000) and unless withholding adjustments are made, quarterly payments may be required.  The self-employed are also subject to this tax increase but no portion of the increase may be deducted by the self employed. [The self-employed are permitted to deduct one-half of the sum of the Old Age, Survivors, and Disability Insurance (12.4%) and the HI (2.9%).  This was to reflect that employers paid one-half of such tax and the employee was not taxed.  The self-employed deduction of one-half established parity between the self-employed and the employed.  Since this 0.9% is an increase on the employee side, to maintain parity there is no deduction for the self-employed.]  This provision applies to remuneration received and taxable years beginning after Dec. 31, 2012. The estimated revenue of the combined HI tax and the tax on unearned income  (see below) is $210 billion.  

2.  Unearned/Investment  Income (Including Capital Gains) Medicare Contribution of High-Income Taxpayers.  In the case of an individual, the Acts impose a 3.8% unearned income Medicare contribution tax on the lesser of (i) net investment income or (ii) the excess of modified adjusted gross income over the threshold amount (modified adjusted gross income (not taxable income) $250,000 for joint returns, $125,000 for married separate returns and $200,000 for all others).  For estates and trusts the increased tax is 3.8% of the lesser of undistributed net investment income or the excess of adjusted gross income over $11,150. [This is the dollar amount at which the highest income tax bracket presently applicable to an estate or trust begins.]  The tax is subject to the individual estimated tax requirements.  Investment income includes net capital gains, net income from passive activities, gross income from interest, dividends, annuities, royalties and rents (other than from trade or business of the taxpayer).  This additional tax was primarily created to offset the revenue loss from the Senate bill resulting from the Reconciliation Act raising the threshold of and deferring the Cadillac tax (discussed below) for five years. The estimated revenue from the combined HI tax (see above) and tax on unearned income is $210 billion.

3.  Cadillac Health Insurance Tax.  This is a 40% non-deductible excise tax on insurance companies on so-called Cadillac healthcare coverage. The tax is likely to be reflected in the future cost of such policies.  The tax will start in 2018 and will apply to the aggregate value of self-employed and employer sponsored health insurance coverage (excluding dental and eye) above $10,200 for an individual and $27,500 for family coverage.  The 2018 threshold will increase if the Federal Employees Health Benefits Plan premiums increase more than 55% between 2010 and 2018.  In 2019 there is CPI-U plus 1% adjustment and thereafter simply the CPI-U adjustment to the threshold.  There is an adjustment by the Secretary of the Department of Labor for gender and age.  There is also a high-risk employment adjustment of $1,650 for individuals and $3,450 family coverage.  [High risk employment is law enforcement officers, those who engage in fire protection activities, those providing out-of-hospital emergency medical care, those engaged in longshore work, construction, mining, agriculture, forestry and fishing and the retirees from such industries.] From a tax structure point of view, the “Cadillac Tax” appears to be analogous to the Alternative Minimum Tax in that it supposedly starts out being imposed on the few, and over the years with inflation it will impact the many.  Even recognizing that providers will desperately try to avoid this high tax, the Joint Committee estimates this will generate $12 billion in its first year (2018) and $19 billion in 2019 for a total of $32 billion.  Although the threshold was lower, started in 2014, and was adjusted by CPI-U plus 1 each year, the Senate bill showed a projected rapid growth from $7.1 billion in 2014 to $29.9 billion in 2019 with aggregate  projected revenue of $148.9 billion.  This growth clearly demonstrates that the healthcare cost side of the equation is expected to continue to grow out of control after this legislation.  As a result, the “Cadillac Tax” would be an enormous revenue raiser in the future.

4.  Changes in eligible medical expenses and increased penalties for misuse.  Only prescribed medicines and insulin will be eligible medical expenses for employer provided health coverage (including health savings accounts, health flexible spending accounts, and Archer medical savings accounts), and there is an increase in the penalty tax for improper usage.  Over-the-counter medicines may not be reimbursed with excludible income starting Jan. 1, 2011.  The estimated revenue is $5 billion.  The penalty on distributions from an HSA or an Archer MSA that are not used for qualified medical expenses is increased from 10% to 20% for tax years starting after Dec. 31, 2010.  Estimated revenue: $1.4 billion.

5.  Fee on insured and self-insured health plans.  A fee is imposed on each accident and health insurance policy multiplied by the average number of lives covered under the policy equal to $1 in 2013, $2 in 2014 and increased by the increase in projected per capita amount of National Health Expenditures.  Government entities are not exempt from the fees (except for certain government programs including Medicare, Medicaid, SCHIP and federal programs for members of Armed Forces, veterans or members of Indian tribes).  The fee is effective for policies and plans for portions of policy or plan years beginning on or after Oct. 1, 2012 and does not apply to plan years ending after Sept. 31, 2019.  The fee is to fund patient-centered outcomes research.  Estimated revenue: $2.6 billion.

6.  Limit Health Flexible Spending Arrangements in Cafeteria Plans to $2,500. Starting in 2013, all cafeteria plans of an employer and affiliates (aggregated under certain sections of the Code) are considered as one with the maximum employee benefit for flexible spending arrangements for health of $2,500 increased by CPI-U.  Estimated revenue: $13 billion.

7.  New business reporting requirement for payments in excess of $600 in a calendar year.  Businesses are required to file an information return for all payments to corporations over $600 in a calendar year unless the recipient is tax-exempt.  This is an expansion of the present reporting requirements.  Estimated revenue: $17.1 billion.

8.  Annual non-deductible fee on branded prescription drugs.  The Acts impose a fee on companies that manufacture or import prescription drugs for sale in the United States.  The fee is divided among the manufacturers by first categorizing the manufacturers based on level of sales and then apportioning the non-deductible fee for the year among them based on their relative market share.  The fee starts at  $2.5 billion for 2011, rises to $4.1 billion for 2018, and drops to $2.8 billion for 2019 and thereafter.  Estimated revenue: $27 billion.

9.  Excise tax on Medical Device Manufacturers.  A tax of 3.2% is imposed on the sale of any taxable human medical device by the manufacturer, producer, or importer of such device.  Excluded are eyeglasses, contact lenses, hearings aids and other devices the Secretary determines to be of a type generally purchased by individuals at retail for individual use. Sales of supplies for vessels or aircraft, sales to State or local governments, nonprofit educational organizations, and qualified blood collector organizations are excluded. The excise tax applies to sales after Dec. 31, 2012.  Estimated revenue: $20 billion.

10.  Annual fee on Health Insurance Providers.  The Acts impose an annual fee on health insurance providers with respect to United States health risks.  The Secretary calculates the fee for each provider based on a ratio designed to reflect relative market share of US health insurance business based on the prior year.  The fee starts at $8 billion a year in 2014 and increases to $14.3 billion in 2018 and is thereafter indexed to the rate of premium growth. Estimated revenue: $60 billion.

11.  Eliminate the deduction for expenses allocable to Medicare Part D subsidy.  Sponsors of qualified retiree prescription drug plans are presently eligible for subsidy payments from the Secretary of HHS with respect to a portion of each qualified covered retiree’s gross covered prescription drug costs if certain requirements are met.  This subsidy is exempt income to the provider.  The Acts reduce the deduction for retiree prescription drug expenses by the amount of the excludable subsidy payments received for tax years beginning after Dec. 31, 2012.  This increases the sponsor’s cost of providing such benefit.  Estimated revenue: $4.5 billion.

12.  Raise the itemized deduction for medical expense threshold.  Effective for tax years beginning after Dec. 31, 2012, individuals may not deduct unreimbursed medical expenses for regular income tax purposes until such expenses exceed 10% of adjusted gross income (up from 7.5% of current law).  If the taxpayer or the taxpayer’s spouse turns or is 65 before the end of the taxable years 2013-2016, the increased percentage threshold does not apply.  Estimated revenue: $15.2 billion.

13.  Health insurance provider limitation of compensation deductions.  The Acts impose a limitation on the deduction of compensation for Applicable Individuals paid by a health insurance provider if at least 25% of such provider’s gross premium income from health business is derived from health insurance plans that meet the minimum creditable coverage requirements of the Acts.  Deductible compensation is limited to $500,000.  Applicable individuals include all officers, employees, directors, and other workers or service providers (such as consultants).  Unlike the TARP compensation restrictions, this limitation on the deduction of remuneration applies to all employees and service providers of the provider. There are no exceptions for performance-based remuneration, commissions, or remuneration under existing binding contracts.  This limitation applies without regard to whether such remuneration is paid during the taxable year or a subsequent taxable year.    All remuneration from a controlled group is aggregated.   This provision applies for remuneration paid in taxable years beginning after 2012 with respect to services performed after 2009.   If an individual is an “Applicable Individual” with respect to a covered health insurance provider for any taxable year, the individual will be so treated in subsequent taxable years.  The question arises, why are employees at or individual service providers to these companies being treated more harshly than the TARP recipients while they had TARP funds?  Estimated revenue: $600 million.  

14.  Special provision for Blue Cross Blue Shield organizations and certain other health insurance providers.  To obtain the Section 833 deduction for Blue Cross Blue Shield providers and certain other health businesses, such organizations will now be required to meet a medical loss ratio standard of 85% for the table year.  This is parallel to the Acts’ 85% loss ratio requirement for other health insurance providers.  The medical loss ratio is to be determined on a organization-by-organization basis, not on an affiliated or other group basis.  This provision is effective for taxable years beginning after December 31, 2009.  Estimated revenue: $400 million.

15.  Ten percent (10%) excise tax on indoor tanning services.  Under the Acts, indoor tanning services do not include phototherapy services performed by a licensed medical professional.  All other services employing any electronic product designed to induce skin tanning incorporating ultraviolent lamps are subject to the tax which is to be paid by the individual on whom the services are performed.  If the tax is not paid by the person receiving services, the tax must be paid by person performing the services.  These tax payments are to be remitted quarterly.   This provision applies to services performed on or after July 1, 2010.  Estimated revenue: $2.7 billion.

16.  Exclusion of unprocessed fuels from the cellulosic biofuel producer credit.  This provision modifies the cellulosic biofuel producer credit to exclude fuels with significant water, sediment, or ash content, such as black liquor (a bi-product of the kraft process for making paper).  This provision applies retroactively for fuels sold or used on or after Jan. 1, 2010.  Congress believes this was an unintended benefit for paper manufacturers who had been using this form of alternative energy for a long time.  Estimated revenue: $23.6 billion.

17.  Codification of Economic Substance doctrine and imposition of penalties.  The Acts toughen the application of the economic substance doctrine and provide a uniform definition of economic substance.  To have economic substance, a transaction must change in a meaningful way (apart from Federal income tax effects) the taxpayer’s economic position and the taxpayer must have a substantial non-Federal-income-tax purpose for entering into the transaction.  To determine a profit motive, the present value of the pre-tax profit must be substantial in relation to the expected net tax benefits – fees and transaction expenses are considered in the calculations as well as foreign taxes.

The Acts impose a new strict liability penalty (20% increased to 40% if inadequate disclosure) for underpayment attributable to disallowance by reason of lack of economic substance.  No exceptions, including reasonable cause, are available.  Tax opinions do not help!  A claim for refund or credit that is excessive due to lacking economic substance is also subject to this penalty.  Estimated revenue: $4.5 billion.

18.  Large Corporation Estimated Tax Payment for payments due in July, August or September of 2014 is increased by 15.75 percentage points.  In a provision that lacks economic substance, corporations with at least $1 billion of assets have their quarterly payment due in July, August or September of 2014 increased to 173.5% of the amount that is normally due with the next payment reduced accordingly.  Without increasing actual federal receipts a dime, the estimated revenue is $2.6 billion.