Health Care Current library
Health Care Current: October 15, 2013
Health care and the global tax landscape
This weekly series explores breaking news and developments in the U.S. health care industry, examines key issues facing life sciences and health care companies and provides updates and insights on policy, regulatory and legislative changes.
By Tom Hogan, DTTL Global Life Sciences & Health Care Tax Leader and US Tax Life Sciences & Health Care Leader, Deloitte Tax LLP
Health care and the global tax landscape: remaining flexible amid uncertainty
I have been working in the health care industry for 30 years and today’s level of uncertainty seems unprecedented to me. The industry is faced with making decisions contingent upon or influenced by the impact of health care legislation and tax reform, organizational structure optimization, globalization, expansion/contraction, patent cliffs, convergence, consolidation, a slowly rebounding economy, price controls and a host of other matters, many of which we have no control over. As these pieces fall into place in the health care industry puzzle, the global tax landscape and potential tax reform are expected to have a larger impact than before.
Any company’s bottom line and value can be significantly impacted by its global tax burden. Where a company is headquartered, operates, holds intellectual property and utilizes cash results in tax rates varying from 0 percent to almost 50 percent. Take research and development (R&D)―a life blood of the life sciences sector―as an example. A company’s decisions surrounding R&D strategy can have far-reaching implications. Companies often consider tax incentives as they determine the location for their R&D centers: during the 1980s and 1990s, while many companies kept their R&D practices in the U.S., they manufactured in low tax jurisdictions like Ireland and Puerto Rico and then distributed their products locally. This approach kept much of their cash outside the U.S and resulted in global tax burdens in the 10-20 percent range. When U.S.-based companies began to need cash in the U.S. and repatriated some of the cash to fund operations and other needs, the impact of taxes jumped to 25-30 percent and this was at a time of fairly stable tax regimes.
For the past several years, global tax legislation and proposed tax reform have begun to place greater pressure on the industry. As health care stakeholders look to contain costs, enhance supply chain and distribution models, merge and/or divest businesses, perform R&D on a global basis, outsource non-core functions and synergize global real estate holdings, companies have had to analyze the impacts of a multitude of recent and proposed tax changes. Specifically, continued focus is needed on three transforming realities:
- Recent or anticipated changes in reduced statutory tax rates, enhanced research and development incentives, patent box regimes and tax holidays.
- Increasing documentation requirements in tax examinations by governments in the U.S. and abroad.
- Enhanced sharing of information between governments calling for greater transparency and consistency in corporate tax filings at a time when there is considerable complexity and ambiguity around global tax laws.
Some of the greatest tax debates between government and businesses have been centered on tax reform platforms to make the U.S. more attractive―for foreign investments into the U.S. and for U.S.-based multinational companies, who are currently at a competitive disadvantage due to the worldwide tax regime to which they are subject. Through these discussions, the U.S. has considered a move to a territorial tax base (i.e., the government would only tax U.S. sourced income). There are many issues associated with this consideration – not only related to how to effect the transition and offset the revenue impact to the government, but also whether it gain broad corporate support. Companies whose operations are primarily in the U.S. are more focused on reducing the current 35 percent statutory tax rate rather than a move to a territorial system.
The current U.S. government shutdown, the implementation of the Affordable Care Act (ACA) and the debate surrounding the debt ceiling have likely moved U.S. tax reform to the back burner for now. Companies will continue to operate under the current tax laws and will likely need to complete short- and mid-term business planning based on laws that may change substantially. This will require continued monitoring of development, engagement in ongoing tax reform debates and flexibility to manage the impact on the business of passage of global tax reform.
As the saying goes “nothing can be certain, except death and taxes.” Stay tuned for continued uncertainty.
PS - The Health Care Industry Group, Deloitte Tax LLP, just released their latest edition of the Newsletter: Tax News & Views: Health Care Edition. This monthly bulletin highlights the latest tax developments in health care on Capitol Hill, at the White House, at the Internal Revenue Service, at the Treasury Department and in the courts. Read the October 2013 edition here.
Implementation & Adoption
Medicaid enrollment projected to grow in all states
Last Monday, a report released by the Kaiser Commission on Medicaid and the Uninsured concluded that all 50 states and the District of Columbia (D.C.) will see an increase in the number of Medicaid beneficiaries and cost of Medicaid programs regardless of participation in Medicaid eligibility expansion under the Affordable Care Act (ACA). The 24 states and D.C. participating in Medicaid expansion will see a larger increase in enrollment and growth in total program spending, but a slower growth rate in the costs the state is responsible for covering. Fiscal Year (FY) 2014 projections:
- Enrollment growth is projected to average 8.8 percent across all states, due to additional participation among those currently eligible for Medicaid.
- Medicaid expansion states will see their beneficiary population rise by 11.8 percent; while states not participating in the expansion will see their enrollee population rise by 5.3 percent.
- A total of 39 states (28 in FY2013 and 25 in FY2014) reported a policy change or initiative to expand managed care, or to improve care through a managed care focused quality initiative.
- The state share of Medicaid spending is expected to increase by 5.1 percent across all states, compared to 3.1 percent in FY2013.
- The average annual growth in total Medicaid spending for states expanding Medicaid is 13.0 percent compared to 6.8 percent in states not expanding the program; however expansion states are projected to have 4.4 percent increase in the state share of spending compared with 6.1 percent in states that are not expanding their program. States participating in Medicaid indicated that they would achieve net state savings from the expansion due to 100 percent federal funding for newly eligible beneficiaries.
(Source: Kaiser Family Foundation, “Medicaid in a Historic Time of Transformation: Results from a 50-State Medicaid Budget Survey for State Fiscal Years 2013 and 2014,” October 2013)
Health care sector added nearly 33,000 jobs in August
The health care industry added 32,700 jobs in August 2013; 10,000 more jobs than the 2-year average. The majority of job growth came from the ambulatory care sector, adding an average of 26,600 jobs. Nursing and residential care added 5,200 jobs, while hospital jobs contributed to adding 900 jobs to the economy. Over the past year, these new numbers put the total health care sector share of employment at 10.73 percent. Other health care industry updates:
- Private sector health care employment has increased by 2.0 percent, adding 287,000 jobs to the economy, while non-health employment has increased by 1.6 percent, adding 1,918,200 jobs over the same period.
- Health care prices in August 2013 were 1.0 percent higher than in August 2012.
- Year-over-year, hospital prices fell to 1.5 percent growth in August, the lowest rate since December 1998; while dental care price growth was 3.4 percent; prescription drug price growth 0.2 percent, up from -0.1 percent in July.
Medicare Part D premiums projected to increase 5 percent in 2014
According to The Kaiser Family Foundation issue brief released last Thursday, the Medicare Part D stand-alone prescription drug plans (PDPs) will provide an average of 4 more choices for stand-alone PDPs in 2014, bringing the total to 35. Overall, the average premium price will increase by 5 percent. Highlights:
- Medicare beneficiaries will see a wide variety in premium prices; the 2 most widely used PDPs will increase premiums by 50 percent, while other widely used PDPs will offer lower premiums.
- Most PDPs will not offer additional gap coverage* beyond what is required by the ACA. Brand-name prescription drugs purchased in the gap will be discounted by 50 percent, with beneficiaries responsible for 47.5 percent of the cost and the remaining 2.5 percent will be covered by drug plans. Generic drugs in the gap will cost beneficiaries 72 percent of the total cost, while drug plans will cover the remaining 28 percent.
- On average 13 percent of beneficiaries switch plans during open enrollment periods.
- Almost half or 46 percent of enrollees who switched plans saw at least a 5 percent decrease in premiums compared to 8 percent of those who did not switch plans.
*Gap coverage is the prescription drug coverage that is implemented once a Medicare beneficiary reaches a certain cap in prescription drug spending. Gap coverage reduces the amount of coverage for prescription drugs for beneficiaries up to a certain limit.
(Source: Kaiser Family Foundation, “To Switch or Not to Switch: Are Medicare Beneficiaries Switching Drug Plans To Save Money?” October 2013; Kaiser Family Foundation, “Medicare Part D: A First Look at Plan Offerings in 2014,” October 2013)
ACOs found more in areas of increased provider integration
Accountable care organizations (ACOs) are more likely to operate in health care systems where 1) hospitals were affiliated with hospital systems, 2) physicians worked in high numbers with other physicians and 3) hospitals used capitation more often as their payment method, according to a study conducted by researchers at Harvard University and the Rand Corporation. Researchers analyzed data from 116 Medicare Shared Savings Program ACOs, 32 Medicare Pioneer ACOs and 77 private sector ACOs in 2012. The study did not find that Medicare spending or spending growth was curbed with the use of ACOs.
On the Hill & In the Courts
House passes stop-gap spending measure for FDA
Last Monday, the House of Representatives passed a short-term spending bill proposed by Representative Robert Aderholt (R-AL) that would fund the Food and Drug Administration (FDA) through December 15, or until the federal government shutdown ends. The Department of Health and Human Services is currently using a contingency plan to partially fund the FDA and continue with reviews of generic drug applications, consumer protection and high-risk recalls. The bill is not likely to pass in the Senate and the White House announced they would veto the bill in its current form.
Federal government shutdown uniquely affects DC’s Medicaid payments
Medicaid managed care providers and Medicaid fee-for-service providers in the Washington D.C. area may not get paid for providing health care services to the roughly 220,000 beneficiaries until the government shutdown ends. Since it is a District and not a state, Washington D.C. is the only city in the nation that must obtain Congressional approval to pass its annual budget, granting access to necessary funding to continue city services. D.C. has a contingency fund it could use to pay for vital city services, but city officials voted against using those funds to pay Medicaid providers on October 2. The Medicaid program has advised providers to submit payment claims per usual and expect payments as soon as the FY2014 budget is approved by Congress. Prior to the government shutdown, D.C. paid $23 million per week to various doctors and providers who care for Medicaid beneficiaries and $89.2 million per month to the four insurers who are part of managed-care plans.
Around the Country
Maine residents gain legal access to mail-order drugs
Maine residents will be able to legally purchase prescription medication online from international pharmacies. New legislation, Legislative Document 171, went into effect last Wednesday, lifting a previous ban imposed in August 2012. The bill:
- Expands the definition of “mail order prescription pharmacies” to include those located outside of the U.S. that dispense prescription medication via mail or carrier to residents of Maine.
- Gives the Maine Board of Pharmacy the authority to enter into reciprocal inspection agreements with any international pharmacy that sells prescription drugs to Maine residents.
Background: Prior to the bill, the city of Portland already obtained prescription medication for employees through international pharmaceutical companies, which according to state budgets produced $3.2 million in savings between 2004 and 2012. The legislation was developed in response to the budget deficit created after the former state attorney prohibited the use of international mail order pharmacies. Opponents of the bill argue that the bill threatens the safe and secure prescription drug distribution system of the U.S. Several Maine pharmaceutical organizations, including the Maine Pharmacy Association, the Maine Society of Healthy System Pharmacists and the Retail Association of Maine, filed a lawsuit against the State of Maine on September 10 challenging the legality of the law.
New Hampshire Commission votes to expand Medicaid
New Hampshire’s Commission to Study the Expansion of Medicaid Eligibility voted last Tuesday to expand the eligibility of its Medicaid program to individuals between 19-65 years of age earning up to 138 percent of the federal poverty level (FPL), starting January 1, 2014. The proposed plan would require newly eligible working adults who have access to employer-sponsored health insurance to keep their benefits if it is more cost-effective than Medicaid benefits; the state would cover the employee’s portion of the premium costs under the existing Health Insurance Premium Payment program. In addition, the Commission agreed to subsidize the cost of insurance for low-income adults earning between 100 – 138 percent of FPL that do not qualify for Medicaid to purchase insurance on the HIX. The Commission must propose their final recommendations to the Legislature on October 15.
Radio frequency identification may improve hospital supply chain, despite costs
According to a recent article in Perspectives in Health Information Management, using radio-frequency identification (RFID) technology (i.e. a wireless system utilizing radio-frequency electromagnetic fields to obtain data for tracking and identifying items) to track medical equipment, blood, supplies and patients has resulted in increased efficiency for hospitals; lowering costs and increased service quality. With supply costs being the second largest expenditure for hospital systems, accounting for 30 to 40 percent of a hospital’s operating budget on average, retaining costly medical equipment and supplies can create cost saving. A survey of 1,381 healthcare supply chain professionals found that the average provider organization participating in the study spent over $100 million each year on supply chain functions, equaling about one-third of their annual operating budget.
Researchers found that RFID technology can reduce costs, improve patient safety and improve supply chain management effectiveness by increasing the ability to track and locate equipment. RFID can also be used to monitor theft prevention, manage distribution, improve patient safety and even facilitate patient billing. Recent data has shown that hospital personnel fail to locate mobile assets such as wheelchairs, infusion pumps and blood supplies anywhere from 15 to 20 percent of the time because of misplacement. With an increased emphasis on efficiency and widespread adoption of mobile health technology, sales of RFID technologies for supply chain applications are expected to grow from $94.6 million to about $1.43 billion by 2019, with more than half of the sales coming mostly from hardware such as tags, readers and antennas and the rest from software and services.
(Source: Coustasse, A.; Tomblin, S.; Slack, C.; Impact of Radio-Frequency Identification (RFID) Technologies on the Hospital Supply Chain: A Literature Review; Perspectives in Health Information Management, October 2013)
Study projects health and economic returns from delaying aging
Using a microsimulation model of the future health and spending of older individuals, a study published last week in Health Affairs suggests that emphasized focus on slowing the aging process as a whole (senescence) could create better outcomes than individually addressing disease specific targets. Researchers projected that slowing the aging process could increase life expectancy by an additional 2.2 years. The economic value of delayed aging is estimated to be $7.1 trillion over fifty years; in contrast, delaying heart disease and cancer separately would yield diminishing improvements in health and longevity by 2060 due to complicated risk factors. The delayed aging scenario would, however, significantly impact the nation’s economy, adding 6.9 percent more older adults to the U.S. population and increasing spending by $295 billion more than in the status quo scenario by 2060.
(Source: Goldman, D. et al.; “Substantial Health And Economic Returns From Delayed Aging May Warrant A New Focus For Medical Research”, Health Affairs, October 2013)