21st Annual Health Sciences Tax Conference Implementation challenges arising out of health care reform 5 December 2011

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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.

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Disclaimer

► Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client serving member of EYGM in the US. For more information about our organization, please visit www.ey.com.

► This presentation is © 2011 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party.

► Views expressed in this presentation are not necessarily those of Ernst & Young LLP.

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Presenters

► Kelvin Ault Vice President, Tax Vanguard Health Systems

► Jack Donovan Ernst & Young LLP Washington, D.C.

+1 202 327 8054 jack.donovan@ey.com

► Peter Dowd Ernst & Young LLP New York, New York +1 212 773 1667 peter.dowd@ey.com

► Michael Udell Ernst & Young LLP Washington, D.C.

+1 202 327 5752 michael.udell@ey.com

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Agenda

► Medical Device Excise Tax ► Health care reform from the employer’s

perspective ► Acute care episode demonstration ► Compensation limits ► Medical loss ratio ► 3% withholding

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Medical Device Excise Tax (MDET)

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MDET background

► The 2.3% MDET is scheduled to take effect beginning 1 January 2013 on most domestic sales of medical devices.

► The new tax is in Section 4191 of the Internal Revenue Code as a manufacturers excise tax.

► The rules and regulations of chapter 32 of the Code apply to the tax.

► Although there are bills in Congress seeking to repeal the tax, it is unlikely that the Senate or the President would pass and sign a bill to repeal the tax.

► As of 11 November 2011, IRS has not issued guidance on this manufacturers excise tax yet, but we anticipate that guidance sometime in fall of 2011.

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MDET key dates

► The new excise tax will be paid semimonthly based on sales occurring after 31 December 2012. ► The first payment will be due 28 January 2013 for sales from

1–14 January of 2013.

► Subsequent deposits are biweekly.

► As an excise tax, it will be an above-the-line expense on financial statements and deducted as part of cost-of-goods sold.

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Broad tax base

► The tax applies to all domestic sales, leases, rentals, uses, charitable contributions, samples, and demonstration units of medical devices, but not to: ► Exports

► Eyeglasses, hearing aids or contact lenses

► Devices sold to the general public generally at retail.

► Treasury is required to provide guidance on the retail exemption above; that guidance is anticipated any time.

► Tax liability is triggered by the transfer of title from the manufacturer. ► If title does not transfer from the manufacturer, the use of the device

generally constitutes a taxable event. ► Some devices are “lent,” such as tools.

► Some devices are rented and title is retained by the manufacturer.

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Tax price

► The price concept is that of a finished product ready for market at the end of manufacturing.

► The 2.3% tax applies to a manufacturer’s wholesale price.

► Price regulations under Section 4216 of the Code are complicated.

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Can the tax impact providers?

► The tax is payable by manufacturers or importers. ► If a provider is an importer of a device, the provider will

become liable for the tax. ► Manufacturers and distributors might want to pass the tax

onto consumers. ► There is nothing in the statute that prevents a

manufacturer or a distributor from increasing prices to cover some or all of the tax.

► There is nothing in the statute that requires that the price be itemized on an invoice. ► As a retail buyer, health care providers might never see the

amount of tax separately itemized on an invoice.

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Can the tax impact providers?

► More than half of the uses of medical devices will be reimbursable through Medicare, Medicaid, the Department of Defense or the Veterans Administration. ► The government should not be expected to accommodate

the excise tax in their reimbursement rates.

► Accountable care organizations can be expected to create further tension between providers and suppliers on which party eventually bears the incidence of the tax.

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Health care reform from the employer’s perspective

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US health care reform – employer perspective Political landscape’s affect on health care reform

► Health care reform is unlikely to be repealed while President Obama is in office.

► No clear GOP strategy exists on how to change the health care act.

► Some states weigh in on reform.

► Uncertainty around which reforms may be in play puts an organization at risk.

Waiting until the 2012 presidential election to begin impact assessments could put organizations at risk for implementing and complying with the 2014 reforms.

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Events to watch

► Cost changes in private plans

► November 2012 Presidential elections

► Employer design changes leading into 2014

► Constitutionality of the individual mandate

► Credibility and viability of state insurance exchanges

► Employers exiting health care sponsorship

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Health care reform timeline

2010 2011 2012 2013 2014 . . . 2018 2019

* Impacts health plan costs

► Benefits and W2 reporting

► State ins. exchanges ► Individual mandates* ► Employer mandates* ► Health insurer fees*

► Excise tax on high cost plans*

► Medicare payroll tax ► Investment income tax ► Retiree drug subsidy tax* ► FSA limits ► Medical device tax* ► Outcomes research fee* ► 162(m) limits on insurers

► Minimum benefits* ► MH parity effects* ► OTC drug exclusion ► Fees on pharma* ► Medicare adv. cuts* ► Max insurer LRs

► Medicare provider cuts* ► Part D “donut hole”* ► Retiree reinsurance*

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Potential changes in cost for employers

Area Issues Claims cost ► Minimum coverage standards

► Excise tax on medical device manufacturers ► Excise tax on pharmaceutical companies ► Medicare reimbursements ► Adverse selection ► Wellness and quality initiatives

Plan/HR administrative costs

► Tax on insurers ► Additional administrative burden on TPA/insurers ► Additional burden on employer to comply

Penalties ► If no coverage provided ► If coverage does not meet minimum standards

Additional participants ► All dependents to age 26 ► Individual mandate – opt-out “returnees”

Taxes ► Excise tax on high-cost plans ► FSA, HRA, HSA impact ► Comparative effectiveness premium taxes ► Elimination of deduction for retiree drug subsidy

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Key tax requirements

► Tax treatment of flexible spending accounts (FSA), health savings accounts (HSA) and health care reimbursement arrangements (HRA) in 2011

► Form W-2 reporting (2012) ► Individuals making over $200,000 ($250,000 for couples) will pay an

additional 0.9% payroll tax on their wages, representing an increase in the Medicare hospital insurance tax (2013)

► FSA limits decreasing (2013) ► Individuals will pay a 3.8% tax on either their net investment income

(e.g., income from interest, dividends, capital gains) or the excess of their modified adjusted gross income over $200,000 (individuals) or $250,000 (couples), whichever is less (2013)

► High-cost plan excise tax (2018)

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Key reporting requirements

► Proof of grandfather status and notices (2011)

► Summary of benefits (2012)

► Notice of exchange coverage options (2013)

► Individual coverage periods to federal government (2014)

► Employee contributions to federal government (2014)

► Notice of qualified health insurance coverage to employees (2014)

► Plan costs to administrators/insurers for excise tax (2018)

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Compliance and administration

► Certification to IRS regarding minimum essential coverage, provide to employee as well (begins 2014)

► Waiting period ► Large employers allowed up to 90 days waiting period before

enrolling new full-time employees in health plan (begins 2014)

► Automatic enrollment ► Employers with 200+ full-time employees must automatically enroll

new full-time employees in an employer-sponsored plan

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US health care reform The “play or pay” decision

“If we play …” ► Can we afford to continue

offering health care benefits? ► What about all the tests? ► What about the tax and accounting

ramifications? ► Can we compete with the

exchanges? ► Do we anticipate any employee

migration? ► Are we clear on our data and payroll

responsibilities?

“If we pay …” ► How much will we owe? ► Will we really save? ► What about employee reaction and

needs? ► Will we lose top talent over this

decision? ► Have we considered the impact to our

corporate reputation? ► How do we communicate this to

employees? ► Will we ever go back?

► The 2010 Patient Protection and Affordable Care Act (PPACA) does not require an employer to offer health care benefits.

► However, the new law does impose penalties under certain circumstances if employers do not offer coverage.

► The decision to “play or pay” is a business strategy, not just a benefits strategy.

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Acute care episode (ACE) demonstration

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ACE components

Competitive bidding

28 cardiac and 9 ortho DRGs

Gainsharing

Beneficiary incentive

Bundled payment

ACE

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ACE processes

Hospital – Part A payment

Physician – Part B payment

Global payment per case

Discount

CMS savings on case

BHS savings on case

50% – Physicians 50% – Baptist Health System

Gainsharing pool

– Admin costs

BHS standardization, quality and cost savings

CMS retains

50% of savings shared with beneficiaries

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Gainshare example

DRG 470 – major joint replacement or reattachment of lower extremity without MCC

Surgeon = $1,200 (80%) + $300 (20% co-pay)

Hospital = $10,400

Patient = $ 0

Surgeon = $1,500

Hospital = $9,800

Patient = $300 (up to 50% of CMS savings)

With ACE

Before ACE

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Volume

≈3,725 patients

Inpatient savings

>$7.0 million

Shared savings

$993K

Gainshare distribution

$871K

Financial July 2009 – December 2010

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Other

► Compensation limits ► Medical loss ratio ► 3% withholding