Category: Health Care
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Massachusetts Proposed Legislation to Curb Health Care Costs by Regulating Hospital Reimbursement Rates
In a previous blog post, we began to dissect the new Massachusetts State Senate bill, “An Act Furthering Health Empowerment and Affordability by Leveraging Transformative Health Care,” and focused on a provision that would ban hospitals from billing payors for many common outpatient hospital services. In this second of a multipart series, we review how this bill proposes to improve the affordability of health care in the Commonwealth.
During the debate before the Massachusetts Senate Working Group on Health Care Costs and Containment Reform, the Senate Working Group stated that this proposal will curb costs associated with health care and predicted a savings of $425 million by 2020 to achieve goals including slowing the rate of premium increases.
Setting a Target Hospital Rate Distribution to Help Moderate Costs
One of the primary ways the bill proposes to moderate costs is by establishing a hospital alignment and review council which will set a “target hospital rate distribution,” the minimum floor payment that an insurance carrier must reimburse a hospital for services. The Senate Working Group hopes that setting a floor payment for carriers will address the price variation across hospitals in the Commonwealth and subsequently stabilize the market. During the hearing, Senators requested industry feedback on setting the rate at 0.9%. Some argue that setting a floor will help hospitals that currently receive lower reimbursement rates to “thrive and survive.” Others assert that setting a floor is not sufficient, rather, a cap on reimbursement rates should be implemented as well to compress rates and control spending.
To make sure that the target hospital rate distributions are met, Section 111 tasks insurance carriers with submitting annual certifications to the review council. If a certification uncovers that any hospital received an increase in reimbursement, all other hospitals contracting with that carrier must have received a similar increase.
Other Items to Achieve a Slower Growth Rate
The proposed bill provides the review council with other tools to achieve a slower growth rate. One such measure is that the council will set a “target growth in hospital spending.” In the event that hospital spending is greater than the target rate, the council may penalize the top three hospitals that contributed to above target spending. Each of these three hospitals will be required to pay its proportional share of the difference between the actual growth in hospital spending and the council’s target growth in hospital spending. Some view this penalty as needed government intervention to correct price variation in the market. In contrast, others argue this is penalty unfairly attacks three hospitals and will create perverse incentives for hospital spending just below the top three.
Setting a target hospital rate distribution will be one mechanism for addressing price variation, but the Working Group is still collecting industry feedback to determine the ultimate amount of governmental control needed in the Commonwealth’s health care market.
This bill is currently open for comments. Any interested parties should strongly consider commenting on the State Senate bill.
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In a striking blow to 340B hospitals, the Department of Health and Human Services, Centers for Medicare and Medicaid Services (CMS) released a final Medicare Outpatient Prospective Payment System (OPPS) rule adopting its earlier proposal to significantly reduce Medicare reimbursement for separately payable outpatient drugs purchased by hospitals under the 340B program. The final rule confirms that CMS will drop the reimbursement rate from the average sales price (ASP) plus 6 percent to ASP minus 22.5 percent. The payment changes are scheduled to take effect on January 1, 2018.
Citing the large growth in provider participation in the 340B Program and the increasing prices for drugs administered under Medicare Part B to hospital outpatients, CMS’ stated goal is to align Medicare payment with the amounts hospitals are actually spending to acquire the drugs. CMS relied on a May 2015 Medicare Payment Advisory Commission (MedPAC) Report to Congress to determine the new formula. While MedPAC estimated that the ASP minus 22.5 percent figure that CMS ultimately adopted was the “lower bound of the average discount” on drugs paid under the Medicare OPPS, MedPAC’s March 2016 Report to Congress recommended a reduction in payment to ASP minus 10%, which would have allowed 340B hospitals to realize, on average, a financial benefit for participating in the 340B program.
The Financial Impact of the Changes to 340B Hospitals
The OPPS changes will have a significant impact on 340B participating hospitals. CMS estimated that the change will result in a $1.6 billion reduction in OPPS payments to 340B hospitals for separately payable drugs—an additional estimated reduction of $700 million over the $900 million estimate from the proposed rule. While CMS had requested comments in the proposed rule on how to redistribute the savings to target hospitals that treat low-income patients, the final rule instead redistributes the amounts saved by the 340B payment reductions by increasing OPPS payments for non-drug services
CMS is exempting rural sole community hospitals, children’s hospitals, and PPS-exempt cancer hospitals from the new drug payment reductions for calendar year 2018; they will continue to be paid at ASP + 6%. The exempted hospitals will need to report 340B utilization to Medicare for information and tracking purposes.
Litigation is Expected
The changes to Medicare payment are likely to be challenged in court by one or more groups of stakeholders, including the American Hospital Association. In comments submitted on the proposed rule, multiple groups contended that CMS lacks authority to implement such large payment changes or to single out 340B hospitals for reductions, and may not otherwise contravene the intent and scope of the 340B Program without further Congressional action. These challenges will likely play out in courts as CMS implements the new rule and while Congress continues to debate the future of the 340B Program.
No Impact on Non-Excepted Hospital Outpatient Departments
The changes to Medicare’s reimbursement also create new incentives for off-campus hospital outpatient departments(HOPD). Since January 1, 2017, new off-campus hospital outpatient departments that do not fall within an exception (non-excepted HOPDs) are not eligible for payment under the OPPS, and instead receive a reduced reimbursement rate. CMS has confirmed in the final rule that the new payment reductions for 340B drugs will not be applied to non-excepted HOPDs, as their drugs are not reimbursed under OPPS. As a result, the use of 340B drugs by a non-excepted HOPD will not impact the HOPD’s Medicare reimbursement.
In light of the new rule, 340B hospitals should prepare to come into compliance, which will require the use of a new modifier on each drug billed to Medicare OPPS that was purchased under the 340B Program. In some cases, this will require greater coordination between the hospital’s billing and pharmacy divisions to ensure the modifier is accurately applied.
We will continue to monitor the 340B Program and will update you on any further changes that may arise.
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On November 2, 2017, the “Tax Cuts and Jobs Act” was introduced in the House of Representatives. This act has immediate and far-reaching implications for tax-exempt finance.
Among other things, the Tax Cuts and Jobs Act would:
- Repeal the authority to issue “qualified private activity bonds” after December 31, 2017. These bonds generally include all tax-exempt bonds that are not “governmental bonds,” and include tax-exempt bonds issued for the benefit of 501(c)(3) organizations and many other types of tax-exempt bonds.
- Repeal the authority to issue advance refunding bonds after December 31, 2017. The repeal applies to advance refundings of governmental bonds as well as bonds issued for the benefit of 501(c)(3) organizations.
- Repeal the authority to issue tax-exempt bonds for professional sports stadiums after November 2, 2017.
- Repeal the authority to issue “tax credit bonds” after December 31, 2017. This repeal concerns a much more limited type of special tax-advantaged bonds.
Summary of Key Points
- The legislation would not adversely affect “governmental” bonds issued for the benefit of state and local governments, except for advance refunding bonds and bonds issued for the professional sports stadiums.
- Certain categories of tax-exempt bonds are at more risk for repeal or restriction than others. The proposed legislation indicates that categories at most risk for repeal or restriction are: all categories of tax-exempt bonds issued for the benefit of borrowers other than state or local governments (that is, “qualified private activity bonds”); advance refunding bonds; and tax-exempt bonds for professional sports stadiums. It is important to note, however, that qualified private activity bonds include a wide range of different types of tax-exempt bonds for different purposes, and that the authority to issue certain types of tax-exempt qualified private activity bonds might be at greater risk than others.
- A “rush to market” is a distinct possibility. The proposed repeal of the authority to issue tax-exempt qualified private activity bonds and advance refunding bonds may result in a much increased volume of tax-exempt bonds for those purposes before the end of 2017.
- “Grandfathering” of bonds issued before tax law change. The tax-exempt status of bonds issued before the relevant effective dates would not be adversely affected by the proposed legislation.
- Transition rules for current refundings of bonds issued before the effective dates will be critically important and are much less certain than in the past. The Tax Cuts and Jobs Act as proposed contains no “transition rules” that permit tax-exempt bond current refundings of qualified private activity bonds issued before the effective date. Whether enacted legislation contains any such transition rules will be of critical importance to many borrowers. In the past, Congress has in many, but not all, instances of enactment of new restrictions on tax-exempt bonds permitted tax-exempt refundings of “grandfathered” bonds issued before the effective date. For a number of reasons, transition rules permitting future tax-exempt bond current refundings are much less certain than in the past.
- Certain types of outstanding tax-exempt financing structures are exposed to risks of tax law changes that are not readily apparent. Examples of types of financing structures that may have “hidden” change of law tax risks include particularly “direct purchases” by banks, tax-exempt commercial paper, and tax-exempt draw-down loans.
- Issuers and borrowers should separately consider the risks for outstanding bonds and the risks for future financing plans. The risks for outstanding bonds are not the same as the risks for future financing plans. Assessing these risks separately can help to focus an action plan.
- It may be prudent for issuers to evaluate future financing plans and to consider an action plan to accelerate the timing of some financings.
- It may be prudent for issuers and borrowers to evaluate, and take steps to manage, the tax risk of their outstanding bonds.
- It may be prudent for issuers and borrowers to start to evaluate the capital raising tools that would replace tax-exempt financing. A variety of capital raising structures in addition to the issuance of taxable bonds is likely to emerge to replace tax-exempt financing if certain types of tax-exempt financing are repealed or further restricted.
A Description of Relevant Provisions of the Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act was introduced on November 2, 2017, in the U.S. House of Representatives by House Ways and Means Committee Chair Brady. Although the enactment of significant tax reform legislation is of course uncertain, this proposed legislation has very large implications for tax-exempt finance. Developments over the next several weeks, including particularly the expected introduction of tax reform legislation in the U.S. Senate, will further inform the risks presented by the introduction of the Tax Cuts and Jobs Act.
Repeal of authority to issue “qualified private activity bonds.” The proposed legislation would repeal the authority to issue all “qualified private activity bonds” after December 31, 2017. ”Qualified private activity bonds” include a large number of different types of tax-exempt bonds that are issued for the benefit of borrowers other than state and local governments. The tax-exempt bonds subject to repeal include all “exempt facility bonds” under Section 142 of the Internal Revenue Code (the “Code”) (such as bonds for airports and docks and wharves and multifamily housing when financed projects are treated as privately used), “single family housing” bonds issued under Section 143 of the Code, qualified small issue bonds for manufacturing issued under Section 144 of the Code, and “qualified 501(c)(3) bonds” issued under Section 145 of the Code (such as bonds issued for the benefit of nonprofit hospitals and universities). The repeal does not apply to traditional “governmental” bonds, which generally do not finance projects treated as privately used, except for advance refunding bonds and bonds for professional sports stadiums. Some types of tax-exempt “governmental” bonds are issued for the benefit of private persons, but are not technically treated as “private activity bonds” (for example, some general obligation bonds used to make grants to private persons); the authority to issue those types of bonds would not be repealed.
The proposed legislation would make a number of revisions to the Code which appear to be intended to purge references and provisions relating to “qualified private activity bonds.”
Repeal of authority to issue “advance refunding bonds.” The proposed legislation would repeal the authority to issue all tax-exempt “advance refunding” bonds after December 31, 2017. Advance refunding bonds are bonds issued more than 90 days before refunded bonds are actually retired. This repeal would apply to advance refunding “governmental” bonds as well as advance refunding “qualified 501(c)(3) bonds.” This is the provision in the Tax Cuts and Jobs Act that would most significantly adversely affect issuers of tax-exempt governmental bonds.
Repeal of authority to issue bonds for professional sports stadiums. The proposed legislation would repeal the authority to issue tax-exempt bonds to finance or refinance capital expenditures for a facility which, during at least five days during any calendar year, is used as a stadium or arena for professional sports exhibitions, games, or training. The repeal would apply immediately, to any bonds issued after November 2, 2017. Although this repeal would apply only to bonds financing professional sports stadiums, the prohibition is written in a manner that is strict. For example, the prohibition contains no “de minimis” relief, so that it appears that a bond issue would fail to be tax-exempt if even $1 is spent on a professional sports stadium. Also, because of the proposed immediate effective date, this proposed prohibition may immediately require special review of tax-exempt bonds that have not yet been issued. Bonds issued after November 2, 2017 for professional sports stadiums may require, at a minimum, special disclosures to investors.
Repeal of authority to issue tax credit bonds. The proposed legislation would repeal the authority to issue tax credit bonds after December 31, 2017. Although many types of tax credit bonds were authorized to be issued under prior legislation, the Code currently permits only a relatively small volume of tax credit bonds to be issued. For example, the authority to issue Qualified Zone Academy Bonds would be repealed. Accordingly, this provision has much less important and far-reaching effects than the provisions concerning tax-exempt bonds.
The Tax-Exempt Bond Markets Could Be Significantly Disrupted Well in Advance of the Actual Enactment of Tax Legislation
In assessing the risks presented by federal tax reform, one particularly important point is that issuers and borrowers could be significantly adversely affected by merely by the credible possibility of specific tax legislation well in advance of enactment. Over the years, members of Congress have on many occasions introduced legislation containing immediate effective dates that would restrict the authority to issue different types of tax-exempt bonds. For example, in June 1996, Senator Moynihan introduced the Stop Tax-Exempt Arena Debt Issuance Act with an immediate effective date, which would have prohibited issuance of tax-exempt bonds for sports stadiums. Because investors generally require a high degree of certainty in tax position, introduction of this type of legislation could have the immediate practical effect of restricting issuance of certain types of tax-exempt bonds, particularly if the legislation is introduced by a prominent member of Congress, or if legislation is introduced with bipartisan support.
Similarly, the mere introduction of credible legislation restricting the issuance of tax-exempt bonds, such as the Tax Cuts and Jobs Act, could result in a “rush to market,” even if the legislation is never in fact enacted.
For these reasons, there is a substantial risk that issuers and borrowers will be immediately affected by the Tax Cuts and Jobs Act and the prospect of enactment of tax reform.
Prior Legislation May Inform an Assessment of the Likelihood of Tax Law Changes Adverse to Tax-Exempt Financing
It is of course not possible to predict with confidence the exact form that enacted tax legislation may take, or even whether fundamental tax reform legislation will be enacted in the near future. An assessment of the risks presented by the Tax Cuts and Jobs Act, however, can be informed by the prior history of legislation and prior legislative proposals. At a minimum, it is reasonable to expect that drafters of any final legislation will at least consider the effectiveness of past legislation.
In broad sweep, the history of federal tax legislation concerning tax-exempt bonds since 1968 has been to place increasing limitations on issuance of tax-exempt bonds, including in particular the permitted uses of tax-exempt bond proceeds.
A general historical trend has been the imposition of increasing limits on the issuance of tax-exempt bonds for the benefit persons other than state and local governments. Most notably in 1968, 1982, 1984 and 1986, by placing restrictions on the issuance of these bonds (now called “qualified private activity bonds”) by, among other things, limiting the types of projects that qualify and, in most instances, by imposing limits on the volume of such bonds and in 1986 Congress placed restrictions on advance refunding bonds.
Accordingly, the provisions adverse to qualified private activity bonds and advance refunding bonds are consistent with a long history of actual tax law changes and proposed legislation. As one example, at a House Ways and Means Committee hearing on tax-exempt bonds on March 19, 2013, both Republican and Democratic members of the Committee raised particular questions about the policy justifications for the authority to issue tax-exempt qualified private activity bonds. Thus, the history of actual tax law changes and prior proposed legislation leads to an objective assessment that the authority to issue tax-exempt qualified private activity bonds and advance refunding bonds faces significant risk of repeal.
Assessing the Risks for Different Categories of Tax-Exempt Bonds
Based on proposed provisions of the Tax Cuts and Jobs Act and the history of past legislation, it is evident that some types of tax-exempt bonds are more at risk for repeal or restriction than others, although all types of tax-exempt bonds may be at some risk.
As is discussed above, the Tax Cuts and Jobs Act would repeal the authority to issue qualified private activity bonds, advance refunding bonds and professional sports stadium bonds; accordingly, the authority to issue those types of tax-exempt bonds is clearly at risk.
It is important to note, however, that “qualified private activity bonds” include a large number of different types of tax-exempt bonds that can be issued for different purposes. It is entirely possible that enacted legislation would repeal the authority to issue some types, but not all types, of qualified private activity bonds.
For example, a reasonable guess may be that qualified private activity bonds issued to finance for government-owned public infrastructure may be at lower risk for repeal than other types of qualified private activity bonds. For example, many tax-exempt bonds issued for government-owned airports and docks and wharves are issued as qualified private activity bonds. The policy arguments that it is appropriate to subsidize borrowing for this type of public infrastructure may be particularly compelling.
On the other hand, a number of provisions in the Tax Cuts and Jobs Act suggest that the authority to issue qualified 501(c)(3) bonds may be at greater risk. One theme in this proposed legislation appears to be a willingness to enact stricter rules for 501(c)(3) organizations to raise federal revenue. For example, the Tax Cuts and Jobs Act would impose a new excise tax on certain investment income of private colleges and universities. In that light, there appears to be no reason to assume that 501(c)(3) organizations will necessarily be afforded favorable treatment in enacted legislation.
|Type of Bond Issue||Examples||Least Risk||Intermediate Risk||Greatest Risk|
|New Money Governmental Bonds||√|
|Current Refunding of Governmental Bonds||√|
|All Advance Refunding Bonds||Governmental and 501(c)(3) Bonds||√|
|New Money Private Activity Bonds for Government-Owned Infrastructure||Government Owned but Privately Used Airports, Water Systems, Docks and Wharves||√|
|Private Activity Bonds for 501(c)(3) Organizations||Nonprofit Hospital, Educational and Cultural Institution Bonds||√|
|Private Activity Bonds for Projects Not Government- Owned||Multifamily Housing, “Small Issue” Bonds for Manufacturing, Solid Waste Disposal||√|
|Private Activity Bonds to Make Loans to the Public||Single Family Housing, Veterans’ Housing and Student Loan Bonds||√|
Grandfathering of Outstanding Tax-Exempt Bonds
The provisions in the Tax Cuts and Jobs Act would not adversely affect the tax-exempt status of tax-exempt bonds issued before the relevant effective date of repeal. This approach is consistent with prior legislation.
In most prior legislation, Congress has taken care to avoid retroactive imposition of limitations on tax-exempt bonds, in large part to avoid disruption of the financial markets. The model for “grandfathering” outstanding bonds generally has been to provide that new restrictions apply only to bonds issued after an effective date. For example, this model was followed in the effective date provisions to the Tax Reform Act of 1986.
This “grandfathering” approach has the weight of history and fairness to the financial markets, but it must be acknowledged that it has a considerable cost to the United States Treasury. Under this approach, the tax expenditure of tax-exempt bonds has a long “tail.” Indeed, many tax-exempt bonds the financed purposes that were prohibited decades ago continue to remain outstanding. Even if repeal of the authority to issue certain types of tax-exempt bonds is enacted in new legislation, tax-exempt bonds issued before the relevant effective date may similarly continue to be outstanding for decades.
This large “tail” on the tax-exempt bond expenditure likely means that effective date provisions will receive close scrutiny in an environment where tax expenditure reduction is of paramount concern. In light of the historical approach of Congress, retroactive legislative repeal appears to continue to be unlikely, but that favorable approach is not absolutely certain.
Grandfathering of Current Refundings of Outstanding Tax-Exempt Bonds?
The Tax Cuts and Jobs Act contains no “transition rules” that would permit tax-exempt current refunding of tax-exempt bonds issued prior to the effective date. We expect that such transition rules will be a particularly important question for the public finance industry as legislation proceeds.
A question that is related to, but different from, the “grandfathering” of bonds issued before new legislation is whether, or how, refinancings of such “grandfathered” bonds may continue to be “grandfathered.” A review of the Tax Cuts and Jobs Act and prior legislation leads to the conclusion that there is considerable risk that final legislation will not necessary “grandfather” refinancings issued after the effective date of the new legislation.
Because of the tax expenditure relating to the tax-exempt bond “tail,” the approach to “grandfathering” of refundings can be expected to have a large revenue effect, and will likely attract the scrutiny of writers of legislation.
Prior legislation restricting tax-exempt bonds has often provided favorable grandfathering to subsequent refinancings, but the approach of Congress has been inconsistent and checkered. Perhaps most notably, the Tax Reform Act of 1986 contained detailed transition rules that permitted favorable grandfathering of refundings. Indeed, such transition rules remain relevant in the municipal market, even 31 years later, as many types of tax-exempt bonds prohibited in 1986 (for example, for privately-owned pollution control facilities and sports facilities) continue to be refunded with new tax-exempt bonds.
Not all new legislation, however, has included favorable transition rules. Most notably, the American Recovery and Reinvestment Act of 2009 permitted the issuance of Build America Bonds in 2009 and 2010, but does not permit the issuance of refunding Build America Bonds.
In the past, many tax-exempt bond issuers and borrowers have drawn comfort from the argument that Congress is likely to be favorably disposed to permitting tax-exempt bond refundings of “grandfathered” bonds, because such treatment has been viewed as a “win/win” situation. That is, if a current refunding reduces interest costs to the borrower, the amount of revenue to the federal government in foregone income tax may also be reduced.
A closer consideration of this “win/win” argument, however, casts doubt on whether it will continue to carry the day for tax-exempt bond issuers. A more refined analysis of the revenue effects to the federal government of “grandfathering” current refundings could be quite complex; the important point, however, is that it is entirely possible that Congress could take the view that such favorable grandfathering for refundings will entail a significant additional federal expenditure.
Accordingly, the risk of losing the ability to refund outstanding tax-exempt bonds on a tax-exempt basis in the future should be viewed as one of the most important considerations for issuers and borrowers.
Although transition rules for tax-exempt refinancings have great practical importance for issuers and borrowers (and to the tax expenditure of the federal government), transition rules have commonly been treated as an afterthought in prior tax legislation. Accordingly, assessing this risk will require a particularly close review of legislation as it is developed.
Assessing Refunding and “Reissuance” Risk
The real possibility that Congress will prospectively repeal the authority to issue certain types of tax-exempt bonds and not provide transition rules for tax-exempt refinancings of outstanding bonds makes an assessment of effective date risk particularly important.
Some of these risks are more obvious than others. For example, if enacted legislation contains no transition rules for refundings, “reissuance” questions will have vastly heightened importance. Reissuance questions commonly are raised for “multi-modal” tax-exempt bonds that permit conversions to different interest rates. In certain situations, the conversion of tax-exempt bonds to a new interest rate after the effective date of repeal might result in loss of tax-exempt status. Particular reissuance questions have been raised with respect to “direct purchase” bonds. Accordingly, one reasonable approach may be to consider whether any tax-exempt bonds held by “direct purchasers” raise particular reissuance risks.
Particular Risks for “Draw-Down” Bonds, Commercial Paper and Similar Tax-Exempt Financing Structures
The relevant effective dates of the Tax Cuts and Jobs Act are based on when “bonds” are issued. This is consistent with prior legislation affecting tax-exempt bonds, but presents particular risks for draw-down bonds, commercial paper, and similar tax-exempt financing structures.
The IRS has issued guidance that generally treats a “bond” as issued when money is actually paid for the bond. This guidance also makes a distinction between the date of issuance of a “bond” and the date of issuance of an “issue” of bonds. For example, consider a “draw-down” tax-exempt financing that permits an issuer to draw down $100 million of tax-exempt bonds over a two-year period; the issuer actually draws down the first $10 million on December 1, 2017, and expects to draw down the remaining $190 million after December 31, 2017. Under existing guidance, only the $10 million actually drawn down in 2017 would be treated as “issued” in 2017. The remaining portion would be subject to any change of law that occurred after 2017.
This means that draw-down bonds, commercial paper, and similar tax-exempt bond structures are subject to particular change of law risks that may not be immediately obvious.
“Rush to Market” Strategies and Limitations
The last enactment of fundamental reform (that is, the enactment of the Tax Reform Act of 1986) was immediately preceded by an enormous “rush to market” issuance of tax-exempt bonds. This “rush to market” included the issuance of a high volume of pooled financing bonds and bonds issued earlier than customary before the effective date of new restrictive rules. The IRS challenged a limited number of these “rush to market” bonds as abusive, which underscores the need for careful structuring and review in such circumstances. For example, in a landmark court decision, the IRS successfully asserted that multifamily housing bonds issued by the Housing Authority of Riverside County were not properly treated as issued before the relevant effective date. The overwhelming majority of such bond issues, however, were not challenged.
The imposition of new restrictive rules in the Tax Cuts and Jobs Act could result in a similar rush to market.
Because of tax law changes since 1986, many of the strategies and approaches used in 1985 will no longer be available. To the extent that an issuer or borrower may seek to issue bonds earlier than is customary before an effective date of new legislation, the “hedge bond” limitations of section 149(g) of the Code will be an important consideration. Although a number of provisions of the tax regulations restrict early issuance of tax-exempt bonds, the most important restriction is set forth in the hedge bond rules. These rules require that, in all instances, an issuer must reasonably expect that it will spend the “spendable proceeds” of the bond issue within certain time periods. One way to meet the “hedge bond” rules is if the issuer reasonably expects that it will spend at least 85% of the spendable proceeds within three years of the date of issuance and the issuer does not invest more than 50% of the proceeds in an investment having a substantially guaranteed yield for four years or more. The other way for an issuer to meet the “hedge bond” rules is for the issuer to reasonably expect that it will spend the proceeds no later than the following schedule:
“Hedge Bond” Requirements
|Period After Date of Issuance||Reasonable Expectation Spending Requirement|
For issuers seeking to maximize the issuance of bonds before a restrictive date, the foregoing schedule sets forth the outside limits, and can be expected to be an important consideration in any “rush to market” situation. For planning purposes, it may be prudent for issuers to assess the amount of financeable projects that could fit within these time periods.
Pooled financing bonds may also be an important strategy to issue bonds before the effective date of restrictive new rules. This strategy will be constrained by the restrictions on “pooled financing bonds” set forth in section 149(f) of the Code, but could still be viable in some circumstances.
“Pooled Financing Bond” Requirements
|Period After Date of Issuance||Reasonable Expectation Loan Origination Requirement/Basis of Redemption Requirement for Some Issues|
The Risks for Outstanding Bonds and Future Bonds are Not Necessarily the Same and Need to Be Separately Considered
Just as the tax risks to issuers are different than the tax risks to holders, the risks for outstanding tax-exempt bonds are different than the risks for future tax-exempt financings. For example, as is discussed above, if Congress repeals the authority to issue tax-exempt bonds after the date of enactment of new legislation, an issuer possibly would gain a benefit with respect to its outstanding bond issues, particularly if the outstanding bond issues have variable interest rates. If the volume of tax-exempt bonds were so restricted going forward, it is reasonable to assume that the pricing of the remaining tax-exempt bonds on the market would benefit. Such legislation, however, would plainly disadvantage issuers for future financings.
For these reasons, the best approach to assessing the possible effects of tax reform is to separately consider possible effects on outstanding bond issues and future financing plans.
The Current Market Pricing of Tax-Exempt Bonds is Not Necessarily a Good Indicator of the Risks to Issuers
Will the risk of tax reform adverse to tax-exempt bond issuers and borrowers be reflected in the bond markets? A large part of the answer to that question is that the risks to holders of outstanding tax-exempt bonds are not the same as the risks to issuers and borrowers of tax-exempt bonds. Also, the analysis of how different proposed changes to the Code would affect holders of outstanding tax-exempt bonds is complex, because some changes might be favorable, and some unfavorable, to holders of outstanding tax-exempt bonds.
In the most straightforward example, suppose that Congress repeals the authority to issue certain types of tax-exempt bonds after the date of enactment of new legislation, but “grandfathers” the tax-exempt status of interest on bonds issued before the date of enactment. That change would plainly be unfavorable to issuers and borrowers of tax-exempt bonds, but would likely be favorable to holders of outstanding tax-exempt bonds, at least with respect to that change considered in isolation.
The analysis of how tax law changes may affect holders of tax-exempt bonds is necessarily complex, and requires a consideration of the effects of changes in tax rates, the effects on the permitted supply of tax-exempt bonds going forward, the extent to which other tax-advantaged investments are permitted, and other factors. The important point is that many of these factors are not directly relevant to assessing the risks that an issuer’s authority to issue tax-exempt bonds will be repealed or restricted. Because of these complex factors, market interest rates may provide no meaningful information about the risks of prospective repeal.
Effect on Tax-Exempt Financing of Other Tax Law Changes
The Tax Cuts and Jobs Act would make a number of other changes to the Code that would not expressly refer to tax-exempt bonds, but which could have a fundamental effect on certain types of tax-exempt financing. For example, the Tax Cuts and Jobs Act would reduce the maximum federal corporate income tax rate from 35% to 20%. Among other things, this reduction might have the effect of significantly reducing the role of banks and other financial institutions and direct purchasers of tax-exempt bonds, because such purchasers would receive a lesser tax benefit.
Such a rate reduction would also trigger interest rate increases for many issuers and borrowers of “direct purchase” bonds, because many “direct purchase” bonds include provisions providing for an increase in interest rate if the tax benefit to the holder is reduced.
Anticipating Capital Raising Structures that May Replace Tax-Exempt Financing – Not Just Taxable Bonds
A final point is that, if the authority to issue certain types of tax-exempt bonds is repealed, taxable bonds may not be the only replacement financing vehicle. Particularly for 501(c)(3) organizations, the future unavailability of tax-exempt financing likely will lead to a reconsideration of a number of different types of possible financing structures, including possible greater use of joint ventures and similar structures. One view is that the use of such structures may have been impeded in the past because of the relative benefits of tax-exempt financing.
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For the second year in a row, Foley & Lardner LLP was named the Outstanding Committee Sponsor of the Year Award by the Association of Corporate Counsel (ACC) for Foley’s work on behalf of the ACC’s national Health Law Committee. Attorneys Alan Einhorn and Jana Anderson, Foley’s liaisons to the Health Law Committee, were presented with the Award on October 15th at the ACC’s Annual Meeting in Washington, D.C. The award recognizes a firm that has provided exceptional support to an ACC committee, including assistance with the committee’s quality of programs and development, and assistance in helping the committee achieve its goals.
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Will the Massachusetts Proposed Legislation on Hospital Outpatient Facility Fees Have a Nationwide Impact?
In some states, including the Commonwealth of Massachusetts, “site neutrality” for outpatient hospital reimbursement is factoring into state-specific health reform and cost containment initiatives. This potentially goes well-beyond Medicare’s limitation of reimbursement at new off-campus outpatient hospital departments under Section 603 of the Bi-partisan Budget Act of 2015. Since Massachusetts’ state health reform law was the model on which the Affordable Care Act was based, many other jurisdictions look to Massachusetts to see how the state is addressing the “cost” component of the equation, especially now that the “access” component is addressed by the ACA and state initiatives. Massachusetts has taken several swings at the cost conundrum, including the latest legislation introduced in October of 2017. This recent legislation includes a provision that would essentially eliminate a large number of hospital outpatient costs, both on-and off-campus.
Treatment of “Facility Fees” Under the New State Senate Bill
On October 17, 2017, the Massachusetts State Senate released a proposed bill entitled “An Act Furthering Health Empowerment and Affordability by Leveraging Transformative Health Care.” This bill was discussed on October 23, 2017 in a packed hearing room before a Special Senate Committee on Health Care Cost Containment & Reform where representatives from teaching and community hospitals, health plans, and patient/citizen groups were present.
This bill also includes several far-reaching provisions, which we will address in future posts, including the provider price variation and out-of-network payment issues; as these provisions are also of great interest to the hospital industry. But, a major concern in the bill, from a hospital operations consideration, is a prohibition on hospitals charging facility fees for many common outpatient services, as a condition of licensure.
The contours of this prohibition are not entirely clear, but it would appear to be targeting so-called outpatient evaluation & management (E&M) services within any department of a hospital that submits a claim to any insurer (public and commercial) as an outpatient service. The bill permits the Department of Public Health (DPH) to add additional services to the ban beyond outpatient E&M. In addition to the billing ban, the proposed legislation serves up several other dishes designed to restrict or burden hospital billing for outpatient services, including limitations on payment for state employees under the Group Insurance Commission (GIC), and several sections requiring notices to patients by hospitals and other providers referring patients for hospital services. At least one of these notices is required before delivery of services in the emergency room (ER), “if practical.”
What is Included in the Massachusetts State Senate Bill?
Presumably, more will be known about the intentions of the drafters in the coming days and weeks, as well as what the House of Representatives will make of this. In the meantime, here are a few observations on the bill as written:
- If passed, Massachusetts hospitals (and, once the insurance provisions kick in, likely hospitals throughout New England and other states treating Massachusetts-covered beneficiaries), will not be able to charge facility fees for many common procedures, but must continue to incur the costs of those services, including nurses, other staff, medical supplies, facilities, overhead, power, electronic medical records, patient safety, infection control, )
- There is serious ambiguity regarding what services are subject to the ban. Is it just outpatient E&M or are other services where a physician performs some E&M service, like an emergency department or observation services impacted? Given the wording of the bill, it would appear to be extremely broad in scope, encompassing many different locations, including on-campus outpatient departments. Indeed, the accompanying Senate Report suggests that a more sweeping set of services would be subject to the payment ban.
- It is unclear which payors are covered. Since the prohibition is incorporated not in the insurance laws but, rather, as part of the hospital licensing requirements, it would appear that it should apply to all payors, including Medicare and employer-sponsored health plans covered by ERISA. This raises serious preemption and other questions. Perhaps it was intended only to apply to commercial payors and the GIC by including similar language in those statutory provisions, but clarification as to the extent of the application of this bill will be needed especially given the placement in multiple statutory provisions.
- Unlike the Medicare site-neutrality law, which permits payment to hospitals at a reduced rate for outpatient services at non-exempt site, Massachusetts is proposing a zero reimbursement rule, not a payment reduction, and with no “grandfathering” of existing locations. If the law is passed, only physicians will be able to charge for impacted services at all sites.
- Also, unlike the Medicare rule, the Senate bill appears to apply to both on-campus as well as off-campus services. Because the accompanying Senate Report suggested recommendation is that only off-campus services be targeted, we wonder if the Senate intended such broad geographic coverage.
- If only physicians can bill for these services, will physicians be required to share their fees back with the hospitals to cover the hospital’s overhead? You may recall that this was a feature of the initial CMS proposal under Medicare site neutrality. If not, is there a “Stark” (physician self-referral) Law implication on the theory that the physician is receiving “free” use of hospital space? If so, will physicians be able to charge a full physician fee schedule payment, without reduction for the “site of service differential? And if physicians cannot bill the full professional fee, does that mean that both hospitals and physicians will be provide these services for free or at a massive discount to all payors?
- Does the bill require hospitals to provide a notice of fees to emergency room patients prior to the delivery of services, and, “if practical”, does it put hospitals on a collision course with the federal government and its implementation of the Emergency Medical Treatment and Labor Act (EMTALA, also known as the patient anti-dumping law)? CMS has long been concerned that talking to patients about costs and charges before receiving emergency services may cause patients to leave a hospital ER in an unsafe medical condition and violate EMTALA.
The Impact of this Proposal May Reach Beyond Massachusetts
While we are asking a number of questions about this initial proposal on hospital costs, it appears that the Commonwealth is heading in a direction that could have a material impact on hospital reimbursements, budget, and operations if passed in any form. Hospital administrators in Massachusetts will be watching this closely. Hospital and health system leaders nationally should also be concerned that this type of state strategy may be considered in other jurisdictions too.
Interested parties should consider commenting on the State Senate bill.
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Efforts to replace the Affordable Care Act (ACA) with the Graham-Cassidy legislation were unsuccessful as lawmakers rushed to meet the September 30th deadline when the Senate would have lost its current reconciliation vehicle. Changes to the bill were incorporated in order to gain Republican support from a number of holdouts, but with Senator Susan Collins (R-ME) announcing she will not vote for the current proposal, Senate Republicans conceded today since they were short of the 50 votes required to pass the measure. Senate Republicans are currently discussing potential paths forward, including future reconciliation vehicles that would allow for ongoing efforts to repeal and replace the ACA. Efforts to stabilize the insurance exchanges were thwarted by Senator Mitch McConnell (R-KY) in order to advance Graham-Cassidy.
Status of CHIP Program
While all eyes have been on the Graham-Cassidy legislation, funding for the Children’s Health Insurance Program (CHIP) is set to expire on September 30, 2017. Last week, Senators Orrin Hatch(R-UT)) and Ron Wyden (D-OR) of the Finance Committee agreed to a five year reauthorization of CHIP. However, there is no guarantee that the House will support their proposal. CHIP has been introduced as a part of the “Keep Kids Insurance Dependable and Secure Act of 2017” and, if passed, would fund the CHIP Program through federal fiscal year 2022.
We will continue to monitor all efforts this week as the September 30th deadline looms.
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Also Changes Required Participation in the CJR Model
On August 15, 2017, the Centers for Medicare and Medicaid Services (CMS) issued a proposed rule (Proposed Rule) that, if finalized, would (1) reduce the number of Metropolitan Statistical Areas (MSAs) in which there is mandatory participation in the Comprehensive Care Joint Replacement model (CJR) from 67 to 34, and (2) cancel the mandatory Episode Payment Models and Cardiac Rehabilitation incentive payment program. The action reflects a change in course for CMS, de-emphasizing and significantly reducing mandatory participation in Alternative Payment Programs.
Reduced Mandatory Participation in CJR Model
The CJR model originally became effective on April 1, 2016 and mandated that hospitals in 67 specified MSAs must participate in an episode-based payment program for hip and knee joint replacements. The Proposed Rule, anticipated to be effective as of February 1, 2018, reduces the mandatory participation in the CJR essentially by one half to 34 MSAs (see Table 1 below taken from the proposed rule for the remaining MSAs).
The remaining MSAs have the highest average wage-adjusted historic episode payments, that is, the counties with the highest average expense cost for the episodes involved. Under the Proposed Rule, hospitals in the other 33 MSAs would no longer be required to participate in the CJR model, but they may elect voluntarily to participate in that program by submitting a participation election letter to CMS by January 31, 2018. In addition, within the 34 MSAs for which participation is mandatory, identified low volume or rural hospitals also would no longer be required to participate, but they may elect voluntarily to do so.
According to CMS, the remaining 34 MSAs for which participation is mandatory will provide sufficient information to evaluate the effects of the CJR model across a broad range of providers. The higher costs in these MSAs also allows the participating hospitals a greater opportunity for showing improvement through participation in the CJR model.
Cancellation of EPM and Cardiac Rehabilitation Incentive Program
The Proposed Rule also seeks to cancel the Episode Payment Model (EPM), that would have expanded mandatory participation in an episode-based payment to hospitals in a number of MSAs for acute myocardial infarctions, coronary artery bypass grafts and surgical hip/femur fracture treatment, and a Cardiac Rehabilitation Incentive payment model that was to be implemented simultaneously with the EPM. Regulations for both models were originally issued on July 25, 2016 and are described here.
What Does All This Mean?
The Proposed Rule shows CMS does not favor mandatory participation in Alternative Payment Programs. As CMS states in the commentary to the Proposed Rule “requiring hospitals to participate in episode payment models at this time is not in the best interests of the agency or affected providers.” CMS further explained that large mandatory episode-based payment models “may impede [the] ability to engage providers, such as hospitals, in future voluntary efforts.”
While CMS and the Center for Medicare and Medicaid Innovation have introduced many Alternative Payment Programs which move reimbursement to providers away from fee-for-service reimbursement toward reimbursement models focused on efficiency, delivery of value, and quality care, some have thought the pace of the transition to value-based care has been slower than anticipated. Since Alternative Payment Models are viewed as an effective way to restrain health care cost increases, some view that such slower pace will mean providers will not be required to take steps necessary to be more efficient and reduce costs. Cancellation of and reductions in mandatory programs will allow providers to avoid, at least for the near term, preparing themselves for such models given the lack of any requirement to do so.
At the same time, voluntary participation ensures participants in such models are committed to and engaged in the value-based models. The continued evaluation of such models with voluntary participants also helps ensure that access to care, quality, and favorable outcomes are not adversely affected by mandatory participation of providers not ready for such programs.
Commercial payor arrangements and market incentives aimed at helping providers to become more efficient are not directly affected by the Proposed Rule. Their presence may still encourage providers to voluntarily participate in Alternative Payment Models.
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Medicare Claims Appeals: D.C. Circuit Reverses and Remands in Case Seeking Relief From Processing Delays
Summary of AHA v. Price, 2017 U.S. App. LEXIS 14887 (D.C. Cir. Aug. 11, 2017)
On August 11, 2017, the D.C. Circuit reversed the district court and held that the district court abused its discretion by ordering the Secretary of HHS to clear the backlog of administrative appeals of denied Medicare reimbursement claims within four years, because it failed to seriously test the Secretary’s assertion that this result was impossible. The underlying action demanded relief to address the Secretary’s inability to keep up with “an unexpected and dramatic uptick in appeals [that] produced a jam in the process” starting in fiscal year 2011.
In the initial proceedings, a group of hospitals sought a judicial order compelling the Secretary to provide relief from what they considered to be unreasonable delays in resolving Medicare claims appeals at the administrative appeals level. The federal district court for the District of Columbia granted the Secretary’s motion to dismiss for lack of jurisdiction, but the D.C. Circuit reversed. The Circuit Court remanded the case back to the district court, with instructions to consider the merits of appeal, i.e., whether relief should be granted and if so the form of the relief.
The Four-Year Plan to Reduce the Backlog
In addressing the merits of plaintiffs’ allegations on remand, the district court adopted the hospitals’ so-called four-year plan and ordered the Secretary to reduce the current backlog of cases pending at the Administrative Law Judge level by 30% by the end of 2017; 60% by the end of 2018; 90% by the end of 2019; and 100% by the end of 2020. The Secretary then appealed the district court’s order to the D.C. Circuit. On appeal the Secretary argued that it would be impossible to comply with the timetable, because the only means of meeting the timetable would be to pay claims through mass settlements regardless of their merits, which (according to the Secretary) would be in violation of the Medicare statute.
Without finding whether in fact the Secretary would be unable to lawfully comply with the district court’s order, the D.C. Circuit held that because the Secretary represented that lawful compliance with the district court’s order was impossible, the district court committed reversible error by ordering the Secretary to comply with the timetable without first finding that lawful compliance was indeed possible. The Circuit Court also held that it was an error for the district court not to evaluate the Secretary’s assertion that the timetable would increase, not decrease, the number of backlogged appeals, because the timetable would generate an incentive for claimants to file additional appeals and hold out for big payouts.
The Case is Remanded to District Court to Determine Feasibility of Compliance Timetable
The D.C. Circuit therefore remanded the case again to the district court and ordered the district court to determine whether the Secretary’s compliance with the timetable is impossible. However, the Circuit Court noted that the Secretary will bears a “heavy burden to demonstrate the existence of an impossibility.” The Court further noted that if the district court finds on remand that the Secretary failed to carry his burden of demonstrating impossibility, it could potentially reissue its order without modification.
What Does this Decision Mean for Hospitals?
Many Medicare coverage appeals involve a hospital appealing the denial of a short stay on the basis that admission was not medically necessary, and that the patient could be treated as an outpatient. However, because CMS does not allow hospitals to rebill under Part B (except during the one year period following discharge, which in the majority of cases will have expired long before the RAC reopens and denies the inpatient claim), hospitals believe that they have no choice but to appeal. It is important to keep in mind that although the D.C. Circuit faulted the district court for not considering the issue of whether the Secretary could legally comply with the prescribed timetable, the fact that the Secretary will bear the burden of proof on this issue may mean that the district court may end up issuing the same type of relief as it did before.
We will be following this case as the district court determines whether the Secretary’s compliance with the timetable is legally possible and will follow up once a decision is rendered.
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Alaska’s Department of Commerce, Community, and Economic Development has finalized new regulations to create a special Telemedicine Business Registry for health care providers delivering telemedicine services in the Frontier State. The regulations in Title 12, Chapter 02 of the Alaska Administrative Code were effective on April 28, 2017 and implement provisions of Alaska SB 74 that was signed into law last summer.
Under the regulations, companies must be registered with the telemedicine business registry before providing telemedicine services to patients located in Alaska. To register, a business performing telemedicine services must submit an application and registration fee. A telemedicine company operating under multiple names to perform telemedicine services must file a separate registration for each name.
If the name, address, or contact information of a business on the telemedicine business registry changes, the business performing telemedicine services must submit a Business Registry Change Form within 30 days of the change.
A business that fails to comply with the regulations section in a timely manner may not perform telemedicine services in Alaska and must submit a new application to the telemedicine business registry before resuming telemedicine services.
Telemedicine companies and health care providers offering services in Alaska should be mindful of these developments. We will continue to monitor Alaska for any changes that affect or improve telemedicine opportunities in the state.
For more information on telemedicine, telehealth, and virtual care innovations, including the team, publications, and other materials, visit Foley’s Telemedicine Practice.
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So far 2017 is proving to be an active year for Health Insurance Portability and Accountability Act (HIPAA) enforcement. This comes on the heels of 2016, which saw an unprecedented level of enforcement actions, with 13 total settlements and nearly a 300 percent increase in total collected fines over 2015. To date in 2017, nine actions have been settled and the average settlement amount continues to outpace 2016.
Three Tips to Help Reduce the Risk of a HIPAA Violation
Several themes have emerged from these enforcement actions that HIPAA-regulated entities should be mindful of to help reduce the risk of a HIPAA violation occurring and to reduce the potential resulting fine in the event of enforcement.
1. Conduct Risk Analyses Regularly. One of the most consistent themes that has emerged from the 2017 settlement and corrective action plans announced by the U.S. Department of Health and Human Services, Office for Civil Rights (OCR) is that organizations subject to HIPAA must regularly conduct risk analyses in accordance with the Security Rule to assess risk and vulnerabilities in an organization’s ePHI environment. The Security Rule does not proscribe a specific risk analysis methodology given that the analysis will vary depending on an organization’s size and capabilities. However, the risk analysis should comply with available OCR guidance, including the Guidance on Risk Analysis Requirements under the HIPAA Security Rule.
[A] lack of risk management not only costs individuals the security of their data, but it can also cost covered entities a sizable fine.
– OCR Acting Director Robinsue Frohboese
2. Implement a Risk Management Plan and Reasonable Safeguards. While conducting a risk analysis is critical, equally important is the risk management plan and the reasonable safeguards an organization adopts in light of any risks or vulnerabilities that are identified in the risk analysis. For example, OCR assessed a $3.2 million civil monetary penalty against a hospital in February, after noting that the hospital continued to use unencrypted devices even after reporting a breach in 2009 involving the loss of an unencrypted, non-password protected device. Note that the issuance of a penalty is rare, as most OCR enforcement actions result in a settlement, not a penalty. Here, however, the hospital chose to pay the penalty as opposed to negotiate with OCR.
3. Report Breaches in Timely Manner. A settlement announced in January made headlines as the first HIPAA settlement based on the untimely reporting or notification of a breach under the HIPAA Breach Notification Rule. OCR found that the healthcare network failed, with unreasonable delay, to notify OCR, the affected individuals, and the media within the required 60-day timeframe. Instead, the notifications were made over 100 days after discovery of the breach. This settlement highlights the importance of having clear policies and procedures that workforce members have been trained on in order to respond within HIPAA’s breach notification timeframes.
OCR Updated Web Tool
OCR recently announced the release of an updated web tool to provide enhanced transparency to the HIPAA breach reporting tool. New features include: 1) breaches currently under investigation and reported within the last 24 months; 2) an archive of all older data breaches; 3) tips for consumers; and 4) navigation to additional breach information.
Foley regularly assists clients with implementing HIPAA compliance programs, handling data breach notification requirements, and responding to OCR audits and investigations. For more information contact: Jennifer Rathburn, Jennifer Hennessy, or Julie Kadish.
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