Category: Reform

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CMS Announces an Advanced Alternative Payment Model – BPCI Advanced

On January 9, 2018, The Centers for Medicare & Medicaid Services (CMS) announced a new voluntary bundled payment model program – Bundled Payment for Care Improvement Advanced (BPCI Advanced). The episode payment model, which is a second generation version of the BPCI program, will qualify as an Advanced Alternative Payment Model (APM) under the Quality Payment Program adopted as part of MACRA, which means that physicians, because they take on financial risk, may earn the Advanced APM incentive payments.

What is BCPI Advanced?

The BPCI Advanced program is a voluntary program that offers a single retrospective bundled payment covering services within a 90-day Clinical Episode.  Participants may be involved in 29 inpatient Clinical Episodes and also, unlike the prior BPCI program, three outpatient clinical episodes –  Percutaneous Coronary Intervention, Cardiac Defibrillator, and Back & Neck except Spinal Fusion.  As with the prior BPCI model, target prices are provided in advance and are measured against the total Medicare fee for service spending and services during the selected Clinical Episodes. Participants who enter into the Participation Agreement with CMS will take on downside-financial risk from the outset of an episode.

Eligible Program Participants

BPCI Advanced will allow participation by Non-Convener Participants and Convener Participants.  Convener Participants may or may not be Medicare enrolled entities and agree to take on risk for downstream entities.  The Convener Participants facilitate coordination among episode initiators and bear the financial risk for the model. Non-Convener Participants are acute-care hospitals or Physician Group Practices, enrolled in Medicare, who are themselves episode initiators. They do not take risk for downstream entities.

Clinical Episodes are attributed at the episode initiator level with a CMS-defined hierarchy for attribution among different types of episode initiators.  The Clinical Episode will begin with an inpatient admission for an inpatient procedure or the start of the outpatient procedure.  Clinical Episodes continue for 90 days after the end of the inpatient stay or the outpatient procedure.

As with the prior BPCI program, payment under the BPCI Advanced program is tied to performance on specified quality measures.

Applications for participation in BPCI Advanced must be submitted by March 12, 2018.  The Model starts on October 1, 2018 and continues through December 31, 2023.

The Future of Alternative Payment Programs

BPCI Advanced is the first Advanced APM announced by the Trump Administration.  Although  it is voluntary, it does reflect continuation of alternative payment programs under the Trump Administration. Some have questioned the new Administration’s commitment to alternative payment programs, although there have been suggestions that HHS Secretary Nominee Alex Azar has indicated enthusiasm for programs that pay providers based on quality, and Nominee Azar has suggested mandatory programs may be appropriate.  Former Secretary Price was opposed to  mandatory programs such as the Episode Payment Models (EPMs),  the Cardiac Rehabilitation (CR) Incentive Payment Model, and the Comprehensive Joint Replacement (CJR) program. At the end of 2017, CMS terminated the EPMs and the CR Incentive Payment Model outright and terminated the mandatory nature of the CJR program.

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Tax Reform and Tax-Exempt Bonds: Risks Presented by the Tax Cuts and Jobs Act

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
1 year 10%
2 years 30%
3 years 60%
5 years 85%

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
1 year 30%
3 years 95%

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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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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Graham-Cassidy Proposal Falls Short on Votes While Other Deadlines Loom

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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Senate Unveils Changes to the Better Care Reconciliation Act of 2017: Significant Changes, but Uncertainty Remains

On July 13th, the Senate released the updated version of the Better Care Reconciliation Act (BCRA) of 2017. While the new version makes some significant changes to the original Senate proposal, the major components of the original bill remain intact.

Will the Changes Result in Additional Support?

Securing the required votes to pass the revised BCRA will be very difficult, with two GOP Senators, Rand Paul (R-KY) and Susan Collins (R-ME) announcing soon after its release they cannot even support beginning debate on the measure, a key procedural Senate vote. Senator Paul believes the bill doesn’t go far enough to repeal the Affordable Care Act (ACA) while Collins believes the Medicaid cuts are far too deep.  Four other Republican Senators have publicly said they remain undecided and many moderates in the Caucus have not announced their position.

Currently, Senate Republican Leader Mitch McConnell (R-KY) plans to begin the procedural process to allow debate on the bill as early as next week, following an anticipated Congressional Budget Office score Monday of the new language and the possible addition of an amendment by Senator Ted Cruz (R-TX).  In an effort to appease more conservative Senators, the Cruz amendment would allow non-ACA compliant plans to exist alongside ACA compliant plans in the exchanges. However, that causes angst for many moderates who are concerned about the potential loss of assurances such as coverage for pre-existing conditions.  Similar to the dynamic that unfolded in the House, moderates and conservatives in the Senate are deeply divided and appeasing one group tends to aggravate the other.

The following are highlights of the changes in the most recent version of the BCRA:

Changes to the Medicaid Provisions

  • Allows CMS to increase federal contributions to states above the limits imposed by per capita caps or Medicaid block grant amounts, if the state, or a location within the state, has a declared public health emergency.
  • Modifies requirements for Medicaid block grants to allow them to be applied to the Medicaid expansion population, and to prohibit states from using unspent block grant funds for non-Medicaid services.
  • Would retain an ACA requirement for states to cover children up to age 19 with incomes below 133% of the federal poverty level.
  • Allows states to receive relief from reductions in allowable disproportionate share hospital (DSH) payments during the following quarter in 2018 or 2019 if the state terminates its Medicaid expansion, and modifies the formula by which non-expansion states can receive additional DSH allocations.
  • Would allow seniors and the disabled to have Medicaid cover services provided during the three months prior to enrollment, as in current law.  Other Medicaid beneficiaries would be limited to retroactive coverage during the month of enrollment.
  • Would allow states to apply for an aggregate of up to $8 billion in additional federally funded payments for home and community based services (HCBS) providers through a demonstration project.  The 15 states with the lowest density are given priority in applying for these demonstration project funds.
  • Would expand federal support for services provided to members of an Indian tribe by enrolled Medicaid providers that are not Indian Health Services facilities.

Insurance-Related Changes

  • Consumers will be permitted to use HSA funds to pay health insurance premiums for the first time.  This will allow consumers to use pre-tax dollars to pay for health insurance, and could reduce the financial incentives that have long supported employer-provided health insurance coverage.
  • The so-called “Cruz Amendment” has been included in the revised BCRA.  This amendment would permit insurers to sell individual health insurance policies that do not comply with the market reforms in the ACA, so long as the insurer also sells an ACA-compliant policy in the same state.
    • The non-ACA-compliant policies would be exempt from a number of popular market reforms, including:
      • Actuarial value requirements
      • Essential health benefits coverage
      • Limits on out-of-pocket expenses
      • Community rating
      • Guaranteed issuance of policies
      • Prohibition of pre-existing condition exclusions
      • Limitations on coverage waiting periods
      • No-copay preventive care coverage
      • Medical Loss Ratio requirements
    • Coverage under a non-ACA-compliant policy does not constitute creditable coverage, so persons moving from non-compliant policies to ACA-compliant policies will be subject to a 6-month waiting period.
    • Non-ACA-compliant policies are not included in the ACA’s risk adjustment program (42 U.S.C. §18063).

Other Notable Items

  • Substance use disorder treatment and recovery service funding is increased from $2 billion for one year to approximately $5 billion per year from 2018 through 2026.
  • Purchasers in the individual market will be able to buy catastrophic/lower-premium plans and still be eligible for tax credits.
  • While most of the Affordable Care Act tax repeals remain, this version does not repeal the net investment income tax, additional Medicare tax, and the limit on insurance company deductions for executive compensation.

As we continue to monitor the Senate debate on the BCRA, we will provide updates on the status of the Senate repeal and replace efforts.

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Senate Releases Repeal and Replace Legislation on ACA: The Better Care Reconciliation Act of 2017

After weeks of secrecy, the Senate has released a discussion draft of legislation that is the counterpart of the American Health Care Act (AHCA) previously passed by the House.  The Senate legislation, entitled the Better Care Reconciliation Act of 2017 or BCRA, closely tracks the language in AHCA.

Foley Attorneys are continually monitoring and analyzing the impact of the bill and will provide additional coverage as changes are announced.  Below is a summary of the differences between the BCRA and AHCA.

Changes to the ACA Insurance Markets and Subsidies

Like the AHCA, the BCRA would make several immediate or near term changes to the health insurance markets originally established by the ACA including:

  • Reduction in Tax Penalties. The tax penalties associated with the employer and individual mandates will be reduced to $0 effective January 1, 2016, essentially repealing the employer and individual mandates with retroactive effect.
  • Reforms for Age and Pre-existing Conditions Remain. Several major market reforms implemented by the ACA are retained, including the ability for children to remain on their parents’ coverage until age 26, the requirement that individual health insurance be guaranteed issue and guaranteed renewable, and the prohibition on pre-existing condition exclusions.
  • Application for Waivers. States may apply for certain waivers of ACA market reforms, including the requirement that health insurance provide coverage of ten “Essential Health Benefits” (EHBs), requirements for credentialing plans on the health insurance marketplaces (exchanges), and limits on deductibles or cost sharing for exchange plans. BCRA would direct the federal government to approve state applications for such modifications, unless the alternative proposal would increase the federal deficit.
  • Increase of Premiums for Older Enrollees. Allowing states to increase premiums for older enrollees up to five times more than younger enrollees, increased from ACA’s maximum ratio of 3 to 1. Unlike the AHCA, the BCRA does not permit waivers of the ACA’s prohibition on determining premium amounts based on an individual’s health status.
  • Addition of a Six-month Waiting Period. Under the updated draft of the BCRA released on June 26, 2017, insurers in the individual market may impose a six-month waiting period on any individual who cannot demonstrate 12 months of continuous coverage. Under the AHCA, health insurance companies in the individual market would assess a 30% premium surcharge if an applicant has gone longer than 63 days without continuous health insurance coverage during a 12-month lookback period.
  • Cost-sharing reduction (CSR) Changes. CSR payment provisions in the ACA are repealed effective starting in 2020. However, the BCRA appropriates funds to make CSR payments through December 31, 2019. The AHCA did not appropriate any funds for CSR payments.

Additional Insurance Market Reforms

Like the AHCA, the BCRA would promote greater use of alternative approaches by states or by individuals to manage insurance costs, including use of high-risk pools and health savings accounts (HSAs).

  • Expanded Tax Benefits Associated with HSAs. Effective January 1, 2018, the BCRA would expand the tax benefits associated with HSAs, and allow consumers to contribute substantially more pre-tax money to an HSA regardless of whether they have individual or employer-sponsored health coverage.  HSA contributions would be allowed up to the limits on out-of-pocket expenses permitted for high deductible health plans (for 2018, $6,650 for self-only coverage and $13,300 for family coverage) (same as the AHCA).
  • Changes in Flexible Spending Account Contributions. Effective January 1, 2018, ACA’s limit on the amount an employee may contribute to a health flexible spending account (health FSA) per year (for 2017, $2,600) would be repealed (same as the AHCA but the BCRA’s effective date is a year later).
  • Ability to Purchase Over-the-counter Medications using FSA or HSA. Effective January 1, 2017, employees would again be able use health FSA and HSA funds to purchase over-the-counter medications without a prescription, as was the case before ACA was adopted (same as AHCA).
  • Changes to the Effective Date of the Cadillac Tax. While many of the taxes included in the ACA would be repealed, the BCRA retains but delays the “Cadillac Tax” until 2026 (same as the AHCA).  The Cadillac Tax is a 40% excise tax on high-cost health coverage provided by employers.

Significant Modifications to the Medicaid Program

The BCRA’s most significant impact may be felt on the Medicaid program, which would be slated for substantial reductions in funding along with new authority for states to modify the scope of their programs.

Incentives to Roll-Back the ACA’s Medicaid Expansion. BCRA would provide significant financial incentives for states to reverse or roll back the expansion of Medicaid under the ACA to cover low-income adults who do not have dependents or serious disabilities.

  • Reduction in Federal Financial Support for the Expansion. The Senate bill would gradually reduce the level of enhanced federal funding available for the expansion population each year until 2023, when funding would be available at a state’s normal Medicaid matching rate.  The reductions are certain to create enormous budgetary problems for states that expanded Medicaid, potentially forcing modifications or reductions in benefits or the roll-back of the expanded coverage.  The Senate bill also prevents states that elect to expand Medicaid on or after March 1, 2017 from receiving the enhanced funding.
  • Disparate Treatment of Expansion and Non-expansion States.  Medicaid expansion states would also face scheduled reductions in their disproportionate share hospital (DSH) payments, while BCRA would remove the reductions for non-expansion states.  In addition, non-expansion states would have their DSH allotments increased between 2020 and 2024 if the state has a per capita DSH allotment below the national average. These increases would not apply to expansion states.
  • New Authority for $2 Billion in Funds for Non-expansion States.  Similar to the House legislation, BCRA would create new authority for $2 billion in funds for non-expansion states that can be used to increase Medicaid payments to providers up to the provider’s uncompensated costs of treating Medicaid and uninsured patients.  A state would be disqualified from these payments if it elects to expand Medicaid coverage.

Changes to Limit Federal Support for Medicaid beginning in 2020.  BRCA also makes significant changes to the financial structure of the Medicaid program that are unrelated to the ACA’s Medicaid expansion.

  • Hard Caps on Federal Medicaid Funding through a Per Capita Calculation.  The formula for this calculation closely follows the approach in the House legislation.  However, the Senate version utilizes a different inflation adjuster beginning in 2025 that, if implemented, would limit the growth in federal Medicaid expenditures (on a per capita basis) to the general consumer price index for urban consumers. In recent years, Medicaid expenditures have risen much faster than this inflation measure. The per capita caps would apply beginning in 2020.
  • Budget Neutral Adjustments to the Per Capita Caps for Low- and High-Cost States.  New authority to adjust the per capita caps for specific enrollment categories for states that are 25% above or below the  mean per capita cap for all states.  Under this provision, states that spend more on a per capita basis for a specific enrollment category (e.g., for Medicaid-enrolled children, or seniors, or the disabled) would have their per capita caps reduced, and states that pay less than the mean would have their per capita cap increased. This authority does not apply to low-density states.
  • Reduction to the Per Capita Cap for New York State.  BCRA includes the language previously included in the House legislation that would reduce the per capita cap for New York state, unless New York state stops requiring local governments (other than New York City) to contribute to the Medicaid program.
  • New Authority for States to Apply for and Receive Federal Block Grants.  New authority for states, beginning with fiscal year 2020, to receive federal block grants for the operation of approved “Medicaid flexibility programs” for qualifying Medicaid beneficiaries.  The legislation provides that the Medicaid flexibility programs would not be available for children, seniors, the disabled, or individuals in the expansion population, meaning interested states would apply them to low-income adults with dependent children. The Medicaid flexibility programs would be in lieu of the operation of the state’s normal Medicaid benefit, and would allow the state to modify conditions of eligibility, benefit package, and cost sharing.  The amount of the block grant would be based on the per capita cap amount otherwise available to the state.  States would be required to meet a maintenance of effort requirement that is lower than what they would otherwise need to expend to draw down the same amount of Medicaid funds.
  • Phases Down the Cap on Health Care Provider Taxes.  BCRA would phase down provider taxes that will be considered permissible without meeting alternate, more burdensome criteria from 6% to 5%, beginning in 2021.  As a result of these changes, the provider taxes or fees in many states that help support Medicaid payments to hospitals and other providers may need to be reduced or modified.

Restrictions on Medicaid Eligibility.  BCRA also implements new oversight and restrictions on beneficiaries accessing Medicaid coverage.

  • Ability to Condition Medicaid Coverage on Satisfaction of a Work Requirement. States would be allowed to condition Medicaid coverage on the beneficiary’s satisfaction of a work requirement, which would be defined by federal law.  This requirement could not be applied against pregnant, disabled, elderly, or minor (under age 19) beneficiaries, or against individuals who is the only parent or caretaker in the family of a child with disabilities or under age 6.
  • Option to Require Re-enrollment for Expansion Enrollees.  States would have the option to require individuals in the Medicaid expansion population to re-enroll at least every 6 months to maintain their coverage.
  • Limits on Retroactive Medicaid Coverage.  Current law requires Medicaid programs to cover services provided to an individual within the 3 months prior to the completed application.  BCRA would reduce this to one month, effective October 1, 2017.
  • Sunset Hospital Presumptive Eligibility. Hospital authority to make presumptive eligibility determinations will end January 1, 2020.

Medicaid Benefit Changes. New limitations or options for state Medicaid coverage.

  • Access to Essential Health Benefits.  BCRA removes the requirement for Medicaid expansion beneficiaries to receive a package including EHBs.  The inclusion of this requirement in the ACA led to a significant expansion of Medicaid mental health and substance abuse disorder treatment services.
  • Limited Exception to Medicaid IMD Exclusion.  Medicaid currently does not cover services for adults who are residents in an institution for mental diseases (“IMD”).  The BCRA would expand state’s options to cover adult psychiatric hospital services, regardless of whether the IMD designation applies, when an individual has a stay of up to 30 consecutive days (and up to 90 days in a calendar year).  State would not be eligible to cover these services if the state reduces the number of licensed beds at psychiatric hospitals owned, operated, or contracted by the state, or reduces the non-Medicaid funding expended by the state and political subdivisions for inpatient and outpatient psychiatric treatment.

Other Notable Changes

  • Medicare Program Remains Intact – Like the AHCA, the Senate bill does not seek changes to the benefits or coverage under the Medicare program, although it does remove taxes imposed by the ACA that help finance the Medicare trust fund.
  • Substance Use Grants – An additional $2 billion would be available as grants for states to support substance use disorder treatment and recovery support services for individuals with mental or substance use disorders.
  • Additional Funding to Federally Qualified Health Centers– An additional $422 million in funding will be provided to Federally Qualified Health Centers through the Community Health Center Fund in 2017.
  • Planned Parenthood Funding – The BCRA would prevent any Medicaid, CHIP, and certain federal block grant payments from being made to Planned Parenthood for one year.

The Question Remains as to Whether the BCRA Will Pass the Senate

Yesterday, the Congressional Budget Office (CBO) released its estimate that 22 million people will lose coverage by 2026 if the Senate bill were to become law. The CBO also projected the measure would reduce the deficit by $321 billion between 2017 and 2026, roughly $200 billion more savings than in the House’s AHCA.

Senate Republican Leader Mitch McConnell (R-KY) intends to bring the bill to the Senate floor for a vote later this week under a process known as reconciliation, which means the measure can move forward with only 51 votes.  Should he be successful, the House could pass the Senate bill at the end of the week and send the measure to President Trump for his signature.  However, thus far five Republican Senators have stated they oppose the bill as currently written:  conservative Senators Rand Paul (R-KY), Mike Lee (R-UT), Ted Cruz (R-TX) and Ron Johnson (R-WI) and moderate Senator Dean Heller (D-NV).  Several other Senators have expressed concerns over a multitude of issues with the bill, including the 22 million individuals that are projected to lose coverage, lack of funding for Planned Parenthood for one year, and the lack of sufficient time to review and understand the likely impacts of the legislation.  McConnell can only lose votes from two Senators or the measure will fail.  Democrats have repeated their willingness to work with the Republicans to improve upon the Affordable Care Act, but oppose the BCRA or the “repeal and replace” bill in its current state.

Negotiations are underway as Senator McConnell tries to secure of the votes in order to move the bill this week.  He has significant flexibility to negotiate on Medicaid, funding to combat opioids, and other aspects of the measure because the $321 billion in projected savings far exceeds the amount required.  Senators are scheduled to be in their home states next week for the July 4th recess.  If the measure does not pass before they leave Washington, D.C., history tells us the path could become even more difficult once they return.  President Trump has reportedly contacted many Senators to hear their concerns and Vice President Pence, who is expected to expected to deliver the 51st vote to get the bill over the finish line, is scheduled to attend today’s regularly scheduled meeting of the Senate Republicans.

We will continue to monitor the Senate Legislation and will provide updates on any changes that happen in an effort to gain support of the existing bill.

Senate Vote Delayed

Editors note: This section was added at 2:30pm CDT on Tuesday, June 27th.

Senator McConnell announced this afternoon (Tuesday, June 27th) the Senate will not vote on BCRA this week, due to concerns raised by multiple Republican Senators who want more time to understand the bill’s impact on their respective states.  The earliest the Senate could take up the bill is the week of July 10th, following a scheduled recess the previous week.  The Senate is in session for three weeks during the month of July and then adjourns for five weeks beginning July 31st.  If the bill has not passed before the August recess its prospects are greatly diminished.

We expect negotiations to continue as McConnell works to address Senators’ concerns and secure the votes necessary for passage.

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Senate Sets Timeline to Take up Repeal and Replace Legislation on ACA

With Congress returning to Washington, D.C. from its Memorial Day work period, Senators are focusing heavily on the timeline and details of legislation that would significantly alter the Affordable Care Act (ACA). Over the last week, many senior Senators have expressed skepticism regarding whether they can pass a bill, but Senate Republican Leader Mitch McConnell (R-KY) has laid out an aggressive timeline. Specifically, he would like the chamber to vote on a bill before the July 4th recess and use the rest of July to reconcile the House and Senate versions, leading to a final vote before the August recess. Congressional Republicans are eager to move beyond health care in order to take up tax reform and FY2018 federal government funding.

The Great Medicaid Expansion Divide

Senate Republicans are in agreement that their bill will be significantly different from what the House passed earlier this year, but that is where consensus ends. The main sticking point is how to appease Senators on both sides of the expansion – states that expanded and those that did not – in order to cobble together 50 votes (with Vice President Pence delivering the 51st). Those that did expand their Medicaid population don’t want to see their expansion population lose coverage, and those that did not expand, believe they are entitled to an additional financial benefit so they are not at a disadvantage as compared to the expansion states.

Achieving the required savings under reconciliation, while appeasing both factions, is proving extremely difficult. At this point, Democrats are not expected to vote for any Senate bill that significantly modifies the ACA so Republicans must rely entirely on their own Conference. Senators are also concerned about the alarming number of Americans projected to lose coverage under the House passed bill, and are developing a plan that would provide more generous tax subsidies for purchasing coverage. At this point, there is very little interest in including changes to the Essential Health Benefits package as was done in the House bill.

Still Awaiting the House-Passed Bill

In an interesting twist, the Senate parliamentarian is still in the process of reviewing the House-passed bill to make sure it does not violate Senate rules. Therefore, the legislative vehicle has still not officially been delivered to the Senate from the House. A ruling is expected this week.

Stay tuned for further updates as we eagerly await the first draft of the Senate bill, which could come as early as this week.

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Republican Health Care Bill Moves Forward to the Senate


In a surprising reversal, last week the U.S. House of Representatives passed legislation that would significantly modify the Affordable Care Act. The legislation, known as the American Health Care Act (the “AHCA”, H.R. 1628), passed on Thursday with a 217-213 party line vote.  After cancelling an expected vote on AHCA in March, the House Republicans developed additional amendments to the AHCA which ultimately led enough House Republicans to support the bill.

While the AHCA would not fully repeal the Affordable Care Act, it does make significant changes to the insurance markets developed under the Affordable Care Act, and also includes numerous tax provisions and significant modifications to the Medicaid program. A summary of the initial AHCA legislation from early March is available here. The version of the legislation approved by the House of Representatives last week also includes key amendments that were introduced to help secure the votes to move the bill forward:

Amendments that Impact the Insurance Markets

  • Beginning January 1, 2018, would allow states to waive the ACA’s “community rating” (or medical underwriting) prohibitions, thereby permitting insurance companies to charge higher premiums for more complex health conditions.
  • Beginning January 1, 2020, would allow states to modify the ACA’s essential health benefits for plans offered in the state on the individual or group market, allowing such plans to offer more limited benefits, and potentially allowing all plans (including employer-sponsored insurance) to impose lifetime caps on benefits that are not essential health benefits.
  • Modifies the AHCA’s required premium increases for individuals who do not maintain continuous health insurance coverage (defined as all but 63 days in the last twelve months) to allow plans to instead consider the health status of such individuals when setting premiums for one year, but only if the state establishes a high-risk pool or other program to stabilize individual health market insurance premiums.
  • Additional funding for the Patient and State Stability Fund, including $8 billion per year from 2018 to 2023 to states who have applied for and been granted a waiver from the ACA’s community rating requirements. These funds must be used to provide assistance to reduce premiums or other out-of-pocket costs to individuals that:
    • reside in states with an approved waiver,
    • have a pre-existing condition,
    • are uninsured due to not maintaining continuous coverage, and
    • have purchased health care in the individual market.

Medicaid Amendments

  • New option for states to be paid a block grant for adult beneficiaries with dependents and child beneficiaries. The block grant would allow states to draw down the federal block grant funds at an enhanced rate, and would allow the state increased flexibility to reduce eligibility standards, benefits, and other Medicaid requirements.
  • New options for states to condition availability of Medicaid beneficiaries on satisfaction of a work requirement.
  • In addition to phasing out the enhanced federal matching funds for the Medicaid expansion for all states beginning in 2020, would include language prohibiting states that elect to expand after January 1, 2017 from receiving the enhanced matching funds.

Looking Forward

Now that the House has passed the AHCA attention turns to the U.S. Senate. Early Senate reactions indicate they will take some time to decide the best path forward and will write their own bill, rather than work off of the House bill.  While the House and Senate Republicans were working closely together on legislative language when the earlier version of the AHCA was released, that effort was abandoned in recent weeks once the House began to include changes to the ACA’s essential health benefits package and provisions related to coverage for people with pre-existing conditions. Those provisions have been met with opposition from some Republican Senators and are unlikely to be included in a Senate bill, in part because they do not have a federal budgetary impact, which is required when moving a bill under the chamber’s reconciliation rules. Moreover, Republican Senators have publicly stated their opposition to the AHCA’s changes to the Medicaid program and repealing funding for Planned Parenthood. To complicate matters further, Congress loses the ability to use the FY17 reconciliation vehicle once they pass a conferenced FY18 budget resolution. Just this week they have turned their attention to the FY18 budget so the clock is ticking.

Last week’s vote puts many House Republicans in districts which were won by Secretary Clinton on the hot seat for their re-election in 2018.  The dynamic is eerily similar to what occurred in 2009 and 2010 when Democrats passed the Affordable Care Act.

Stay tuned for further updates as we watch the Senate to see what happens to the AHCA and to the ACA.

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Key Takeaways From FHA’s Health Law Summit


Foley recently co-hosted the Florida Hospital Association’s (FHA) 2017 Health Law Summit, which brought together more than 40 in-house attorneys and compliance officers from FHA member hospitals to discuss the current state and future direction of the health care industry.

Amid so much economic and political uncertainty, we are diligent about keeping our fingers on the pulse of the macro trends impacting providers operating in the U.S. health system. While we know you’ve been paying close attention to these developments as well, following is a brief recap that encapsulates the key takeaways from event speakers and other health care practitioners in attendance.

Telehealth and Destination Medicine

Florida has rapidly become a hotspot for the burgeoning area of destination medicine, and hospitals must account for the movement, lest they lose valuable revenue and patients to specialty competitors. While current laws and regulations are complex, there are avenues to create compliant offerings, including telehealth and online second opinion programs.

Health Care Privacy and Cybersecurity

Managing relationships with vendors, especially those who handle protected health information, is key. Best practices include conducting due diligence and negotiating appropriate contractual protection.

Labor and Employment Law

Laws affecting the workplace are in a state of flux, but changes are on the horizon under the new administration, which is generally viewed as being pro-employer. Hospital executives are eager to see how the DOL will be steered on issues such as overtime, worker safety and collective bargaining, to name a few.

False Claims Act Investigations and Enforcement

Civil Investigative Demands (CID) served by the government must be treated differently than other kinds of subpoenas or demands, and misperceived responses can have an adverse impact. In-house counsel who receive CIDs must have an escalation plan that addresses potential high-risk or high-likelihood scenarios, including investigations, litigation, settlements, liability, damages, insurance and disclosures.

Update on Stark Law and Anti-Kickback Statute

Government enforcement of such violations is expanding at a rapid rate, particularly in Florida. There were several notable public settlements in the state last year, as well as changes made to 11th Circuit case law, so it’s important for in-house counsel to stay abreast of these developments.

Boards and Hospital Governance and Compliance

The Department of Justice is increasingly holding individual leaders responsible for the stewardship of their hospitals. Educating hospital boards is vital to effective compliance, especially related to financial arrangements and quality of care.


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