You’ve probably never heard of H.R. 436, the Protect Medical Innovation Act of 2011. The bill was proposed by Rep. Erik Paulsen (R-MN) just a few months after the Patient Protection and Affordable Care Act (more commonly called “the health care reform bill” or alternatively, “Obamacare”) was slated to take effect. It has languished in committee for more than a year after it was introduced but is now picking up steam as the poster child for the debate over President Obama’s health care reform.
The bill would, on its face, repeal a controversial 2.3% excise tax on medical devices. The tax, currently a part of the existing health care law, is expected to raise nearly $29 billion in revenue. The tax has faced criticism from the medical industry for potentially driving up the cost of health care and possibly sending even more jobs overseas – medical companies and pharmaceutical companies like Pfizer and Wyeth have already famously relocated offices and in some cases, headquarters, abroad to take advantage of tax havens.
To combat the loss of revenue with the repeal, Republicans have offered up a plan to recapture excess tax credits under the health care law’s government-sponsored insurance exchanges. While the tax credit repayment is currently subject to an income cap, the Republican plan would remove the cap altogether, ostensibly to protect against fraud. Democrats, however, argue that the measure would subject taxpayers to what amounts to a penalty for finding a job or other life events.
Here’s how the cap works. Under the health care law, beginning in 2014, refundable tax credits (okay, you already know how I feel about these) are available for certain taxpayers to buy health insurance through state-based exchanges. It’s more or less a subsidy to allow all taxpayers the ability to buy insurance if they can’t otherwise afford it. Eligibility is based on information including income and family size provided on your income tax returns for the prior two years.
The fear is, of course, that as life happens – income varies, kids move on, folks get divorced – that the subsidy might actually be overpaid to some taxpayers, especially if those taxpayers don’t report those changes immediately. If a taxpayer gets too much subsidy, he or she is required to pay some or all of it back, subject to a cap based on income levels. Currently, taxpayers earning less than 400% of the federal poverty level only have to repay a portion; by way of example, a family of four is considered to be at the poverty level with a gross income of $23,050 for the year and 400% of that is $92,200.
The new law would remove the income cap for repayment and would require any taxpayer who receives more subsidy than he or she is entitled to receive to repay the credit, irrespective of income. It has been estimated by Ways and Means Committee Staff that this move would save taxpayers $43.9 billion over the next ten years.
The bill appears ready to sail through the House as-is.
But wait… the Ginsu knives package of bills does even more! Republicans intend to wrap up two other health-care related bills into H.R. 436. And here’s where things get sticky.
The package of bills would also change the rules for the treatment of over-the-counter drugs under popular savings plans. The health care law changed the way that OTC medications had been treated under those plans: currently, OTC medications are no longer qualified medical expenses for most flexible spending arrangements (FSAs), health reimbursement arrangements (HRAs), health savings accounts (HSAs), and Archer medical savings accounts (Archer MSAs) unless a doctor writes a prescription for the medications. The change made sense from a tax policy perspective since personal items and non-prescription medications are not allowed as deductions on a Schedule A as deductible medical expenses; in this way, the law is “conformed” to the definition for purposes of medical expenses at IRC §213. But, as you are likely aware, it wasn’t a popular change with taxpayers. So, under the proposed law, for 2013 and beyond, the prohibition on using tax-free funds from FSAs, HRAs, HSAs, and Archer MSAs to purchase OTC medicine would be lifted.
And wait… there’s still more!
The package of bills would also allow employees to recover unused balances under health flexible spending arrangements. Under the current law, those FSAs which are funded by payroll deductions have a “use it or lose it” rule. If an employee doesn’t use up the funds inside an FSA by the end of the year, the balance is forfeited.
Under the proposed law, beginning in 2013, employees would be able to recover the remaining balance – up to a maximum of $500 – at the end of the year so long as it is treated as taxable compensation (remember, funds inside the plan have never been subject to tax).
So… what’s the big deal?
Well, none of these proposals in and of themselves are all that remarkable. Most are fairly popular, too, among legislators (the first version of H.R. 436 alone has 230 co-sponsors) and taxpayers.
The concern in Washington is more about what the consolidated plan stands for than what it is.
Democrats fear that it is the beginning of dismantling the new health care law. So far, the Republicans haven’t been able to knock it out as a whole inside the courts. But what if instead of repealing it – or overturning it – they merely chipped away at it, one section at a time?
I know what you’re thinking: the health care law is huge. Crazy huge. And when it was passed, it was a (*clears throat*) big deal. And it would take years and years to undo it piece by piece.
But what if it was kind of like a Jenga puzzle? And all you had to do was pull a piece or two out at the bottom until the whole thing crumbled?
That would make Republicans quite happy. And it would make Democrats quite unhappy. And this being an election year… well, you see the problem.
So watch this vote carefully. It’s not about medical devices or taxes, really. Not by a long shot.
