H.R. 436: Health Care Cost Reduction Act of 2012

H.R. 436

Health Care Cost Reduction Act of 2012

Sponsor
Sen. Bernard Sanders

Date
June 7, 2012 (112th Congress, 2nd Session)

Staff Contact
Communications

Floor Situation

On Thursday June 7, the House is scheduled to consider H.R. 436 (to amend the Internal Revenue Code of 1986 to repeal the excise tax on medical devices, to repeal the amendments made by the Patient Protection and Affordable Care Act which disqualify expenses for over-the-counter drugs under health savings accounts and health flexible spending arrangements, to increase participation in medical flexible spending arrangements and for other purposes), under a rule. 

 H.R. 436, Rules Committee Print 112-23, is a consolidation of three separate bills with the addition of an offset marked up during the reconciliation process earlier this year.  First, the pre-consolidated H.R. 436, the “Protect Medical Innovation Act of 2011,” was introduced by Rep. Erik Paulsen (R-MN) on January 25, 2011 and was referred to the Committee on Ways and Means.  The Ways and Means Committee held a mark-up session on May 31, 2012 and ordered the bill as amended in the nature of a substitute by Committee Chairman Dave Camp (R-MI)  favorably reported by a vote of 23-11.  Second, H.R. 5842, the “Restoring Access to Medication Act,” was introduced by Rep. Lynn Jenkins (R-KS) on May 18, 2012 and was referred to the Committee on Ways and Means.  The Ways and Means Committee held a mark-up session on May 31, 2012 and ordered the bill as amended in the nature of a substitute by Committee Chairman Dave Camp (R-MI)  favorably reported by a vote of 24-9.  Third, H.R. 1004, the “Medical FSA Improvement Act of 2011,” was introduced by Rep. Charles Boustany (R-LA) on March 10, 2011 and was referred to the Committee on Ways and Means.  The Ways and Means Committee held a mark-up session on May 31, 2012 and ordered the bill as amended in the nature of a substitute by Committee Chairman Dave Camp (R-MI)  favorably reported by a vote of 23-6.

Bill Summary

Section 1.  Short title; table of contents:  Subsection (a) provides that the short title is the “Health Care Cost Reduction Act of 2012”.  Subsection (b) provides the table of contents.

Section 2.  Repeal of medical device excise tax:  Under the president’s takeover of health care law, effective in 2013, a 2.3 percent excise tax will be imposed on the manufacture or import of certain “medical devices” (as defined by section 201(h) of the Federal Food, Drug, and Cosmetic Act).  This section would repeal this medical device excise tax.  The provision would reduce revenues by $29.1 billion FY 2013-22.

Section 3.  Repeal of disqualification of expenses for over-the-counter drugs under certain accounts and arrangements:  Also a provision in the president’s health care law, taxpayers may not use tax-free distributions from flexible spending arrangements (FSAs), health reimbursement  arrangements (HRAs), health savings accounts (HSAs), and Archer medical savings accounts (Archer MSAs) for the purpose of purchasing over-the-counter (OTC) medicine other than prescription drugs or insulin.  Effective for expenses incurred after 2012, this section would repeal this prohibition.  The provision would reduce revenues by $4.0 billion FY 2013-22.

Section 4.  Taxable distributions of unused balances under health flexible spending arrangements:

Health flexible spending arrangements (FSAs) offered through a cafeteria plan allow participants to contribute pre-tax dollars from their paychecks to pay for approved out-of-pocket health care expenses not covered by insurance.  Under cafeteria plan rules, an employee must forfeit to their employer any remaining balance in the cafeteria plan at the end of the year; a “use-it-or-lose-it” rule.  Effective for plan years beginning after 2012, this section would allow employees with health FSAs funded through salary deductions to “cash out” any remaining balance at year-end, up to a maximum of $500, and would treat it as taxable compensation.  The provision would reduce revenues by $4.1 billion FY 2013-22.

Section 5.  Recapture of overpayments resulting from certain federally-subsidized health insurance: Beginning in 2014, the president’s health care law provides advanceable and refundable tax credits (“Exchange subsidies”) for the purpose of purchasing certain health insurance through state-based Exchanges.  Some beneficiaries will fail to properly report changes in their financial situation, resulting in these beneficiaries receiving subsidies to which they are not entitled based on their actual income for the year.  Under current law, beneficiaries earning less than 400 percent of the Federal Poverty Level and receiving a subsidy overpayment only have to return a limited portion of the overpayment.  This section would require those who receive Exchange subsidies to which they are not entitled to repay the full amount of overpayments.  This provision would reduce the deficit by $43.9 billion FY 2013-2022.

Background

Repeals the Health Care Law’s Medical Device Tax

 Beginning in 2013, the president’s health care law institutes a 2.3 percent excise tax on the manufacture or import of certain “medical devices.”  

The medical device industry employs more than 400,000 workers nationwide and invests nearly $10 billion in research and development ("R&D") annually.  The tax is expected to stifle innovation, increase health care costs, and cost thousands of high-paying jobs.

One study concluded the tax could result in job losses in excess of 43,000 and employment compensation losses in excess of $3.5 billion.  The study also demonstrated that the tax would "roughly double the device industry's total tax bill and raise the average effective corporate income tax rate to one of the highest effective tax rates faced by any industry in the world."

The new tax also will increase costs for patients.  ln April 2010, the CMS Office of the Chief Actuary explained how various taxes and fees, including the medical device excise tax, would be passed onto patients in the form of higher prices.  The Chief Actuary wrote: "We anticipate that these fees and the excise tax would generally be passed through to health consumers in the form of higher drug and device prices and higher insurance premiums, with an associated increase in overall national health expenditures ranging from $2.1 billion in 2011 to $18.2 billion in 2018 and $17.8 billion in 2019."

Moreover, the excise tax will increase the effective tax rate for many medical technology companies, thereby reducing financial resources that should be used for R&D, clinical trials and investments in manufacturing.

Repeals the Health Care Law’s Limitations on Using Health-Related Savings Accounts for Over-the-Counter Medication

Because of a provision in the president’s health care law, taxpayers may not currently use tax-free distributions from flexible spending arrangements (FSAs), health reimbursement arrangements (HRAs), health savings accounts (HSAs), and Archer medical savings accounts (Archer MSAs) for the purpose of purchasing over-the-counter (OTC) medicine without a prescription from a physician.  If HSA or Archer MSA funds are used to purchase OTC medicine (other than insulin) that is not prescribed by a physician, those funds are subject to full income taxation plus a 20 percent penalty because it would be considered a “nonqualified withdrawal.”  With respect to FSAs and HRAs, taxpayers simply would be denied reimbursement from the accounts.

Allows Americans to Keep Unused FSA Funds

FSAs offered through a cafeteria plan allow participants to contribute pre-tax dollars from their paychecks to pay for approved out-of-pocket health care expenses not covered by insurance.  Under the cafeteria plan rules, which apply to FSAs funded with pre-tax contributions from payroll deductions, an employee must forfeit any remaining balance in the cafeteria plan at the end of the year (which may include a grace period of up to two-and-a-half months at the beginning of the following year).  This means that if an employee chooses to reduce his or her salary to fund an FSA but does not spend down his or her entire FSA balance by the end of the year, the remaining balance is forfeited to the employer.

Effective for plan years beginning after 2012, the provision would allow employees with health FSAs funded through salary deductions to “cash out” any remaining balance at year-end, up to a maximum of $500.  The rebate would be included as income of the employee for federal income tax purposes and as wages for payroll tax purposes in the year of the rebate (because the same amount would have been excluded from both income and wages in the previous year). 

Eliminates the Health Care Law’s Insurance Subsidy Overpayments

The President’s health care law fails to adequately protect taxpayers from overpayments of health insurance Exchange subsidies, even in the case of fraud.  Exchange subsidy eligibility and the amount of the subsidy will be based on two-year old income tax return data.  Because Exchanges will rely on self-reported information and income can change (new job, promotion, spouse returns to the workforce, etc.), the government will conduct an annual review to determine if someone received more taxpayer-funded subsidies than he/she was entitled to receive. 

If an overpayment was made, the recipient is required to repay some or all of the overpayment, subject to certain limits.  Congress has twice overwhelmingly passed, and President Obama has signed, legislation to increase the amount of overpayments recipients are required to repay (the Medicare “doc fix” in 2010 and the 1099 repeal bill in 2011).  HHS Secretary Sebelius described the subsidy recapture provision as “making it fairer for recipients and all taxpayers.”

This provision would require those who receive Exchange subsidies to which they are not entitled to repay the full amount of overpayments. 

Cost

The Congressional Budget Office (CBO) estimates the bill would decrease the deficit by $6.7 billion over the 2013-2022 period.

 Enacting the bill would affect both direct spending and revenues; therefore, pay-as-you-go procedures apply.

 For more complete information see June 5, 2012 CBO letter here.