As was widely expected over the month of December, the Obama Administration and Congress scrambled in the late hours of 2012 and on New Year’s Day devising a legislative package to prevent the United States from going over the “Fiscal Cliff,” a series of across-the-board tax increases and spending cuts that would have automatically implemented without intervening legislative action. Although the compromise they reached was far from the “Grand Bargain” that President Obama and many members of Congress were seeking, Vice President Biden and Senate leadership came to an agreement to avoid the cliff for the early part of 2013. The Senate approved the package, the American Taxpayer Relief Act (H.R. 8), by an overwhelmingly bipartisan vote of 89-8 in the early morning hours of New Year’s Day. Later that day, shortly before midnight, the House voted to approve the Senate package by a vote of 257-167, with 85 Republicans joining 172 Democrats in support.

The legislation contains some significant health policy changes, described in more detail below, although its primary purpose is to prevent steep tax increases for 99% of Americans and to delay the automatic “sequestration” spending cuts that were scheduled to go into effect due to an earlier agreement to raise the debt ceiling. In H.R. 8, which the Congressional Budget Office (CBO) estimates will cost around $4 trillion, the sequester is turned off for two months, allowing Congress more time to focus on a comprehensive deficit reduction solution. In addition, current tax rates are permanently extended for all Americans earning up to $400,000 for individuals and $450,000 for married couples. Several other major tax modifications, including some related to the estate tax and capital gains, were also included. Discussion about other aspects of the legislation, including changes to renewable energy programs, may be found here.

The health policy provisions included in the bill fall into two main categories: (1) extension of various health care programs and reimbursement streams under Medicare and other government initiatives, and (2) “offsets” and changes in other programs and payment methodologies to glean savings to cover the costs of the package. A summary of the major health care provisions are as follows.

Summary of Extensions of Health Care Programs/Reimbursement

The most sought-after extender provision in the Act is the so-called “Doc Fix” or physician payment adjustment for Medicare providers. If Congress had failed to act, as of January 1, 2013, reimbursement rates for physicians under the Medicare program would have dropped by about 26.5% based off of the application of the sustainable growth rate (SGR) formula that adjusts Medicare physician reimbursement annually. The effect of the SGR formula, if it is actually implemented, is to decrease, not increase, physician reimbursement. Although there is widespread support for a “permanent fix” to the SGR, the steep costs of not implementing its cumulative reductions leads Congress every year to seek a short-term solution. H.R. 8 freezes the Medicare physician reimbursement rate at its 2012 level until December 31, 2013 with a price tag of about $25 billion over ten years. (A more permanent, albeit expensive, solution for the Doc Fix may be considered in Congress as part of the upcoming debates starting this spring over the debt ceiling increase and continuing resolution.)

In addition to the Doc Fix, several other payment and program extensions were part of the legislative agreement. Some of the more notable provisions include:

• Ambulance Add-On Payments: This provision continues the base rate payment add-ons for ground ambulance transports through December 31, 2013. Ambulance transports will receive a 2% add-on in urban areas, a 3% add-on for rural areas, and a 22.6% add-on for super-rural areas (a “super-rural area” is defined as a rural county that is among the lowest quartile of all rural counties by population density).
• Payments for Outpatient Therapy Services: Payments for these services will be capped at $1,880 for any therapy services provided by non-hospital providers. The Act continues to use this limit, but also extends the “exceptions case process” by which providers can receive additional reimbursements if more therapy services are deemed to be medically necessary. The extension lasts until December 31, 2013.
• Medicare-Dependent Hospital (MDH) Program: H.R. 8 extends the MDH program, which delivers increased reimbursements to small rural hospitals that depend on Medicare payments for a large share of their revenue. The MDH program also supports the development of rural health infrastructure. The extension lasts through the beginning of the next federal fiscal year on October 1, 2013. The Act also extends a payment add-on for low-volume hospitals, which are defined as having fewer than 1,600 Medicare discharges and being at least 15 miles away from the nearest “like-hospital.”
• Work Geographic Adjustment: Under this provision the existing 1.0 floor on the “physician work” index continues through December 31, 2013, to reflect the geographic differences in cost of resources to provide physician services to Medicare beneficiaries.
• Medicare Advantage Plans for Special Needs Beneficiaries: The Act extends through 2014 the authority of specialized Medicare Advantage plans to target the enrollment of special needs individuals.
• Medicare Reasonable Cost Contracts: H.R. 8 allows Medicare Reasonable Cost Contracts to exist through 2014 in areas in which at least two Medicare Advantage coordinated care plans currently operate.
• Performance Improvement under Medicare: The Act extends funding through 2013 for the Medicare Improvements and Providers Act of 2008 and for outreach and assistance for low-income programs.

Outside of the Medicare program, the Act also has a number of other extensions, including: extending the Qualifying Individual Program, which allows Medicaid to pay Medicare Part B premiums for beneficiaries with incomes between 120% and 135% of the poverty line, until December 31, 2013; extending the Transitional Medical Assistance program, which allows low-income residents to maintain their Medicaid coverage when they start new employment, through December 31, 2013; continuing the Medicaid and CHIP Express Lane option through September 30, 2014; and extending funding for Family-to-Family Health Information Centers and diabetes research, treatment, and prevention programs for American Indians and Alaska Natives.

Summary of Health Care Offsets

In order to offset the projected costs of the extender provisions in the bill, the Act implements cost reductions in Medicare and other government health programs. Most significantly, a provision adjusting the Documentation and Coding of Medicare payments will allow CMS to recoup overpayments that it determines had been made to hospitals, and not yet recovered, as a result of the transition to Medicare Severity Diagnosis Related Groups (DRGs). CMS had been concerned that providers were “over-coding” (providing better documentation and coding of medical records to achieve a higher-weighted DRG) to increase their reimbursements and had instituted a prospective recoupment program covering certain years. This program is now extended. Congress estimates savings of $10.5 billion over ten years. In a separate provision, the Act increases the statute of limitations for recovering overpayments from 3 to 5 years.

Some of the other more notable offsets include the following:

• End Stage Renal Disease (ESRD) Payments: H.R. 8 makes several changes related to payments for ESRD. It is projected to save $4.9 billion by altering the bundled payment to account for behavioral and utilization changes of dialysis drugs. It also is projected to save $300 million by reducing reimbursement rates by 10% for ambulance services to ESRD individuals receiving non-emergency basic life support services.
• Medicare Disproportionate Share Hospitals: To save an estimated $4.2 billion, the Act maintains the 75% reduction in the reimbursement rate for Medicare Disproportionate Share Hospitals contained in the Affordable Care Act, and will determine future allotments from this rebased level.
• Coding Intensity Adjustment: Under current law, Medicare Advantage plans receive a coding intensity adjustment of 3.41%, which reduces those plans’ reimbursement rates so that they more closely match the reimbursement to Medicare fee-for-service plans. This rate factor, determined by the CMS, will be increased to save an estimated $2 billion.
• Consumer Operated and Oriented Plans (CO-OPs): The Act rescinds all unobligated funds for the CO-OP Program and its plans, which are nonprofit health insurance providers, established by section 1332(g) of the Affordable Care Act. The provision does not take away any obligated CO-OP funds, but it does create a contingency fund consisting of 10% of the current unobligated funds. The contingency fund will be used to help currently approved and created co-ops and will result in an estimated savings of $2.3 billion.
• CLASS Repeal: The Act repeals the Community Living Assistance Services and Supports (CLASS) program established by the ACA and championed by the late Sen. Ted Kennedy (D-MA). Although in October 2011 the Obama administration suspended the long-term care insurance program in which workers would have paid monthly premiums during their careers to create a cash-bank in case of disability later in life, many Democrats had hoped to revive the program someday. H.R. 8 repeals the CLASS Act, although doing so provided no savings. In its place, the Act creates a Commission on Long-Term Care to develop a plant for the establishment, implementation and financing of a system to make long-term care services and support available for individuals. The Commission has no scoring effect.
• Medicare Improvement Fund: The Act eliminates the Medicare Improvement Fund for an estimated savings of $1.7 billion.
• Multiple Therapy Procedure Payment Reduction: The Act reduces payments for physical and other therapy services when they are provided in the same day for an estimated savings of $1.8 billion.
• Advanced Imaging Services Adjustment: The Act increases the utilization factor used in the setting of payment for imaging services in Medicare from 75% to 90%, which is projected to save $800 million.
• Competitive Bidding Rates Applicable for all Diabetic Supplies: The Act applies competitive bidding payment rates to diabetic test strips purchased at retail pharmacies for an estimated savings of $600 million.
• Radiology Services Adjustment: The Act reduces payments for stereotactic radiosurgery services paid for under the Medicare hospital outpatient system, which is expected to save $300 million.

Although the American Taxpayer Relief Act has prevented the country from going over the “fiscal cliff,” the 113thCongress will almost certainly continue to focus on health care cost containment and entitlement reform in the coming weeks and months. Mintz Levin and ML Strategies will continue to closely monitor the effect of fiscal policy on health care.

©1994-2012 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

Bryan M. Stockton with Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. recently had an article, The Fiscal Cliff Deal’s Impact on Clean Energy, in The National Law Review:

Contains key tax provisions for renewable energy but funding for USDA energy programs is left out

Capping weeks of intense negotiations between the Obama Administration and Congressional leaders to avert the fiscal cliff, the House of Representatives late on the night of Jan. 1 passed HR 8, the American Taxpayer Relief Act, on vote of 257-167. The Act was passed by the Senate, 89-8, in a similar late night vote on Dec. 31, so it now goes to President Obama for his signature.

The Act is not a “grand bargain” or a comprehensive solution: sequestration—the automatic spending cuts Congress imposed on itself–has been postponed for only two months to give time for further negotiations. The Act allows federal tax rates to rise on those making over $400,000 ($450,000 for married couples) but also limits the impact of the Alternative Minimum Tax on 4 million taxpayers. The Act also includes a one-year extension of emergency unemployment benefits and a one-year extension of provisions to prevent doctors’ payments from Medicare from being cut.

The Act is a mixed bag for the clean energy industry but contains some significant wins on tax policy. The Act extends $46 billion in tax cuts for individuals and businesses—the so called tax extenders.Many of these tax extenders target the renewable energy and energy efficiency industries. For example, a tweak to the Section 45 production tax credit will allow projects that begin construction before Jan. 1, 2014 to take advantage of the credit. However, the Act is a disappointment for those depending on USDA Energy Title Programs as no mandatory funding was contained in the ninemonth reauthorization of Farm Bill programs included as part of the package.

Below is a summary of key clean energy provisions in the American Taxpayer Relief Act.

Tax extenders

• Extension and modification of incentives for Sec. 45 renewable electricity property production tax credit.  Under current law, taxpayers can claim either a 1.1 or 2.2 cent per kilowatt hour tax credit for electricity produced for a 10-year period from eligible facilities placed-in-service by the end of 2012 (wind) or 2013 (closed-loop biomass, open-loop biomass, landfill gas, or municipal solid waste facilities). The provision modifies section 45 to allow eligible renewable energy facilities that begin construction before the end of 2013 to claim the 10-year credit.
• Extension of investment tax credit in lieu of production tax credit. The Act would allow facilities qualifying for the section 45 production tax credit to elect to take a 30% investment tax credit in lieu of the production tax credit for facilities that begin construction by the end of 2013.
• Extension of alternative fuel vehicle refueling property credit (non-hydrogen refueling property). The Act extends for two years, through 2013, the 30% investment tax credit for alternative vehicle refueling property.
• Extension of incentives for alternative fuel and alternative fuel mixtures (other than liquefied hydrogen). The Act extends through 2013 the $0.50 per gallon alternative fuel tax credit and alternative fuel mixture tax credit. This credit can be claimed as a nonrefundable excise tax credit or a refundable income tax credit. Due to claims of abuse in the alternative mixture tax credit, taxpayers can no longer claim the refundable portion of the alternative fuel mixture tax credit.
• 25C Credit for certain nonbusiness energy property.  The Section 25C credit for energyefficient improvements to existing homes is extended for two years, through 2013. This reinstates the credit as it existed before passage of the American Recovery and Reinvestment Act.
• Plug-in electric motorcycles and highway vehicles.  The Act reforms and extends for two years, through 2013, the individual income tax credit for highway-capable plug-in motorcycles and 3-wheeled vehicles. It also makes golf carts and other low-speed vehicles ineligible for the credit.
• Cellulosic biofuels producer tax credit. The Act extends the $1.01 per gallon production tax credit on cellulosic biofuel produced before the end of 2013. The definition of qualified cellulosic biofuel production is expanded to include algae-based fuel.
• Biodiesel and renewable diesel credits.  The Act extends through 2013 the $1.00 per gallon tax credit for biodiesel, as well as the $.10 per gallon small agri-biodiesel producer credit.  The Act also renews through 2013 the $1.00 per gallon tax credit for diesel fuel created from biomass.
• Credit for construction of new energy efficient homes.  The tax credit for the construction of energy-efficient new homes that achieve a 30% or 50% reduction in heating and cooling energy consumption is extended for two years, through 2013.
• Energy efficient appliance credit.  The Act extends for two years, through 2013, a tax credit to US-based companies that manufacture energy-efficient clothes washers, dishwashers and refrigerators.
• Cellulosic biofuels bonus depreciation.  The 2008 Farm Bill allowed cellulosic biofuel facilities placed-in-service before the end of 2012 to expense half of their eligible capital costs in the first year of operation. The Act extends this bonus depreciation for one additional year for facilities placed-in-service before the end of 2013 and allows algae-based fuel to qualify for bonus depreciation.
• Special rule for sales of transmission property.  The Act extends the present law deferral of gain on sales of transmission property by vertically integrated electric utilities to FERC approved independent transmission companies. The Act allows gain on such sales prior to January 1, 2014 to be recognized ratably over an eight-year period.
• Extension of New Markets Tax Credit.  The federal government leverages New Markets Tax Credits (NMTCs) to encourage significant private investment in businesses in low-income communities. The program provides a 39 percent tax credit spread over 7 years.  The Act extends NMTCs for two years, permitting a maximum annual amount of qualified equity investments of $3.5 billion each year.
• Extension of bonus depreciation. Businesses are allowed to recover the cost of capital expenditures over time according to a depreciation schedule. Starting in 2008, Congress allowed businesses to take an additional depreciation deduction allowance in the first year.  The Act extends the 50 percent accelerated expensing provision for qualifying property purchased and placed in service before January 1, 2014 (before January 1, 2015 for certain longer-lived and transportation assets).

Bioenergy funding

The Act also extends the 2008 Farm Act for nine-months (until the end of fiscal year 2013). A short term extension was necessary after the House refused to vote on a five-year reauthorization. The Act reauthorizes funding for US Department of Agriculture (USDA) Energy Title programs but does not provide mandatory funding. Despite hopeful signals that mandatory funding was included in an agreement between the Agriculture Committees’ leadership, it was not included in the final deal between Senate Minority Leader McConnell and the Obama Administration.

By comparison, the Senate Farm Bill passed last year contained approximately $800 billion over 10 years for USDA energy programs. It also would have expanded eligibility under certain programs to renewable chemicals. These USDA programs provide grants, loans, and loan guarantees to renewable energy and advanced biofuel projects; promote cultivation of cellulosic feedstocks; and provide research funding. Work on a new five-year Farm Act will now have to start again, though much of the groundwork has already been done by the committees.

©1994-2012 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.