We can help you develop a long-term tax planning strategy to enable you to make informed financial decisions. We’re dedicated to staying abreast of new and emerging trends and developments in tax laws, enabling us to offer you the depth, dimension and experience you need to be successful. Our guiding concept of focusing on planning throughout the year, combined with our taxation expertise and business backgrounds, differentiates our tax practice.

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2010 MID-YEAR TAX PLANNING LETTER

Dear Clients and Friends,

Mid-year tax planning for 2010 may require an understanding of one of the most complicated tax years in recent memory.

The 2010 tax year represents a critical time to ascertain
and identify any tax traps while maximizing opportunities
for dramatic tax savings. Next year may truly be too late...

There have been many changes to tax law already this year, and more changes are anticipated. As always, the key is to be able to project your anticipated income levels not only for 2010 – but also for the next two to three years.

Although the typical tax planning wisdom has been to avoid paying any taxes for as long as possible, this strategy may have to be dramatically altered. On the other hand, deductions may be worth a great deal more in a year or two.

Unfortunately, any tax projections can require you to predict a series of unknown future events. But, despite the difficulties involved, you will need to make educated guesses and reasonable assumptions. Remember, no tax strategy is cast in stone until the time for changing strategies has passed. Tax planning is a dynamic process, and the earlier you start, the better.

Here are some basic principles that can help guide your overall thinking:

• If you expect your tax rate will be higher next year, you may want to accelerate income into this year and defer deductions into next year.
• If you think your tax rate might be lower in 2011, consider deferring income to next year and accelerating deductions into this year.

Remember to pay careful attention to your marginal tax rate – the highest rate at which your last, or marginal, dollar of income will be taxed.

Overall tax rates are scheduled to rise in 2011. However, if your income in 2011 will be substantially lower than in 2010, your marginal tax rate may actually decrease.
Here are a couple of additional guidelines:

• If your deductions might be limited next year, try to accelerate some deductible expenses into this year.
• If you qualify for the standard deduction in either year, consider shifting the itemized deduction into the year you can itemize.

The critical step is to meet with your tax adviser now, during the middle of the 2010 tax year, while there is still plenty of time to consider and implement appropriate planning strategies.

MARGINAL TAX RATES
The biggest factor in your planning is that marginal tax rates are scheduled to increase in 2011, to a top tax rate of 39.6 percent, 4.6 percent higher than the current top rate of 35 percent.

This can be somewhat misleading because the limitations on both itemized deductions and personal/dependency exemptions are scheduled to be restored in 2011. They had been eliminated for 2010. And, taxpayers fully subject to the limitations face an effective top marginal tax rate that can, in fact, be 3 to 4 percentage points higher than the stated 39.6 percent rate.

If that were not enough, there is talk that dividends may once again be taxed as ordinary income. This could mean a marginal tax rate on dividends of up to 39.6 percent, up from 15 percent in 2010. This would represent an increase of 164 percent!

Looking into the future, the news gets worse.

For 2013, the top marginal rate for long-term capital gains will climb to 23.8 percent (20 percent plus an additional 3.8 percent Medicare tax).

With scheduled rate increases such as these, it may be tempting to opt out of the installment sale treatment, even though the taxes would be paid sooner. Make sure you consider that an additional Medicare tax of 3.8 percent will apply to unearned income beginning in 2013. As a result, installment gains could be taxed at an effective tax rate in excess of 45 percent (39.6 percent highest marginal rate plus the effect of the phaseout of itemized deductions and exemptions, plus a 3.8 percent Medicare surtax). This is before you even begin including any applicable state or local income taxes!

A solution may be to consider taking an installment note payable over a shorter period – preferably, a three-year term or less for assets disposed of in 2010. As you can see, tax planning is very important.

The highest long-term capital gain rate is increasing from 15 percent to 20 percent in 2011, at least for those taxpayers in the two highest brackets. Also remember, any type of income such as long-term capital gains would be included in adjusted gross income, which then affects the limitations on itemized deductions and exemptions.

The timing of taking a bonus from your profitable company is another critical issue. Once again, W-2 or self-employment income faces a top rate of only 35 percent this year vs. 39.6 percent in 2011.

Starting in 2013, earned income above $200,000 for an unmarried taxpayer ($250,000 on a joint return) will be subject to a new .9 percent Medicare surtax. Thus, the Medicare surtax increases to 2.35 percent vs. the current 1.45 percent rate.

The FICA cap is set at $108,600 for both 2010 and 2011, but with the shortfalls expected for the Social Security system, this cap is projected by the Social Security Administration to rise to $154,000 by 2017!

The good news is that, despite the fact that this Medicare surtax will be applied to most types of earned and unearned income starting in 2013, it will not be imposed on retirement plan distributions, IRA payouts or Social Security benefits. Tax-exempt income, such as municipal bond interest, would also be spared.

DEDUCTIONS
The curious thing is that the value of deductions will correspondingly increase as these marginal tax rates go up over the next few years. Therefore, it might make a great deal of sense to pay any real estate taxes just after the close of the 2010 tax year, along with fourth-quarter estimated state income taxes.

Too many itemized deductions in one year may cause a trap for the unwary because of the alternative minimum tax (AMT). The key is to find a balance between paying these expenses over the two-year period.

The same will hold true for deductions stemming from depreciable asset acquisitions. However, the exact analysis will depend on your particular cash flow needs.
For instance, the following three criteria might be used in doing this analysis:

1. If your business was experiencing cash flow problems due to losses over the last several years, and asset acquisitions were made during 2009, you would have until the extended due date of the return, or Oct. 15, 2010, to claim 50 percent bonus depreciation on certain eligible property. This write-off could, in turn, serve to create or increase a net operating loss, which could then be carried back three, four or five years to a profitable tax year, to garner a refund and thus assist in cash flow needs. Conversely, it should be noted that a Section 179 deduction would not generate any immediate tax benefit to the extent that the business did not have current trade or business taxable income to cover the deduction amount. This also applies to partners who file Form K-1.
2. If the business, especially a flow-through entity such as a partnership, LLC or S corporation, was finally starting to make money or its losses were starting to diminish in 2010, and it anticipated these profits to grow dramatically over the next several years, future deductions would be even more valuable as individual tax rates increase. A Section 179 immediate expensing election of up to $250,000 might make sense even if there were not enough profits to cover the expensed amount.

For example, suppose 2010 was a loss year, but the company was finally able to start reinvesting in plant and equipment. On the other hand, 2011 and 2012 were projected to be significantly more profitable. In such a scenario, it might make sense to take the Section 179 deduction in 2010 and then carry it over to the next year or two and deduct it when the business owner will be facing a 39.6 percent marginal tax rate on the company’s profits.

1. If the deductions would be most valuable in later years – 2013 or later, when the top marginal rate could be as much as 43.4 percent before considering the effect of the phaseout mechanisms at the K-1 owner level – then it might be best to take normal depreciation over a four-, six- or eight-year period, as appropriate.

LOSSES
The sad thing about personal losses for individual taxpayers is that they continue to be nondeductible. This includes any loss incurred on the sale of a personal residence or vacation home. Meanwhile, capital losses (both short- and long-term) remain capped at $3,000 per year to the extent that they exceed the total of any capital gains.

One bit of good news continues to be that individuals experiencing any forgiveness of debt in relation to their mortgage on a principal residence need not pick this up as income to the extent that it does not exceed $2 million. Yet, any other “cancellation of debt” income, such as mortgages on second homes or rental properties or credit card debt, remains fully taxable unless the taxpayer is otherwise insolvent or has filed for bankruptcy protection.

Most business investments are done through ownership of a partnership, LLC or S corporation. If someone is merely an investor in this business enterprise and not actively participating, the “passive loss” rules will normally come into play. Basically, investors are not allowed to take such passive losses (e.g., those that have flowed through to investors on a Schedule K-1) to the extent that they exceed any net profits received from such investments or from net rental income. The losses become “suspended” until some future time when profits are realized.

The only other exception results when investors finally dispose of their entire investment in a particular passive activity in a fully taxable transaction. Then, any suspended losses become fully deductible. Therefore, if investors do hold investments in these so-called passive investments, it behooves them to consider disposing of them in 2011 or 2013, when such losses might be much more valuable.

It is common for the owners of a business conducted as a partnership, LLC or S corporation to also own the real estate that is held in a separate LLC in the same percentages and is, in turn, rented to the business.

Furthermore, given the state of the economy over the last several years, rent being paid to the owners of these “real estate” LLCs was probably the last use to which the company’s limited cash flow was spent.

As a result, it has not been unusual to see a net rental loss flowing out of the LLC to the owners on their K-1 forms. In such a situation, consideration should be given to elect to treat the ownership of the business and the LLC holding the real estate as one activity. The end result is that the passive loss rules do not apply to these particular rental losses, meaning that the owners can freely take the losses as a write-off against their other earned income, as well as their portfolio, such as dividend, interest and capital gain income.

Taxpayers owning real estate used in, or rented to, a trade or business should consider having a cost segregation study done to ascertain whether a much faster write-off can be obtained. Such a study could segregate shorter-life parts of the property from the underlying real estate that normally receives 27.5- or 39-year depreciable life. Not only will a shorter period be required in taking any depreciation deductions, assets might be identified for which a Section 179 immediate expensing election can be made. Or, a 50 percent bonus depreciation deduction might apply, at least for those assets placed into service before 2010.

CREDITS
For tax credits, 30 percent of the cost of any insulation or other energy-saving investments, such as new windows or doors, can be taken on your 2010 return. This is limited to an overall cap of $1,500 for 2009 and 2010 combined. With the popularity of geothermal wells being used to lower energy costs, especially with new construction, this 30 percent credit has no cap whatsoever. In most cases, this is combined with a return on investment period of less than seven years.

The use of the first-time home buyer credit grew dramatically in 2010. The key deadline required was that the contract be signed by April 30, 2010, with the taxpayer taking occupancy by June 30.

For new construction, the same occupancy cutoff of June 30 applied. That deadline also applied to individuals claiming a credit for a new home purchase after owning another principal residence for at least five consecutive years out of the prior eight years.

CONCLUSION
A number of tax provisions expired at the end of 2009 that will most certainly be extended at least for the 2010 tax year. The provisions include the sales tax deduction, the $250 educator’s deduction and the deduction for charitable IRA transfers of up to $100,000.

Congress is having trouble figuring out how to pay for its continuation of the current and projected future deficits. Nevertheless, new laws will likely be passed in time for filing of 2010 returns.

Gifts exceeding $13,000 annually to any third party remain taxable. But a credit against such transfer tax remains available for up to $1 million of gifts over one’s lifetime.

The news isn’t so good for the estate tax, which remains in limbo at this point.

However, the consensus by financial professionals is that it will be retroactively reinstated with a top rate of 45 percent and an exemption of $3.5 million per decedent. Talks of lowering the rate or increasing the exemption remain just that – mere discussion points.

Although this letter cannot cover all possibilities, it has outlined numerous tax alerts that should be discussed with your adviser. It is imperative that appointments be made while there is still time to implement recommended strategies.

This is indeed a challenging year to begin planning for your 2010 taxes – and for those in the next few years, given the many changes to tax law. We are ready to help. Please contact us to discuss your individual situation.

2010 HEALTHCARE REFORM LEGISLATION

Dear Clients and Friends:

Two bills signed into law by President Obama at the end of March will change health care in the United States and have an impact on every medical practice, employer and citizen of our country.

While many of the changes mandated by the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Act of 2010 will not be implemented for a number of years, others will take effect immediately.

The new landmark laws will have an impact on many key health reform areas. However, they did not address the issues related to the Sustainable Growth Rate formula used for setting Medicare physician payment rates.

Physicians continue to be subject to a last-minute guessing game of whether Medicare reimbursement will drop precipitously or Congress will step in at the last minute to stave off the cuts. Congress is expected to address this problem when it returns from recess in April.

The two new laws together exceed 3,000 pages. The following information highlights some of the more important areas impacting employers, individuals and medical practices.

EMPLOYERS
There has been much discussion – positive and negative – about the potential financial impact of this legislation on employers, especially small businesses. It is important to keep in mind that the law does not require employers to provide health insurance coverage. It does require automatic enrollment in plans sponsored by large and mid-sized employers. Employers that do not provide minimum essential coverage will be liable for an additional tax.

Large employer penalty – Employers with an average of at least 50 full-time equivalent employees (30 hours or more per week) during the preceding calendar year will have to pay a penalty if they do not provide adequate minimum essential healthcare coverage. Effective in 2014, a monthly penalty will be assessed in the amount of 1/12 of $2,000 per full-time employee. The law excludes the first 30 employees from the calculation. Employers with fewer than 50 employees are exempt from this requirement.

In addition, employers with 50 or more full-time employees that offer coverage but have at least one full-time employee receiving a premium tax credit or cost-sharing reduction for health insurance purchased through a state exchange will pay a monthly excise tax in the amount of 1/12 of $3,000 for each full-time employee who receives either subsidy. This penalty is capped at the amount that the employer would be assessed for failure to provide coverage, as specified above.

Small business tax credits – For tax years 2010 through 2013, employers with no more than 25 full-time employees and average wages of less than $50,000 per employee could qualify for a tax credit of up to 35 percent of employer contribution premiums. In general, the employer’s contribution would equal 50 percent of the premium cost.

Employers with fewer than 10 employees earning an average of $25,000 per year will be entitled to the full credit. The credit phases out as company size and/or average employee wages increase.

In 2014, if a qualified small business purchases coverage through a state-based exchange, a 50 percent credit will be available for two years.

“Free choice” voucher requirement –Employers that provide the minimum essential coverage to employees will be required to give certain employees a free choice voucher if their income does not exceed 400 percent of the federal poverty level. To qualify, the employee’s contribution to an employer-provided plan has to exceed 8 percent of household income (but not more than 9.8 percent of income), and the employee has to enroll in a healthcare exchange plan.

Excise tax on “Cadillac” or high-cost employer-sponsored health coverage – Beginning in 2018, the law places a 40 percent nondeductible excise tax on insurance companies and plan administrators for any health coverage plan if the annual premium exceeds $10,200 for individual coverage and $27,500 for family coverage. Stand-alone dental and vision plans are excluded from the amount subject to tax.

A higher premium level of $11,850 for individual coverage and $30,950 for family coverage is imposed for employees in high-risk professions and retired employees age 55 and older who are not eligible for Medicare.

Reporting requirements – Beginning Jan. 1, 2011, employers must disclose the value of the benefit provided by them for each employee’s health insurance coverage on the employee’s W-2. These benefits will continue to be nontaxable to the employee under most circumstances. Businesses must also file an information tax return for payments totaling more than $600 per calendar year to a single provider of property and services, including corporations (unless tax-exempted).

Discrimination based on salary – The act prohibits new group health plans from establishing any eligibility rules for health insurance coverage that have the effect of discriminating in favor of higher-wage employees.

Discriminatory practices – The act does not allow discriminatory practices, such as denial of coverage, against small businesses and the self-employed because of health status, age or pre-existing conditions.

Fees on health-related industries– The act imposes annual nondeductible fees on various health-related industries. For example, pharmaceutical manufacturers and importers will have to pay an annual flat fee beginning in 2011, allocated across the industry based on market share.

Starting in 2013, manufacturers or importers of medical devices will have to pay an additional 2.3 percent tax on the sale price of these devices. IRS-specified medical devices sold at retail establishments for personal use, such as eyeglasses, contact lenses and hearing aids are exempt from the excise tax.
Health insurance providers will face an annual flat fee on the health insurance sector, effective January 2014.

INDIVIDUALS
A great deal of speculation has spread through the media about how people will be impacted by healthcare reform. Many individuals who currently do not have coverage will be able to obtain medical insurance through one of a number of channels.

Existing coverage – Individuals who currently have coverage and wish to retain it can do so under a grandfather provision in the legislation. The coverage will be deemed to meet the individual’s responsibility to have insurance. Employers currently offering coverage also fall under the grandfather provision.

Coverage for the uninsured – The act expands Medicaid to cover individuals earning less than 133 percent of the federal poverty level, or $14,404 for individuals or $29,327 for a family of four, according to current guidelines.

Healthcare exchanges (or Small Business Health Options Programs) – The law mandates that states create healthcare exchanges. These exchanges can be administered by a government agency or a nonprofit organization. The federal government will fund these exchanges with startup money, with the goal that they be operational by 2014.

Initially, exchanges will be open only to individuals who work for firms with 100 or fewer employees and those looking to buy insurance for themselves. These individuals could be self-employed, unemployed or retired but not yet eligible for Medicare. The exchanges are meant to function as a cooperative that allows interested individuals to band together to purchase coverage.

Each exchange will offer four levels of plans of declining expense – platinum, gold, silver and bronze – and work to create standardized levels of coverage. This will make comparisons across plans easier for consumers.

Penalty for remaining uninsured – By 2014, most Americans must have health insurance or pay a penalty. The penalty would start at $95 for an individual or up to 1 percent of income, whichever is greater, and increase to $695 or 2.5 percent of income by 2016. The limit on a family’s penalty is 300 percent of the applicable dollar amount for the year ($2,085 in 2016). For individuals under age 18 or in college, the applicable flat dollar penalty will be one-half of the stated penalty amount.

Some people may be exempted from the insurance requirement because of financial hardship or religious beliefs. Individuals are exempt if they cannot afford coverage because the contribution for employer-sponsored coverage or the cost of the “bronze” plan offered by the healthcare exchange exceeds 8 percent of household income.

Low-income tax credits for health exchange participation – Individuals and families making between 100 percent and 400 percent of the federal poverty level, who want to purchase their own health insurance from the exchanges, will be eligible for premium credits.

Pre-existing conditions – The law bars health insurance companies from denying coverage to individuals with pre-existing conditions. This provision takes effect for children six months after passage of the law and for all others starting in 2014.

Lifetime maximum coverage – Within six months after enactment, health insurance companies are banned from placing lifetime caps on coverage.

No rescissions – The act bans health insurance carriers from dropping people from coverage when they get sick. This provision takes effect six months after enactment.

Medicare Part D coverage hole – The law provides a $250 rebate to Medicare beneficiaries who hit the doughnut hole in 2010. The “doughnut hole” is the gap in coverage between the basic Medicare Part D benefit and the catastrophic coverage benefit. Beginning in 2011, there will be a 50 percent discount on brand-name drugs in the doughnut hole. The hole will be completely closed by 2020.

More affordable Medicare preventive services – Beginning in 2011, co-payments and deductibles will not apply to certain preventive services recommended by the Preventive Services Task Force for Medicare patients.

Extension of coverage to young adults – Health plans will be required to allow dependent (for tax purposes) children up to age 26 to remain on their parents’ employer-provided accident or health plan, at the parents’ discretion. This requirement takes effect six months after the passage of the bill.

Disease-specific programs – Funding is provided for disease-specific programs, such as those dealing with obesity and diabetes. The funding is specifically for illnesses that create a huge financial drain on the healthcare system.

Medicare tax – Starting in 2013, families making more than $250,000 per year (individuals making more than $200,000) will pay more in Medicare payroll taxes. The rate will increase from 1.45 percent to 2.35 percent.

The employee portion of Medicare payroll tax will also be expanded to include unearned income of 3.8 percent on investment income for families with adjusted gross income above $250,000 per year ($200,000 for individuals). The new tax on investment income will apply only to income above the $250,000/$200,000 threshold.

Investment income includes interest, dividends, royalties and rents. Self-employed individuals, as well as estates and trusts, will be liable for the additional tax. However, the 3.8 percent surtax does not apply to qualified retirement plans and individual retirement account distributions.

Flexible spending accounts – The amount of contributions to health flexible spending accounts will be limited to $2,500 per year effective for tax years beginning after Dec. 31, 2012. This amount will be indexed for inflation after 2013. There will also be changes that will no longer permit the reimbursement of over-the-counter medications that are not physician prescribed through health savings accounts (HSAs), health reimbursement arrangements (HRAs) or Archer medical savings accounts (MSAs) beginning in 2011. The tax on nonqualified distributions from HSAs and MSAs increases to 20 percent.

Medical expense deductions – The adjusted gross income threshold for claiming the itemized deduction for medical expenses will increase from 7.5 percent to 10 percent for individuals under the age of 65. The 7.5 percent threshold will continue through 2016 for individuals 65 and older.

Help for early retirees – A temporary re-insurance program will help offset the costs of expensive health claims for employers that provide health benefits for retirees between the ages of 55 and 64, until the healthcare exchanges are available. Payments made under the reinsurance program would be excluded from gross income.

Uninsured with pre-existing conditions – Until the exchanges are functioning, a temporary high-risk pool provides immediate access to insurance for people who are uninsured because of pre-existing conditions. This pool will be effective 90 days after the law’s enactment.

Catastrophic coverage – People in their 20s will have the option of buying a catastrophic plan that will have lower premiums. The coverage will kick in after the individual has $6,000 in out-of-pocket expenses.

Preventive services – Preventive services, such as mammograms and immunizations, must be covered by insurers, with no co-payment or deductible required. This provision is effective six months after enactment or beginning on Jan. 1, 2011, for Medicare.

MEDICAL PRACTICES
A majority of both pieces of legislation will have an impact on medical practices.
Many of these changes are intended to move the healthcare system to look more at quality of care and preventive services. Every medical practice will need to make changes to its operations to be in compliance.

Medical practices that have been providing care to uninsured patients may now be able to receive payment once these individuals have the ability to obtain coverage.

Medicare benefits – Neither law has any cuts to traditional Medicare benefits.

Medicare annual wellness – Beginning in 2011, Medicare will cover annual wellness visits, including a health risk assessment, health advice, and referrals to education and preventive counseling. These services will not be subject to a co-payment or deductible.

More affordable Medicare preventive services – Beginning in 2011, co-payments and deductibles will not apply to certain preventive services recommended by the Preventive Services Task Force for Medicare patients.

Medicaid preventive services – Beginning in 2010, Medicaid will be required to cover tobacco cessation services for pregnant women. In 2011, Medicaid will begin to cover preventive services at 100 percent coverage.

Incentive payments for primary care physicians – Physicians specializing in family medicine, internal medicine, geriatrics and pediatrics will be eligible for up to a 10 percent bonus payment for evaluation and management services from 2011 to 2016.

Incentive payments for mental health services– For 2010, Medicare will increase payment for psychotherapy services by 5 percent.

Geographic payment differentials – The national average GPCI (geographic practice cost indices) has been re-established for 2010. Medicare reduces the GPCI adjustment for physician practice expenses in rural and low-cost areas.

Incentive payments extended– Incentive payments of 1 percent in 2011 and 0.5 percent from 2012 to 2014 will continue to be available for voluntary participation in the Medicare Physician Quality Reporting Initiative (PQRI). An additional 0.5 percent incentive payment will be made to physicians who participate in a qualified Maintenance of Certification Program.

Beginning in 2015, physician payments from Medicare will be reduced by 1.5 percent for physicians who do not successfully participate in the PQRI program. In subsequent years, the penalty will be 2 percent. There will also be public reporting of physician participation in the PQRI program.

PQRI alternative – The law allows physicians to participate in the American Board of Medical Specialties Maintenance of Certification as an option for fulfilling CMS requirements for PQRI starting in 2011.

Medicaid payments– Medicaid payments to physicians specializing in family medicine, general internal medicine and pediatrics for evaluation and management services and immunizations will increase to a level at least equal to Medicare rates in 2013 and 2014. The bill provides for 100 percent federal funding for the incremental costs incurred by states in meeting this requirement.

Administrative simplification – Rules will be developed, beginning in 2010, and implemented between 2013 and 2016 to standardize and streamline health insurance claim processing requirements. These changes are intended to make it easier to track claims and should reduce practice overhead costs.

Claim submission time limit – The time limit for submitting claims to Medicare has been reduced to 12 months, effective Jan. 1, 2010. In the past, physicians had between 15 and 26 months to submit claims.

Increases in the number of primary care practitioners– The law provides for funding for increased training for primary care practitioners, including doctors, nurses, nurse practitioners and physician assistants, effective beginning in fiscal year 2011.

Medical liability– Beginning in 2011, the Secretary of the Department of Health and Human Services (HHS) is authorized to award five-year demonstration grants to states to develop, implement and evaluate alternative medical liability reform initiatives, such as health courts and early offer programs to settle lawsuits. Medical liability protection under the Federal Tort Claims Act will be extended to officers, governing board members, employees and contractors of free clinics.

Enrollment screening– New screening processes will be in place when a physician enrolls or revalidates as a Medicare provider. The process will be at the discretion of the HHS and the Office of the Inspector General (OIG). If the agencies believe that providers pose a risk to patient well-being, background checks and fingerprinting can be required, as well as unannounced site visits.

Prohibition on physician referrals for hospitals– Physicians are prohibited from referring to physician-owned hospitals unless they are grandfathered in before Aug. 1, 2010.

Fraud and abuse – The government will now have the authority to suspend payments to providers pending a fraud investigation. Fraud and abuse agencies will receive increased funding.

RAC audits – RAC (recovery audit contractor) audits were expanded to include identification of underpayments and overpayments for Medicaid services and Medicare Advantage plans.

Physician ownership or investment interests – Manufacturers of medical devices and equipment must report transfers of ownership or other financial interests to physicians, practices and teaching hospitals beginning in 2013. These transfers include consulting fees, honoraria, gifts, speaking fees and charitable contributions, among other items.

Overpayments – Physicians will be required to report and return any overpayments that are discovered to their Medicare carrier or Medicare administrative contractor within 60 days.

Referral documentation – Physicians will need to provide written documentation of referrals and orders for all services and equipment, including home health services. Failure to have this documentation available upon request may result in a one-year suspension from Medicare.

Self-referral disclosure policy– The HHS and the OIG will create a policy for providers to disclose any actual or potential violations of the physician self-referral law. This policy will be issued within six months of enactment of the law.

Value-based reimbursement – The law establishes a value-based payment system, which will be phased in starting in 2015. The system adjusts Medicare fee schedules to be based on quality of care. The criteria will be established by the Secretary of HHS.

Medicare Advantage plans – The law cut $132 billion in subsidies to the private companies that offer Medicare Advantage plans over a 10-year period. The cut will be achieved by restructuring payments to Medicare Advantage plans. Areas with low Medicare fee-for-service payments will be compensated with higher payments. Beginning in 2012, bonus payments will be made for Medicare Advantage plans that achieve certain quality standards. This may result in the plans dropping some of the extra benefits they currently offer as they experience the effect of the budget cuts.

Independent Payment Advisory Board – A 15-member independent panel will be formed to act when Medicare costs are projected to be unsustainable. The panel cannot ration patient care, raise taxes or change premiums, eligibility or benefits.

Although the information outlined above seems exhaustive, it does not include all the changes that will affect the healthcare system. More information on the health reform legislation can be found at http://www.whitehouse.gov/health-care-meeting/proposal. The full text of both laws will be published in the Federal Register in the next few weeks.
Since these initiatives have varying implementation dates, businesses should carefully evaluate which aspects of the legislation affect them and create a budget to determine the financial impact on their organizations. Businesses should work with their insurance brokers, healthcare attorneys and CPAs to ensure compliance. The changes may require modification of employee handbooks, employment contracts and corporate documents.
There may be efforts in the coming months and years prior to 2014 to roll back some of the changes found in this legislation. Businesses, medical practices and individuals should continue to monitor the news carefully to understand the full impact of the healthcare reform legislation.