Health-Related Revenue Provisions: Changes
Made by the Reconciliation Act of 2010 to
Senate-Passed H.R. 3590
Janemarie Mulvey
Specialist in Aging Policy
March 19, 2010
Congressional Research Service
7-5700
www.crs.gov
R41128
CRS Report for Congress
P
repared for Members and Committees of Congress
Health-Related Revenue Provisions: Changes Made by the Reconciliation Act of 2010
Summary
This report summarizes the health-related revenue provisions in the Reconciliation Act of 2010,
introduced in the nature of a substitute to H.R. 4872. The bill amends provisions in H.R. 3590,
the Patient Protection and Affordable Care Act, passed by the Senate on December 24, 2009.
Title 1, Subtitle E of H.R. 4872 includes amendments to the revenue provisions in H.R. 3590.
This report identifies the changes made by H.R. 4872 to the health-related revenue provisions in
H.R. 3590. Specifically, the report discusses the amendments to the revenue provisions related to
changes in the thresholds, health plans included, and implementation date for the 40% excise tax
on high-cost health insurance plans. The Reconciliation Act also includes provisions to add a
3.8% Medicare tax on net investment income, and converts the fee on medical device
manufacturers to an excise tax based on sales revenue. H.R. 4872 would also delay
implementation dates for a number of revenue provisions in H.R. 3590 including implementation
of the flexible spending account limitations, and provisions to eliminate the deduction for
expenses allocable to the Medicare Part D subsidy.
Congressional Research Service
Health-Related Revenue Provisions: Changes Made by the Reconciliation Act of 2010
Contents
Introduction ................................................................................................................................ 1
Health-Related Revenue Provisions............................................................................................. 1
Provisions Affecting Health Care Firms and Other Employers............................................... 3
Excise Tax on Health Insurance Plans ............................................................................. 3
Annual Fee on Health Insurance Plans ............................................................................ 5
Annual Fee On Pharmaceutical Companies and Medical Device Manufacturers .............. 5
Eliminate Employer Deduction for Retiree Prescription Drug Plans Eligible for
Federal Subsidy ................................................................................................................. 6
Provisions Affecting Individuals............................................................................................ 6
Medicare Taxes ............................................................................................................... 6
Tax-Advantaged Accounts and Itemized Deductions Used to Pay for Health Care
Expenses............................................................................................................................ 7
Modifications to Tax-Advantaged Accounts .................................................................... 7
Tables
Table 1. Health Related Revenue Provisions in Title IX of H.R. 3590 and Subtitle E of
H.R. 4872 ................................................................................................................................ 2
Table 2. Comparison of Excise Tax Provisions on High-Cost Health Plans .................................. 4
Contacts
Author Contact Information ........................................................................................................ 9
Congressional Research Service
Health-Related Revenue Provisions: Changes Made by the Reconciliation Act of 2010
Introduction
The Senate passed H.R. 3590, The Patient Protection and Affordable Care Act on December 24,
2009 (hereinafter referred to as the Senate bill or H.R. 3590). On March 18, 2010, The House
Rules Committee introduced H.R. 4872, The Reconciliation Act of 2010 (hereinafter referred to
as the Reconciliation bill or H.R. 4872) that amends health-related revenue provisions in H.R.
3590. These amendments include modifications to taxes and fees imposed on firms in the health
care sector and other employers by H.R. 3590 as well as additional taxes on high-income
individuals. The Reconciliation bill also would delay implementation of a number of health-
related revenue provisions in H.R. 3590. This report details the changes made to the health-
related revenue provisions in H.R. 3590 by the Reconciliation Act of 2010.
Health-Related Revenue Provisions
The health-related revenue provisions in H.R. 4872 amend H.R. 3590 in a number of ways. The
most significant differences include changes to the 40% excise tax on high cost plans and the
imposition of a new tax on investment income for high-income tax filers. Other changes include
delays in the implementation date of the various provisions.
Table 1 shows the implementation date and projected preliminary revenues from each provision
in the two bills. Note that the revenues in the Table 1 under the column labeled H.R. 4872
represent a combination of the revenue effects of H.R. 3590 as amended by H.R. 4872. According
to the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT), the
health-related revenue provisions are projected to be $388.8 billion over 10 years if both bills are
enacted. CBO further estimates that the deficit would be reduced by $138 billion over the 10-year
period 2010-2019 if both bills were enacted. Of those savings 62% ($85 billion) is on-budget and
the remaining 38% ($53 billion) is off-budget reflecting increases in the Medicare Hospital
Insurance (HI) and Supplementary Medical Insurance (SMI) Trust Funds.1
1 Congressional Budget Office, Letter to Honorable Nancy Pelosi, March 18, 2010.
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Health-Related Revenue Provisions: Changes Made by the Reconciliation Act of 2010
Table 1. Health Related Revenue Provisions in Title IX of H.R. 3590 and Subtitle E of
H.R. 4872
H.R. 3590
H.R. 4872a
Effective Date,
Increase in
Effective Date,
Increase in
Taxable Years
Revenues
Taxable Years
Revenues
Beginning
(FY2010-FY2019)
Beginning
(FY2010-FY2019)
Provisions Affecting Health Care Firms and Employers
Excise Taxes and Fees
40% Excise Tax on
High-Cost Plans
2013 $148.9
billion
2018 $32.0 billion
Impose Annual Fee
on Health Insurance
2011 $59.6
billion
2014 $60.1
billion
Providers
Annual Fee on
Manufacturers and
Importers of
2010 $22.2
billion
2011 $27.0
billion
Branded Drugs
Annual Fee/ Excise
Tax on
Manufacturers and
2011 $19.2
billion 2013b $20.0
billion
Importers of Certain
Medical Devices
Limitations on Employer Deductions
Eliminate
Deductions for
Expenses Al ocable
2011 $5.4
billion
2013 $4.5
billion
to Medicare Part D
subsidy
Limit Deduction for
Compensation to
$500,000 for
2013 $0.6
billion
2013 $0.6
billion
Executives of Health
Insurance
Companies
Provisions Affecting Individuals
Medicare Tax
Medicare Payroll
Tax
2013 $86.8
billion
2013 $86.8
billion
Medicare Tax on
NA NA 2013
$123.4 billion
Investment Income
Modifications to Tax-Advantaged Accounts and Itemized Deductions Used for Health Care
Limit Health Flexible
Spending Accounts
2011 $14.3
billion
2013 $13.0
billion
(FSAs) to $2,500
Raise Penalty for
Non-Qualified HSA
Withdrawals from
2011 $1.3
billion
2011 $1.4
billion
10% to 20%c
Change the
Definition of Medical
Expenses for FSAs
2011 $5.0
billion
2011 $5.0
billion
and Health Savings
Accounts (HSAs)
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Health-Related Revenue Provisions: Changes Made by the Reconciliation Act of 2010
H.R. 3590
H.R. 4872a
Effective Date,
Increase in
Effective Date,
Increase in
Taxable Years
Revenues
Taxable Years
Revenues
Beginning
(FY2010-FY2019)
Beginning
(FY2010-FY2019)
Raise 7.5% Floor for
Itemized Medical
2013 $15.2
billion
2013
$15.2 billion
Expenses to 10% for
Those Under Age 65
Total Revenues
Relating to
Private Health
— $378.5
billion — $388.8 billion
Insurance
Source: Joint Committee on Taxation, December 19, 2009, JCX-61-09, and additional note by CBO Letter to
Senator Harry Reid dated March 11, 2010, noting that the FSA revenue estimate increased by about $1 billion
from previously published estimate. Joint Committee on Taxation, March 18, 2010, JCX-16-10.
Notes: This table does not include those revenue provisions not directly related to health care.
a. Represents the combination of provisions in H.R. 4872 with the revenue effects of H.R. 3590 as passed by
the Senate.
b. Imposed on sales after this date.
c. The differences between the revenue estimates between the two bills do not reflect differences in
provisions but rather technical corrections.
Provisions Affecting Health Care Firms and Other Employers
The enactment of H.R.3590 as passed by the Senate and the related amendments within H.R.
4872 would impose the following taxes or fees directly on health insurers and plan
administrators:
• an excise tax on high-cost employer-sponsored health insurance;
• an annual fee on health insurance providers;
• an annual fee on manufacturers and importers of brand name pharmaceuticals;
and
• an excise tax on manufacturers and importers of certain medical devices.
In addition, the bill would limit the deductibility of compensation for health insurance executives.
The bill would also limit the ability of employers to deduct from their taxable income the federal
subsidies for retiree prescription drug coverage. The following section describes the current law
(where applicable), current revenue provisions in the Senate bill and the Reconciliation bill.
Excise Tax on Health Insurance Plans
Under current law, there is no tax on the value of health care insurance coverage provided by
insurers.2 The Senate bill would impose a 40% excise tax on health insurers and health plan
administrators for coverage that exceeds certain thresholds. Health insurance coverage subject to
2 See CRS Report RL33505, Tax Benefits for Health Insurance and Expenses: Overview of Current Law and
Legislation, by Janemarie Mulvey.
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Health-Related Revenue Provisions: Changes Made by the Reconciliation Act of 2010
the excise tax in H.R. 3590 was broadly defined to include not only the employer and employee
premium payments for health insurance (including self-insured plans), but also premiums paid by
the employee and the employer for dental and vision coverage. In addition, tax-advantaged
health-related accounts such as flexible spending accounts (FSAs), health savings accounts
(HSAs), and health reimbursement accounts (HRAs) are also specified as health insurance
coverage and subject to the excise tax. For these tax-advantaged accounts, the plan administrator
(which is often the employer) would be subject to the excise tax. The excise tax would be levied
on each of these components (i.e., health insurance, dental and vision, FSAs, etc.) based on their
share of the total for health insurance coverage. This share would then be applied to the amount
of the total contribution that exceeds the applicable threshold to determine the excise tax imposed
on each component.
The Reconciliation bill (Sec. 1401) would amend the excise tax provisions in the Senate bill as
shown in Table 2. Specifically, H.R. 4872 would amend H.R. 3590 to:
• raise thresholds for all groups;
• remove stand alone dental and vision plans from threshold calculation;
• delay implementation of the excise tax until 2018;
• allow multi-employer plans to be subject to family thresholds only; and
• eliminate high cost state designations eligible for phased-in thresholds.
Table 2. Comparison of Excise Tax Provisions on High-Cost Health Plans
In H.R. 3590 and H.R. 4872
Senate-Passed H.R. 3590
H.R. 4872
General Threshold Amounts
$8,500 single
$10,200 single
$23,00 family
$27,500 family
Insurance Coverage Subject to the
Health insurance, dental, vision,
Same as H.R. 3590, except excludes
Thresholds
flexible spending and health savings
stand alone dental and vision plans
accounts.
Alternative Thresholds
High Risk professions and retirees
Same as H.R. 3590
ages 55 to 64
Alternative Thresholds for Special
$9,850 single
$11,850 single
Groups
$26,000 family
$30,950 family
Multi-Employer Plans (Unions)
Same thresholds as general category
Only subject to general threshold for
above
family coverage (even for self-only
coverage)
High Cost State Designation
Phased-in thresholds
Eliminate Provision
Implementation Date
2013
2018
In addition to the differences between the two bills identified in Table 2, the Reconciliation bill
would amend the Senate bill to allow employers to adjust the cost of health insurance coverage
(when compared to the thresholds) if the demographics of their workforce in terms of age and
gender is different from that of a national risk pool.3 The amendments in H.R. 4872 to the excise
3 The national risk pool is based on the rates in the standard Blue Cross Blue Shield FEHBP health insurance plan.
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Health-Related Revenue Provisions: Changes Made by the Reconciliation Act of 2010
tax provisions would reduce the 10 year revenue projection by $117 billion as compared to H.R.
3590 (see Table 1).
Annual Fee on Health Insurance Plans
Under current law, while some states impose premium taxes and there are general corporate taxes,
there are no federal taxes targeted explicitly toward health insurers. The Senate bill would impose
a fee on all health insurers based on their market share. The fee would be applied to net premiums
written and would be imposed beginning in 2011.4 The fee would not apply to self-insured plans,
and federal, state, or other government entities. Certain nonprofit insurers who have medical loss
ratios within specific limits would also be excluded. However, under the Senate bill the annual
fee would apply to companies or organizations that underwrite government-funded insurance
(i.e., Medicaid managed care plans, Federal Employees Health Benefits Program [FEHBP]).
The Reconciliation bill (Sec. 1406) would delay the implementation of the fee on health insurers
by three years to 2014. The Reconciliation bill also adds additional provisions for tax-exempt
insurance providers. Only 50% of net premiums for tax-exempt insurer are taken into account
when calculating the fee. The bill would also exempt Voluntary Employee Benefit Associations
(VEBAs) and nonprofit providers for whom more than 80% of revenues are received from public
programs that target low-income, elderly, or disabled populations.
Annual Fee On Pharmaceutical Companies and Medical Device
Manufacturers5
Under current law, beyond corporate taxes, there are no fees or excise taxes targeted toward drug
companies and medical device manufacturers. The Senate bill would impose an annual fee on
certain manufacturers and importers of branded prescription drugs (including biological products
and excluding orphan drugs). The fee structure would be based on annual sales and set to reach a
certain revenue target each year. The Reconciliation bill (Sec. 1404) would amend the annual
target revenues to $2.5 billion for 2011, $3 billion per year for 2012 through 2016, $3.5 billion for
2017, $4.2 billion for 2018, and $2.8 billion for 2019 and thereafter. The bill would also delay
imposition of the fee from one year (to 2011). JCT projects that the Reconciliation provisions
would raise the 10-year revenue projection by $4.8 billion over the Senate bill’s projected
revenues (see Table 1).
An annual fee on certain manufacturers and importers of medical devices would also be imposed
by H.R. 3590. However, the Reconciliation bill (Sec. 1405) would repeal this fee and replace it
with a new excise tax of 2.9% on the sale of a medical device by a manufacturer, producer, or
importer. H.R. 4872 would exempt Class 1 medical devices,6 eyeglasses, contact lenses, hearing
aids, and any device of a type that is generally purchased by the public at retail for individual use.
The tax would apply to sales made after December 31, 2010. With the H.R. 4872 amendments,
4 See CRS Report R40834, The Market Structure of the Health Insurance Industry, by D. Andrew Austin and Thomas
L. Hungerford, for information on market share of individual health insurance companies.
5 See CRS Report R40943, Public Health, Workforce, Quality, and Related Provisions in H.R. 3590, as Passed by the
Senate, coordinated by C. Stephen Redhead and Erin D. Williams.
6 Defined in Federal Food, Drug, and Cosmetic Act (FFDCA), Sec. 201(h).
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Health-Related Revenue Provisions: Changes Made by the Reconciliation Act of 2010
revenues over the 10-year period would increase $0.8 billion as compared to the Senate-passed
bill (see Table 1).
Eliminate Employer Deduction for Retiree Prescription Drug Plans
Eligible for Federal Subsidy
Under current law, employers who provide their retirees with prescription drug coverage that
meets or exceeds federal standards are eligible for subsidy payments from the federal
government. These qualified retiree prescription drug plan subsidies are excluded from the
employer’s gross income for the purposes of regular income tax and alternative minimum tax
calculations. The employer is also allowed to claim a business deduction for retiree prescription
drug expenses even though they also receive the federal subsidy to cover a portion of those
expenses. The Senate-passed bill (H.R. 3590) would require employers to coordinate the subsidy
and the deduction for retiree prescription drug coverage beginning in 2011. The amount allowable
as a deduction for retiree prescription drug coverage would be reduced by the amount of the
federal subsidy received. The Reconciliation Act (Sec. 1407) would delay implementation of this
provision by two years to 2013. This delay would reduce the 10-year revenue projection by $0.9
billion (see Table 1).
Provisions Affecting Individuals
Medicare Taxes
Under current law, employers and employees each pay a payroll tax of 1.45% to finance
Medicare Part A. The Senate bill includes additional hospital insurance taxes on high-income
taxpayers. This bill would impose an additional payroll tax of 0.9% on high-income workers with
wages over $200,000 for single filers and $250,000 for joint filers effective for taxable years after
December 31, 2012. The additional tax only applies to wages above these thresholds. For these
workers, the payroll tax would increase to a total of 2.35% for wage income over the thresholds
noted above. These additional revenues would go to the Medicare Hospital Insurance Trust Fund
(often called Part A). The Reconciliation bill (Sec. 1402) amends this to clarify that married
taxpayers filing separately are subject to a $125,000 threshold. According to the Joint Committee
on Taxation, the revenue provisions under the Senate bill and the Reconciliation bill are the same
and would raise $86.8 billion over a 10-year period (see Table 1).
The Reconciliation bill (Sec. 1402) would also impose an additional tax on net investment
income with the revenues going to the Federal Supplementary Medical Insurance Trust Fund
(often called Part B). The Reconciliation bill defines net investment income to be interest,
dividends, annuities, royalties, rents and taxable net capital gains. It excludes distributions from a
qualified annuity from a pension plan.7 Households with modified adjusted gross income under
these thresholds would not be subject to the investment income tax. Specifically, effective for
taxable years after December 31, 2012, the bill would impose a tax equal to 3.8% of the lesser of:
7 As defined in IRC Sec. 401(a), 403(a), 403(b), 408, 408A, or 457(b).
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Health-Related Revenue Provisions: Changes Made by the Reconciliation Act of 2010
(1) Net investment income for such taxable year; or
(2) The excess of modified adjusted gross income (MAGI)8 over $250,000 for joint filers
($125,000 for married filing separately and $200,000 for all other returns).
This tax is also applicable to income from estates and trusts. The active income from trade for
self-employed and S-corporations would not be subject to the tax.9 For these entities, the tax
would apply only to passive income and trade income related to commodity trading. There is also
a special provisions for the application of the tax to S. Corporations who sell their businesses.
As shown in Table 1, the investment income provision in H.R. 4872 would raise $123.4 billion in
revenues over a 10-year period.
Tax-Advantaged Accounts and Itemized Deductions Used to Pay
for Health Care Expenses
There are a number of tax-advantaged accounts and tax deductions for health care spending and
coverage that would be affected by the revenue provisions in Title IX of H.R. 3590. The
Reconciliation bill makes minor adjustments to one these provisions.
Modifications to Tax-Advantaged Accounts
H.R. 3590 includes a number of provisions that would directly and indirectly affect tax-
advantaged accounts to help workers pay for their health care expenses. Under current law FSAs,
HSAs, HRAs, and Medical Saving Accounts (MSAs) all allow workers under varying
circumstances to exclude a certain portion of qualified medical expenses from income taxes.10
Under current law, health FSAs are employer-established benefit plans that reimburse employees
for specified health care expenses (e.g., deductibles, co-payments, and non-covered expenses) as
they are incurred on a pre-tax basis.11 About one-third of workers in 2007 have access to an
FSA.12 Each employer may set their limits on FSA contributions. In 2008, the average FSA
contribution was $1,350.13 The Senate-passed H.R. 3590 would limit the amount of annual FSA
contributions to $2,500 per FSA beginning in 2011. The Reconciliation bill would amend the
Senate bill and delay implementation of the limits on FSA contribution by two years until 2013.
8 Modified adjusted gross income is defined as adjusted gross income increased by the excess of foreign earned income
(defined in IRC Sec. 911(a)(1)) over the amount of any deductions or exclusions disallowed under IRC Sec. 911(d)(6)
when determining foreign earned income.
9 Corporations may elect S-corporation status if they meet a number of Internal Revenue Code requirements. Among
other things, they cannot have more than 100 shareholders or more than one class of stock. S-corporations are tax-
reporting rather than tax-paying entities, in contrast to C-corporations, which are subject to the corporate income tax.
10 See CRS Report RL33505, Tax Benefits for Health Insurance and Expenses: Overview of Current Law and
Legislation, by Janemarie Mulvey.
11 See CRS Report RL32656, Health Care Flexible Spending Accounts, by Janemarie Mulvey.
12 Bureau of Labor Statistics, Table 24. Pretax benefits: Access, private industry workers, National Compensation
Survey, March 2007.
13 Mercer Human Resources Consulting, National Survey of Employer-Sponsored Health Plans 2008.
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Health-Related Revenue Provisions: Changes Made by the Reconciliation Act of 2010
According to JCT, this provision would reduce revenues compared to H.R. 3590 by $1.3 billion
over 10 years (see Table 1).
HSAs are also tax-advantaged accounts that allow individuals to fund unreimbursed medical
expenses (deductibles, copayments, and services not covered by insurance) on a pre-tax basis.14
Eligible individuals can establish and fund accounts when they have a qualifying high deductible
health plan and no other health plan (with some exceptions). Unlike FSAs, HSAs may be rolled
over and the funds accumulated over time. Distributions from an HSA that are used for qualified
medical expenses are not included in taxable income. Distributions from an HSA that are not used
for qualified medical expenses are taxable as ordinary income and, under current law, an
additional 10% penalty tax for those under age 65. The Senate bill would raise this penalty on
non-qualified distributions to 20% of the disbursed amount. According to the JCT, this provision
would raise $1.3 billion over 10 years (see Table 1). The Reconciliation bill would not amend the
HSA provisions in the Senate-passed bill.
H.R. 3590 would also modify the definition of qualified medical expenses. Under current law
qualified medical expenses for FSAs, HSAs, and HRAs can include over-the-counter
medications. The bill would restrict this practice and exclude over-the-counter medications
(except those prescribed by a physician) as a qualified medical expense. According to the JCT,
this provision would increase revenues by $5 billion over 10 years (see Table 1). The
Reconciliation bill would not amend these provisions.
Modify Itemized Deduction for Medical Expenses
Currently, taxpayers who itemize their deductions may deduct unreimbursed medical expenses
that exceed 7.5% of adjusted gross income (AGI). Medical expenses include health insurance
premiums paid by the taxpayer, but also can include certain transportation and lodging expenses
related to medical care as well as qualified long-term care costs, and long-term care premiums
that do not exceed a certain amount. About 7% of tax returns for tax year 2007 reported a
deduction for medical expenses.15 Taxpayers with adjusted gross income below $50,000
accounted for 52% of those taking this itemized deduction for medical expenses.16 The Senate bill
would increase the threshold to 10% of AGI for taxpayers who are under age 65, which would
limit the amount of medical expenses that can be deducted. Taxpayers over age 65 would be
temporarily excluded from this provision and still be subject to the 7.5% limit from 2013 through
2016. The Reconciliation bill would not amend these provisions.
14 See CRS Report RL33257, Health Savings Accounts: Overview of Rules for 2010, by Janemarie Mulvey.
15 Internal Revenue Service, Statistics of Income, Table 1.3: All Returns: Source of Income, Adjustments, Deductions,
Credits and Tax Items, by Marital Status, Tax Year 2007.
16 Joint Committee on Taxation, Tax Expenditures: Compendium of Background Material on Individual Provisions,
December 2008.
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Health-Related Revenue Provisions: Changes Made by the Reconciliation Act of 2010
Author Contact Information
Janemarie Mulvey
Specialist in Aging Policy
jmulvey@crs.loc.gov, 7-6928
Congressional Research Service
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