Now You Know How That Care Got So Affordable - A New Round of PPACA Taxes Began on January 1, 2013 (Part 1)

Among other things, the re-election of President Obama in November ensured that the gradual roll-out of widespread health care reform under the 2010 Patient Protection and Affordable Care Act (the “Affordable Care Act”) would continue into this year.  Not only does the Affordable Care Act have far-reaching implications on the delivery of health care services and the provision of health insurance coverage for a large number of Americans, but the legislation also provides for several tax increases and other revenue-generating mechanisms, several targeted specifically at health care-related industries.  Certainly many national health insurers affected are Delaware corporations, but the tax impact reaches down to individual physicians, pharmaceutical companies, and even Delawareans who frequent the local tanning salon.

Several of the revenue-raising provisions of the Affordable Care Act came into effect on January 1, 2013, including two changes – one additional tax, one modification to existing tax deductions – aimed directly at health care-related industries.  How are you affected by the newly implemented taxes?

  • Providers.  The one tax implemented under the Affordable Care Act with the most targeted impact on health care providers is the 2.3 percent excise tax now assessed on the sales price of most medical devices purchased from a manufacturer, producer, or importer.  This tax will apply to the purchase of a medical device, as defined under the Federal Food, Drug, and Cosmetic Act, that is intended for humans, although exceptions to the new tax are made for eyeglasses, contact lenses, hearing aids, and other devices typically held out for sale to the general public at retail for individual use.  Health care providers that purchase these devices for regular use in their practice are likely to see their expenditures on devices increase to reflect the additional tax liability.  Normally sales tax-free Delaware is not excepted.
  • Insurance Executives.  Most health insurance issuers – including licensed insurance companies, insurance services, and health maintenance organizations (HMOs) and other insurance organizations – will no longer be able to deduct more than $500,000 in any tax year for remuneration paid to any officer, director, employee, or outside service provider who performs services on their behalf in that year.  Deductions for payments of deferred remuneration to any such individual related to services provided by him or her during any year after 2009 are similarly limited.

Other health and personal care-related taxes have already been implemented under the Affordable Care Act and are taking their toll on other health care participants, whereas more are planned for next year.

  • Pharmaceutical Manufacturers and Importers.  Starting in 2011, an annual fee of between $2.5 and $4.1 billion is assessed among manufacturers and importers of branded prescription drugs.  A firm’s share of the overall annual fee is determined by the volume of its total sales related to Medicare or other government programs.
  • Insurance Providers.  Still to come starting in 2014, is another annual fee, starting at $8 billion, to be assessed among health insurance providers.  A provider’s share of the overall annual fee is based on its net premiums written in association with insuring U.S. citizens’, residents’, and temporary visitors’ health risks.
  • Jersey Shore Devotees.  Starting July 1, 2010, a 10 percent excise tax was implemented on indoor tanning services, other than phototherapy services performed by a licensed medical professional.

January 1, 2013, will also see the introduction of new Medicare surtaxes on wages and net investment income that will have general applicability among all higher-income taxpayers, including those in health care fields.  These new surtaxes will be discussed in Part 2.

Author:  James J. Gallagher, Esquire is a member of the Tax, Estates and Business Practice at Morris James LLP.