Health Services Tax Conference Day Two

2015 Health Services Tax Conference

May 18-19, 2015The Drake HotelChicago, IL

PwC

Welcome and opening remarks

Rob FrizUS Health Services Tax Leader, PwCKelvin AultUS Investor-owned Health Services Tax Leader, PwC

www.pwc.com

Ceci ConnollyManaging DirectorPwC Health Research Institute

Introducing the New Health Economy and the Shift Towards the ConsumerHealth Services Tax ConferenceMay 19, 2015

PwC Health Research Institute

Would you be comfortable with using a mobile device to check for ear infections?

4

One in four US clinicians surveyed by HRI said they

would be comfortable prescribing based on data from

such a device.


Have you been to a medical clinic in a retail store or pharmacy in the past 12 months?

In 2013, 35% of survey respondents

told HRI they had visited a retail clinic

in the past year

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In 2007, that number was just 10%.


Do you own a wearable device and do you wear it everyday?

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By the end of 2014, wearable companies will have shipped a

projected 7.6 million units within the US, up 200% from

2013.


The New Health EconomyTM: Where are we heading?

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Consumers are ready to abandon traditional care models for convenient alternatives

8

…threatening $64 billion of traditional provider revenue

36.7%

Have at-home chemotherapy

Get an MRI at a retail clinic orpharmacy

34.4%

Ah

Send a digital photo of a rash/skin problem to a dermatologist

Use an at-home strep test

54.8%

58.6%

Have stitches or staples removed at a retail clinic or pharmacy

Check for an ear infection using a device attached to your phone

46.9%

48.3%


High deductible plans continue to rise

Source: Kaiser Family Foundation – 2014 Employer Health Benefits Survey

16%

21%

35%

40%

46%

50% 49%

58%61%

6%9% 9%

13%

17%

22%

26%28%

32%

10%12%

18%

22%

27%

31%34%

38%41%

2006 2007 2008 2009 2010 2011 2012 2013 2014

All small firms (3-199 workers) All large firms (200 or more) All firms

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Healthcare follows other industries

Standardized marketingand inventory

Limited travel agency availability

Limited teller hours

Customized and data-driven

Online booking

24/7 ATMs and mobile banking

Past Present

1980s - 2010

Blockbuster drug model

Limited hours and standardized treatment plans

Personalized medicines

Personalization of treatments and protocols

Present Future

Ongoing shift

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The transformation taking place in health

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New Health EconomyValue over volume

Sophisticated customer segmentation

Fueled by technology

Built on analytics

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Healthcare’s new entrants: Who will be the industry’s Amazon.com?

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Nearly half of Fortune 50 companies are healthcare new entrants

“Our goal is to be the number one healthcare provider in the US,” - Retail company

“Our goal is to become a global leader as a healthcarecompany,” - Consumer Electronics company

“We can own the wellness space,” - Grocery company

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How New Entrants are disrupting the health sector

Democratization of careAccessible healthcare through technology

New business models Non-traditional players disrupt status quo

Addressing the void New entrants are meeting an unfulfilled need in the delivery system

Wellness and fitnessViable entry point to participate in health

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Consumer use of retail clinics on the rise

In 2007, proportion of

survey respondents

who had visited a

retail clinic:

In 2013, proportion of

respondents who had visited a

retail clinic in the last

12 months:

9.7% 35%15


Case study: Walmart is exploring whether it can make price matter in basic medical care

“How do we introduce service and access at

fundamentally transformative price

points so there is no one in America who can’t have access to

care?”

Marcus Osborne,Vice President of Health & Wellness Payer Relations

Wal-Mart Stores, Inc.

Opened micro-clinics called Kaiser Permanente Care Corners in two stores in California

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Care innovation via remote technology

Provider tools Consumer tools

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…creating new models to deliver health

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An example: Global emergence of apps formularyApps Formulary

AliveCor Cardiac

Withings Blood Pressure

bant Diabetes

Pain Squad Pain Mgmt

MyIBD Crohn’s Disease

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A glance towards the future

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Healthcare spending shifts toward preventive care

5% 7%12%

15%17%

21%

70% 65% 51%

10% 11%16%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2012 2025FPrevention Diagnosis Treatment Prognosis

Preventive Healthcare Market: Healthcare Spending by segment, U.S. 2007-2025

Global consumers spent $9.6 trillion on

wellness

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Where are consumers spending on wellness?

$45.40B Natural &

organic food

$30.40B Vitamins

and nutritional

supplements

$1.02B Nutrition

and energy bars

$16.80B Functional beverages

$59.20B for sporting

goods

$61.6B for

alternative healthcare

$11.25B for weight

loss

$40.33Bfor fitness

$1.30B for mobile

health apps

$93.62B for

nutrition

Wellness market$267B

US Healthcare system$2.8T

US total healthcare cost $3T

$25.27BGym

membership

$7.31B Personaltrainer

$6.85B Pilates &

yoga studios

$0.64B Boxing gyms

& clubs

$0.26B Fitness

DVD production

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U.S. consumers have high hopes for wearables

23


Clinician use of mobile devices is on the rise

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Healthcare organizations should focus on key areas and understand the business model implications

Consumer Innovation

Smart Analytics

Operational Agility

Build a full continuum of care

Understand, attract and retain new markets

Incentivize value and quality

Increase efficiencyCommercializecore competencies

Improve outcomes through discovery

Pursue new partnerships

Exploit new technologies

Convert data into insights

1 2

34

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For more information

www.pwc.com/hri

Ceci ConnollyHealth Research Institute, Leader(202) 312 [email protected]: @CeciConnolly

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This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice or a contract for services. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law.

PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

© 2015 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the US member firm, and may sometimes refer to thePwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

This content is for general information purposes only, and should Not be used as a substitute for consultation with professional advisors.

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Keynote General Session

Philip BredesenGovernor of Tennessee from 2003-2011



Breakout Session

2a. ACA Tax Considerations -Information Reporting and Section 6055/6056

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Sandi HuntSteve Chapman

PwC

ACA Reporting – What’s at Stake?

What’s at stake?

No coverage offered “A” Penalty- Applies if the employer fails to offer

Minimum Essential Coverage to 95% *of its full time employees (and their dependents) and any FTE obtains subsidized coverage on an exchange.

• (1/12 X $2,000) X (Total FTEs – 30**)

Insufficient coverage offered “B” Penalty– Applies if a FTE receives a premium tax credit because coverage was not offered to them, or employer offered coverage that was unaffordable or did not provide minimum value.

• (1/12 X $3,000) X (Number of FTEs receiving subsidized coverage)

*70% in 2015

**Total FTEs – 80 in 2015

PwC

ACA Reporting – 2015 Overview

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• New reporting process under the ACA:

– Large employers must report monthly information regarding affordable healthcare both to full-time employees and the IRS starting for 2015 (reporting to be completed in early 2016) via Form 1095-C and 1094-C

– Self-insured employers must also report on minimum essential coverage provided to employees, retirees, and others

– Reporting is by each FEIN, including “disregarded entities”

– Reporting obligation created to support the ACA’s individual and employer mandates and to support imposition of employer penalties

• New reporting requirements’ data elements include:

– Identify all full-time employees (working 30+ hours per week, per ACA)

– Coverage offered and employee cost

– Employee and dependent social security numbers

– Applicable safe harbors, transition rule

– Actual coverage provided to employees, dependents, retirees, COBRA beneficiaries

– Full-time and total employee counts ACA reporting to IRS and employees is the latest and one of the most challenging ACA-related developments

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ACA Reporting – Overview of Requirements

Minimum Essential Coverage Employer Shared Responsibility

Responsible • Self-insured employers and insurers • Employers with 50 or more full-time employees during the prior calendar year

Reporting Contents

• Months of minimum essential coverage for all covered individuals

• Months during which coverage was offered and type of coverage

• Employee’s share of lowest-cost self-only coverage offering minimum value during each month

• Employer’s use of any safe harbors and transition relief

ReportingRecipients • All covered individuals and IRS • All full-time employees and IRS

Timing• Full-time employees and covered individuals – by January 31, 2016 for 2015

• IRS –by March 31, 2016 for 2015

Allowable DistributionMethods

• To covered individuals – by first-class mail or electronically with participant consent• To IRS – mandatory electronic filing

Reason for Reporting

• Enforcement of individual mandate• Evaluation of individual eligibility for

public exchange subsidies

• Enforcement of employer shared responsibility mandate

• Evaluation of individual eligibility for public exchange subsidies

PwC

ACA Reporting – Illustrative Timeline

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January 2015Employer shared responsibility requirement begins for employers with 100+ FTEs (reporting/payment in 2016)

January 2016Reporting for 2015 coverage year begins (sections 6055 and 6056)

By January 31st

Employers distribute Forms 1095-C to employees

By March 31st

Employers electronically submit Forms 1094-C (and copies of all 1095-Cs) to IRS

Information must be collected and tracked to ensure readiness for 2016

reporting.

January-December 2015

Develop implementation plan including project milestones and deadlines

March 31

January 31, 2016

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Overview of 1094-C Form – Page 1At least one 1094-C Form is submitted to the IRS for each EIN. Multiple 1094-Cs can be sent for different groups within an EIN, but one “authoritative” form must aggregate all information related to the EIN

Information on employer

- Number of 1095-Cs attached to Form

- Confirm filer is part of larger controlled group

- Certification of how filer is meeting employer mandate requirements and filing method

- Signature

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PwC

Overview of 1094-C Form – Page 2

Confirmation by month that coverage was offered to 70% of full-time employees (95%

for 2016+)

Total employees and total full time employees by

month

Confirm whether filer is part of larger controlled group by

month

Confirmation of eligibility for 70% threshold transition

relief in 2015; other transition rules

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PwC

Overview of 1095-C Form

Employee Information

Employer Information

Indicator by month of:

-Offer of coverage-Cost of coverage-ACA Safe Harbor

Name, SSN or DOB and Coverage

status of employees and dependents by

month

At least one 1095-C Form is submitted to the IRS and employees for each employee who is full time or enrolled in coverage for at least one month

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PwC

ACA Reporting – Practical Challenges

In addition to the technical and data challenges that exist under the ACA, there are also a number of reporting challenges that employers will need to understand for notices

And, don’t forget the reporting…

• Administrative burdens surrounding a large scale filing obligation with employees and the IRS need to be considered.

• Delivery of forms to employees – electronic delivery is permitted, but only if employees affirmatively elect to receive electronically.

• Exchange notifications will be coming – need to develop a plan for working through those notices.

• In addition to the exchanges, the IRS will likely have a separate process for examination and/or notices that will need to be separately managed.

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PwC

ACA Reporting – Data Considerations

February 4, 2015

The ACA reporting process is dependent on the data available as of the filing date. Much of the data required for ACA reporting has not previously been needed for tax filings, which are signed under penalties of perjury.

Some important considerations with respect to data are:

• Your data is not getting cleaner on its own…don’t let data quality issues stop you from getting started

• Identifying important factors such as special unpaid leave or reclassifications will be difficult to incorporate retroactively

• Establish clear ownership and accountability for data points – internal or external

• Identify what data is missing, and develop a plan to gather quickly –dependent SSNs are a common example

PwC

Thank you!

Sandi Hunt

Principal

[email protected]

415.498.4635

Steve Chapman

Partner

[email protected]

646.471.5809

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Breakout Session

2b. M&A update focusing on vertical and horizontal consideration

www.pwc.com

Chris Monte, LifePoint HospitalsBryan Mello, FreseniusPat Pellervo, PwCJennifer Wyatt, PwC

PwC

M&A activity*

• Healthcare provider-sector deals for 2015 Q1 reflect a 46% increase over 2014 Q1.

• Hospitals, insurers, and private equity firms are acquiring medical practices – 41 private equity deals in 2015 Q1.

• Private equity typically exits a portfolio investment in approximately 5 years, so M&A activity will continue for the foreseeable future.

* Source: Modern Healthcare, April 18, 2015

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Tax due diligence considerations

• Affordable Care Act compliance

• Highly compensated employees of health insurance providers (Section 162(m)(6))

• Section 501(r) requirements for hospitals

• Tax treatment of professional corporations and similar entities, and potential effect on acquiring group

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Professional Corporations (“PCs”) & Professional LLCs (“PLLCs”)

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Restrictions on “Corporate Practice of Medicine” (“CPOM”)

Many states impose restrictions on corporations or LLCs providing medical (or other professional) services.

• As it relates to medical providers, PCs and PLLCs generally must be legally owned by licensed providers (e.g., physicians).

• Certain states also refer to “beneficial ownership.”

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Affiliated groups & controlled groups

Section 1504(a): Affiliation

• Prerequisite for consolidated return election

• Group member(s) must directly own at least 80% of voting power and value

• Section 1504(a) ownership threshold also applies for other purposes, including sections 332, 338, and 165(g)(3)

Section 1563: Controlled groups

• Generally requires ownership of at least 80% of voting power or value

• Certain applications reduce the threshold to more than 50% of voting power or value

• Ownership attribution rules apply

• Includes foreign entities

• Application is mandatory

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Consolidated groups

• Current offset of income/losses of group members

• Deferral of intercompany transactions between group members

• Stock basis adjustments to reflect income/loss

• Tier-up of E&P (including deficits)

• Unified Loss Rule (“ULR”) and Excess Loss Account (“ELA”) rules apply to many dispositions/deconsolidations

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Controlled groups

• Deferral of intragroup losses (but not gains)

• Single employer for benefit plans

• Single application of graduated rates

• Treated as a single corporation for purposes of determining eligibility for cash method of accounting

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“Friendly PC” example

Medical Director Agreement: Dr. X oversees and coordinates Sub’s business objectives for PC, including clinical decisions. May be terminated by Sub without cause. Dr. X may be an employee of Parent or Sub.

Support Services Agreement: Sub performs all administrative services for PC (e.g., billing), managing PC to the extent its management does not constitute the practice of medicine (e.g., decisions affecting clinical care).

Stock Transfer Restriction Agreement: Restricts Dr. X’s ability to transfer shares of the PC or to cause the PC to take certain actions (e.g., prohibited to declare a dividend, issue equity, merge/liquidate, etc.). Upon the occurrence of a “Transfer Event,” the PC shares will be transferred for nominal consideration to another shareholder of Sub’s choosing (e.g., another physician in its employ); such transferee is required to enter into a similar agreement. Transfer Events include Dr. X’s termination as Medical Director.

Sub

Parent

PC

Dr. X

Support ServicesAgreement(Sub & PC)

Stock Transfer Restriction Agreement(Dr., Sub & PC)

Medical DirectorAgreement(Dr. and Sub)

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IRS guidance

• Private Letter Ruling 201451009

- IRS ruled that PC was a member of Parent’s affiliated (and thus permitted to join its consolidated) group.

- Holding premised upon the legal enforceability of the arrangements under applicable state law.

• But also see PLR 9752025, revoking PLR 9605015

- FSA 199926014 explained that under applicable state law, an attempt to transfer beneficial ownership to a non-physician would be void, thus defeating affiliation.

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Example of an unfavorable statute

PA Code – Title 15, Chapter 29, Section 2923

§ 2923. Issuance and retention of shares.

a. General rule.--Except as otherwise provided by a statute, rule or regulation applicable to a particular profession, all of the ultimate beneficial owners of shares in a professional corporation shall be licensed persons and any issuance or transfer of shares in violation of this restriction shall be void. A shareholder of a professional corporation shall not enter into a voting trust, proxy or any other arrangement vesting another person (other than a person who is qualified to be a direct or indirect shareholder of the same corporation) with the authority to exercise the voting power of any or all of his shares, and any such purported voting trust, proxy or other arrangement shall be void.

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Not-for-profit affiliation

• Hospital is sole member of taxable not-for-profit

- Governance Provisions

◦ Hospital appoints physician board members and also has ability to removed board members

◦ Hospital appoints officers

◦ All financial decisions made by hospital member

◦ All clinical decisions made by physicians

◦ Hospital has authority to liquidate the entity

- Financial Provisions

◦ Entity is precluded from paying dividends

◦ Hospital is entitled to all liquidation proceeds

• Private Letter Ruling 201024001: the IRS held that affiliation was satisfied

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A few of the unanswered questions

• How far do these rulings extend?

- For example, are stock basis adjustments made to “sub” stock that legally is not owned by a group member? If so, if an ELA is created with respect to nonexistent stock, what is the trigger mechanism?

- Does PC’s E&P (or deficit) “tier-up” to Parent?

• If a consolidated return election is in place for Parent’s group, is inclusion of PC mandatory in the absence of a PLR?

• If consolidation is not desired/elected, do controlled group rules nevertheless apply?

• If the PC was instead a PLLC, is its default classification a single member LLC (i.e., disregarded) or a partnership (due to the physician’s nominal interest)?

- Consider Luna and Culbertson cases

- Who has rights to benefits and burdens of ownership?

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Joint Ventures (“JVs”)

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Common JVs

• Hospital forms a joint venture with a group of physicians

• The assets and business of a nonprofit are contributed to a newly created joint venture, and a partner organization (generally for-profit) contributes capital sufficient to provide it with a majority ownership interest in the joint venture

- Day-to-day operations of the joint venture often are managed by the for-profit entity pursuant to a management contract

- Nonprofit provides clinical and physician development services to the joint venture

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Capital structure of JVs

• Common interests –

- Income allocated pro rata based on value of contributions

- Distributions pro rata based on value of contributions

• Preferred interests –

- Minimizes downside risk to a member

- Potential for phantom income

• Profits interest

- Provide physicians with profits interests in the partnership

- Typically nontaxable if no liquidation value upon receipt

• Additional compensation may be provided by management contracts

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JV considerations

• Form a new LLC

- Contribution of property and brand names

◦ Negotiating section 704(c) method for allocating income, gain, loss and deductions from contributed built-in gain property

◦ Potential to allocate income in excess of ownership percentage to contributing partner

◦ Determine whether property contributed is amortizable

- Disguised sale rules

◦ Cash distributions within two years of contribution unless an exception

› Reimbursement of preformation expenditures

› Debt-financed distribution

› Operating cash flow

◦ Assumption of nonqualified liabilities

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JV considerations (continued)

• Buy into existing LLC

- Step-up to FMV tax basis under section 743(b) with a valid section 754 election in place

- Benefit of amortization deductions allocated only to buying partner

• Divesting a group of clinics to partners

- Leverage partnership prior to divesting interest

- Consider disguised sale rules

Breakout Session

2c. Tax planning for executive an physician compensation and benefit arrangements

Bruce Clouser, PwCTravis Patton, PwCMaryAnn Piccolo, University of Pennsylvania

PwC

Tax planning for executive and physician compensation and benefit arrangements

Deferred Compensation Planning

• Techniques

• Reporting Considerations

• Other Items

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Deferred compensation planning –Techniques

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Deferred compensation planning – Techniques

Overview

• Goals of a Deferred Comp Program

• Types of Deferred Comp Arrangements

- Qualified Plans/Section 403(b) Plans

- Section 457(b) Plans

- Section 457(f) Plans

- Section 409A

- Split Dollar Life Insurance

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Deferred compensation planning – Techniques (continued)

Qualified Plans/Section 403(b) plans

• Defined Contribution vs. Defined Benefit Plans

• Advantages

- Tax-deferred accumulation until distribution (or later if rolled into IRA)

- Benefits are secure from creditors

• Disadvantages

- Contributions/benefits subject to limits and non-discrimination testing (governmental plans generally exempt from non-discrimination testing)

- Compliance requirements may be complex

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Section 457(b) Plans

• Availability/Funding Rules

• Advantages

- Amounts may be fully vested without tax

- Permits additional wealth accumulation on tax-deferred basis

• Disadvantages

- Relatively low contribution limits ($18,000 for 2015)

- Can’t be rolled over (unless governmental plan)

- Not secure from creditors (unless governmental plan)

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Section 457(f) Plans

• Availability/Funding Rules

• Advantages

- Unlimited deferral opportunity

- Limited compliance requirements

• Disadvantages

- Must be at risk of loss to avoid premature taxation

- Not exempt from section 409A

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Section 409A

• Imposes requirements on deferred compensation plans

- Time of payment must be set up front

- Limited payment events may satisfy section 409A

- Limited ability to accelerate or defer payment

- 20% additional income tax applies to affected participant if a violation occurs

- Section 457(f) plans may be subject to section 409A

• Exception – short-term deferrals

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Split dollar life insurance

• Organization and executive jointly own a policy

- In typical approach, organization loans premiums to executive which are repaid at death or termination

- Cash value build up is generally tax free to executive, as is any payment of life insurance

- However, executive is subject to tax annually on imputed income in form of loan interest

- Administration charges and fees may reduce potential upside

- Ultimate payout would depend on investment performance within policy

PwC


Summary of Deferral Opportunities

• 457(b) – up to $18,000

• 403(b) – up to $53,000 (employee plus employer, with employee limited to $18,000 pre-tax) plus $6,000 catch-up, subject to non-discrimination testing (unless a government)

• 401(a) – defined contribution – up to $53,000, may need to coordinate with section 403(b) contributions, subject to non-discrimination testing (unless a government)

• 401(a) – defined benefit – up to $200,000, depending on age, etc., subject to non-discrimination testing

• 457(f) – unlimited

• Split-dollar – unlimited, subject to insurance policy limits

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Deferred compensation planning –Reporting considerations

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Deferred compensation planning – Reporting Considerations

Reasonableness of Compensation

• Rebuttable Presumption

• IRC Section 4958 Excess Benefit Transactions

- Intermediate Sanctions

- Excise Tax Considerations

• Tax Reform Proposal – Entity-level excise tax on excessive executive compensation

- 25% tax on organization paying compensation over $1m

• Form 990 Reporting

- Publicly Available

- Media Scrutiny

• Completeness

- Reporting of all taxable/non-taxable benefits on Form 990

- Form 990, Schedule J reporting of deferred comp programs, participants & distributions

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Deferred compensation planning – Reporting Considerations (continued)

Reasonableness of Compensation

• State Reporting Implications

- Form 990 typically must be attached to annual state solicitation registration filings

- Compensation practices may need to be disclosed for sales tax exemption renewal purposes (PA-as example)

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Deferred compensation planning –Other items

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Deferred compensation planning – Other items

• Joint Venture Relationships

• Revenue Sharing Arrangements

• Licensing Fees

• Other Items

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Questions?

MaryAnn Q. PiccoloAssociate Comptroller –Tax & Int’l Operations,University of Pennsylvania(215) [email protected]

Bruce E. ClouserPartner, PwC LLP(267) [email protected]

Travis L. PattonPartner, PwC LLP(202) 414-1042 [email protected]

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Tax Function of the FutureRedesign, redefine, and redeploy tax to be a strategic business asset

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• Introductions• Background• Tax function of the future: Predictions• Tax operations• Data

Agenda

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Tax function of the futureBackground

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BackgroundTax Function Evolution

• Since adoption of Sarbanes Oxley, Tax functions have been under increased pressure both internally & externally (cost pressures, PCAOB, auditors, etc.)

• Some Tax functions began implementing systems in an attempt to improve their efficiency and effectiveness

• Others, stuck with what worked for them, even if not efficient or optimal, because of the perceived complexity of their processes/structure.

• In the past several years, Tax technology has improved such that tax functions are able to utilize enabling technologies for key areas:

• Tax sensitization of data

• Storage of data

• Management of tax provision and return process

• Forecasting and modeling

• Management of tax controversies

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BackgroundTax Function Trends

Tax Functions are now trying to approach provision and compliance differently. They are realizing that simply integrating the tax provision and return process just puts them at the starting gate. There is an opportunity to rebuild the provision and compliance process to improve efficiencies, mitigate risks and enhance performance.

• Focus on compliance and provision integration

• Tax sensitization of data and tax data consolidation

• Leveraging existing technology utilized within the Enterprise

• Structured document management platforms replacing shared drives

• Use of automated workflow and collaboration platforms to help formalize existing processes

• Enhanced analytics enabled through better defined data and data architecture

• More effective data collection approaches and methods

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Need to changeMegatrends and the impact to organizations

Staff is more decentralized with growing skill gaps.

Demographic shifts

Trade and investment is shifting to developing countries increasing risk and complexity.

Shift in global economic power

Governments are competing for business and requiring greater transparency.

Accelerating urbanization

Technology vendors are developing new capabilities and new market entrants are emerging.

Technological breakthroughs

Organizations continue to demand higher quality analysis while staffing levels are holding steady or falling.

Operational optimization

Global Megatrends

Demographic shifts

Shift in global economic power

Accelerating urbanization

Technological breakthroughs

Climate change & resource scarcity

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Tax function of the futurePredictions

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Legislative/regulatory

• Global tax information reporting requirements (e.g., BEPS and similar transparency initiatives) will grow exponentially and will have a material impact on the operations and related budget allocations of Tax functions.

• Global markets will demand complete transparency and information sharing among stakeholders and taxing jurisdictions, resulting in an increase in overall tax liabilities.

• The majority of taxing jurisdictions, in both developed and emerging markets, will have systems and data-mining capabilities to conduct global audits which will reconcile income and expense across jurisdictions.

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Risk & governance

• Many jurisdictions will legislatively require the adoption of a tax control framework which follows guidelines similar to Sarbanes-Oxley and COSO (Committee of Sponsoring Organizations of the Treadway Commission).

• Enhanced stakeholder scrutiny and reputational risk will force companies to continuously re-evaluate their tax decisions.

• Strategic focus on jurisdictional reporting and documentation of business activities, including transfer pricing, will be critical to managing the increased tax controversy resulting from transparency initiatives.

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Data

• The majority of Tax functions will receive all information in a ‘tax-ready format’ from either their enterprise-wide financial systems or a dedicated tax data hub.

• Dedicated tax data hubs will become mainstream and be developed internally, licensed from a third-party vendor, and/or accessed through an accounting firm as part of a co-sourcing arrangement.

• Data security will be high on the agenda of Tax functions due to concerns over confidential information being inadvertently released or shared publicly.

Data in tax-ready format

Licensedthird-party

Internally owned

Co-sourcing

BuyBuild Rent

Centralized tax data hubEnterprise systems

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Technology

• The vast majority of Tax functions will rely on professional data analysis tools to assist in the decision-making process in areas such as detection of risk, opportunity identification, projections and scenario planning, and overall business support.

• More companies will use their enterprise-wide financial systems to prepare tax calculations (e.g., income tax accounting and indirect taxes), thereby replacing spreadsheets and/or traditional tax technology solutions.

New technology

Reduce global tax rate

Identify risks

Projections and predictive analytics

SpreadsheetsSpreadsheets

Better decision making and enhanced strategic planning

Enterprise systems

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Process

• Tax functions will use real-time collaboration tools to automate their workflow, document management, calendaring, and internal controls.

• Most global tax preparatory compliance and reporting activities, including data collection and reconciliations, will be performed within the company’s shared service center or will be co-sourced with a third party.

On-line collaboration tools

Workpapercreation

Data collection

Analysis Workflow

Shared service center

Tasks and processes

Tax function

Co-source Greater efficiency

Improved controls

Reduced costs

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People

• Tax functions will employ dedicated tax IT, data and project management specialists who will develop, champion, and execute the tax technology and transformation strategies.

• A successful tax professional of the future will be highly proficient in data analysis, statistics, and technology, as well as process improvement and change management.

TechnologySoft skills

Technical skills Leadership skills

Data analysis Statistics

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Tax function of the futureTax Operations Ecosystem

PwC

The future state ecosystem

Tax Finance Third parties

Key deliverables

Business intelligence and analytics

Tax data hub

Tax applications

Tax sensitization

Tax datamanagement

Tax data mappings

Enterprisesystems

Document managementProcess management and workflow CalendarData collection

Tax operations management

PwC

Tax function of the future Data

PwC

Federal & State Tax Analytics – sample

PwC

International Tax Analytics – sample

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PwC refers to the United States member firm, and may sometimes refer to the PwC network. Each member firm is a separate legalentity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

Thank you!

Breakout Session

3b. State and local tax update

www.pwc.com

Troy Deason, HCADoug Jacobs, Steward HealthMaureen Pechacek, PwCEdward Bringhurst, PwCGeorge Famalett, PwC

PwC

State tax panel

Maureen Pechacek – Partner, PwC, Moderator

Troy Deason – Director, State Income & Franchise Tax, HCA

Doug Jacobs – Director, Corporate Tax, Steward Health Care

Edward Bringhurst – Director, PwC

George Famalett – Partner, PwC

PwC

Refund of California sales tax on medical supplies for medicare patients

• Many medical supplies are subject to sales tax in California unless an exemption applies.

• The historical position in California has been Healthcare providers (both For Profits and Not For Profits) are considered “consumers” rather than retailers of medical supplies which means healthcare providers are responsible for the sales tax on medical supplies purchases.

• A position has been developed by PwC to classify Healthcare providers as retailers on medical supplies utilized by healthcare providers who provide services to certain medicare patients.

• The theory here is the U.S. government is financially responsible for services provided to medicare patients which is an exempt transaction as a sale to the U.S. government.

• What is the benefit for healthcare providers? Example – Healthcare provider has 200 million of annual medical supplies that relate to the care of certain medicare patients. If 25% of these purchases (e.g., 25% of 200 million or 50 million) are subject to sales tax, a refund of 4.25 million per year is available to a healthcare provider (50M 8.50%).

• A detailed data model must be built to support sales tax refunds relating to medical supplier or medicare patients. This data model needs to determine the medicare usage percentage by department (they are different) with appropriate audit documentation); a methodology for bulk purchases, medicare revenue tie out (In patient vs. out patient) to name a few issues.

PwC

Cloud Computing: Evolving the IT Stack

Cloud LayersTraditional IT Stack

0

0

Data Center Facilities

Networking

Servers and Storage

Operating Systems

Applications

Application Development & Deployment

Infrastructure Software (VM, Database, IT Mgmt)

Software as a Service (SaaS)

Platform as a Service (PaaS)

Infrastructure as a Service (IaaS)

Traditional IT Stack

• Corporate IT hosted on-premise

• Each component linked, and built to satisfy future capacity

• Riddled with complexity, high management costs, lack of efficiency, unused capacity

Cloud IT

• Can be hosted on-premise, off premise or hybrid

• Components are no longer linked, and can be provisioned as a service in whatever combination needed

• Built for most effective utilization

• Degree of complexity, management costs decrease, much more efficient use of resources

PwC

State and Local Indirect Tax Considerations for Cloud Computing

• Classification of Service Offerings

• Sourcing

• Billing and Multiple Points of Use

• Risks

PwC

Classification

One of the main struggles in taxing cloud computing services is how to classify the transaction—to answer the question “What are you selling?”

• Is it software?

• Is it information services?

• Is it data processing services?

• Are you leasing tangible personal property?

• None of the above?

PwC

Classification of SaaS

States are taking different approaches to cloud computing, mainly SaaS at this point.

• Electronically delivered software

• Non-taxable information or data processing service

• Taxable information or data processing service

• Nothing: state does not tax electronically delivered software or information/data processing services

PwC

Classification of IaaS and PaaS

States are beginning to take a closer look at the classification of hosting services.

• Some ITFA grandfathered states that tax Internet access are taxing hosting services as related Internet access services if sourced to that state

• Most classify it as a computer service, taxable or not taxable depending on the state

• Some can’t make up their mind

PwC

Sourcing

The next issue that arises once a service offering has been classified is to which state you source the revenue.

• By server location

• By user location

• By billing address or headquarters

If the service is deemed to be the sale or lease of tangible personal property, the revenue would be sourced to the server if the provider can identify which server was being used. If multiple servers are used, the issue becomes more complex.

PwC

Billing and MPU Issues

Compliance:

• Customers may need detailed user or server location information in order to determine their own sales tax exposures and for providers to correctly apportion revenue.

• Customers may want sales tax collected based on user location (MPU issues). Is there an industry standard?

• Can the suppliers automate the collection of sales and use taxes for multiple user locations?

PwC

Sales/Use tax Conversion of not-for-profit system to for profit

• Identification of Services Performed(i.e. parking, lodging, sales of personal property, cafeteria and non-patient meals, food court, gift shop, etc.)

• Sales/use tax applicability to medical supplies & devices as well as ALL non-medical items purchased

• Sales/use tax applicability to assets

• Purchasing Department – Sales/use tax awareness and training

• Systems and IT – Turning on the tax flags; changing the tax flags

• Registering with taxing authorities; Reporting to taxing authorities; record retention for audit support

• Other Indirect Taxes – Local business taxes; recordation taxes; registered and titled property

PwC

Texas margins tax – Industry issues

• Overview: Computation – The lower of the Following:

- Total Revenue minus COGS

- Total Revenue minus compensation

- 70% of Total Revenue

• Exclusions from Revenue

- Health Care Institutions

◦ 50% of revenues from Medicaid, Medicare, CHIP, TRICARE, Workers Compensation claims, cost of uncompensated care

- Health Care Providers:

◦ 100% of Revenues from Medicaid, Medicare, CHIP, TRICARE, Workers Compensation claims, costs of uncompensated care

PwC

Texas margins tax – Industry issues (continued)

• Uncompensated Care valuation

• Interplay on bad debt deduction and excluded uncompensated care

• Treatment of Co-Pays and deductibles

• Expenses related to excluded revenue

• Treatment of partial payments and the uncompensated care exclusion

• Treatment of expenses attributable to uncompensated care

• Treatment of partnerships

• Deduction for certain flow-through funds

• Recent TX ruling regarding reimbursements

PwC

Multistate income tax issues

• Pending GAAP change to revenue recognition rules

• Treatment of rebates

• Sourcing:

- Market-based sourcing and COP state challenges

- Pennsylvania, Florida, Indiana, New York, others

• Transfer Pricing Issues

- Recent litigation in DC

- MTC Proposed Changes

- Audit Activity

PwC

District of Columbia – Transfer pricing

Hess Corp. v. OTR, No. 2012-OTR-00027 (November 14, 2014); Exxon Mobil Oil Corp. v. OTR, No. 2012-OTR-00049 (November 14, 2014); Shell Oil Co. v. OTR, No. 2011-OTR-00047 (November 14, 2014)

• Three orders of the Office of Administrative Hearings reversed District of Columbia Office of Tax and Revenue (OTR) proposed franchise tax assessments based on transfer pricing analyses prepared by OTR’s third-party contractor, Chainbridge Software LLC.

• Taxpayers argued that non-mutual offensive collateral estoppel should be preclude OTR from relitigating whether the Chainbridge methodology can be utilized to assess franchise taxes.

• The Administrative Law Judge (ALJ) reviewed several ‘fairness’ factors and determined that applying estoppel against OTR would not be unfair.

PwC

Other multistate income/franchise tax & other unique issues/opportunities

• Move to Unitary Combined Reporting

• Treatment of Foreign Income

• Franchise Taxes – LLC’s – Louisiana

• Credits & Incentives

• New Markets Tax Credit

• Purchasing Companies

PwC

Healthcare provider taxes

Where Provider Taxes Exist?

49 States and the District of Columbia have imposed Healthcare Provider Taxes of some sort.

Why Provider Taxes Exist?

Provider taxes to help ease the State burden associated with Medicare/Medicaid

Who do Provider Taxes Apply?

Federal requirements allow states to impose provider taxes on 19 classes of healthcare providers, but most typically:

• Nursing Facilities

• Hospitals

• Intermediate Care Facilities

• Managed Care Organizations

PwC

Healthcare provider taxes – OverviewCMS reimbursement

Hospitals

State Government

Federal Government Center for Medicare & Medicaid Services (CMS)

$302.9 mmHealthcareProviderTaxes

$248.7 mm StateContribution

$341.4 mmFederalContribution

$590.2 mmSupplementalPayments

Federal Contributionbased on state per capita income

$590.2 mmCMS Disbursement

PwC

Healthcare provider taxesNew Hampshire – April 2014

Catholic Medical Center et al v. N.H. Department of Revenue

• Equal Protection argument

- Hospitals were subject to tax, clinics were not

- Hospitals and clinics provided several of the same services

- Parties must be treated equally unless the “rational basis test” is satisfied

PwC

Healthcare provider taxesNew Hampshire – April 2014 (continued)

Catholic Medical Center et al v. N.H. Department of Revenue

• Rational Basis Test

- Hospital tax was imposed to balance state budget by taxing and returning tax to hospital, but receiving Federal matching

- CMS fought these policies beginning in 2011, and obtained a Federal prohibition against guaranteeing a hospital is “held harmless” by a tax.

- Since hospitals were no longer acting as a conduit to balancing the budget, the “rational basis” was destroyed for the New Hampshire tax

- Medicaid Enhancement Tax (MET) struck down

PwC

Healthcare provider taxesKentucky – April 2015

Saint Joseph Health Systems, Inc – KY Board of Tax Appeals

• Statutory Construction – HB 380

- Hospital provider tax collections for FY 2006-2007 and 2007-2008 shall not be less than $180,000,000. Notwithstanding the tax shall not exceed the amount of the aggregate provide taxes paid by hospitals in FY 2005-2006

- Issue was whether it was taxes original paid and/or amounts paid after refunds of overpaid tax. BOTA held it was original tax paid

PwC

Healthcare provider taxesKentucky – April 2015 (continued)

Saint Joseph Health Systems, Inc – KY Board of Tax Appeals

• Federal Preemption

- “No tax or fee or other monetary payment may be imposed directly or indirectly on a carrier… with respect to any payment made under the fund” 5 U.S.C Section 8908(f)(1)

- Taxpayer argues that tax is “indirectly” on the carrier because they pass it on through higher medical costs. In addition, the department believes the original position on granting refunds in 2005-2006 years was incorrect. The Board held that they would follow the West Virginia case and “the mere fact that a provider may opt to pass through the cost it bears to carriers, including FEHB carriers, dot not transform the provider tax into an illicit indirect imposition of a state tax upon the FEHB fund”

PwC

Healthcare provider taxesKentucky – April 2015 (continued)

Conclusion

• Evaluate potential CA opportunity

• Evaluate flow through exemptions related to Medicare

• Significant sales tax issues related to conversion of Not-for-Profit to For-Profit – evaluate and understand issues & increased costs

• Evaluate Texas Margins Tax for potential opportunities

• Understand changes related to new GAAP revenue recognition rules

• Keep Transfer Pricing reports current

• Evaluate purchasing companies

• Healthcare provider taxes – Additional litigation is expected

PwC

Thank you


3c. Unrelated Business IncomeModerator: Gwen Spencer, Tax Partner

Panelists: Michael Walton, Vice President,Tax Services at Kaiser Permanente

Amity Ollis, Tax Manager, Dartmouth- Hitchcock

PwC

Agenda

• Background

• New business operations

• Investments

• Accountable Care Organizations (ACOs)

• International transactions – beyond captive insurance

PwC

UBI – New business operations

Telemedicine, Virtual Care, E-Medicine

The use of telecommunication and information technologies in order to provide clinic health care at a distance. Telemedicine helps eliminate barriers and can improve access to medical services that would often not be consistently available in distant and/or rural communications. It is also used in critical care and emergency situations.

• HUB = Hospital, clinic, or other healthcare provider that is providing the clinical services.

• SPOKE = Hospital, doctor’s office, clinic, etc. that is receiving the services or serves as an intermediary and point of access for patients.

Medical Directorships and Clinic Support

• Individuals employed by one particular hospital are provided to unrelated hospitals in return for a fee.

• Hospital staffing clinics in retail chains (Walmart, Walgreens, etc.) and corporations.

PwC

UBI – New business operations

Mercy set to open ‘virtual care center’ to reduce variation in care deliveryhttp://medcitynews.com/2015/05/mercy-set-open-virtual-care-center-reduce-variation-ca

Texas votes to limit telemedicine solely to in-state practiceshttp://www.nytimes.com/2015/04/11/us/texas-medical-panel-votes-to-limit-telemedicine-practices-in-state.html?_r=0re-delivery/

NY telemedicine reimbursement legislationhttp://www.natlawreview.com/article/new-york-passes-telemedicine-reimbursement-legislation

Partnerships of exempt hospitals/health systems with telemedicine technology companies to expand care marketshttp://finance.yahoo.com/news/carena-partnerships-expand-telemedicine-solutions-130000560.html

Kaiser Permanente joins forces with Target Corp on in-store clinicshttp://www.latimes.com/business/la-fi-kaiser-target-clinics-20141118-story.html

Wal-Mart partners with hospitals to rapidly expand in-store clinicshttp://www.amednews.com/article/20080225/business/302259998/1/

PwC

UBI – New business operations – Tax considerations

• Definition of Patient?- Are they a patient of the Hub? Are they registered with the Hub?- What is the patient billing/registrations structure?- Who is being billed for the service (the Spoke or the patient)? - Are the services being provided to communities where the services are not otherwise

available/provided?- Does the provider interact with the patient? Or, does he or she rely solely on records, images,

and other healthcare providers?• Does the activity further the organization’s charitable purpose? • How does the shift in capacity impact the analysis?• Who is the nfp providing the service for? For-profit?• Private benefit concerns• Future Concerns

- Loss activity now, but what about the future?- Joint venture rules come into play- The impact on TE status when engaging with for-profits to grow their business

• State reporting obligations • International operations

PwC

UBI – Investments

Background:

• Certain investments of the organization generate UBI – Federal and State

• Activities of LPs/LLCs are attributed to the tax-exempt partner – IRC section 512(c)

Tax Considerations:

• UBI – Federal and State

• Federal & State Filings

• Domestic Filings to Report Foreign Activities

• Reportable Transactions

• Foreign Bank Account Reporting

• Boycott filings

• Form 5471

PwC

UBI – Investments

Things to consider:

• Healthcare systems may not be as experienced as others in understanding compliance requirements arising from investments by a nfp organization

• Process improvement - how does your organization approach the process?

• Communication/education of Treasury/CIOs

• Inventory – what was entered and what was exited - Secure all the k-1s (IRS now often asks for a list of K-1s in audit process)

• Pre-investment consultation with tax

- Considering blocked v. unblocked

- Use of existing NOLs – Federal and State

• Foreign investments – direct or indirect

• Direct communication with investment contacts

PwC

UBI – Accountable Care Organizations (ACOs)

Background:

• A group of physicians, hospitals, and other health care providers that come together to provide coordinated care to patients for whom they have a collective responsibility for their health needs.

Tax Considerations:

• Whether the arrangement furthers a charitable purpose;

• Whether the exempt organization has ceded control over a substantial portion of its activities or has retained sufficient control to avoid inappropriate benefit to the non-exempt partners;

• Whether the non-exempt partners participate on terms that are consistent with fair market value (i.e., no private benefit or inurement).

Considerations:

• ACOs - more to come?

• ACO – beyond MSSP?

PwC

UBI – Accountable Care Organizations (ACOs)

IRS Notice 2011-20:• A tax-exempt entity’s participation in an ACO will not result in private inurement, more than

incidental private benefit, or in UBI, if: - The terms of participation are set in advance in a written agreement negotiated at arm’s

length- CMS has accepted the ACO into the MSSP- The economic benefits, ownership interest, return of capital, distributions and allocations

are proportional in value to the tax-exempt entity’s capital contributions- The tax-exempt entity’s share of losses does not exceed its share of economic benefits ‒ All

contracts and transactions among the parties are consistent with fair market valueIRS Fact Sheet 2011-11• The IRS provides questions and answers on the following topics:

- Shared Services Programs and ACOs- Participation by charitable organizations in ACOs- Shared savings program activities- Non-shared savings activities- Tax status of ACOs- Clarification of Notice 2011-20- Electronic health records technology

PwC

UBI – International transactions – Beyond captive insurance

Tax Considerations

• Permanent establishment (“PE”) risk

• Registration/licensing/permitting/withholding

• Payroll/personnel considerations

• Foreign exchange risk

• Structuring considerations

- Joint Ventures

- Partnerships with Foreign healthcare entities (virtual and physical presence)

- Controls around expenditures abroad

• Completeness of Form 990, Schedule F reporting

• Intellectual property/capital risks

• Transfer pricing considerations

• FBAR reporting

• Reputational/headline risks

PwC

UBI – International transactions – Beyond captive insurance

International patientshttp://www.bostonglobe.com/business/2014/12/31/international-patients-boost-profits-children-hospital/eKD4tUTt6CsbBXoumYvrTL/story.html

How US hospitals are helping US trade policyhttp://foreignpolicyblogs.com/2014/03/25/how-hospitals-are-helping-u-s-trade-policy/

UPMC overseas growth (2010)http://www.post-gazette.com/local/city/2010/05/30/How-UPMC-s-overseas-operations-blossomed-in-14-years/stories/201005300208

America’s top hospitals go global (2008)http://www.forbes.com/2008/08/25/american-hospitals-expand-forbeslife-cx_avd_0825health.html

US Providers enter variety of collaborations (2012)http://www.modernhealthcare.com/article/20120609/MAGAZINE/306099941

PwC

Thank you!

Michael Walton (510) 271-6385 [email protected] Ollis [email protected] Spencer (617) 530-4120 [email protected]



Health Services Tax Conference

Responses to Health Reform

Amy Bergner

PwCPwC

Health care reform – five years after ACA

Payers EmployersHospital Systems

.

PwC

Responses to health care reform

Consideration of private exchangesShift to high deductible health plansInterest in direct contracting, new delivery models, value based payments

New markets – direct to consumer, private and public exchangesClinical improvementsValue based paymentsPurchase of provider organizations

New marketsNew entrantsNew payment modelsConvergence with payers

PwCPwC

Everyone in the pool!

PwC

Paying for reform – tax perspectives

Health Insurance Provider Fee/HIT taxMLRReinsurance contributionsPCORI

Shift to retail and consumer modelBearing riskImpact of convergence and becoming subject to payer taxes

Reinsurance contributionsPCORIEmployer mandateCadillac tax

PwC

Annual Fee on Health Insurance Providers

Health insurer’s Net Premiums

PercentTaken Into Account

Not more than $25 million

0

$25M - $50M 50Over $50M 100

Every health insurer offering a covered plan pays an allocable share of the health insurer fee

Year Applicable Amount

2014 $8 billion2015-2016 $11.3 billion2017 $ 13.9 billion2018 $14.3 billionLater years

Increased by rate of premium growth

PwC

Data year begins

January 2016

File Form 8963 with IRS

Deadline for paying fee

Premium information must be collected and tracked to ensure

readiness for 2015 reporting.

January-December 2014

April 15, 2015

June 15

IRS preliminary fee calculation

Sept 30Aug 31

Notification of final fee amount

Corrected form deadline

July 15

HIT Timeline

PwC

Annual Fee on Health Insurance Providers

What are penalties for understatement?

Are there other penalties?

Do I have revenues attributable to certain exempt activities?

What’s excluded in premium revenue?

What’s included in premium revenue?

What’s a health insurance issuer?

Am I a covered entity?

PwC

Polling question

Is your department involved in the Annual Health Insurance Provider Fee?1. Yes, we are responsible for preparing, filing and addressing

error corrections2. Yes, others prepare the form, we are responsible for reviewing

and we are responsible for filing3. No, we are not involved4. Our organization is not subject to the Health Insurance

Provider Fee

PwC

Payers and employers contribute to additional ACA programs

PCORI fees T Transitional reinsurance

• Started in 2013

• Applies to insured policies and self-insured health plans

• $2.08 per covered life for 2015, then indexed through 2018

• Based on average number of covered lives; alternative methods available to determine covered lives

• Reported on IRS Form 720, generally due by July 31 of following year

• Assessed on calendar year basis 2014-2016

• Requires payments from insurers and employers on behalf of self-insured medical plans for major medical coverage

• $63 per covered life for 2014; $44 per covered life for 2015

• Covered lives first reported to HHS in November 2014, with fee paid in one or two installments in 2015 using pay.gov

• 2015/16 exemption for self-insured and self administered group plans

PwC

Polling question

Is your department involved in the Transitional Reinsurance Fee? 1. Yes, we are responsible for preparing and filing 2. Yes, others prepare the filing, we are responsible for reviewing

and we are responsible for filing3. No, we are not involved4. Our organization is not subject to the TRF

PwC

Keeping it all under control…Assessment of Risk & Focus of Potential Regulatory Inquiries

Regulator ProvisionHHS, IRS & DOL 90 day maximum waiting periodHHS/CMS/CCIIO/ State Administrative SimplificationHHS, IRS & DOL Annual LimitsHHS, IRS & DOL Claims and AppealsHHS, IRS & DOL Clinical TrialsHHS, IRS & DOL Coverage of Adult Children to age 26IRS Employer Shared Responsibility - IRC 4980HHHS/CMS/CCIIO/ State Essential Health BenefitsHHS, IRS & DOL Excepted BenefitsHHS/CMS/CCIIO/ State ExchangesIRS Excise tax on Health Insurance IssuersHHS, IRS & DOL Grandfathered StatusHHS/CMS/CCIIO/ State Guaranteed AvailabilityHHS/CMS/CCIIO/ State Guaranteed RenewabilityIRS Health Flexible Spending Account Pre-tax Contributions HHS/CMS/CCIIO/ State Health Status DiscriminationHHS/CMS/CCIIO/ State Indiv idual and small group transitional policiesIRS IRC 6055HHS, IRS & DOL Lifetime LimitsDOL Medical Loss RatioHHS/CMS/CCIIO/ State Medical Loss RatioIRS Medical Loss RatioHHS, IRS & DOL Mental Health ParityDOL Multiple Employer Welfare ArrangementsHHS, IRS & DOL Nondiscrimination Rules for Insured PlansIRS Over the Counter Drugs under health plans or accountsHHS, IRS & DOL Patient ProtectionsIRS PCORI FeeHHS, IRS & DOL Pre-existing condition limitationsHHS/CMS/CCIIO/ State Premium StabilizationHHS, IRS & DOL PreventionHHS, IRS & DOL Provider nondiscriminationHHS/CMS/CCIIO/ State QHPsHHS/CMS/CCIIO/ State Rate ReviewHHS/CMS/CCIIO/ State Rating LimitationsIRS Reporting of employ er sponsored health coverageHHS, IRS & DOL RescissionHHS/CMS/CCIIO/ State Student HealthHHS, IRS & DOL Summary of Benefits and Coverage and Uniform GlossaryHHS, IRS & DOL Various prov isionsHHS, IRS & DOL Wellness program incentiv es

Prioritizing Assessment

• Likelihood of audit

• Compliance risk

• Breadth of impact

• Level of previous scrutiny

• Suspected weaknesses

• Consumers impacted

• Financial/reputational risk

• Delegated/contracted providers

PwCPwC

Employer ACA issues

PwC

PwC

• New tax information reporting process under the ACA:

– Large employers must report monthly information regarding affordable healthcare both to full-time employees and the IRS starting for 2015 (reporting to be completed in early 2016) via Form 1095-C and 1094-C

– Insurers and Self-insured employers must also report on minimum essential coverage provided to employees, retirees, and others

– Reporting is by each FEIN, including “disregarded entities”

– Reporting obligation created to support the ACA’s individual and employer mandates and to support imposition of employer penalties

• New reporting requirements’ data elements include:

– Identify all full-time employees (working 30+ hours per week, per ACA)

– Coverage offered and employee cost

– Employee and dependent social security numbers

– Applicable safe harbors, transition rule

– Actual coverage provided to employees, dependents, retirees, COBRA beneficiaries

– Full-time and total employee counts ACA reporting to IRS and employees is the latest and one of the most challenging ACA-related developments

Overview of ACA Reporting for 2015

PwC

IRS progress

Affordable Care Act Information Returns (Forms 1094-B, 1095-B, 1094-C and 1095-C) must be filed using “AIR” (Affordable Care Act Information Return System) – ACA Information Returns may not be filed using FIRE.

• Acceptable Format for Transmission is XML (Returns will not be accepted electronically in any other format).

• Each transmission is limited to 100MB, transmissions larger than 100MB must be split.

• Testing for Calendar Year 2014 returns (voluntary year) will begin July 2015 and Calendar Year 2014 returns may be filed beginning October 2015.

• Returns for Calendar Year 2015 must be filed with the IRS by February 28, 2016 (paper) or March 31, 2016 (electronic) .

PwC

PwC

PwC

ACA reporting survey

• Only 10% of participants reported having already implemented an in-house or outsourced solution

• 16% of survey participants reported that they have not yet even considered a solution, or do not know what solutions they should consider

• 65% of survey participants indicated that data quality was a concern

• 43% of survey participants indicated that they are concerned about responding to exchange notices

PwC

Polling question

FOR YOUR ORGANIZATION’S ACA REPORTING AS AN EMPLOYER1. We will do ACA reporting in-house with no assistance from an

outside vendor2. We are considering an outsourced vendor3. We are working with an existing vendor already4. We have not decided what to do

PwC

Who is responsible?

82% of survey participants indicated that the human resources/benefits department is leading the ACA reporting compliance effort• 5% indicated that the department leading the effort is still

undecided62% of survey participants reported that the human resource department is responsible for determining whether an individual is properly treated as an independent contractor• 12% of participating employers did not know who would be

responsible for this determination

PwC

Employer concerns

Concerns <1,000 EEs 1,000 – 5,000 EEs 5,000+ EEs

Data quality 55% 63% 72%

Responding to exchange notices

40% 35% 54%

Understanding different reporting options

70% 58% 51%

Determining differentreporting entities within the controlled group

24% 26% 25%

Expense of reporting 43% 42% 46%

Data security 25% 31% 35%

Other 6% 6% 6%

PwC

Delivery of forms

• 46% of employers are undecided about how they are going to deliver the necessary forms to employees and the IRS• 30% of participating employers plan to use a vendor • 24% plan to perform this in-house

• For companies with a large variable hour/part-time workforce, there could be a challenges associated with reaching out to employees to have them elect electronic forms initially and on an on-going basis because such workers generally have a high level of workforce turnover

PwC

Hour tracking

• 79% of employers have already begun tracking employee hours of service for purposes of determining full-time employee status in 2015 • The manufacturing (67%) and health industries (72%)

employers are less prepared in terms of tracking hours than the retail & consumer industry (92%)• With a larger variable hour/part-time workforce, the

retail & consumer industry generally has had to track employee hours to determine medical plan eligibility for a longer period of time than other industries

PwC

Reactions to ACA provisions

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Drop coverage for part-time employees

Consider changing workflow mix of part-time and full-time employees

Evaluate covering employees through state-run health insurance exchange(s)

Significantly change/eliminate company subsidies for employee medical coverage

Evaluate direct contracting with providers or ACOs

Provide coverage to part-time employees

Significantly change/eliminate company subsidies for dependent medical coverage

Drop spousal coverage if the spouse is eligible for coverage elsewhere

Evaluate covering employees through the use of private exchange

Move to a defined contribution approach to healthcare

Make changes to your company's benefits to offset costs associated with ACA

Re-evaluate your overall benefits strategy

Increase your company's efforts related to wellness & health management

Very likely Somewhat likely Unlikely

• The vast majority (87%) of employers are likely to increase their efforts related to wellness & health management

• 84% of employers are likely to re-evaluate their overall benefits strategy, of which 41% are very likely to do so

Source: 2015 PwC Touchstone Survey

PwC

Financial impact

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

$2,000 penalty per FTE

Limit of 90 days on eligibility waiting period

$3,000 penalty per FTE

Excise tax on high cost plans("Cadillac Tax")

Reporting of minimum essential coverage (MEC)

Large employer reporting for employer shared responsibility

Additional fees and taxes(PCORI and reinsurance)

Reporting and compliance requirements

Significant impact Slight impact No impact

• 64% of employers in 2015 indicated that they will be financially impacted by the excise tax on high cost plans as compared to 60% in 2014

• 88% of employers will be impacted by the new reporting requirements


PwC

Reactions to ACA provisions

When access is granted in the public exchange for active full-time employees, employers are considering:

<1,000 employees

1,000 - 5,000 employees

5,000+ employees 2015 total

Moving employees to public exchange as individuals with a subsidy 3% 4% 2% 3%

Moving employees to public exchange as individuals without subsidy 0% 1% 0% 0%

Moving group to a public exchange when available 2% 3% 1% 2%

Continuing to offer traditional employer plans 73% 80% 85% 78%

Do not know 25% 16% 13% 19%More than one option was allowed to be selected

• 78% of employers plan to continue offering traditional benefit plans compared to 72% in 2014

• Nearly a fifth (19%) of employers will take the “wait and see” approach before deciding upon a strategy

• 85% of large employers plan to offer traditional benefit plans, while 3% are considering moving active employees to the public exchange

• Interest in public exchanges has decreased within the large employers with only 3% considering moving active employees to the public exchange compared to 6% in 2014


PwC

What’s ahead? 2018 Cadillac tax

• Excise tax imposed if the aggregate value of employer-sponsored health insurance coverage for an employee exceeds a threshold amount- Coverage includes health & supplemental coverage, but not separate

dental or vision coverage- Includes both employer and employee share

• The tax is equal to 40% of the excess value over the threshold- The 2018 threshold is:

◦ $10,200 for individual coverage ◦ $27,500 for family coverage

- Indexed at CPI+1% for 2018, CPI thereafter- Assessed on individual basis (but not based on individual claims)- The tax is non-deductible

PwC

Cadillac tax strategies – not too soon to start planning

SCALING BACK PLANS • High-deductible plans• Move to voluntary employee after-tax coverages• Once “plan” is further defined, consider options to

consolidate or combine• Collectively bargained plans

SCALING BACK ELIGIBILITY• Spouses• Dependents

PwC

Thank you!

Amy Bergner

Managing Director

202 312 7598

[email protected]



Breakout Session

4a. 3R’s and Tax Implications

www.pwc.com

Jinn-Feng LinMichael F Callan

PwC

Content

• Introduction

• ACA Premium stabilization program – 3Rs

• 3Rs – Current approaches and latest development

- Reinsurance

- Risk adjustment

- Risk corridor

• 3Rs and MLR interaction

• Potential tax implications

PwC

ACA Premium stabilization program – 3Rs

PwC

PwC

Health exchanges – ACA premium stabilization (“3Rs”)

Reinsurance Risk CorridorsRisk Adjustment

Cost >103% of Target

Cost <97% of Target

Costs >97% to <103% of Target

Plan pays portion to HHS

No payments or charges

HHS pays plan for portion of loss

Individual Member’s Claims ($)

attachmentptPayer Covers

Reinsurance covers portion (coins %)

Premium Rate for Average Risk

Rates adjusted up for individuals with diagnoses requiring more care

Rates adjusted down for individuals with diagnoses requiring less care

cap

claim amt

Reinsurance Risk adjustment Risk corridors

Program goals

• Protects against high cost of outliers and anti-selection

• Provides funding to plans that enroll high-cost individuals

• Budget neutral

• Protects against adverse selection• Transfers funds from lowest-risk plans to

highest-risk plans• Budget neutral

• Protects against inaccurate rate setting• Limits issuer loss (& gains)• May not be budget neutral

Market segment affected

Individual market plans (inside and outside of the Exchange)

Individual and small-group market plans (inside and outside of the Exchange)

Only Qualified Health Plans (QHPs)

Funding Assessment on all insurance issuers and TPAs (for self-insured plans)

Revenue re-distribution Direct settlement between carriers and HHS

Coverageperiod

2014 - 2016 only 2014 and beyond 2014 - 2016 only

PwC

Health exchanges – Risks & mitigation

• ACA established a Premium Stabilization Program – known as the “3Rs” – to mitigate the impact of adverse selection and stabilize premiums in the individual and small group markets:

- Transitional Reinsurance

- Risk Adjustment

- Risk Corridors

• While it does provide some protection, in some instances the 3Rs program actually increases risk and still leaves carriers with significant risk exposure

Risks (non-3Rs) Mitigation strategiesMany “Unknowns” in Exchange pricing may result in adverse 2014 experience (e.g., demographics, health status, pre-ex conditions)

• Outside of 3Rs, consider private reinsurance to cover claims in excess of $250,000

• Encourage initial PCP visit for new members, to capture diagnoses early for risk score

Very little experience data is available for 2015 pricing esp. due to extended 2014 open enrollment

• Develop and test process to collect experience and demographic data (e.g., systems interface to data warehouse)

Regulators may not approve necessary rate increases could be particularly damaging for plans which captured significant Exchange market share

• Set up processes for data reconciliation and validation prior to rate filling submission

• Review high-increase rates with senior management to confirm long-term strategy

Potential for compliance issues across separate Exchange/government entities

• Establish PMO to address ongoing reporting

• Conduct periodic audits of compliance processes

PwC

ACA Premium stabilization – Considerations

Reinsurance Risk adjustment Risk corridorsDifficult to estimate potential reinsurance recovery on unpaid claims (no specific information available)

Educate providers regarding importance of proper claims coding (diagnosis, co-morbidities)

Calculations may require additional allocation to the state/market level that issuers are not currently performing

Potential for reinsurance benefits to be impacted due to:

• Review process may lead to denial of some filed claims

• Limited availability of funds

• Currently the coinsurance is projected to be over 80% due to overfunding

Effective internal quality assurance and audit program, including:

• Monitoring

• Data analytics

• Personal review of claims and diagnoses reported

• An audit plan, to ensure data reported is accurate and in compliance with program requirements

Accrual calculation is relatively complex, needs to integrate with other items such as reinsurance and risk adjustment settlements

Issuers will be recording an accrual at December 31 for year’s reinsurance recovery, may impact year-over-year comparability of financial statements

Ensure that those (potentially third parties) providing coding review services are qualified and have been properly engaged

Calculation is not symmetrical –positive experience in one cell does not necessarily offset negative experience in another cell

PwC

3Rs – Current approaches and latest development

PwC

PwC

Current approaches to transitional reinsurance accrual estimation

Transitional reinsurance mechanism is designed to protect issuers in the individual market by reimbursing 80% of claims between $45,000 and $250,000 for a given individual in 2014. Settlement to occur by June 30 of the following year, so an accrual would need to be estimated at year-end

• All observed industry carriers are booking accrual for paid to date 2014 reinsurance recoveries. Some use higher reinsurance percentage than prescribed formula above. A few carriers indicated less than expected reinsurance receivables were calculated from Edge Server.

• Majority of plans also booked additional amounts for the expected reduction in IBNR due to reinsurance recoverable amount to date based on the projected recoverable annual amount. Year to date amounts adjusted for the seasonality and claim payments patterns.

• Projected 2014 ultimate reinsurance recoveries are based on the group and/or individual experience with attention to the historical large claims payment patterns and range from 16 to 20% of incurred claims.

PwC

Reinsurance program parameters considerations

Parameters 2014 Current regulation

2015 Current regulation

Considerations

Attachment Point/CAP

• a$45,000/$250,000

• $45,000/$250,000

• No changes are expected after already implementation of the reduction to the attachment point in 2014. Reduced the attachment point from $75,000 to $45,000 in 2015.

Coinsurance Rate

• 80% • 50% • Potential Increase. There are carriers which use higher than prescribed amount in the accrual calculation.

Funding Contribution

• $63 PMPY • $44 PMPY • No changes are expected.

Funding • $10 Billion • $6 Billion • Projected collected amounts and lower market place enrollment increase portion of reinsurance claims.

PwC

Current approaches to risk adjustment accrual estimation

Permanent risk adjustment program is designed to reimburse or charge carriers based on the relative risk in the state’s non-grandfathered individual and small group markets. Settlement to occur by June 30 of the following year, so an accrual would be estimated at year-end.

• Current approaches in the accrual setting in the market place differ by size, region, market share, filling requirements, and available resources.

• Carriers that we observed estimate ultimate receivable positon by year-end but books conservative accrual estimate of $0.

• Methodologies observed include use of: pricing assumptions, market modeling based on publicly available data(on and off exchange enrollment demographics, consultant studies) and own experience, consultant studies based on historical experience, consultant market assessment and internal modeling.

PwC

Current approaches to risk adjustment accrual estimation –Other considerations

• Readiness of carriers for Edge Server submission.

• Data quality issues in the Edge Server submissions and potential record rejections.

• Availability of preliminary results from CMS that can be used for year-end estimation.

• Modeling Concerns:

- New uninsured population

- Timing of the open enrollment period and renewals

- Competitive posito

- Own and competitors approach to the transitional markets

- Coding efficiency

PwC

Current approaches to risk corridor accrual estimation

Transitional risk corridors applied at the plan level, but with the “target” claims cost set as a pro-rata allocation from the applicable state/market cell.

• Intended to be a budget neutral but CMS might fund short fall from next year fund collections*. There are carriers that are not recording full amounts of estimated accrual due uncertainty with fund available and tax allocation methodology.

• Risk corridor payable/receivable formula includes reinsurance and risk adjustment amounts adding complexity to the accrual estimation.

• Carriers use already developed process such as MLR calculation for the formula inputs and identification of the administrative expenses and administrative expenses considered as claim expense.

• Use of aggregate approach is common, not all of carriers currently estimating accruals at the plan level.

• Observed carriers are booking receivables with risk corridor formula loss ratios in range of 120%to 140% range.

• Tax allocation at the plan level is a very important issue in all of the plans due to very limited guidance.

* CMS Risk Corridors and Budget Neutrality Memo, April 11, 2014

PwC

Risk corridor – Funding issues

Based on an S&P analysis, the ACA risk-corridor pool is significantly underfunded for 2014 if its funding is limited only to insurers' risk corridor payments

• The analysis found that the aggregate risk-corridor payables recorded by U.S. insurers for 2014 are less than 10% of the aggregate risk-corridor receivables booked by insurers for the same year.

• Additionally, several insurers that may be eligible for corridor payments were conservative and did not record any receivable or only partially booked them on their balance sheets in 2014. It indicates that the actual aggregate payments due to insurers from the corridor are likely even higher.

• Uncertainty of payment due to underfunding can cause volatility in the market for all participants.

* CMS Risk Corridors and Budget Neutrality Memo, April 11, 2014

PwC

3Rs and MLR interaction

PwC

PwC

Medical loss ratio – Interaction with 3Rs

June 1st (Pre 3Rs Implementation)

July 31st (Post 3Rs Implementation)

August 1st (Pre 3Rs Implementation)

September 30th (Post 3Rs Implementation)

• To reflect the need to incorporate the premium stabilization program amounts into the MLR calculations and rebate distributions, the 2014, 2015 and 2016 deadlines have been delayed.

Revised MLR timing due to 3Rs

• MLR filing deadline

• Rebate disbursement deadline

PwC


• Statutory assessments to defray operating expenses of any State or Federal department, transitional reinsurance contributions assessed, and examination fees in lieu of premium taxes as specified by State law.

• The State and Federal Exchange user fees.

• The risk adjustment user fees of $0.08 per month.

• Data validation systems expenditures are not allowed to be deducted.

Certain fees resulting from 3Rs can be counted as Taxes, Licensing and Regulatory Fees

• Section 1342(c) of the Affordable Care Act requires that risk corridor calculations treat reinsurance and risk adjustment payments as adjustments to allowable cost.

- The final regulation stated that that risk adjustment amounts, risk corridors amounts, and reinsurance payments would have a net impact on the MLR numerator.

- One exception is the reinsurance contribution amount which is to be included in fees and assessments, having a net impact on the MLR denominator.

3Rs inclusion in the MLR formula

PwC


MLR = (MLR Numerator/MLR Denominator) + Credibility Adjustment

MLR Numerator = (incurred claims + QIA - reinsurance receipt + risk corridor payment + risk adjustment payment - risk corridor receipts – risk adjustment receipts)

MLR Denominator = (Earned Premium – taxes & assessments – regulatory fees –reinsurance contributions)

MLR Formula with 3Rs

PwC


Implications of 3Rs with MLR:• Each one of the 3Rs impacts the MLR formula and the possibility of having to pay a MLR refund. The

process to estimate potential rebates are complicated by the need to estimate additional assets and/or liabilities attributable to the 3Rs after January 2014.

• The MLR liability estimate has to be modified to take into consideration the reinsurance, risk corridors and risk adjustment asset or liability estimates. The order of calculations becomes very important.

• Risk Adjustment and Transitional Reinsurance should be the first calculations performed. Next would be the risk corridors (reflecting both reinsurance and risk adjustment results).

• The MLR rebate calculations will not be able to be performed until all the other three risk mitigation programs have been completed. Estimating the impact of these other three programs for financial statement purposes will be complex, since they are interrelated and depend upon not only the specific carrier’s experience, but its experience relative to all other carriers within the market.

MLR

Transitional ReinsuranceRisk Adjustment Transitional Risk

Corridor

PwC

Tax implications

PwC

PwC

Income tax allocation for MLR reporting

Statute indicates that MLR denominator is premium revenue, “excluding Federal and State taxes and licensing and regulatory fees”. “Federal and State taxes” includes income taxes, except income taxes on investment income and capital gains

There is a need to allocate income taxes across lines of business for MLR reporting purpose into the following categories:

• Rebate-eligible blocks (individual, small group, large group, Medicare, mini-med, and expat)

• Rebate-ineligible blocks (ASO, Medicaid, Specialty Block…etc.)

• Investment income

Income Tax Allocations

• For the MLR reporting, carriers generally use a consistent approach based on generally accepted accounting method

• Allocate income taxes to the LOB based on pre-rebate underwriting gain; avoid potential circular interaction between rebates and taxes

• With the rebate liability being within the scope of actuarial opinion, the valuation actuary who provides actuarial opinion and memorandum needs to have a good understanding and be comfortable with the company’s approach to allocating income taxes

PwC

Federal income tax allocation for MLR reporting

• Taxes incurred should be consistent with the reported statutory annual statement amounts based on SSAP 101 and allocated to all Lines of Business (LOB) including large group, small group, individual, and other business segments

- Excludes taxes on investment income and capital gains

- Excludes taxes on rebate per NAIC regulations Section 3C and avoid circular tax calc

• In general, for LOBs in an underwriting loss position, a tax benefit would be calculated. On the other hand, LOBs in a profitable position would result in tax expenses

• Amounts by segment should reconcile on an entity basis to the reported annual statement incurred taxes

• SHCE and HHS reported tax items are expected to be the same unless reconciliation/documentation provided to discuss rationale for the differences

PwC

State and other taxes allocation for MLR reporting

State taxes incurred

• Employment taxes (payroll and Social Security)

• State premium taxes (allocate to LOBs based on written vs. earned premiums)

• State disability funds

• State unemployment taxes

• Regulatory fees and assessments

• Community benefit expenditures

Federal, State and local non-income taxes

• Allocations depend on specific facts for each entity and tax/assessment item

• Allocate to states that impose income tax based on respective portion of individual state applicable state rate to total entity state rate

• Allocate to LOB within state based on respective portion of pre-tax income within that State

PwC

Tax allocation for MLR vs Risk corridor

Tax allocation for Risk Corridor is an important issue in all of the carriers due to very limited guidance.

ACA requires that MLR and Risk Corridor be closely related in definition and consistent in calculation

MLR

Federal and State income taxes should be allocated to each LOB based onpre-tax income

Risk Corridor

Based on recent FAQ by REGTAP and CMS, allocation for each QHP should be based on the earned premium

• Larger Tax Dollars/Higher Effective Tax Rates

- Lead to unreasonable results for MLR/Risk Corridor

• Underwriting Gain Approach to Rebate and Percentage of Premiums for Risk Corridor may not meet “Consistent” standard

• Percentage of Premium Revenue method to reflect Non-Revenue lines or small revenue lines could be problematic

PwC

Tax allocation by gain/loss

Risk Corridor (Plan 1)Claims = $430,000Premium = $450,000Admin = $35,000Profit = ($15,000)Tax = ($450,000/900,000) x 17,500 = $8,750Risk Corridor % = 109.4%RC Receipt/(Payment) = $14,263

Risk Corridor (Plan 2)Claims = $350,000Premium = $450,000Admin = $35,000Profit = $65,000Tax = ($450,000/900,000) x 17,500 = $8,750Risk Corridor % = 99.2%RC Receipt/(Payment) = $0

Non-QHP PlanClaims = $80,000Premium = $100,000Admin = $10,000Profit = $10,000Tax = 35% x (10,000) = $3,500

All LOBClaims = $860,000Premium = $1,000,000Admin = $80,000Profit = $60,000Tax = 35% x (60,000) = $21,000

PwC

Tax allocation by premium

Risk Corridor (Plan 1)Claims = $430,000Premium = $450,000Admin = $35,000Profit = ($15,000)Tax = ($450,000/900,000) x 18,900 = $9,450Risk Corridor % = 109.6%RC Receipt/(Payment) = $14,832

Risk Corridor (Plan 2)Claims = $350,000Premium = $450,000Admin = $35,000Profit = $65,000Tax = ($450,000/900,000) x 18,900 = $9,450Risk Corridor % = 99.3%RC Receipt/(Payment) = $0

Non-QHP PlanClaims = $80,000Premium = $100,000Admin = $10,000Profit = $10,000Tax = ($100,000/1,000,000) x 21,000= $2,100

All LOBClaims = $860,000Premium = $1,000,000Admin = $80,000Profit = $60,000Tax = 35% x (60,000) = $21,000

PwC

Tax allocation for MLR vs Risk corridor

MLR3

MLR , ,, , ,

= 89.30% MLR , ,, , ,

= 89.36%

Risk Corridor (QHP)Claims = $780,000Premium = $900,000Tax = $17,500RC Receipt/(Payment) = $14,263

Non-QHP PlanClaims = $80,000Premium = $100,000Tax = $3,500

Gain/Loss

Non-QHP PlanClaims = $80,000Premium = $100,000Tax = $2,100

Risk Corridor (QHP)Claims = $780,000Premium = $900,000Tax = $18,900RC Receipt/(Payment) = $14,832

Premium

PwC

Thank you!

Jinn-Feng LinPwC | PrincipalOffice: 1-312-298-3792 | Mobile: 1-847-476-9220Email: [email protected]

Michael F CallanPwC | PartnerOffice: 1- 213 -356 -6039 | Mobile: 1-661 -645 -7319Email: [email protected]

Breakout Session

4b. Regulatory Update; PCAOB, SEC and IRS Practice & Procedure

www.pwc.com

Mike Kurowski, Community Health SystemsRob McCallum, HealthSouthBeth Tucker, PwCDave Wiseman, PwC

PwC

Agenda

• SEC Update

• PCAOB inspection trends and themes

• Standard setting update

PwC

SEC update

PwC

PwC

Insights from 2014 AICPA national conference on current SEC and PCAOB developments

Annual conference hosted by representatives of regulatory and standard setting bodies along with auditors, users, preparers, and industry experts.

Key messages conveyed by SEC:

• Streamlining disclosures, eliminating boiler plate language

• Income Tax Disclosures in MD&A

- MD&A disclosure of material trends and uncertainties is critical

- Focus on quality and transparency of key disclosures

- Specific to company’s facts and circumstances

- Expect continued inquiries about valuation allowances/realizability of deferred tax assets, and indefinite reinvestment

PwC

Insights from 2014 AICPA national conference on current SEC and PCAOB developments (continued)

• Expected increase in number of questions and requests for enhanced disclosures around:

- Effective tax rates

◦ Explaining fluctuations in the effective tax rate from the statutory rate

◦ Volatility in the effective tax rate

◦ Effective tax rates that do not change because of material changes in components are offsetting

◦ More insight from qualitative disclosures above and beyond what is in the quantitative disclosures

- Foreign earnings and the associated taxes

◦ Source and extent

◦ Pushback on boilerplate language regarding rate being impacted by mix of foreign earnings

PwC

SEC’s areas of focus in 2015

• Valuation allowances

• Realizability of deferred tax assets

• Indefinite reinvestment assertions

• Income tax expense, in particular when tax rates appear unusual relative to the expected statutory rate, effective tax rates are volatile, or effective tax rates do not change because material changes in components are offsetting

• Income tax disclosures in MD&A

PwC

SEC comment letters

• Valuation allowances

- Sources of taxable income

- Positive and negative evidence considered

- Timing

• Uncertain tax positions

- Transparent disclosure of unrecognized tax benefits

- Timing of changes in assessment

PwC

SEC comment letters (continued)

Valuation allowances

We note that you reversed $187.5 million of the deferred tax asset valuation allowance during the second quarter of fiscal year 2013 based on five consecutive quarters of earnings, the expectation of your continued profitability, and signs of recovery in the housing market. In your fiscal year 2012 Form 10-K, you noted “…the inability to carry back its current net operating losses and [your] recent earnings history are significant evidence of the need for a valuation allowance against [your] net deferred tax assets.” Considering the reversal of the valuation allowance materially impacted net income, it is unclear how your current disclosures sufficiently explain to investors the material positive and negative evidence you considered when arriving at the conclusion that the majority of the valuation allowance for your net deferred tax assets should be reversed.

Please substantially revise your disclosure in future filings to provide investors with quantitative and qualitative information of the material positive and negative factors that you considered when arriving at your conclusion that it is more likely than not that the deferred tax assets will be realized. Please refer to ASC 740-10-30-16 — 30-25 for guidance. Please provide us with the disclosures you would have included in this Form 10-Q in response to this comment.

PwC


Uncertain tax positions

Given the material impact that the unfavorable tax court decision had upon your income from continuing operations for the three and six months ended June 30, 2014 as well as the impact it will have upon your liquidity when payment becomes due, please tell us the following:

1. Describe in greater detail how the specific tax position(s) taken by the Company regarding the federal taxation of foreign income of certain foreign subsidiaries differed from the factors considered by the tax court in reaching their decision;

2. Tell us how you historically contemplated the possibility that the IRS could reach a different conclusion based upon the same facts and circumstances and how that possibility was reflected in your accounting for income tax liabilities as of December 31, 2013 and March 31, 2014; and

3. Explain the factors you historically relied upon to support your assessment that it was more likely than not that the position you had taken would be sustained upon examination.

PwC


• Effective tax rate

- Netting of items in presentation lines (e.g., foreign/state rate differentials)

- Other reconciling items

• Indefinite reinvestment of foreign earnings

- Focus on the accounting and disclosure requirements

- Cumulative amount of temporary differences related to indefinitely reinvested foreign earnings

- Impracticability of deferred tax liability quantification

PwC


Effective tax rate reconciliation

We note that your reconciliation between the actual and expected income tax includes a significant line item for foreign tax rate differentials. In order to provide investors with greater insight into this item that affects your income taxes, please expand your disclosure in future filings. For example, discuss how the tax rate differential is determined and identify the significant components of these items. Also, discuss what countries contribute to this tax rate differential and whether there are any known uncertainties or trends in the lower tax jurisdictions that could affect your income taxes in future periods. Refer to item 303(a) of Regulation S-K. Provide us with a sample of your proposed revised disclosure.

PwC


Effective tax rate reconciliation

1. We note the significant impact of “foreign tax effect” on your effective tax rate. Please provide us with a breakdown of the components included in this line item of your effective tax rate reconciliation for each period presented, and tell us what consideration was given to providing further quantitative breakdown of this line item in your disclosures. Refer to Rule 4-08(h)(2) of Regulation S-X.

2. We note your response to our prior comment where you indicate that it is most appropriate to present foreign items together on a single line of the rate reconciliation. Please quantify for us each of the separate items for the periods presented and to the extent any item exceeds five percent of the amount computed by multiplying the income before tax by the applicable statutory federal income tax rate, revise to disclose the item separately. In this regard, we note that tax rate differential, tax credits and the effect of exchange rates, although all related to your foreign operations, appear to be dissimilar in nature.

PwC


Indefinite reinvestment assertion – The initial comment

We note your disclosure on page F-23 that it is not practical to determine the amount of income or withholding tax that would be payable upon the remittance of these foreign earnings. Please tell us why it is not practical to determine the amount of tax that would be payable. Describe the complexities involved that make determination of the amount difficult. Alternatively, revise future filings to quantify the effect that repatriation of foreign earnings would have.

PwC


Indefinite reinvestment assertion – The company’s response

“The Company advises the Staff that determination of the potential deferred income tax liability on these undistributed earnings is not practicable because such liability, if any, is dependent on circumstances that exist if and when remittance occurs. The circumstances that would affect the calculations include the source location and amount of the distribution, the underlying tax rate already paid on the earnings, foreign withholding taxes and the opportunity to use foreign tax credits.”

PwC


Indefinite reinvestment assertion – The SEC staff’s response

We note your response describing why you believe it is impractical to determine the amount of tax that would be payable. We note the factors you cite appear to relate to potential future events that could impact the ultimate amount of tax that would be payable. Please revise future filings to disclose an estimate of the amount of tax that would be payable upon the remittance of foreign earnings based on current facts and circumstances. In this regard, we would not object if you also disclosed that the amount of tax that would be payable could be further impacted by the factors that you cite in your response.

PwC

PCAOB inspection trends and themes

PwC

PwC

Insights from 2014 AICPA national conference on current SEC and PCAOB developments

• The most common deficiencies relate to audits of internal control, assessing and responding to risk of material misstatement, audits of fair value measurements and estimates and testing of data and reports.

• It is critical for the auditor to understand an issuer's operations, including how transactions flow and the controls in place to detect a risk of material misstatement.

• Taxes expected to be an area of interest in upcoming year.

PwC

PCAOB inspection trends and themes

Recent Areas of Focus:Documentation of significant audit areas, including:

• Assessment and testing of review controls (common ones include valuation allowance, uncertain tax positions)

• Significant estimates

• Likely sources of potential misstatement

PwC

PCAOB inspection trends and themes (continued)

Assessment and testing of review controls

• Understanding the objective of the control?

• Who performs and its frequency?

• The specific procedures performed?

• The process the reviewer follows?

• Threshold of review?

• How variances or irregularities are followed up on and what constitutes resolution?

• What drives consistent execution?

• What evidence is retained that the control executed?

• What data, systems, and reports are used?

PwC

PCAOB inspection trends and themes (continued)

Significant estimates

Documenting the audit of all aspects of significant estimates

Estimate

DataAssumptions

Risks and Controls

Risks and Controls

“Model”

UTPs Tax Planning

Valuation Allowances

Indefinite Reinvestment Assertion

PwC

Risk and control environment

Likely Sources of Potential Misstatement

Illustration of LSPM Concept: “Your important trip”

Leave home Travel to airport

Check-in/Security Flight Travel to

event

• Consider this situation

- You have signed up to attend an event 300 miles from home on a fixed date and time in the future

- What is the source of the likely and potential risks that could cause your trip to go awry?

Note: For financial reporting purposes, your risks for what could go awry are the likely sources of potential misstatement

PwC

Risk and control environment (continued)

“Your important trip”

Leave home

• Packed at last minute

• Oversleep

• Interrupted by phone when leaving house

• Want to wait to see the end of a close sporting event

Travel to airport

• Car service is late

• Traffic

• Car breaks down

• Get lost

• Need to stop for gas

Check-in/Security

• Long lines to check bag

• Forgot Photo ID

• Additional screening required

• > 3oz. of liquids

• Forgot to take firearm out of luggage from prior trip

Flight

• Plane serving as your aircraft has not arrived

• Flight crew is delayed or times out

• Bad weather

• Traffic on tarmac

Travel to event

• Luggage is lost

• Car service is late

• Traffic

• Car breaks down

• Get lost

PwC


Internal control design

• An organization’s controls should be adequately designed to mitigate the identified likely sources of potential misstatement

• The PCAOB comments and scrutiny in this area have increased

• The identification of the likely sources of potential misstatement represents the basis of a “risk-based” review and allows management to focus attention on what matters

PwC


What are examples of the likely sources of potential misstatement in the development of a complex estimate and judgment?

• Assumptions used may not be based upon best available information

• Data used is not complete and accurate or fit for purpose

• Highly manual process resulting in a higher risk of computational or other errors in the determination of the estimate

• Misapplication of US GAAP/Misuse of facts

PwC

Standard setting update

PwC

PwC

FASB project agenda topics

Exposure draft

On January 22, 2015, the FASB issued an exposure draft on the following:

• Elimination of the exception for recognizing deferred taxes on certain intercompany transactions under ASC 740-10-25-3(e)

• Classification of all deferred tax assets and liabilities as non-current

- Modified retrospective transition for the intercompany transactions topic and prospective transition for the classification topic

- Effective after December 15, 2016 for public companies and after December 15, 2017 (interim periods in the following year) for private companies

The comment period for the exposure draft will end on May 29, 2015

PwC

FASB project agenda topics (continued)

Proposed exposure draft

On February 4, 2015, the FASB agreed to issue an exposure draft on tax accounting for stock compensation, including the following revisions to the current guidance:

• Recognition of all excess tax benefits ("windfalls") and deficiencies ('shortfalls") within income tax expense and elimination of the requirement that cash taxes payable be reduced in order to record a windfall tax benefit

• Elimination of the requirement to display the gross amount of windfalls as an operating outflow and financing inflow in the statement of cash flows

The exposure draft is expected to be issued in May 2015. Stakeholders will have the opportunity to provide feedback during a 60-day comment letter period

PwC

FASB projects – Disclosure framework project

Foreign earnings

On February 11, 2015, the FASB reviewed income tax disclosures in relation to foreign earnings and tentatively decided that the following disclosures should be required:

• Earnings disaggregated between domestic and foreign earnings for public and non-public entities

• Foreign earnings would be further disaggregated for any country that is significant to total earnings

• Domestic tax expense recognized in the period for taxes on foreign earnings

• Undistributed foreign earnings that are no longer asserted to be indefinitely reinvested during the current period and an explanation of reasoning. Separate disclosure for any country that is significant

• Disaggregation of the current requirement to disclose the cumulative amount of indefinitely reinvested foreign earnings if any country represents at least 10 percent of the disclosed amount

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FASB projects – Disclosure framework project (continued)

Undistributed foreign earnings

The Board tentatively decided that the following disclosures would not be required:

• Disaggregation of deferred tax liabilities recorded for unremitted foreign earnings by country

• An estimate of the unrecognized DTL on the basis of simplified assumptions

• Past events or current conditions that have changed management’s plans for undistributed foreign earnings

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IRS Tax Controversy Update

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Overview – IRS hot topics

Current State of IRS

LB&I Goals

Recent Developments

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Current state of IRS

Recent leadership changes

• Significant leadership changes and challenges

Budget challenges

• FY 2015 budget of $10.9B is down $1.2 B from FY 2010

• Staffing down…100,000 in 2010 to 87,000 in 2014 (LB&I revenue agent staffing down by 1,000 since 2011)

• Hiring and training challenges

• Limitations on hiring external experts (i.e. industry experts, economists)

• Significant challenges ahead to fully implement ACA tax provisions and FATCA (unfunded mandates being absorbed out of budget base)

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IRS funding levels have dropped amidCongressional opposition to increased funding

11,523

12,146 12,122

11,817

11,199

11

10.9

0

10,800

11,000

11,200

11,400

11,600

11,800

12,000

12,200

12,400

12,600

2009 2010 2011 2012 2013 2014 2015

Dollars (in millions)

IRS appropriations

Source: GAO analysis of fiscal years 2009 through 2015 congressional justifications for IRS.

$

a b

Fiscal year

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Declining IRS personnel resources

LB&I technical staff FY - 2012 FY - 2013 FY - 2014 YOY decrease

Revenue Agents 3353 2980 2814 16%International Examiners 508 535 436 14%All 4946 4626 4345 12%

FY 2010 FY 2011 FY 2012 FY 2013 FY 2014Appeals Staffing

2173 2111 1981 1830 <1750

• Appeals staffing has fallen by approximately 20% since 2010• Cycle time in CIC cases is roughly 800 days (> 2 years)

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LB&I priorities – “Do more with Less”

• Number of audits and revenue from audits declining

• Focus on streamlining corporate audits with issue focused approach

• Move more taxpayers into Compliance Assurance Process

• Increase mid-market audit coverage

• Increase audits of flow-through entities

• 190,000 of 260,000 LB&I taxpayers are flow-through entities

• Increased international issue focus

• Expanded reliance on IPGs/IPNs

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LB&I recent developments

• LB&I Reorganization

• Issue-Focused Exam Initiatives

• Quality Exam Process

- Use of Alternative Dispute Resolution

• Appeals Process

- Return to a quasi-judicial approach

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Alternative dispute resolution – Health sector best practices

• Compliance Assurance Process (CAP)

- Benefits:

◦ Reduce taxpayer burden and uncertainty

◦ Accuracy of returns prior to filing

◦ Reduce/eliminate need for post-filing extensions and amended state returns

◦ Impact on Financial Statement (reserves)

• “Pre-Filing Agreements”

• Accelerated Issue Resolution

• Fast Track Settlement

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Trends in appeals

• July 18, 2013: Appeals issued its Appeals Judicial Approach and Culture memorandum, indicating that IRM will be updated

• Purpose – Return Appeals to a quasi-judicial approach

• New policy – Appeals will not raise new issues nor will it open closed issues on which Exam and taxpayer agree

• Appeals may, however, consider alternative or new legal arguments, but will only use the evidence in the case file

• Appeals will attempt to settle case on factual hazards when case submitted by Exam is not fully developed and taxpayer presents no new information or evidence

• Clarifies that Appeals should not assist Exam with case development

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Thank you!

Mike Kurowski

Rob McCallum

Beth Tucker

Dave Wiseman

Breakout Session

4c. Section 501(r) and the final regulations with an open session for a moderated dialogue and Q&A on Section 501(r) and other hot topics

www.pwc.com

Rob Friz, PwCRobert Waitkus, Cleveland ClinicRon Schultz, PwC

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Agenda

Introductions

Final regulations §501(r)

Organizational approach to compliance with §501(r)

Question & answer on §501(r)

Other hot topics

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Welcome

Rob Friz, Partner and US Health Services Tax Leader

Ron Schultz, Managing Director

Bob Waitkus, Senior Director Taxation and Compliance at The Cleveland Clinic Foundation

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Final Regulations §501(r)

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IRC Section 501(r)

Section Requirement Effective date501(r)(3) Community Health Needs Assessment – Each tax

exempt hospital must conduct a CHNA at least once every three years and adopt an “implementation strategy” to meet the needs identified by the assessment.

Taxable years beginning after March 23, 2012

501(r)(4) Financial Assistance Policy – Each tax exempt hospital must establish, implement, and make widely available written policies regarding financial assistance and emergency medical care.


501(r)(5) Limitation on Charges – Each tax exempt hospital must limit the amount it charges for emergency or other medically necessary care provided to patients eligible for financial assistance to not more than the lowest amounts charged to insured patients.


501(r)(6) Billing and Collections – A tax exempt hospital cannot take “extraordinary collection actions” (lawsuits, arrests, liens, or other similar actions) until it has made “reasonable efforts” to determine whether a patient is eligible for financial assistance.


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Final regulations 501(r)Overview

• Preamble provides significant commentary and analysis

• Requirements cut across various aspects of a facility’s operations

• Compliance with state law ≠ compliance with 501(r)

• Generally, effective for taxable years beginning after December 29, 2015

• Pre-2016 years can rely on reasonable, good faith interpretation of the statute

- May rely on proposed regulations, final regulations, or any reasonable good-faith interpretation.

• Failure to comply with the requirements of 501(r) could result in significant taxes and penalties and/or the loss of the organization’s tax exempt status

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Final regulations 501(r)Scope

• Definition of “hospital facility” keys off of state license and “hospital organization” keys off of 501(c)(3) status

• Requirements applied on a facility-by-facility basis

• Proper identification of separate facilities is critical

• Taxpayers must be in compliance with final regulations beginning in 2016 –Planning is key

• Compliance implementation plan cuts across all hospital operations

• All violations need to be corrected, some may need to be disclosed

• Monetary penalties and threats to exempt status also possible

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Organizational approach to compliance with §501(r)

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Organizational approach

Bob Waitkus, Senior Director Taxation and Compliance at The Cleveland Clinic Foundation

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Question & Answer on §501(r)

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Scope and general applicability

• Definition of facility

• Definition of substantially related entity

• Provision/Location of care

• Medically necessary care

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Financial Assistance Policy – “FAP”

• Specificity of descriptions

- Eligibility criteria

- Benefits offered

• AGB information sheet

• Provider list

• Need to amend/re-adopt

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Community Health Needs Assessment – “CHNA”

• Explanation of actions taken

• Written public comments

• Definition of community served

• Overlapping communities

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Amounts Generally Billed – “AGB”

• Safe harbor

• Application to underinsured – e.g., high deductible plans

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Extraordinary Collection Actions – “ECAs”

• Special emergency room rule

• Instances where no completed application is received

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Transparency, disclosure and reporting

• Level of specificity in Schedule H reporting

• Errors or omissions not required to be reported on Schedule H

• Translation requirements

• Web site requirements

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Other hot topics

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Other hot topics

1. Potential impact on exemption standard

2. Potential impact on accountability to the public

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SpotMe app

This presentation, and additional reference materials are provided to you in your SpotMe Application.

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Thank you

Rob [email protected](267) 330-6248

Ron [email protected](202) 346-5096

Bob [email protected](216) 445-2526

General Session and Wrap Up – Ask the Experts

Rob Friz, PwCKelvin Ault, PwC