American Medical Association Voices Strong Opposition to Proposed Withholding Regs

Dear Mr. Shulman:

The American Medical Association (AMA) appreciates the opportunity to provide comments regarding the Internal Revenue Service (IRS) Notice of Proposed Rulemaking regarding Withholding Under Internal Revenue Code Section 3402(t); 73 Fed. Reg. 74,082 (Dec. 5, 2008). This proposed rulemaking is pursuant to section 511 of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), Pub. L. No. 109-222, 26 U.S.C. 3402(t). Under section 511, federal, state and local government entities are required to withhold 3 percent of all payments made for services or property after December 31, 2010, including payments under the Medicare program.

The AMA strongly opposes section 511 and we continue to support repeal of this provision. There was no opportunity for Congress or affected parties to appropriately discuss the policy implications of this provision as it was inserted into the TIPRA conference report, and was not included in the House or Senate version of the tax legislation. H.R. 1, the recently-enacted American Recovery and Reinvestment Act of 2009, delays for one-year, from Dec. 31, 2010, to December 31, 2011, implementation of section 511. This requirement will be extraordinarily costly and administratively burdensome to implement, and government agencies, physicians, and other health providers will all bear the brunt of these costs and administrative burdens, which will far outweigh any possible benefit of the withholding requirement.

For these reasons, as further discussed below, we strongly support an exemption from section 511 for physicians and all providers who furnish health care services to Medicare beneficiaries and enrollees of other federal health care programs, including, for example, TRICARE, the Federal Employees Health Benefit Program (FEHBP), and the Veterans Administration.

The Withhold Provision Will Place a Significant Burden on Medicare and Further Jeopardize Access to Care for Medicare Beneficiaries

The Centers for Medicare and Medicaid Services (CMS) announced that total Medicare spending in 2007 was $431.2 billion. Section 511 may apply to a large portion of this total outlay. This will require the application of significant resources by the Medicare program, as well as by physicians and other providers, to administer and ensure proper operation of this provision.

The vast majority of physician practices are small businesses. Withholding 3 percent of Medicare payments for services furnished by physician practices will create a difficult cash flow problem for physician practices as small businesses. This will be extremely detrimental to Medicare beneficiaries and the physicians who treat them because the withhold comes on top of drastic cuts in Medicare physician payment rates projected in the coming decade. Under current law, in the absence of Congressional action, Medicare physician payment rates are slated to be reduced by 21 percent on January 1, 2010, and the Medicare Trustees predict cumulative reductions in Medicare physician payment rates of about 40 percent in the coming decade. These successive annual reductions are due to a statutory formula governing annual Medicare physician payment updates that is broken beyond repair and must be replaced. In addition to generating these pending steep pay cuts, the formula has kept average 2009 Medicare physician payment rates at just slightly above the 2001 payment rates.

Cuts of this magnitude, on top of physician payment rates that, to date, have fallen well behind medical practice cost inflation, will impact Medicare beneficiary access to care. In an AMA survey, 60 percent of responding physicians said they would have had to limit the number of new Medicare patients they treat if a 10 percent Medicare physician pay cut scheduled for 2008 had not been stopped by Congress. Further, more than half of the surveyed physicians said they could not have met their current payroll with a 10 percent Medicare pay cut and would have been forced to reduce their staff.

It is clear that physicians cannot absorb the pending cuts in Medicare physician payment rates, and the resultant pending access crisis for Medicare beneficiaries will only be made worse if physicians face serious cash flow interruptions due to the 3 percent withhold, on top of steep cuts projected for 2011 and beyond.

Medicare beneficiaries will not be the only vulnerable population affected by these cuts. The Military Officers Association of America states that Medicare physician pay cuts would significantly damage military beneficiaries' access to care under TRICARE, as TRICARE payments are linked to Medicare rates. Further, the congressionally-created Council on Graduate Medical Education is already predicting a shortage of 85,000 physicians by 2020. Medicare cuts will exacerbate this shortage by making medicine a less attractive career. Section 511 will only hasten these trends and disproportionately impact physician specialties that treat a higher percentage of Medicare patients, thus further driving looming shortages in these particular specialties. This will adversely impact the delivery of health care to all patients in this country.

Other government contractors have the ability to, and will, increase contract bids to account for the 3 percent withhold. This unfairly and disproportionately places a burden on physicians who participate in the Medicare program because their payment formula establishes specific payment amounts for which they are paid for each medical service furnished under the program and, unlike other government contractors, physicians cannot increase amounts owed to them by Medicare.

The Implementing Costs of the Withhold Provision Greatly Outweigh Any Benefit to the Federal Government

The section 511 withhold is intended to offset otherwise unreported tax revenues, and although it has a $7 billion revenue score, the vast majority of these dollars results from an initial acceleration of tax receipts and not from an actual revenue increase from improved tax compliance. We understand, rather, that the provision will result in only about an estimated $215 million per year of increased revenue (with only slight increases in each of the following years). These amounts will not likely offset the government and private sector costs that will be required to implement section 511. Government and private sector systems, including physician group practices and solo practitioners, are not set up to track and ensure the appropriateness of the withhold. This will become particularly difficult to administer as the 3 percent withhold amount may need to be retroactively tracked and adjusted if, for example, a physician successfully appeals a claim or files a corrected claim and the payment amount for such claim is subsequently adjusted by the Medicare contractor.

This tracking and recordkeeping system will be complicated by the fact that most physicians and other providers receive payments from many different government organizations, each of which will apply the 3 percent withhold, thereby significantly complicating the record-keeping and reconciliation processes. A single physician practice, for example, may provide services to patients enrolled in many different federal programs, including Medicare fee-for-service, the FEHBP, the Veterans Administration, TRICARE, or a state, county, or city health plan. Physician practices likely would be notified of the withheld amounts in the remittance advice accompanying the federal payment for the medical services provided. They also likely would receive periodic reports from each of the withholding organizations to show how much was withheld by taxpayer identification number. The physician practice would then need to reconcile the remittance advice with the periodic reports.

The substantial administrative costs, required oversight and hassle factor related to implementation of section 511 will far outweigh any benefit from this provision. Existing laws provide the government with the authority to force companies to pay their tax liabilities, and greater benefit could come from better enforcement of these laws rather than requiring a withhold on tax-compliant physician practices and companies.

The Federal Payment Levy Program (FPLP), for example, provides a simpler, more targeted, and equitable means for addressing healthcare providers who fail to pay their federal taxes. Under the FPLP, CMS may reduce Medicare payments subject to the levy by 15 percent of the payment, and the levy is continuous until the overdue taxes are paid in full or other arrangements are made to satisfy the debt. The advantages of this targeted approach are far superior to the across-the-board withholding policy that will impose a significant administrative and financial burden on physicians and all other tax-paying health care providers, along with all affected government units as well.

Transition Relief for Existing Government Contracts

The proposed regulation provides "transition relief" in applying the 3 percent withhold requirement. Specifically, the proposed rule states that the 3 percent withholding requirement generally will be effective for payments made after the later of December 31, 2010, or the date that is six months after the publication of final regulations. In responding to commenters who asked whether the withholding requirement would apply to payments made under contracts in existence prior to the requirement's effective date, the proposed rule provides that "payments made under written binding contracts in effect on the later of December 31, 2010, or the date that is six months after the publication of final regulations are not subject to withholding . . . unless such contract is materially modified. Payment pursuant to contracts entered into after the later of December 31, 2010, or the date that is six months after the publication of final regulations will be subject to" the withholding requirement.

The AMA applauds this transition relief, and we urge the IRS to clarify in final regulations that this transition rule applies to physicians who currently have in effect an "Agreement" under the Medicare program (as well as other federal programs, such as the FEHBP, Veterans Administration and TRICARE) to furnish services to these beneficiaries. Under the Medicare program, physicians sign an Agreement to furnish medical services to Medicare beneficiaries, and the Agreement is automatically renewed each year (unless the Agreement is terminated by the physician or Medicare). This Agreement is the basis by which physicians receive Medicare payment for their services. (The amount and nature of the Medicare payments is pre-determined by federal law, which is subject to change.)

The AMA urges the IRS to confirm in the final regulations that all such physician Agreements with Medicare (and other federal health care programs) qualify for the transition rule, and that they will not be treated as "materially modified" as applicable law may change the amount and nature of payments made. This clarification would help ease the significant financial and administrative burden of the withhold requirement. Currently, CMS issues physicians and other providers a provider number that is used to bill the program for services furnished to Medicare beneficiaries, but CMS does not collect information on the tax-paying status of these providers. If the withholding requirement applied to new Agreements only, then CMS could implement a process to collect tax status information when a physician seeks an Agreement after the effective date of the withholding provision. Otherwise, CMS would be faced with having to survey all physicians (and all other health care providers) for their tax status or undertake a difficult and burdensome data sharing effort with the IRS.

While we support this transition relief, we emphasize that the huge burdens imposed by the withhold will still be imposed on new physicians to Medicare and other federal programs, which would primarily include those physicians who have just completed their residency and are already saddled with significant debt. According to 2008 data, the average medical student debt for indebted graduates (those who have student loans/debts) is $155,000. As discussed above, adding a 3 percent withhold on top of this debt will further exacerbate the looming shortage of physicians in this country, at a time when millions of baby boomers will be entering the Medicare program and in need of a physician who treats new Medicare beneficiaries.

Clarification of the $10,000 Minimum Threshold Requirement Needed

As discussed above, we urge the IRS to clarify that physician Agreements to provide medical services under Medicare and other federal programs qualify for the transition rule. Physicians, however, who sign an Agreement after the effective date of the final rule, and thus are potentially subject to the withhold requirement, may be exempt under the $10,000 minimum threshold discussed in the proposed rule. We urge the IRS to provide further guidance in applying this $10,000 minimum threshold.

The proposed rule provides that the withhold will not apply to any payment that is less than a $10,000 minimum threshold. It also discusses that this threshold applies to the total amount of the payment when the government entity chooses for its convenience to bundle payments for different unrelated transactions, causing the total amount of the payment to exceed $10,000. We agree that this minimum threshold should not apply if government payments are for the same property or same services, but were billed separately simply to avert the threshold. If the payments, however, are for separate transactions, as is the case with individual physicians' services, we believe the threshold should apply to each transaction separately, rather than to the full payment amount. Most (if not virtually all) physicians' claims for individual services are less than the $10,000 minimum threshold. In fact, Medicare pays about $61 (this rate varies somewhat depending on geographic location) for the most commonly billed physicians' service, which is a typical physician office visit for an established patient.

Medicare contractors, however, often pay physicians for medical service claims on an aggregated basis, and contractors across the country have varying policies regarding aggregation, which means that the $10,000 minimum may vary in application depending on the contractor's payment aggregation policies. Further, this minimum threshold will have a varying impact on physician practices, depending on size of practice, type of medical service furnished, and geographic location. While some physicians may be exempt from the 3 percent withhold due to the $10,000 minimum threshold, physicians who furnish more complex services or physicians in a large practice will disproportionately bear a larger burden of the withhold requirement.

We urge the IRS to provide in the final rule that the $10,000 minimum applies to each individual physician service billed to Medicare or other federal health care programs (and not to aggregate amounts paid by the Medicare or other federal program contractor), and ensure that this threshold does not disproportionately impact physicians depending on size of practice, type of medical service furnished, and geographic location.

We appreciate your consideration of these comments and stand ready to assist in working toward resolution of the foregoing matters. If you have any further questions, please contact Margaret Garikes (202) 789-7409.