Hearing on the Tax-Related Provisions in the President’s Health Care Law
SUBCOMMITTEE ON OVERSIGHT
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
March 5, 2013
Printed for the use of the Committee on Ways and Means
COMMITTEE ON WAYS AND MEANS
SAM JOHNSON, Texas
|SANDER M. LEVIN, Michigan
CHARLES B. RANGEL, New York
JIM MCDERMOTT, Washington
JOHN LEWIS, Georgia
RICHARD E. NEAL, Massachusetts
XAVIER BECERRA, California
LLOYD DOGGETT, Texas
MIKE THOMPSON, California
JOHN B. LARSON, Connecticut
EARL BLUMENAUER, Oregon
RON KIND, Wisconsin
BILL PASCRELL, JR., New Jersey
JOSEPH CROWLEY, New York
ALLYSON SCHWARTZ, Pennsylvania
DANNY DAVIS, Illinois
LINDA SÁNCHEZ, California
JENNIFER M. SAFAVIAN, Staff Director and General Counsel
SUBCOMMITTEE ON HUMAN RESOURCES
DIANE BLACK, Tennessee
|JOHN LEWIS, Georgia
JOSEPH CROWLEY, New York
DANNY DAVIS, Illinois
LINDA SÁNCHEZ, California
Douglas Holtz-Eakin Ph.D.
President, American Action Forum
President & CEO, Cyberonics; Chairman, Medical Device Manufacturers Association
President & CEO, OsteoMed
Managing Director of the Kogod Tax Center, American University; Executive-in-residence, Department of Accounting and Taxation
CEO and Co-Founder of BrightStar Care
James River Heating and Air Conditioning Company
Paul N. Van de Water Ph.D.
Senior Fellow, Center on Budget and Policy Priorities
Hearing on the Tax-Related Provisions in the President’s Health Care Law
U.S. House of Representatives,
Committee on Ways and Means,
The subcommittee met, pursuant to notice, at 11:12 a.m., in Room 1100, Longworth House Office Building, Hon. Charles Boustany [chairman of the subcommittee] presiding.
of the hearing follows:]
*Chairman Boustany. We will now begin our hearing on the tax‑related provisions in the President’s health care law.
Three months ago President Obama signed into law the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act. For individuals, families, and small businesses struggling to pay for health care, this milestone is no cause for celebration. Today we will examine the impact of key tax provisions of that law.
The health care law contains over a trillion dollars in new taxes on employers, medical device makers, families buying health insurance, and others. These unprecedented new taxes could hardly come at a worse time as our economy continues to struggle through the slowest recovery on record.
With the Congressional Budget Office predicting that unemployment will remain above 7 percent, the law’s new taxes make it more costly for employers to hire, more expensive for families to purchase health insurance, and more difficult for the health care industry to innovate.
And it is getting worse every month. Federal agencies are busy issuing new regulations to implement the law, adding over 150 million new compliance burden hours a year and billions of dollars in cost that will be borne largely by employers. These are time and red tape costs on top of the taxes. This is not a recipe for economic growth and job creation.
Today’s hearing will explore these new taxes and their economic effects. The new medical device tax is particularly destructive, as it targets one of the few remaining industries in which America continues to lead the world in innovation. This is an industry in which companies often go years without making a profit, hoping to survive long enough to reach profitability and introduce innovative, life‑saving medical products.
But the new tax hits employers regardless of profitability, and has already resulted in layoffs and additional delays in new products reaching the market.
The new insurance tax and employer mandate threaten to stifle small business growth across all industries. Beginning next year, job creators will be saddled with burdensome new rules and taxes that disincentivize hiring new employees and provide economic incentives to reduce employees’ hours and drop health insurance coverage altogether.
Before knowing whether the IRS will deem job creators a large employer and thus subject to the tax, employers will have to work out a complicated algorithm, aggregating the hours of all part‑time workers and adding in the number of full‑time workers. With the new law, Washington is effectively telling many Main Street businesses to cut their workforce and stop growing, hardly the incentives we need to be giving employers in our current economic climate.
Today’s hearing is especially important because we will be hearing not only from economic and tax experts, but also job creators from across the country. These are individuals who spend their days trying to grow their businesses and expand economic opportunity, but are forced to do so against prevailing headwinds of new taxes and regulations from Washington. They know the effects of the new law firsthand because they live these effects.
I was also hoping to welcome a witness who runs a small business in my district, but unfortunately, he had to cancel after his business partner had a medical emergency. I certainly wish his partner a speedy recovery, but this goes to show how unpredictable and how vulnerable a lot of our small business operations truly are. Washington should be making their jobs easier, not more difficult.
Last year the Subcommittee held hearings on a provision in the health care law that requires holders of FSAs and HSAs to get a prescription in order to use accounts to buy over‑the‑counter medicine. The House subsequently passed legislation, authored by Congresswoman Jenkins, repealing this provision, as well as a medical device tax repeal, which was authored by Congressman Paulsen.
I have introduced legislation repealing both the employer mandate tax and health insurance tax. These issues all reinforce the fact that the health care law was not simply a health care law. It was an enormous tax change, and as such, it is proper for the Subcommittee to examine these laws, which are within the scope of tax reform.
Now I’m happy to yield to the distinguished Ranking Member, my friend Mr. Lewis from Georgia.
*Mr. Lewis. Thank you, Mr. Chairman. I thank the Chairman for holding this hearing on the Affordable Care Act. We are always pleased to discuss our landmark health care reform law, which will expand health coverage to 27 million Americans.
The last time the Oversight Subcommittee reviewed the tax provisions of this law was in September 2012. Since enacted, the Affordable Care Act has helped millions of Americans. For example, the Affordable Care Act has protected over 17 million children with preexisting conditions who can no longer be denied health coverage, and more than 6 million young adults who have health insurance through their parents’ health plan until age 26.
As another example, the health care law requires insurance companies to spend a certain amount of the premiums they collect on medical care. As a result, about 13 million Americans received more than $1 billion in rebate payments last year from insurance plans that failed to spend enough on benefits.
Because of positive reforms like these, we are moving forward. We must ensure that we act with all deliberate speed to implement the Affordable Care Act. I know that this hearing focuses on provisions that impose taxes on industries that benefit from the law and wealthy Americans. This one‑sided view does not examine other provisions in the law that deliver hundreds of billions of dollars of Federal tax credits to millions of American families and small businesses.
These tax credit and cost‑sharing subsidies will make health insurance affordable for middle-class Americans and families. Countless others now have peace of mind, knowing they are not just one step away from losing their health insurance, when it needed the most.
Mr. Chairman, I am confident that the tax provisions of the Affordable Care Act will be carried out on schedule. Today I look forward to hearing where we are in the process, and the issues that remain. I want to thank all of the witnesses for their testimony and recommendations.
Thank you very much, Mr. Chairman.
*Chairman Boustany. Thank you, Mr. Lewis.
Now it’s my pleasure to welcome the panel of seven witnesses we have before us today. Our witnesses today run the gamut from academics to budget experts to business owners. I’m delighted to have all of you here with us today. I think this will be a very enlightening hearing.
First we will hear from Douglas Holtz‑Eakin, President of the America Action Forum here in Washington, D.C. Dr. Holtz‑Eakin has been Chief Economist with the President’s Council of Economic Advisors, Director of the Congressional Budget Office, and fellow at various think tanks. We’re pleased to have his expertise today.
Next we have Dan Moore, President and CEO of Cyberonics, a global medical device manufacturer. Mr. Moore also serves as Chairman of the Medical Device Manufacturers Association, a trade association composed of smaller medical device companies. Thank you, Mr. Moore, for joining us today.
Third, we will hear from Walter Humann, President and CEO of OsteoMed, a surgical device manufacturing company based in Dallas. Mr. Humann joined OsteoMed in 2001, growing the company into a variety of surgical device markets. Mr. Humann, thank you for joining us.
Fourth we will have David Kautter, Managing Director of the Kogod Tax Center and Executive‑in‑Residence in the Department of Accounting and Taxation at American University. Mr. Kautter had a distinguished career at Ernst & Young, where he recently served as Director of National Tax. Mr. Kautter also served on Capitol Hill as a legislative counsel to Senator John Danforth. Thank you for bringing your expertise to us today, Mr. Kautter.
Next we will hear from Shelly Sun, CEO and Co‑Founder of BrightStar Care, a premium health care staffing company. BrightStar has 250 locations nationwide, providing the full continuum of care, from home care to supplemental staffing for corporate clients like nursing homes and physicians. Ms. Sun just finished writing her first book, and was named International Franchise Association Entrepreneur of the Year in 2009. Ms. Sun, thank you for joining us today.
Sixth we will hear from Hugh Joyce, President of the James River Air Conditioning Company in Richmond, Virginia. Mr. Joyce has been present of James River Air Conditioning for 19 years. He is here to speak from his experience as a small business owner, as well as on behalf of the National Federation of Independent Businesses. Mr. Joyce, thank you for joining us today.
And finally, we’ll hear from Mr. Paul Van De Water, Senior Fellow with the Center on Budget and Policy Priorities. Dr. Van de Water, we appreciate you being here, as well.
We welcome all the witnesses. We received your written statements, and they will be made part of the formal hearing record. You will each have five minutes for your oral remarks, and I will start with you, Dr. Holtz‑Eakin.
STATEMENT OF DOUGLAS HOLTZ‑EAKIN, PH.D., PRESIDENT, AMERICAN ACTION FORUM
*Mr. Holtz‑Eakin. Chairman Boustany, Ranking Member Lewis, and members of the Committee, I thank you for the privilege of appearing today. My written testimony contains a more detailed analysis of some of the major taxes imposed in the Affordable Care Act. Let me make four brief points as an overview.
Point number one is simply the scale of taxation is very large ‑‑ easily over 800 billion, reaching nearly a trillion, and larger than the, I think, much more ballyhooed fiscal cliff deal that was reached earlier this year. Any law that imposes that scale of taxation ought to be looked at very carefully by the conventional metrics of tax policy.
And those would be how distortionary are the taxes which are imposed? What is the incidence of those taxes ‑‑ that is, who will actually bear the burden, and are they fairly distributed? And then third, what will be the macroeconomic effects of those taxes?
Let me touch briefly on each. The ACA taxes are highly distortionary. If you take the benchmark that non‑distortionary taxes will have a broad base and equal treatment of equals, the ACA taxes look very different than that.
The device tax and the health insurers tax are sector‑specific taxes that will impact the ability to attract labor and capital to those sectors. As I detail in the written statement, each also has flaws in its design within that sector, the device tax discriminating against relatively small medical device manufacturers, and health insurers tax having a whole set of what I view as very problematic provisions, treating differently for‑profit and not‑for‑profit insurers, treating even more differently those who have extensive lines of business in elderly and low income products.
It’s a very distortionary tax, and is the only one that I’ve ever seen that actually demands that you raise a fixed amount of revenue, regardless of what it does to the industry, beginning with 8 billion next year. And so it’s a very distortionary tax.
As you know, the so‑called Medicare taxes, surtaxes on payroll income and on net investment income, draw sharp lines in the tax code. And even more troubling to me, those lines are not indexed for inflation; indexing the tax code for inflation has been a principle adopted by the United States since the early 1980s, and doesn’t represent good tax policy.
So as a whole, I think of these as not‑particularly‑well‑designed taxes, given the level of revenue they will raise.
They are also not especially progressive taxes. The taxes that are levied on device manufacturers are going to end up in health insurance costs, which will be then in turn shifted into premiums. Health insurance is a broadly consumed product, with the largest burden on the middle class in America.
Certainly the health insurance tax is going to show up very directly in premiums, and given some of its peculiarities in design ‑‑ the inability to deduct this tax for the purposes of corporation income tax ‑‑ there will be even greater upward pressures on premiums as a result.
And the so‑called Cadillac tax on high‑cost plans, despite its name, is a tax that’s going to hit the middle class. And taken as a whole, these impacts are going to fall on the middle class and exacerbate other premium pressures that are already present in the ACA from benefit mandates and other regulations that have been imposed.
And the final point is that the ACA taxes suffer from very poor macroeconomic timing. As this Committee well knows, we are struggling to recover from a financial crisis and very deep recession. It is hardly a benchmark of great policy to levy hundreds of billions of dollars in new taxes, which are poorly designed, and to accompany them with a very heavy regulatory load, and an expansion of entitlement programs at a time when the U.S. debt exceeds the size of its economy and is being driven by the existing entitlement programs.
So I think that probably the greatest lesson that can be taken away from look at these taxes carefully is that even if you wanted to raise this revenue, you could do it better, and that thinking hard about this in the context of tax reform, which I know the Ways and Means Committee is deeply interested in, is probably a good idea.
[The prepared statement of Mr. Holtz‑Eakin follows:]
*Chairman Boustany. Thank you, Dr. Holtz‑Eakin.
Mr. Moore, you are recognized for five minutes.
STATEMENT OF DAN MOORE, PRESIDENT AND CEO, CYBERONICS; CHAIRMAN, MEDICAL DEVICE MANUFACTURERS ASSOCIATION
*Mr. Moore. Thank you, Chairman Boustany and Ranking Member Lewis, for the opportunity to testify here today. As mentioned, my name is Dan Moore, and I am CEO of Cyberonics, a Texas‑based medical device company that focuses on epilepsy and other neurological conditions. I am also the chairman of the board for the Medical Device Manufacturers Association, and I’m pleased to be testifying today in that capacity.
The medical device technology industry is one of America’s great success stories. We contribute to Americans living longer, healthier, and more productive lives. We play an important role in driving economic growth by employing high‑skilled manufacturing workers, who contribute to our industry’s trade surplus. We are the envy of countries around the globe.
However, I have real concerns about the future of America’s global leadership in medical devices. These concerns stem in part from personal experiences as the son of a steelworker, and I’m hoping that as a country we do not lose leadership in yet another industry.
I was born in Gary, Indiana, which at one time was one of two big American steel towns. My family, friends, and neighbors were all employed in the steel industry. These hardworking Americans had opportunities for advancement when the industry was thriving.
I’m extremely proud of my father, who went from being a laborer to having responsibility for maintenance in three mills that were part of the Gary Works Corporation. He worked hard and was able to provide for my mom and our family of eight children. The United States was the global leader in steel production and manufacturing, and the byproduct of this leadership was great jobs that built communities and sustained families for decades.
Sadly, we all know what happened to this chapter of American manufacturing. I am here today to tell you today that the global leadership position of the medical device industry is at a crossroads, and not unlike what faced America’s steel industry years ago.
If we lose this leadership and the great jobs and all the benefits that come with it, we will never get it back. And countless communities, again, will never look the same. The good news is that there is legislation to fix this problem, and bipartisan momentum continues to build in support of it.
Beginning on January 1st, medical device innovators began paying a 2.3 percent excise tax to the Government. I’m often asked, a 2.3 percent tax, how could it be so damaging to innovation, jobs, and patient care? After all, it’s only 2.3 percent. Right? It’s important to remember that this is a tax on medical device company revenues, not profits. One study estimated the tax will increase a company’s effective tax rate by an average of 29 percent.
Many companies are having their entire profits wiped away because of the medical device tax. Others aren’t even profitable yet, but find themselves still having to pay a tax that is destroying their ability to invest in research and development to fund future medical breakthroughs. A study showed that this onerous policy would lead to the loss of 43,000 good‑paying jobs.
Regardless of company size, success, or stage of development of medical technologies, a 2.3 percent excise tax will have a significant impact, and at the end of the day a negative impact on providers and patients, the people we intend to help.
We all love the stories of innovators and entrepreneurs coming up with ideas in their garages or spare bedrooms and building American dreams into proud organizations. As I speak before you today, physicians and engineers are working on new technologies like an artificial pancreas that will allow diabetes to control blood glucose levels automatically. Just weeks ago, the FDA approved a new product hat literally allows the blind to see.
Do we really want to risk the loss of these amazing new devices by imposing an additional tax on medical device companies? Medical technology innovators are pushing the boundaries of science, all driven by American ingenuity and American manufacturing. The medical device tax is putting an end to some of these dreams and aspirations before they ever get out of the lab, or perhaps one’s garage.
I respectfully urge all of you to continue working together to provide an environment where tomorrow’s technologies and devices will not be sacrificed as a result of misguided policies today. None of us want to have to explain to our children one day why they don’t have the opportunity to work in the same dynamic industry as their parents, focused on improving the human condition.
I pledge to all of you that I will do everything I can to help Congress and policy‑makers ensure the 21st century is as bright for medical technology innovation as was the last. I urge you to support the repeal of this onerous medical device tax, a tax on innovation, jobs, and most important, a tax on patient care. Thank you for the opportunity to share my concerns today.
[The prepared statement of Mr. Moore follows:]
*Chairman Boustany. Thank you, Mr. Moore.
Mr. Humann, you are recognized for five minutes.
STATEMENT OF WALT HUMANN, PRESIDENT AND CEO, OSTEOMED
*Mr. Humann. Chairman Boustany, Ranking Member Lewis, members of the Subcommittee, thank you all for the opportunity to testify before you today. Again, my name is Walt Humann. I’m president and CEO of OsteoMed, a medical device company located in Dallas, Texas. I am also on the board of the Medical Device Manufacturers Association.
On any Tuesday like today, I would normally be at OsteoMed’s facilities, ensuring that our company continues to develop and produce innovative medical technologies that improve patient outcomes, lower health care costs, and provide well‑paying jobs to hardworking Americans.
Instead, I am before you now to sound the alarm bell on the devastating excise tax that is already having a negative impact on thousands of medical device companies. Unfortunately, these negative consequences of the excise tax have already been felt at OsteoMed.
Like the majority of medical device companies, we have humble beginnings as a startup company. OsteoMed was founded in 1991 in Glendale, California. We started supplying proprietary patented instruments for the orthopedic industry, and quickly expanded to design, manufacture, and produce various small bone fixation devices, surgical implants, and surgical systems. I want to highlight for you a few of our products that have dramatic impacts on patient care.
One of our systems are used for children born with severe head and facial deformities. Our product allows surgeons to reconstruct very young babies for normal function and appearance, and in many cases avoid the feeding problems, the tracheotomies, and the other feeding and treatment problems that would hinder normal childhood development.
Another system we produce focuses on repairing and reconstructing the feet and ankles. OsteoMed recently was fortunate to support a mission trip to Mexico, where these products were used by surgeons to allow very young children to walk normally for the very first time. However, our ability to innovative and improve upon these projects is now threatened by the medical device tax.
When Congress passed the Affordable Care Act in 2002, it unfortunately also included this devastating tax on innovation In particular, the ACA includes a 2.3 percent excise tax on the sales of most medical devices in the U.S. Again, this tax applies to the total revenue of a company, not to profit.
In many cases, companies will end up paying more in taxes than they actually generate in profits. As an example, two years ago we started a project within OsteoMed that greatly simplifies back surgery and reduces a two‑hour operation to just 30 minutes. This project is now producing revenues, but is not yet profitable.
Unfortunately, the tax is clearly impacting the way that OsteoMed and countless other companies select future R&D projects. For some companies, the device tax has already led to significantly reduced spending on research and development. For others, it has led to a freeze on hiring and expansion projects. Finally, many companies have made the painful decision to let employees go. Unfortunately, at OsteoMed we have done all three.
Supporters of the medical device excise tax claim that the nearly 30 million new covered beneficiaries will use more medical devices, and tax will be offset. This is simply not the case. Many medical devices are products that are used on a variety of patients.
For example, automated external defibrillators are found in public places like airports, shopping malls, and here in the halls of Congress. If a person goes into cardiac arrest today, he or she will receive the treatment regardless of their insurance status.
At OsteoMed, our products are used in trauma and reconstructive procedures. We are fortunate to live in a great country. People with injuries to the head face, and extremities are able to receive our products. Sadly, our ability to continue to innovative on these products is threatened.
There are numerous published reports regarding the impact of the medical device excise tax. One report suggests that nearly 45,000 jobs will be lost as a result of the tax. I am here because I am concerned over 40 jobs in particular.
These are the 25 members of the OsteoMed family that had to be let go because of the medical device tax. In addition, there are more than a dozen future planned positions that now will not be pursued at OsteoMed. n the 22‑year history of our company, we have never had to lay off an employee, much less for a government‑related tax. Therefore, Congress must do everything it can to eliminate this devastating tax. Tens of thousands of patients who use our devices are relying on your leadership.
Nearly 300 employees and their families at OsteoMed are ready for this barrier to be removed in order for us to continue to improve health care. We must do everything in our power to ensure that this great American industry remains a truly global leader.
Thank you again for this opportunity to testify before you, and I’m happy to answer any questions later.
[The prepared statement of Mr. Humann follows:]
*Chairman Boustany. Thank you, Mr. Humann.
Mr. Kautter, you are recognized for five minutes.
STATEMENT OF DAVID J. KAUTTER, MANAGING DIRECTOR, KOGOD TAX CENTER, AMERICAN UNIVERSITY, EXECUTIVE‑IN‑RESIDENCE, DEPARTMENT OF ACCOUNTING AND TAXATION
*Mr. Kautter. Chairman Boustany, Ranking Member Lewis, and members of the Subcommittee, thank you for the opportunity to testify today.
My name is David Kautter. I am Managing Director of the Kogod Tax Center located at American University.
The Kogod Tax Center is a tax research institute focused on promoting balanced, non‑partisan research on tax matters, including complexity.
Primarily, we focus on middle income taxpayers, small businesses, and entrepreneurs.
I have been a tax practitioner for over 40 years, and prior to joining the Kogod Tax Center, I was the Director of Tax at Ernst & Young.
Over the course of my career, I have watched the Internal Revenue Code grow increasingly complex in its structure, incomprehensible in its nature, and pervasive in its effect on economic decisions.
It is estimated that the Internal Revenue Code and regulations are over nine million words in length, and Americans spend more than 6.1 billion hours a year filing Federal tax forms.
The more than 45 tax related provisions in the Affordable Care Act will not make things any easier.
I will focus my testimony today on two particular provisions, the new tax on net investment income, and the new Medicare tax on wages.
The statute proposed regulations and preambles for just these two provisions are over 48,000 words in length, take up over 85 pages in the Federal Register, and are estimated to increase the time taxpayers will spend on compliance by well over two million hours.
The tax on net investment income constitutes a new third tax system within the Internal Revenue Code. It is its own self contained tax system which sits along side the regular income tax and the alternative minimum tax.
Like the regular tax and the alternative minimum tax, this new tax system comes complete with its own unique set of definitions, rules for computing the tax, and a threshold that is not indexed for inflation.
This new parallel universe also comes complete with its own set of new compliance obligations, additional tax forms, new tax calculations, and new estimated tax requirements.
Compliance with these rules will not be a task for the faint hearted.
From a tax planning point of view, taxpayers are already focused on simultaneously managing two entirely new calculations, modified adjusted gross income and net investment income.
This is just the beginning. Make no mistake about it. Planning to minimize and comply with the tax on net investment income will consume tens of thousands if not hundreds of thousands of hours every year for the foreseeable future.
That would be in addition to the two million hours of compliance time, and that will be in addition to the 6.1 billion hours already being spent complying with the Federal tax laws.
The additional tax on Medicare wages increases tax complexity in three ways, and they are all first’s. It is the first time the Medicare tax is computed on an individual’s personal tax return. It is the first time the Medicare tax is imposed solely on employees without a matching employer payment, and it is the first time that the amount of the Medicare tax will vary with the taxpayer’s marital status.
These are by no means trivial changes. They bring with them new rules for computing and paying Medicare tax, new withholding rules, and plenty of opportunities from mistakes and penalties.
The areas of complexity that concern me the most with respect to the new Medicare tax are the rules relating to withholding and the potential for the imposition of penalties.
The rules are just too complicated. Mistakes are going to be made, and substantial penalties are going to be imposed.
I am also deeply concerned about the complexity and burden this new law creates for small employers. Just like the tax on net investment income, it is already clear that employees and their employers are seeking to alter the behavior in response to this tax.
I will conclude my remarks by saying a few words about a common feature of both these taxes, and that is their imposition on income in excess of a threshold.
A taxpayer’s income can increase substantially in one year due to an once in a lifetime event, such as the sale of a long held asset or the payment of a bonus that took several years to earn.
In situations such as these, taxpayers are taxed at higher rates on income that accrued over a lengthy period of time, and may never occur again in the taxpayer’s lifetime.
Taxing such one time gains at higher rates contributes to a perception of unfairness and tends to increase cynicism on the part of taxpayers.
Not only that, in addition to the new thresholds for these two provisions, two other new thresholds come into effect this year, the so‑called “PEP and Pease threshold,” and the threshold for the top individual tax rate of 39.6 percent.
With three new thresholds, complexity is not arithmetically increased by a factor of three, it is increased exponentially because all three thresholds interact with each other.
The problem is made even more challenging because each of the thresholds that come into effect this year start at different levels of income and penalize married taxpayers compared to single taxpayers.
That concludes my prepared remarks, Mr. Chairman. Thank you very much.
[The information follows: Mr. Kautter]
*Chairman Boustany. Thank you, Mr. Kautter.
Ms. Sun, you are recognized for five minutes.
STATEMENT OF SHELLY SUN, CEO AND CO‑FOUNDER, BRIGHTSTAR CARE
*Ms. Sun. Thank you, Mr. Chairman, members of the Committee, for this opportunity.
My name is Shelly Sun. I am the Co‑Founder and CEO of BrightStar Franchising. I am a member of the Board of Directors of the International Franchise Association.
BrightStar Care is a franchise system of more than 250 independently owned and operated agencies that provide home care for over 10,000 families in 38 states, 160 franchisees employ more than 15,000 nurses and care givers.
My husband and I founded BrightStar over ten years ago with $100,000 of our own money, and by guaranteeing $100,000 line of credit with our bank with the equity in our home.
Small business owners take on this type of risk to start their businesses, create jobs, and help the American economy every day.
This is supposed to be the American dream as a small business owner. Invest money, take a risk, work hard, build a business, and pay back what you invested and earn a profit.
Part of what makes entrepreneurs so special is their passion for creating and providing opportunity for others. This law jeopardizes the ability of small business owners to create more jobs and reinvest profits back into their businesses.
Small business owners must make difficult decisions every day to protect their personal investments and their American dream, and this law will compel entrepreneurs to do what it takes, including reducing hours of their employees to keep their business and their dream alive.
One of the biggest challenges we have with the law is how it redefines “full time employees.” Business owners in every sector of the American economy have for decades managed their workforce to the current standard of 40 hours per week.
When Congress set the definition as 30 hours per week, it forced employers to manage their workers to fewer hours. Thus, reducing the earnings potential of hundreds of thousands of employees.
Because the law requires everyone to have insurance, part time workers will have to buy insurance on their own or through an exchange. That expense will impact their personal family budget as well as demands on Medicaid.
Clearly, these are unintended and significant consequences of a law that was supposed to expand opportunities for health coverage to all.
Simplifying the definition of “full time” would provide small businesses with more certainty, allowing them to better control costs, and make long term business plans for future growth.
Fifty‑five of my BrightStar franchisees are considered large employers under the Affordable Care Act. The rest are on pace to grow to that level in the next two to five years.
Thus, our franchisees, like many other successful small business owners across the country, find themselves in a Catch‑22. They want to expand but if they do, they get hit with significant new health care and compliance costs that impede growth.
In this context, it is absolutely staggering to think that as defined by the Affordable Care Act, an employer with 50 full time employees is in the same category as an employer with 5,000 full time employees. We can absolutely do better.
If the 55 BrightStar franchisees who qualify under the current definition of “large employer” maintain their current scheduling level and all eligible employees enroll for this affordable coverage, the average franchisee will spend $127,000 providing this coverage. This wipes out 50 to 100 percent of the franchisees’ profit.
How can we ask small business to risk more, work harder, and invest further with administratively complex and expensive legislation like the Affordable Care Act?
We cannot. We must remove obstacles, and we must understand small business owners will find a way so they remain in business and protect the jobs they can offer. What choice do entrepreneurs have if they want to remain in business?
My two requests today on behalf of my business, on behalf of the 160 BrightStar franchisees and their 15,000 employees across the country, and on behalf of the franchising community and small businesses everywhere, first, change the definition of “full time employee” to more closely align with the current standard of 40 hours per week, setting the definition as 30 hours per week simply forces employers to manage their workers to fewer hours.
Second, define “large employer” as one with at least 50 full time employees instead of full time equivalents.
This simplifies the complexity of the law and a huge administrative burden.
Specifically, this change reduces the 55 BrightStar franchisees impacted by the unintended consequences of the Affordable Care Act down to eight.
Thank you again for the opportunity to be here with you today to work together to prevent the devastating, unintended consequences the Affordable Care Act will have on small businesses, employees, and the American economy.
[The information follows: Ms. Sun]
*Chairman Boustany. Thank you, Ms. Sun.
Mr. Joyce, you are now recognized for five minutes.
STATEMENT OF HUGH JOYCE, JAMES RIVER HEATING AND AIR CONDITIONING COMPANY
*Mr. Joyce. Mr. Chairman, Ranking Member Lewis, and members of the Oversight Subcommittee, thank you for having me here today.
I am Hugh Joyce, and I own and operate a heating and tooling business with approximately 152 employees in the Richmond, Virginia area.
I come before you today to express my continued concerns regarding the new health care law, specifically the negative impact and the overwhelming confusion regarding the 47 tax provisions in the law and their implementation.
In the spirit of full disclosure, I personally lobbied heavily against this bill. Not because I did not want to pay for insurance, because I was already doing that, but because I felt the bill lacked provisions to drive down true costs.
There are lots of lines of code that are spread around who is paying for the insurance. There is this Government kind of thing, but there is little that addresses insurance pooling, personal incentives to maintain health, standard insurance plan design, hospital costs and competition, market transparency, doctor monopolies on care, individual purchase models, and strategies.
There are 47 tax related provisions that hurt businesses, families and workers. Keeping up with the implementation of the regulations will be costly, time consuming, and difficult.
Employers like me must track and monitor employee hours, report, verify insurance coverage, all diverting valuable resources from productivity.
Key areas of concern are the mandated coverage’s in indirect taxes that are driving costs up and affordability down. The significant new taxes on investment and pass through income reduce capital and limit the ability to expand and create jobs.
Reporting, tracking, and paperwork is daunting, especially for smaller businesses, and confusion.
Finally, the lack of simplicity. Look at our greatest new world companies, Apple, Google, Geico, JetBlue. They are all successful because they keep it simple.
I have great concerns that this health care plan and this health care act are so complicated.
Since 2009 and its enactment, our insurance premiums have risen from $664,000 to $924,000, with a flat head count. We are projecting our renewal premium for this year to be $1.9 million, an 18 percent increase, which includes a two percent premium tax on our fully insured product.
These numbers are not sustainable over time. Our entire discretionary net profit will be absorbed by health insurance costs in five years, if the current premium trajectory continues.
Fear is the most crippling emotion. I am convinced that fear coupled with the uncertainty of new costs and frustration regarding the health care law is a key reason we are not seeing robust hiring and job creation today.
As I look across my competitive landscape, I see major disparities. My average competitor is less than five employees, if they provide insurance, they get a subsidy. My competitors with less than 15 employees do not have to do anything.
I am over 100. I am required to provide insurance and pay for it or I face penalties. Should not everyone be subject to the same rules?
If we want to lead in a global competitive platform and keep insurance affordable, we must revisit this health care law and the tax provisions.
This can be done. I think we can provide health care without major new tax increases and burdensome compliance measures.
Let’s look at strategies for a simplified plan that reduces costs, opens up market competition and transparency, and provides every American with great benefits that they can buy on their own.
These strategies will provide certainty for the private sector and help us grow our economy.
[The information follows: Mr. Joyce.]
*Chairman Boustany. Thank you, Mr. Joyce.
Dr. Van de Water, you are recognized for five minutes.
STATEMENT OF PAUL N. VAN DE WATER, PH.D., SENIOR FELLOW, CENTER ON BUDGET AND POLICY PRIORITIES
*Mr. Van de Water. Mr. Chairman, Ranking Member Lewis, and members of the Subcommittee, I appreciate the opportunity to appear before you this morning.
The Affordable Care Act will extend health insurance coverage to 27 million people and help assure that Americans have access to affordable coverage, and it will do so in a fiscally responsible way.
In fact, the Congressional Budget Office has estimated that the Affordable Care Act will reduce the deficit modestly in its first ten years, but substantially in the following decade.
The tax provisions of the Affordable Care Act not only raise revenue but are also sound health and tax policy. Some provisions will encourage consumers to be more cost sensitive in purchasing health insurance and health care services.
Among these provisions are the inclusion of the cost of employer sponsored health coverage and on W‑2 forms, the excise tax on high cost employer sponsored coverage, and limitations on the use of tax advantaged accounts to pay for health related expenses.
The Affordable Care Act also levies taxes or reduces Medicare payments to businesses in industries that will directly benefit from health reform. The taxes on drug manufacturers and importers, medical device manufacturers, and health insurance providers fall into this category.
Two other new taxes will affect only the wealthiest Americans who have the greatest ability to pay: the additional hospital insurance tax on high earners, and the new 3.8 percent Medicare tax on unearned income.
Finally, health reform makes health insurance coverage a shared responsibility for individuals and employers. Individuals who do not obtain coverage for themselves and their families and large employers who do not offer affordable coverage to their workers will be subject to a tax penalty.
This structure follows the Massachusetts model of health reform, which relies primarily on private health insurance plans to provide coverage.
Taken as a whole, the Affordable Care Act will significantly strengthen our nation’s economy. CBO estimates that health reform will slightly reduce premiums for employer sponsored health insurance in the near term.
For employers with more than 50 workers who account for 70 percent of the insurance market, CBO estimates the law will reduce average premiums by up to three percent in 2016.
For small employers, the estimated change in premiums ranges from an increase of one percent to a reduction of two percent.
All and all, the short term economic effects of health reform will be small. Moody’s Analytics terms the law’s economic impact “minor,” and says any disincentives from higher taxes and fees will “hardly make a difference.”
The Congressional Budget Office foresees a small net reduction in labor supply, because some people who now work mainly to obtain health insurance will choose to retire earlier or work somewhat less, not because employers will eliminate jobs.
Even that effect could be partly offset by increased incentives to work for people who now face losing Medicaid coverage if they work more.
Over the long run, health reform will have many positive impacts on the economy. The lower budget deficits stemming from health reform will hold down interest rates and free up capital for private investment.
Health reform will increase labor market flexibility since workers will no longer be locked into a job by the need for health coverage.
Expanding coverage will also improve health outcomes by helping people obtain preventive and other health services and improving the continuity of care.
Most important, the Affordable Care Act includes a wide array of policies to improve health care quality and reduce costs.
All these factors should enhance the nation’s economic productivity.
In conclusion, the tax related provisions of the Affordable Care Act form part of a carefully thought out structure to expand health insurance coverage and slow the growth of health care costs without adding to the budget deficit.
Any effort to change these provisions must not be allowed to undercut any of these critical objectives.
Thank you, Mr. Chairman.
[The information follows: Dr. Van de Water]
*Chairman Boustany. Thank you, Dr. Van de Water. We will now proceed with questioning of the witnesses.
Dr. Holtz‑Eakin, we have quite often heard ad nauseam that the health care law, ACA, reduces the deficit. Is that true?
*Mr. Holtz‑Eakin. I think the original cost estimate suffered from what are now widely recognized as a lot of budget gimmicks, things like the CLASS Act, which has met its demise since the initial passage, front loaded premium receipts and back loaded spending.
There were a number of double uses of money like the Medicare reductions being used to fund the insurance expansion.
I think the answer would be no. The most important thing is that our current deficits and the projections are driven by the health entitlement programs and their rapid rate of growth, and there has yet to be an objective and non‑partisan assessment of the law that says it will actually bend the cost curve.
*Chairman Boustany. Part of that calculation by CBO with regard to the effect on the deficit was largely because ACA raises taxes significantly, as you stated in your testimony.
*Mr. Holtz‑Eakin. Sure.
*Chairman Boustany. Let’s assume for a moment, for the sake of argument, that the underlying policy for health care is correct.
As a physician, I happen to believe to the contrary, but let’s assume for a moment it is correct.
Let’s also take it one step further. Let’s assume that it is reasonable or wise or good policy to extract $1 trillion from the U.S. economy to pay for this.
Dr. Holtz‑Eakin, I want you to comment, and Mr. Kautter, looking solely at the methods by which this law raises taxes, and I think you both talked a little bit about this in your testimony, it raises these new taxes on innovation, innovative companies, small businesses, many that are trying to make a profit.
It raises taxes by taxing health insurance premiums, which will be passed onto the purchasers of those premiums, raising premium costs.
Are these rational ways to extract $1 trillion out of the U.S. economy given we have very sluggish economic growth, unemployment that is projected to remain above seven percent through 2015, and maybe beyond.
We are also looking at tax reform. It is no secret that this Committee has set a goal to fundamentally rewrite the Tax Code to simplify it and lower rates, all to promote competitiveness for American companies.
Is this a smart way to raise taxes? It seems to me ACA is a very complex tax bill. We saw added complexity with the Fiscal Cliff tax package. We are going in the wrong direction.
I would like both of you to comment on that.
*Mr. Holtz‑Eakin. I certainly would agree, Mr. Chairman. This is going in the wrong direction. This is not good tax policy. If you look at this by the standard metrics of efficiency and equity, these are bad taxes.
I know Mr. Kautter does not love the excise taxes on payroll and net investment income, and I share his concern with the complexity and having a third Tax Code.
I think the health insurer’s tax is the worse designed tax I have ever looked at. If the Committee wants to raise $8 billion next year in some way for the insurance industry, you could do a lot better than that, and more generally, I think we should recognize the importance of broad‑based taxes that are less discriminatory and less interfering with the economy.
I want to comment just on this notion of somehow these are benefit taxes. Benefit taxation is a well established principle in tax policy. Benefits accrue to individuals and taxes are paid by individuals in the end, and it is difficult to imagine the ACA being a benefit tax because the idea was in fact to give low income Americans a benefit, which was insurance, very costly, and if we make them pay for that benefit, we will un‑do the redistribution, which is at the heart of the law.
In the end, it is not the medical device manufacturers or the insurer’s who benefit from this tax. It is workers, shareholders, and customers that ultimately should be looked at.
You cannot defend this on the basis of benefit taxation.
*Chairman Boustany. Thank you. Mr. Kautter?
*Mr. Kautter. Mr. Chairman, I am very concerned about complexity, and having spent 40 years in the trenches helping all sorts of taxpayers comply with the tax law, I understand the complexity matters.
This bill has got enormous complexity in it with respect to the tax provisions. It is sort of like embarking on a great archeological dig as you work your way through the pages of the bill and now the regulations.
The tax on net investment income is a brand new third tax system. This Committee and other committees have wrestled with the alternative minimum tax and indexing the alternative minimum tax.
The net investment income tax is similar to the AMT. It has its own separate definition of income, its own method of allocating expenses to that income, its own method of calculating the tax. It determines which other taxes are creditable against that tax. It is a free standing separately contained system in the Internal Revenue Code.
I guess folks can discount it by saying well, only the top four percent or so of all taxpayers will pay the tax, a lot of those folks invest and innovate, and from a complexity point of view, it is a large step backwards.
*Chairman Boustany. This Subcommittee is deeply concerned about the ever rising level of complexity in the Tax Code, both from the standpoint of those who are taxed, but also from the standpoint of an IRS that keeps coming before us asking for more resources to deal with this ever growing complexity in the Code.
*Mr. Kautter. I think the IRS has done as good a job as can be done in trying to implement the tax on net investment income. They have largely referred to existing provisions and standards.
Unfortunately, the existing provisions and standards are not very simple. You now have this new system that refers to old principles which were controversial to begin with, and these are just two of the taxes.
The Medicare tax, if someone knows they will be subject to the Medicare tax because they and their spouse will earn more than $250,000, and they individually earn less than 200, they cannot ask to have the Medicare tax withheld from their wages. They have to ask to have additional income tax withheld.
What sense does that make to most people who are trying to fill out what is called the “W‑4” for withholding. It is one of the most misunderstood forms and the potential for complexity and misunderstanding and penalties is rife.
*Chairman Boustany. Thank you. You pointed this out, I think, in your testimony. The net investment tax is referred to in the law as “unearned income and Medicare contribution,” yet the revenue goes in the General Fund. It does not do anything to help Medicare, does it?
*Mr. Kautter. It does not. It goes right into the General Fund.
*Chairman Boustany. The new law gives the impression that there are provisions to help finance Medicare and improve Medicare, but are there other examples of that, Dr. Holtz‑Eakin, in this law?
*Mr. Holtz‑Eakin. In the end, this law has the flaws of many laws that rely on these accounting gimmicks. Money flows into the Federal Treasury. Money flows out of the Federal Treasury.
Any labels attached to them are strictly accounting fiction because the money is gone and never saved in any meaningful way.
Medicare right now, the gap between payroll taxes and premiums coming in, spending going out, is about $300 billion, with 10,000 new seniors every day. That is the true state of Medicare’s financial condition.
Any accounting ledger to suggest there is money in a trust fund for anything or somehow the Medicare tax will be deposited in it is in defiance of economic reality.
*Chairman Boustany. Thank you. That is all I have. Mr. Lewis?
*Mr. Lewis. Thank you, Mr. Chairman. Dr. Van de Water, the Affordable Care Act is a landmark law that helped millions of Americans.
For example, 86 million Americans have received one or more free check‑ups or screenings to prevent and detect illness.
The Affordable Care Act delivered hundreds of billions of dollars of Federal tax credits to many American families and small businesses.
Some have suggested that the ACA is a massive tax increase on the middle class. Others have argued the opposite, that the ACA is a middle class tax cut.
The Washington Post did a fact check on the claim that the ACA was a middle class tax cut and found the claim to be true.
Mr. Chairman, I ask unanimous consent to place this article in the record.
*Chairman Boustany. Without objection.
[The information follows: The Honorable Mr. Lewis]
*Mr. Lewis. Dr. Van de Water, what is your opinion of whether the ACA is a middle class tax cut or tax increase, and please explain your opinion.
*Mr. Van de Water. Thank you for asking that question, Mr. Lewis. I think it is an excellent one. It illustrates the importance of looking at the Affordable Care Act as a whole.
We have heard a lot of discussion about individual taxes, but as I mentioned in my prepared statement, one of the important things to remember is the taxes in the Affordable Care Act were not levied for the sake of imposing taxes, but for the sake of financing the coverage expansions in the law.
Those are primarily of two sorts: first, the expansion of Medicaid for people with incomes below 138 percent of poverty, and second, financing the premium tax credits for people between 138 percent and 400 percent of poverty. Those premium tax credits, by their very nature, go to folks who are middle class, defined as having income of no more than 400 percent of poverty. And, as I recall, what that Washington Post fact check, to which you referred, did was to take a look at was all of these provisions together, not just the taxes, such as the medical device tax and so forth, but also the effects of the premium tax credits that will be provided to help people obtain health coverage. And when you look at all of those tax provisions together, I think what the Post concluded, and what I think is in fact correct, is that that the law does provide a net tax reduction for what we might consider to be middle class folk.
*Mr Lewis. Thank you very much. Thank you. I yield back.
*Chairman Boustany. Ms. Black?
*Mrs. Black. Thank you, Mr. Chairman. And I want to go back to the issue of complexity that the chairman has talked about and several of the witnesses have as well. Under the President’s health care law’s employer mandate tax, which I think is a very creative title that they give it, a Shared Responsibility for Employer’s provision, we know that there is going to be a fairly complicated regulatory analysis to determine what tax you are going to be hit with.
And I think Ms. Sun mentioned this when she talked about deciding the definition of what full time is. So, you are going to have to consider in that what employees count as full time, what counts as part time, how many hours they worked, whether the insurance they provide to employees meets Washington’s requirements and other sundry of complicated questions that will have to be answered. And, of course, we all know this starts at the end of the year.
Now, the answer to many of these questions of course is going to be by the rules that are written by the Treasury. And I hold in my hand here a temporary set of rules. We do not know whether these rules are actually going into effect or not. There are 144 pages that I hold here in my hand. These are the drafts of the latest version. I think it is also interesting that the Treasury Department admitted last week that the health care law was, and I quote this, “Not as artfully drafted as it could have been.” And that the Treasury Department is working on fixing those flaws that may be in this new regulation.
So, my question, and probably the best one to start with, would be, Ms. Sun and Mr. Joyce, since you are employers who are going to have to implement whatever comes out in these rules, and my question to you is do you feel that given the fact that we just right now have temporary rules that you do not even see, not knowing what time line is going to be when these rules are going to be final, that you will have enough time as an employer to be able to implement these provisions as you are working within your business and looking at your own budget and what you need to do for the year? Ms. Sun?
*Ms. Sun. Thank you, Ms. Black. No, we absolutely do not. And we have even engaged through the International Franchise Association, bringing in Ernst & Young to try to help us and try to help educate our franchisees. But it is a five step calculation that I think you need to graduate degrees to try to figure out how to even calculate it. And our franchisees seem paralyzed to even to try to calculate it because they are afraid if they get it wrong, what is the impact going to be.
So, we see hiring freezes at our franchisees level. We have seen an unprecedented level of franchisees turning back in territories where in prior years we have had most of our franchisees opening two and three locations and employing many more people in their local communities, turning those locations back in and saying, “You know what with the Affordable Care Act, we just do not want to take on that risk.” We do not want to take on the complexity. We would just potentially want to stay under 50 employees and leave the headaches until we can hope that we can get to 2014 and everyone realizes what they have done. And they see the impacts of what they have done. And this is repealed or replaced in some way, in form or in fashion, because right now we cannot figure it out.
And we have the best and brightest of Ernst & Young, which my esteemed to my colleague to my right, used to work for, and we still have difficulty trying to figure it out and trying to help our franchisees figure it out.
*Mrs. Black. And, Mr. Joyce, before you answer let me just add one more question to Ms. Sun since she brought this up about hiring a firm to give you some advice. Have you any idea or calculation of what that might cost you in hiring this firm?
*Ms. Sun. We have estimated, and we have done a pretty thorough calculation, we have estimated it will cost each of our 160 franchisees $8,455 for every single one of our franchisees just to comply with the law at their current stage and size of business without even looking at continued growth.
*Mrs. Black. And that is complying with the law, that is not what it is going to cost you ‑‑
*Ms. Sun. So they could figure out how to comply with the law, that is what we estimate it would cost them.
*Mrs. Black. Okay. Mr. Joyce, same question for you?
*Mr. Joyce. We agree with those ‑‑ I agree with her comments. And I will just tell you, I was talking to my insurance agent last night working through my comp renewal, and I was just asking him ‑‑ we were talking about the Act ‑‑ and I guess the big concern is it is moving so fast there is a lack of information. Everyone is making decisions, do I hire, do I not hire? And, as I said in my comments, fear and frustration cripple business and markets. And the best thing that we can do for our country right now is excite markets and not cripple markets. And I am telling you I believe with all my heart that the reason we are not seeing robust recovery right now is consternation over small and medium and big business with regard to these rules and regulations. It is a major concern.
*Mrs. Black. Paralysis from not knowing what to do, the uncertainty. Thank you, and I yield back the remainder of my time.
*Chairman Boustany. Ms. Jenkins?
*Ms. Jenkins. Thank you, Mr. Chairman. Dr. Holtz‑Eakin, this Subcommittee held a hearing last year that reviewed a provision within the ACA that requires a physician’s prescription in order to gain a reimbursement through tax preferred accounts like FSAs and HSAs for the purchase of over‑the‑counter medicines. And some of my colleagues across the aisle claim that only the wealthy use these accounts, but I know that over 19 million families alone use FSAs. What are your thoughts on this provision and the impact on families on a budget and the burden on physicians who are now seeing patients to prescribe something that can be bought over the counter?
*Mr. Holtz‑Eakin. Well, I think that it is pretty obvious and onerous compliance cost, just making the ‑‑ getting prescriptions impose a big cost on everybody. Past that, when you think about the goals of this, if you want to make people more sensitive to the kinds of things that they do, it seems odd to single out these particular accounts as the way to do it. This is a law that has a nearly infinite scope. It touches every piece of an American economic life, and to target something that has been relatively successful and popular like the FSAs and the HSAs strikes me as a really narrow way to go at it.
*Ms. Jenkins. Would you consider this a tax on working families?
*Mr. Holtz‑Eakin. This is a repeal of a clear benefit that was in the Tax Code to reach a policy objective, and it is going to make their taxes higher.
*Ms. Jenkins. Do you feel that the provision provides in any way an efficiency for the health care system?
*Mr. Holtz‑Eakin. Again, I think if you want to get genuine efficiency you have to do broad‑based things, not these rifle shots. And I think that would be the way to go.
*Ms. Jenkins. Okay, and on another note, several experts, as well as the Congressional Budget Office and the Joint Committee on Tax, have estimated that the health insurance tax will result in higher health insurance premiums for individuals and families. Could you please explain why the tax will lead to higher premiums and how the tax is at odds with the ACA’s stated goal of making coverage affordable?
*Mr. Holtz‑Eakin. The way the tax is designed, the fixed fee, $8 billion for example in 2014, is allocated among insurance companies on the basis of market shares. And what that means is that every time you sell another policy, you raise your share and thus raise the tax that you have to pay. That is just like putting a sales tax on insurance. And we know what happens with sale taxes. If at all possible, you try to shift that on to the customer.
This is exacerbated in this case by the fact that for the for‑profit insurers, those paying corporation income tax, they are not allowed to deduct this tax. So if you have got a dollar of premium tax, you actually cannot just raise premiums by a dollar and come even because your tax liability is going to go up. So you have to actually raise it by $1.54 if you do the arithmetic. That is a real upward pressure on premiums that is built into this tax.
And you might like to think maybe it will magically come out of profits, but these are insurers that operate in competitive capital markets. They do not have excess profits that you can identify. You might want health insurance workers to work for less, but I think we are trying to have workers have their incomes go up, not down and have more employment. So the net effect of this is by and large going to be higher premiums, and that is going to get shifted on to probably the middle class.
*Ms. Jenkins. Okay, thank you, I yield back.
*Chairman Boustany. I thank the gentle woman. Before I yield to Mr. Davis, I want to mention that this Subcommittee did hear testimony last year with regard to the Small Business Health Insurance Tax Credit and the difficulties that small businesses were having in complying with it. In fact, by the IRS’s own estimation it consumes about 40 million man hours per year, which averages out to about 19 hours, man hours, to comply per small business. So I thought that was important to mention. And, secondly, the projection of the number of small businesses that are availing themselves of this tax credit, it has been way below what was originally anticipated. With that, I will yield to Mr. Davis.
*Mr. Davis. Thank you very much, Mr. Chairman. And I want to thank the witnesses. Especially, I want to thank you for calling this hearing because it gives us an opportunity to look at several dimensions of the Affordable Care Act.
One of the things that I have noted is 105 million Americans have had a lifetime limit on their coverage eliminated, which I find to be quite commendable, 6.6 million young adults up to the age of 26 now have health insurance through their parent’s insurance, and 6.1 million seniors in the donut hole have received savings on their prescription drugs. These savings total $5.7 billion overall and averaged $706 per senior in 2012. And, of course, these savings will continue to grow as the donut hole becomes more fully closed.
Mr. Van de Water, if I could ask you, I have noted that some commentators are concerned that the ACA will lead to a significant reduction in the labor market. And while CBO did state that the Affordable Care Act will reduce the labor supply, CBO believes that this would be due in significant part to the end of what is called “job lock.” In other words, employees would choose to work less or perhaps work for themselves because the Affordable Care Act would allow them to obtain affordable health insurance from sources other than their employer. What is your opinion relative to the effect of the ACA on the labor supply?
*Mr. Van de Water. Thank you, Mr. Davis. Yes, you are exactly correct in describing the Congressional Budget Office’s assessment of the effect of the Affordable Care Act on labor markets. CBO concluded that, as I think virtually all of our personal experience would attest, that there are people, particularly those who are approaching their retirement years, who may be sort of hanging on to a job, even one that they are finding very onerous, because that is the only that they can retain health insurance. In some cases, even at younger ages, people are not shifting to another job if the current job that they have has health insurance but the one that they prefer based on other factors does not. So the availability of heath care coverage through the exchanges on a guaranteed issue basis will eliminate that locking of people into a particular job.
And in the case of some of the older workers, the Congressional Budget Office estimates they may decide that they will actually withdraw from the labor market a bit earlier, and obtain coverage through the exchange instead of through an employer. But even the extent to which that happens, CBO estimates will amount to a very small drop in employment.
*Mr. Davis. I have also heard people suggest that a medical device excise tax will shift jobs overseas and investment away from the medical device industry in this country. What is your opinion of these types of arguments?
*Mr. Van de Water. Again, that is an excellent question. The assertion that you referred to is a common one, that the medical device excise tax will cause jobs to shift overseas. But it turns out that this tax is carefully structured so as to avoid that particular effect. And the reason is as follows, that the tax does apply to imported medical devices, as well as to devices produced domestically, but the tax does not apply to exported devices. So that means that if we are talking about devices that are going to be used in the U.S., the tax is paid whether the device is made domestically or abroad. But if we are talking about devices that are to be used overseas, the tax is not paid, whether the device is manufactured here or overseas. So in either case the playing field between American manufacturers and foreign manufacturers remains level.
*Mr. Davis. Thank you very much, and I yield back, Mr. Chairman.
*Chairman Boustany. I thank the gentleman. Mr. Marchant?
*Mr. Marchant. Thank you, Mr. Chairman. It is an honor today for me to have a couple of Texans here on this panel. And, welcome, thank you for being here today. Mr. Joyce, thank you for your statement. I think your statement embodied exactly the feelings of every business in my district. I represent a district that has Addison, Las Colinas, all the DFW Airport and all of the surrounding areas. And throughout the district every single owner, every single CEO is sitting down with their accountant, sitting down with their insurance agent, and they are trying to figure out how they are going to do business next year. And that is creating uncertainty and, in your words, it is creating fear. And in a business environment of uncertainty and fear, you do not have hiring. In fact, you have exactly the opposite. So many of these fortunate individuals that will be able to stay on their parents’ insurance for another couple of years, because of the abysmal hiring atmosphere, it may be that those very individuals that have stayed on their parents’ insurance for an additional couple of years actually will not have anywhere to go to work after they get out of college because the hiring has been frozen, and there is such uncertainty.
During the debate when we ‑‑ when this Affordable Health Care Act was adopted, one of the major arguments the Administration and supporters gave the companies, and the medical device companies specifically, would receive a windfall because there would be so many thousands and literally millions of people that didn’t have insurance, that would have insurance that would now begin to access the health care system. And because of that, your business, Mr. Humann, your business, Mr. Moore, would have so many new customers and would be able to sell so many more instruments that your profits would go up. And because of those profits, you should help pay for this system. So, I would like to give both of you the opportunity today to address that argument?
*Mr. Humann. Yes, thank you for the question. At OsteoMed, we just have not seen that and do not expect to see that. First of all, the products that we make patients are receiving regardless. There are products that are for trauma and for severe reconstruction issues. Secondarily, the majority of newly insured patients are younger ‑‑ younger people, and they will likely not be utilizing the medical technologies that are out there. And then third, when we look at Massachusetts, which has had universal health coverage now for some time, we have seen no up‑tick in our business in that state whatsoever.
*Mr. Marchant. So, basically, in your case, the Medical device tax is just a redistribution? It is basically going to your company and saying your company or your industry is going to pay for the Affordable Health Care Act?
*Mr. Humann. It is very simple. It is an extra cost on our business. It is one less dollar that we have to invest in innovation and new hires within OsteoMed.
*Mr. Marchant. Thank you. Mr. Moore?
*Mr. Moore. And we ask that same question across many of our members: is there an expected windfall? And I think coming back to that Massachusetts experience, in our surveys 90 percent of companies who had been through the Massachusetts experiment of universal care did not see a windfall, did not see any growth, any greater growth in Massachusetts than they did in the rest of the country. So whether you are talking Cyberonics or the rest of the industry, we do not expect to see that windfall.
*Mr. Marchant. And do you ‑‑ do either of you expect to be able to pass ‑‑ fully pass on the expense of the tax to your customer?
*Mr. Humann. The competitive environment is incredibly tough. We have foreign manufacturers coming over. We have domestic companies that we compete against. We need to look at our costs first, and keep all of our options open and try and make the ends meet at the end of the day. This is a new cost on our business.
*Mr. Moore. Right, and, as I said in my comments, we see our taxes going up with this 2.3 percent revenue tax. Across the industry we see our taxes going up 29 percent. We are not finding a way that we think we can recover the tax. Quite the contrary, we are saying where do we cut in order to find some cost savings to offset the tax increase? And those start hitting things that we least want to hit. They hit American people in the area of jobs. They affect projects, American projects, our research and development. And fewer people working on fewer R&D projects ultimately impacts in a very negative way, ultimately patient care.
*Mr. Marchant. Thank you, Mr. Chairman.
*Chairman Boustany. Mr. Paulsen?
*Mr. Paulsen. Thank you, Mr. Chairman, and also for holding this hearing and for our witnesses for all being here today. I do share the deep concern that has been expressed by many of the members here as well as some of the folks that have testified here this morning about how the Affordable Health Care Act or the taxes that are in the bill, in the new law, have actually contributed to the rising cost of health care. And are putting now a heavy burden on some of our best job creators, which we just heard about.
As co‑chair of the Medical Technology Caucus and as the chief author of the bill to repeal the device tax, I have a particular interest in how this tax, this really destructive tax, has been harmful not only to American jobs but also innovation and also patient care. Now, already we have seen thousands of layoffs in this industry. I mean that is pure and simple. Thousands of layoffs in this very dynamic, very vital industry. It is in Minnesota. It is around the country. The President has repeatedly stated his objective to increase domestic manufacturing, American manufacturing. And I think the irony here is that this is a policy that is actually being very harmful to achieving this goal, as our witnesses have already pointed out. It is having the opposite effect primarily because this is a tax that applies to sales, not to profits. And it is going to raise the average tax bill by some companies by almost a third. And other countries are absolutely incentivizing these companies to makes these products overseas while we are taxing and regulating unfortunately our best companies out of existence. And so this American success story I think needs to be protected. We cannot take that leadership for granted.
I want to ask this question though, Mr. Moore and Mr. Humann. I am so glad you are here to testify about the very real effects that the tax is having on your employees and on your company and on medical ‑‑ on the quality of health care, but I am wondering whether there are other hidden costs that are there as part of this device tax if we dive a little deeper, beyond the tax itself? For instance, I know that due to the new tax, medical technology companies have to keep track now of which products are sold in the United States versus which are sold overseas, which products are “further manufactured,” which are subject to the retail exemption. And on top of that the tax is now paid every two weeks, every two weeks, this excise tax. And I know many companies have hired full time staff just to handle the device tax compliance.
And I have spoken to some larger companies that sell thousands of unique products. Small companies have difficulty complying with the new rules. One company said they have 129,000 products that needed to be individually analyzed, which cost the company $10 million on the compliance side, including two full time new tax employees, four to six dedicated brand new consultants on site for a year and two new IT people as well. So that is not on the research and development side. This is on the compliance side. I do not think those are the types of jobs we should be creating.
So, Mr. Humann and Mr. Moore, in addition to the $30 billion in the new tax that you are going to have to deal with the next few years and the job loss and the innovation struggle, how is it now ‑‑ how is it for your companies now to calculate and pay the tax?
*Mr. Humann. Yes, without a doubt, the tax provides a complexity that has not been there before. OsteoMed’s whole mission in life is to improve patient outcomes. That is what we come to work everyday to be able to do. And, again, anything that we have to spend non‑value added time and resources on to administrate a tax, to figure out a tax, to pay a tax is one less dollar that we have to, again, continue to innovate and come up with great new products to help people reduce health care costs and ultimately help patients.
*Mr. Paulsen. Mr. Moore, are there other costs?
*Mr. Moore. Well, I have seen estimates across the industry that reach into the hundreds of millions of dollars, which sounds like a lot of money. However, what we know is this 2.3 percent revenue tax is going to cost our industry $29 billion. So hundreds of millions versus the $29 billion, the bigger issue is still the device tax. And I think Republican, Democrat, there is agreement among many, bipartisan support, that this device tax is bad policy, and that it needs to be reversed.
So the implementation at this point is the least of my concerns. The bigger issue is we are losing jobs. We are losing the American manufacturing and the leadership that we have. It is like deja vu all over again, back to my childhood as a son of a steelworker. One of the most difficult decisions I have had to make is to begin setting up manufacturing for the first time in our 25 year history outside the United States. And, unfortunately, at this point we have broken ground. I hope to limit the number of jobs and get back to creating more jobs in America.
*Mr. Paulsen. Thank you, Mr. Chairman.
*Chairman Boustany. I thank the gentleman. I want to thank you for your leadership on that particular issue, but also for raising the question of the complexity in complying with that tax, especially for some of our larger companies with complex supply chains. It has gotten to be a nightmare. So, I deeply appreciate your raising that concern.
Next, Mr. Kelly, you have got 5 minutes.
*Mr. Kelly. Thank you, Mr. Chairman. And thank you all for being here, especially small business owners. My whole life I have been involved in small business. My father started a business in 1953 after being a parts picker in a General Motors warehouse, coming back from the war and starting a dealership, a very small store, one car showroom, about four service bays. So I know of what you talk. And one of the most fascinating things since I have been here is to listen to the opinions of those who are not on the field. I spent a little bit of time playing football in my life, and I always thought it was much more interesting to be up in the stands. I could really pick out what people were doing wrong as opposed to being six inches from somebody that is trying to take my head off. I watch you.
And, Mr. Moore, the area I went to school and I would go by Gary, Indiana. What a great place it was at one time with all the steel mills, and the same in my town of Butler, Pennsylvania. We had great steel mills. We had great railroad companies. We had a lot of great things that are no longer there.
But I think the disconnect here is that people do not get it that there is a cost of operation that we keep messing with all the time by increasing their tax load. And for some reason, Mr. Paulsen just talked about medical devices. You cannot increase the cost of your product and hope to compete in a global competitiveness where people do not have to play by the same rules. It is fascinating to me. One of the biggest items we sell right now are cars or navigation systems because people do not know how to get from Point A to Point B or they want to find the fastest or the quickest or the most use of freeways. And I would just tell you that most times it gets a little bit confusing, and when it does, a little voice comes on that says, “Recalculating.”
This Affordable Care Act, I mean I cannot imagine something being named worse in my life, “affordable”? Heavens, no. Heavens, no. Try and work with it. I mean the people that actually have to work it. Get up out of bed in the morning, put their feet on the ground and go to work. They are the ones that have to struggle with it. And I am fascinated by folks who have never done it that can tell you how easy it is. All you need to do is get a laptop. I will put the program in for you. I will show you how it works. Tell me the struggles that you have just trying to maintain your competitive edge.
And the other thing is one of the things says the employer mandate is called the “Shared Responsibility for Employers Regarding Health Coverage Payment,” which kind of suggests that me as an employer all my life, I did not really know how to take care of my employees. And that is kind of funny because I have been to baptisms. I have been to communions. I have been to weddings, and I have also been to funerals. So, I think I understand my people pretty well. Tell me some of the concerns you have? And I think this is absolutely insulting to tell people who have lived their whole life with associates that help make them successful that you did not know what you were doing, and we have got to tell you because this is an outfit that runs so well. We know how to do it.
Ms. Sun, your business has become very complicated for your franchisees, has it not?
*Ms. Sun. Thank you, yes, it has become very complicated. And I think the biggest issue we have with having the health insurance cost being forced on our franchisees potentially before they are ready, we believe in providing health insurance for our employees and doing the right thing. We often go to the employee ‑‑ our employees’ baptisms and birthdays and funerals and new births at the hospitals and when they are sick, but many of our franchisees have only been in business for two years, three years, four years. Many of them still do not have bank loans. And to put a mandate of additional cost on their business before they are out of debt and have paid back their small business loans to the SBA, I think that is improper. And it is not government’s place to be telling our small business owners how they should be interacting. That is a relationship between the employer and the employee. And that is what is scary for how the Affordable Care Act is being implemented.
*Mr. Kelly. As I go back in the district, that relationship between the owner of the business and the associates that work together, as one of you talked about having to lay people off, there is nothing worst for an owner than to have to call somebody and tell them, “You know what, we are not going to be able to keep you on the payroll anymore.”
I have got a friend in Erie, Pennsylvania who is in the fast food business. He is going to have to reduce his workload of people down from being fully employed to part time in order to meet this. These are the costs that people who have never done it do not get. They think they are so darn smart. What they have caused is us to lay off people that we know, that we have lived with, that we have suffered with, and that we have gotten through tough times with.
One of you talked about it, 40, they talked about the 40, right?
*Mr. Humann. Yes.
*Mr. Kelly. That is what is so critical here. We are telling those people they cannot work full time anymore, not because we do not love them, not because we do not need them, but the government has made it impossible for us to keep them on the payroll.
*Mr. Humann. That is exactly right. They really are family members within the company, but the greater responsibility to the remaining almost 300 employees that are there. And the costs, as they continue to increase, have to be addressed. And the tax is a substantial cost.
*Mr. Moore. Mr. Kelly, if I could, I heard earlier that this is not causing jobs to move overseas. Whether you are a company of my size, and after 25 years, we have set up our first outside United States manufacturing facility, or you listen to some of the larger companies, one whom more recently announced a $75 million new tax bill, job losses of a 1,000 in the U.S., while they are hiring more in China. I connect those two, increased taxes and moving jobs outside the U.S. As we get more tax burden, we have to find ways to make up for that tax. And one way is to move jobs offshore. And I do not like it.
*Mr. Kelly. No, nobody does. I have talked to more people, it is not that they are unpatriotic, it is just that they are not stupid. They cannot keep their companies open by trying to work under a definition, under rules that make no sense. I talked to our controller today at the dealership this morning. Our costs now, we just got the bids back, $500,000, which is nothing in Washington’s terms, but for my little dealership, that adds to our cost of operation which affects the cost of labor. It affects the cost of every product we sell. It affects the way we look into the future, and I think that is the real bad part of this thing. We do not understand how badly we have hurt people’s looks into the future with any type of confidence that they can survive in an area where the government should be your friend. They should be helping you get to a prosperous thing. And, you know what, we are just the opposite.
*Mr. Moore. And we do hear from those governments in other countries. I get at least an e‑mail a week from another country soliciting our jobs.
*Mr. Kelly. Well, thank you for staying the course, and do not give up faith. I think we can still get this thing fixed. I think we have got some people thinking a lot more clearly about this, but thanks so much.
Mr. Chairman, thank you so much for having this hearing. I think it is so critical that the folks that are actually on the ground that face these challenges everyday get a chance to come before Congress and tell them exactly how hard it is to do what they do every single day. And you are the ones that fund the whole government. I mean we are killing the goose that laid the golden egg. So striking it and keep saying, “Lay hen, lay,” those days are gone. We better wake up and smell the coffee. Thank you so much. And thank you, Mr. Chairman.
*Chairman Boustany. Thank you, Mr. Kelly. I would ask the panel to hang around for just a moment. We have two additional questioners, Mr. Davis and Mr. Marchant. So, Mr. Davis?
*Mr. Davis. Thank you very much, Mr. Chairman. Mr. Van de Water, let me ask you. There are those who argue that the health insurance industry fee in the ACA will be passed through to businesses and consumers in the form of significantly increased premiums. These commentators do not seem to acknowledge the downward pressure on premiums that the ACA will have. Could you please discuss these countervailing factors and include in your remarks what the CBO and the ACT believe would be the impact on premiums?
*Mr. Van de Water. Yes, Mr. Davis, as you indicate, that while if taken by itself, the tax on health insurance providers, with other things being equal, tends to increase the cost of health insurance, there is no question about that there are other features of the Affordable Care Act, which are designed to increase competition and reduce costs. And taking all of those factors into account, the Congressional Budget Office has estimated that for large employers, those with more than 50 workers, the Affordable Care Act overall will reduce average premiums by up to 3 percent in 2016.
For small employers, CBO has a range. They estimate that there possibly could be a small increase in premiums of as much as one percent, but there could be a decrease of as much as 2 percent. So the middle of that range actually would be for a small decrease in premiums, illustrating once again that it is important to look at the total effect of the law, not just the effect of one particular provision.
Mr. Davis, if I might, I would like to comment on something that was said a moment ago about the Medical Device Tax and the effect on jobs, following up with a question you asked previously. Clearly, there is no doubt that some medical device manufacturers, like firms in other industries, are opening up plants overseas, but it has been well documented and it is quite clear by the structure of the tax itself, since the tax does apply to imported devices that are manufactured overseas, the tax itself cannot possibly be a reason to move production overseas. There are indeed other cost reasons that apply in particular cases that lead manufacturers to make that decision, but the device tax itself does not change the balance of cost between producing domestically and producing abroad.
*Mr. Davis. Let me ask you — could labor supply and production costs have something to do with movement?
*Mr. Van de Water. Presumably, it does. The gentlemen here who actually run the companies can speak to that in a way that I cannot, but I would also note that there are other device manufacturers who take a contrary point of view. And if I might, I would just like to quote a couple of them. A fellow by the name of Martin Rothenberg, who heads a device manufacturer in upstate New York, says that the claims that the device tax will cause layoffs and outsourcing, his word, not mine, he calls these claims “nonsense.” The tax, he says, will add little to the price of a new device that his firm is developing. “If our new device proves effective, and we market it effectively, the small increase in cost will have zero effect on sales. It would surely not lead us to lay off employees or shift overseas production.”
Another gentleman by the name of Michael Boyle, who founded a device firm in Massachusetts says that the device tax is “not a job killer. It would never stop a responsible manager from hiring people when it is time to grow the business.” So, again, I just want to note that there are different views within the device industry itself about the effect of the tax.
*Mr. Moore. You know, in my case I made that decision for our company, and I can tell you I made that decision based on interactions with the government, primarily driven by another tax. After going through the process of a startup company, in our first 20 years, we only made a profit, a small profit, for one year, but cumulatively we had losses of over $250 million. Around year 20, we were not yet profitable and losing $50 million a year. We needed to do something. Now, five years later, we have some profitability, but we still have net operating losses in a successful business.
When I look overseas, there is another reason beyond taxation for opening a plant overseas, there is something called country of origin, with which which says certain countries penalize me for being solely a U.S. manufacturer in that they will not allow me to go for a product approval in their country until I have approval in my home country, where we manufacture. So, yes, there are other reasons to set up manufacturing overseas, but in our case I can speak to the decision because I am the CEO who made that decision to set up in another country, to invest millions of dollars to set up a plant in another country, to hire our first OUS manufacturing employee who starts on Monday. I made that decision based on our situation and it is tied to the device tax.
*Mr. Davis. Thank you very much, Mr. Chairman.
*Mr. Humann. If I could add on that, the device tax in general has on average across the industry effectively increased the tax ‑‑ the effective tax rate 29 percent. And so, again, every dollar that goes to Washington is one less that we can put into our development back in Dallas or throughout the industry. At the end of the day, if it makes economic sense for a company to look overseas to be able to reduce its overhead, they have got to, and this tax certainly does not help in that process.
*Chairman Boustany. Thank you. Mr. Marchant?
*Mr. Marchant. Thank you, Mr. Chairman. Just a couple of comments. Mr. Kautter, your testimony I have read, and I think, Mr. Chairman, we might if we had the time, we could have a complete hearing just on the idea of this complexity of this law and the complexity of this tax changing the absolute behavior of investors. I think ‑‑ I have read through it, and there is one page in here that just crystallizes it. And so if you are an investor, if you are somebody nearing retirement and you are trying to preserve your retirement, you are going to look at this, and you are going to change your behavior.
And, Mr. Eakin, you know that American business and American investors will spend a lot of money on tax avoidance. And they will spend a lot of money on tax planning. And so I commend you for your testimony here. I have read it. It is very serious testimony, and I would like to thank Mr. Eakin for you have been on TV a lot the last two weeks and thank you for your very commonsense comments.
But, Mr. Chairman, I would commend you for bringing this subject. This is the exact opposite of what our committee is working on. Our committee is working on simplifying the tax code and lowering tax rates. This does nothing to simplify the tax code. In fact, it makes it so complex.
The most alarming figure that I read here today was the threshold for trust and estates is $12,950. That will probably ‑‑ that will completely alter the behavior of those trusts in the States, and I contend they will not pay that tax. Thank you.
*Chairman Boustany. That figure was alarming when I read your testimony as well. And I have gotten a lot ‑‑ Mr. Marchant, I have got a lot of questions about that tax and how it might apply, the 3.8 percent tax, net investment ‑‑ new net investment tax. So a lot of my constituents were struggling for some of the answers based on the very specific questions they were asking me. And even their accountants were confused, but your testimony helped us sort of understand generally the level of complexity that this has added. And I do agree with you, we might need to investigate this further. So I appreciate your raising that concern and question, Mr. Marchant.
With that, I want to thank all of you who have presented in front of the committee today and for being here and for your testimony. I will remind all the members that if you have additional questions, you can submit these, and they will be made part of the record. And to the witnesses, there may be additional questions that members may want to submit to you. So, we will be accepting submissions for the record which is open for two weeks following the hearing.
With that, this hearing is now adjourned.
[Whereupon, at 12:50 p.m., the subcommittee adjourned.]
Public Submissions For The Record
American Farm Bureau Federation
California Healthcare Institute
Dental Trade Alliance
Kenneth H. Ryesky
Medicaid Health Plans of America
National Association for the Self-Employed
The Brinks Company
The Center for Fiscal Equity