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Health Services Tax Conference Day One
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Transcript of Health Services Tax Conference Day One
2015 Health Services Tax Conference
May 18-19, 2015The Drake HotelChicago, IL
PwC
Welcome and opening remarks
Bob VallettaUS Health Services Leader, PwCRob FrizUS Health Services Tax Leader, PwCSandi HuntGHRS Health Services Leader, PwCKelvin AultUS Investor-owned Health Services Tax Leader, PwC
PwC
Agenda – Day One
12:45pm - 1:00pm Welcome and opening remarksBob Valletta, US Health Services Leader, PwCRob Friz, US Health Services Tax Leader, PwC,Sandi Hunt, GHRS Health Services Leader, PwCKelvin Ault, US Investor-Owned Health Services Tax Leader, PwC
1:00pm - 1:45pm Megatrends and the Impact on HealthcareTim Ryan, Vice Chairman, Markets, Strategy and Stakeholders Leader at PwC
1:45pm - 2:45pm The Healthcare Industry: A View from WashingtonPam Olson, US Deputy Tax Leader and Washington National Tax Services Practice Leader, PwCHon. Dave Camp, Senior Policy Advisor, Washington National Tax Services, PwC
2:45pm - 3:00pm Break
3:00pm - 4:00pm Breakout session #1
4:00pm - 5:30pm Healthcare M&A Transactions and ConvergenceBrett Hickman, US Health Services Deals Leader, PwC
6:30pm - 9:00pm Tour of Wrigley Field
PwC
Agenda – Day Two
7:30am – 8:30am Registration and Breakfast
8:30am – 9:30am The New Health EconomyCeci Connolly, Leader, PwC’s Health Research Institute
9:30am – 10:30am Keynote General SessionGovernor of Tennessee from 2003-2011, Philip Bredesen
10:30am - 10:45am Break
10:45am – 11:30am Breakout session #2
11:30am – 12:15pm Breakout session #3
12:15pm – 1:15pm Lunch
1:15pm – 2:15pm How various organizations are responding to health reformAmy Bergner, Managing Director, Healthcare and Benefits, PwC
2:15pm – 2:45pm Break
2:45pm – 4:00pm Breakout session #4
4:00pm – 4:30pm General session and wrap up – Ask the experts
Megatrends | 2015 Health Services Tax Conference
May 18, 2015
www.pwc.com
Megatrendsand the Impact on Healthcare
PwC
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Not Random
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Cyber crimes exponentially increasing — not random
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Increased conflicts globally —not random
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China and the US agreeing on broad climate goals —not random
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3D houses are being constructed in less than two hours in China
Using four huge 3D printers, a Chinese company printed the shells of 10 one-room structures in 24-hours at a cost of only about $5,000 per building.
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Increased proportion of freelance talent — not random
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Success or failure --will not be random
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Megatrends
Accelerating urbanization
Climate change & resource scarcity
Demographicshifts
Shift in global economic power
Technological breakthroughs
PwC
Accelerating urbanization
Urbanisation rate, 2030 (%)
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The movement of populations out of suburbs and rural areas and into cities is changing how people work and live
• More than half of the global population now lives in urban areas.
• In the next 25 years about a billion people move to cities.
• In China alone, 300 to 400 million people will move to cities in the next 15 years, which translates to building the entire built infrastructure of the US in 15 years.
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Accelerating urbanization
Healthcare Implications. Health organizations will need to understand consumers, their needs and their behaviors differently than they have in the past
In 2013, 35% of survey respondents told PwC’s Health Research Institute (HRI) they had visited a retail clinic in the past year
Source: PwC Health Research Institute, April 2014, “Healthcare’s New Entrants: Who will be the industry’s Amazon.com?”
In 2007, that number was just 10%
Have you been to a medical clinic in a retail store or pharmacy in the past 12 months?
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By the end of this century, the world will need to
produce 2.5 times more food than was needed in
the last 8,000 years, all while the average global
temperature rises at an average rate of 0.15oF
per decade (which it has done since 1901).
Air pollution (annual mean concentration of particulates
less than 10 microns of diameter)
Climate change & resource scarcity
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Climate change & resource scarcity
Healthcare Implications. Scare resources, the risk of over-regulation, & how indebted governments will handle huge fiscal deficits are top of mind for healthcare CEOs
Source: PwC Pharma 2020: From vision to decision
71% of healthcare CEOs are nervous about changes in regulation.
PwC 18
Demographicshifts
Census data leave no doubt that minorities are
rapidly increasing as a proportion of the total
United States population.
Minorities will become the majority of the
national population around the year 2050, but
many communities have made the transition.
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Demographicshifts
Healthcare Implications. Population changes are generating increased demand for health care, making it a large and growing share of GDP across the world
1Source: United States Census Bureau, 2012 data.
The ACA newly
insured compared
to the currently
insured …
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By 2050, the GDP of the emerging market seven countries will be twice the size of the G7; and, the F7 will continue to increase in relevance
Shift in global economic power
2009 2050
G7 countries US, Japan, Germany, UK, France, Italy, Canada
E7 countries China, India, Brazil, Russia, Indonesia, Mexico, Turkey
$29 $21
$69$138GDPIn US$ trillions
Bangladesh
Morocco
Nigeria
Vietnam
Philippines
Peru
Colombia
The F7Today’s frontier markets will be tomorrow’s emerging markets….
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Shift in global economic power
New Health Economies
Public-private partnerships
New flow of funds
Shift in global economic power
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Technological breakthroughs
Technology is key – enabling a globally mobile workforce, new scientific advancements, and real-time analytics
PwC
Technological breakthroughs
Healthcare Implications.Health information technology is evolving fast
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How do Ebola Volunteers Know Where to Go in Liberia? Crowdsourcing
Google files patent for wristband that could attack Parkinson's, cancer cells.
PwC
Technological breakthroughs
Healthcare Implications.Health information technology is evolving fast
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Technology is starting to up-end the insurance business.
New tool allows patients to share experiences with medications.
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Technological breakthroughs
Healthcare Implications.Emerging technologies are fueling innovations in healthcare that will revolutionize treatment
Michael Balzer saved his wife’s eyesight by 3D printing a model of her skull, with a life threatening tumor inside of it, which allowed a surgeon to perform a delicate and novel operation with minimal invasion
Source: http://elitedaily.com/news/world/man-helps-save-wifes-eyesight-3d-printing-skull-tumor/907578/
Pamela Shavaun Scott, with a 3D printed copy of her own skull. Her right index finger is indicating the location of the meningioma she had removed
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So what does this all mean?
Accelerating urbanization
Climate change & resource scarcity
Demographicshifts
Shift in global economic power
Technological breakthroughs
PwC
3 thingsleaders can do
As leaders, make inherent tensions productive.
Commit to learning and evolving.
1X per week — how are you connecting with the world's best thought leaders?
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Healthcare Thought Leadership
HealthCast: Global Best Practices in Bending the Cost Curvehttp://www.pwc.com/gx/en/healthcare/bending-the-cost-curve/assets/pwc-healthcast-global-best_practices-in-bending-the-cost-curve-full-report.pdf
Healthcare reform: Five trends to watch as the Affordable Care Act turns fivehttp://www.pwc.com/us/en/health-industries/health-research-institute/aca-health-reform.jhtml
The FDA and industry: A recipe for collaborating in the New Health Economyhttp://www.pwc.com/us/en/health-industries/health-research-institute/hri-pharma-life-sciences-fda.jhtml
Top Health Industry Issues of 2015http://www.pwc.com/en_US/us/health-industries/top-health-industry-issues/assets/pwc-hri-top-healthcare-issues-2015.pdf
© 2015 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved.
PwC refers to the US member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
The Healthcare Industry – A View from Washington
www.pwc.com
Pam OlsonUS Deputy Tax Leader and Washington National Tax Services Practice Leader, PwC
Hon. Dave CampSenior Policy Advisor, Washington National Tax Services, PwC
PwC
Agenda
Health services legislative update Outlook for tax reform
PwC
Health services legislative update
PwC
PwC
2010 health care law implementation timeline
PwC
King v. Burwell case could have major effect on ACA and 2015 legislative session
• On March 4, the US Supreme Court began hearing oral arguments on whether premium tax credits and cost-sharing subsidies can be offered to roughly 8 million enrollees in federally-run health insurance exchanges covering 34 states.− Ruling expected in late June
• House and Senate debate on response to a ruling against Administration could consume much of post-June 2015 legislative session
• Adverse ruling carries implications for consumers and businesses:− The employer mandate penalties are assessed when employees receive
premium tax credits, and the individual mandate can be waived if available coverage is unaffordable.
− ACA guarantee of coverage regardless of pre-existing conditions would remain in effect
− Without insurance subsidies, individual markets could be crippled in states that would be impacted absent a legislative response by Congress or action by states relying on federal exchanges
PwC
Repeal of the Medical Device Tax
• The ACA imposed a 2.3 percent excise tax on medical device manufacturers.
• Repeal of the medical device excise tax is one of the few items for which there is bipartisan support, and conditions are ripe for repeal in the current Congress.
• CBO’s January 2015 Budget and Economic Outlook estimates that the medical device excise tax will raise over $30 billion over the 2016 to 2025 budget window.
• A recent CRS analysis concluded the impact of the tax on the device industry is minimal, with most costs passed on to consumers in the form of higher prices.
PwC
Congress passes permanent “Doc Fix”
House (392-37) and Senate (92-8) votes mark bipartisan resolution to Medicare physician pay issue that has required 17 temporary fixes since 1997• Permanently repeals reduction in Medicare physician fees (21% cut took
effect on March 31, 2015), and replaces with 0.5% increase 2015-2019 (freeze 2020-2025).
• Extends Children’s Health Insurance Program through 2017 and extends other miscellaneous health programs
• CBO projects net increase in deficit of $141 billion (2015-2025) but notes that long-term deficit effect is unclear− Partial offsets from increases in Medicare premiums for high income beneficiaries,
reducing increases in Medicare payment rates for providers, and reducing future Medicaid payments for ‘disproportionate share’ hospitals
− Minor changes in revenues related to health programs ($3.7 billion over ten years) related primarily to reduced need for ACA coverage tax subsidies
− Increased Medicare spending could trigger action by Independent Payment Assessment Board earlier than previously projected (2018 instead of 2022)
PwC
CBO long-term budget projections, 2014-2043Extended baseline assumptions include “sequester” level spending caps and no extension of expiring tax provisions
0.0
5.0
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25.0
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Per
cen
t of
GD
P
Discretionary and other mandatory outlays
Medicare, Medicaid, health subsidies
Social Security
Net interest
Revenues
Source: CBO Long Term Budget Outlook, July 2014.
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Outlook for tax reform
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International competitiveness
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25
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1981
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2015
Top Statutory (Federal and State) Corporate Tax Rates, OECD 1981-2015
United States OECD Average Excluding US
Since 1988, the average OECD statutory corporate tax rate (excl. US) has fallen by over 19 percentage points, while the US rate has increased.
Source: OECD Tax Database and PwC Calculations
United States
OECD Average Excluding US
39.0
24.6
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Number of OECD countries with territorial systems has grown since last US tax reformOnly six of 34 OECD countries have worldwide tax systems
9 8 9 1012 13 14 15 16
2123 24
27 28
05
1015202530
1986 1988 1989 1991 1992 1998 2000 2001 2003 2004 2005 2006 2009 2011
Source: PwC report, Evolution of Territorial Tax Systems in the OECD, prepared for the Technology CEO Council, April 2, 2013.
PwC
Research credits & patent box regimes
-10%
0%
10%
20%
30%
40%
50%
Indi
aP
ortu
gal
Spai
nFr
ance
Den
mar
kM
alay
sia
Bra
zil
Hun
gary
Nor
way
Sou
th A
frica
Turk
eyC
zech
Rep
ublic
Can
ada
Taiw
anB
elgi
umC
hina
Net
herla
nds
Irela
ndJa
pan
Aus
tria
Italy
Aus
tralia
Uni
ted
Kin
gdom
Rus
sia
Sou
th K
orea
Sin
gapo
reU
nite
d S
tate
s*S
love
nia
Chi
leFi
nlan
dIc
elan
dIn
done
sia
Isra
elLu
xem
bour
gM
exic
oPo
land
Slo
vak
Rep
ublic
Sw
eden
Sw
itzer
land
Ger
man
yN
ew Z
eala
nd
US is 27th out of 41 countries
Countries with solid bars have patent box regimes (Ireland's Knowledge Development Box is under development). R&D tax subsidy rate does not reflect patent box. US rate is a weighted average of alternative simplified and regular research tax credits.
Source: Information Technology and Innovation Institute, "The United States Lags Far Behind in R&D Tax Incentive Generosity," July 2012
PwC
Recent tax reform developments
2007 2010 2011 2012 2013 2014 2015
W&M Chairman Rangel tax reform bill (HR 3970)
Senator Wyden tax reform bills (S 3018; S 727)
Obama Admin.FY 2016 budget proposes minimum tax on foreign earnings of US-based company CFCs
“Fiscal cliff” legislation makes most Bush tax cuts permanent
SFC Chairman Baucus international; cost recovery; administration; energytax reform drafts
W&M Chairman Camp tax reform bill (HR 1)
SFC working groups to address tax reform
W&M Chairman Camp international tax reform draft
President Obama ‘framework for business tax reform’
W&M Chairman Camp financial products; small business tax reform drafts
PwC
Fiscal deadlines, other dates affecting prospects for tax reform
May 31, 2015 Highway funding expires
June/July 2015 US Supreme Court decision expected in King v. Burwell case
August 2015 GOP presidential primary debates begin; Iowa straw poll held
October 1, 2015 Internet tax moratorium expires
October 1, 2015 FY 2016 begins; budget “sequestration” reinstated
October/November 2015 Treasury debt limit “extraordinary measures” expire
December 2015 Deadline for year-end “tax extenders” bill, if not addressed as part of tax reform
January 2016 Iowa and New Hampshire primary elections held
July 2016 Republican and Democratic presidential nominating conventions held
PwC
Thank you!
Pam Olson, US Deputy Tax Leader and Washington National Tax Services Practice Leader, [email protected] +1 202-414-1401
Honorable Dave Camp, Senior Policy Advisor, Washington National Tax Services, [email protected] +1 202-414-1700
2015 Health Services Tax Conference
May 18-19, 2015The Drake HotelChicago, IL
Breakout session
1a. IRS Controversy ActivityLoss Reserves/CAP/PFA’sR&D Tax Credit Successes via CAP and PFA’s
www.pwc.com
Robert P. AlperinKevin M. BrownMark S. Smith
PwC
Agenda
• IRS: Doing Less with Less
• Discounted Unpaid Losses
• R&D Tax Credit
• Other Issues
Circular 230: This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding US Federal, state or local tax penalties that may be imposed on any taxpayer.
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IRS: Doing Less with Less
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IRS funding levels have dropped amidCongressional opposition to increased funding
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10.9
IRS leadership changes at a time of funding constraints and staff morale problems
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Declining IRS personnel resources
LB&I Technical Staff FY - 2012 FY - 2013 FY -2014
YOY Decrease
Revenue Agents 3353 2980 2814 16%International Examiners 508 535 436 14%All 4946 4626 4345 12%
FY 2010 FY 2011 FY 2012 FY 2013 FY 2014Appeals Staffing
2173 2111 1981 1830 <1750
- Appeals staffing has fallen by approximately 20% since 2010
- Cycle time in CIC cases is roughly 800 days (> 2 years)
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PwC
IRS priorities
• Recent comments from IRS executives on the future of LB&I examinations
• Move more taxpayers into Compliance Assurance Process
• Make audits more “issue-focused”
• Increase mid-market audit coverage
• Increased use UTP disclosures to target audits
• Eliminate special distinction for CIC taxpayers (900 of 260,000 LB&I taxpayers) - 50% of IRS resources focused on CIC taxpayers
• Increase audits of flow-through entities
• 190,000 of 260,000 LB&I taxpayers are flow-through entities
• Increased international issue focus
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Trends in IRS exam and appeals
• Elimination of Tiers, introduction of IPGs/IPNs
• Eliminate distinction for CIC taxpayers
• Requirement of IDRs to state underlying issue
• Stricter enforcement of IDR timelines
• Appeals returning to quasi-judicial approach
• Effort to create audit templates with examples of good / bad tax planning
• Impact of BEPS rhetoric
2014 Compliance Assurance Process (CAP) program
186 taxpayers 162 returning taxpayers
64 in compliance maintenance
20 taxpayers in pre-CAP
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PwC
Discounted Unpaid Losses
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Deductible Unpaid Loss Reserves:Setting the Stage
• Section 832(b)(5) permits a deduction for losses incurred, which include discounted unpaid losses.
• Section 846 requires that those losses be discounted, and instructs that the starting point for computing discounted unpaid losses is undiscounted unpaid losses shown in the annual statement.
• Section 1.832-4(b) further requires that unpaid losses represent a fair and reasonable estimate of the amount the company will be required to pay.
• Hanover Insurance Co. v. Commissioner, (1st Cir., 1979) (Unpaid losses set forth in annual statement are not insulated from review by IRS.)
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Deductible Unpaid Loss Reserves:A String of Additional Cases
Utah Medical Insurance Assoc. v. Commissioner, (TC, 1998) (“Fair and reasonable estimate” was not limited to midpoint of actuarially-determined range.)
Physicians Insurance Co. of Wisconsin v. Commissioner, (TCM 2001) (Whether estimates of unpaid losses are fair and reasonable is a valuation issue, there is no single correct estimate, must objectively validate how amount was arrived at.)
Minnesota Lawyers Mutual Ins. Co. v. Commissioner, (8th Cir. 2002) (Bulk, adverse loss development portion of unpaid losses is not deductible.)
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Deductible Unpaid Loss Reserves:A 2009 Coordinated Issue Paper
• Coordinated Issue Paper LMSB4-1109-041 states IRS position that deductible (“fair and reasonable”) tax reserves cannot include explicit or implicit “margins”
• As a practical matter, in Examination IRS relies on its own actuaries to determine reserves, and sometimes asserts there was an implicit “margin” if taxpayer’s number was higher
• History of redundancy also sometimes used against taxpayers
• Formal status of the paper is unclear after decoordination of all CIPs, but as a practical matter the issue is still sometimes raised
• Acuity case also casts a shadow on the CIP’s analysis
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Deductible Unpaid Loss Reserves:The Acuity Case
• In Acuity v. Commissioner, (TCM, 2013), the Tax Court focused on actuarial credentials and application of established actuarial standards to conclude that reserves were fair and reasonable.
• The opinion is 98 pages long and demonstrates the kind of solid factual development that can withstand challenge.
• The case was not appealed by the Service, because it was inherently factual and only a memorandum opinion.
• Some at IRS privately question what is left of the “margin” issue provided the process for determining unpaid losses has actuarial integrity.
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Deductible Unpaid Loss Reserves:The Acuity Case, cont’d
• Earlier, the Seventh Circuit (to which Acuity would have been appealed) concluded in State Farm v. Commissioner, (7th Cir., 2012) that compensatory damages portion of bad faith judgment was includible in unpaid losses even though not strictly “under” an insurance contract.
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Deductible Unpaid Loss Reserves:What Paths to Resolution?
• Preventing a Challenge in the First PlaceWhat makes a strong case, and how can it be constructed up-front?
• Fast-Track Settlement in AppealsLearning from a war story
• Prefiling AgreementWhat reserve issues may lend themselves to the PFA process?
• CAP TaxpayersAny advice?
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R&D Tax Credit
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R&D Tax Credit Overview• Incentive for companies to perform R&D in the US• Eligible expenses include wages, supplies and contractors
- Qualified Research Expenditures (“QREs”)• Incremental credit• Two methods
- Regular method - 13% reduced credit- Alternative Simplified Credit (“ASC”) method – 9.1% reduced credit
• Software development activities are eligible- Including development of internal use software (“IUS”)
• Federal R&D tax credit expired 12/31/14• Many states and countries have R&D tax credits or incentives
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PwC
Recent Developments• New IUS Proposed Regulations issued January 16, 2015 (taxpayer
favorable)• New Final and Temporary Regulations published on June 3, 2014 allow
certain taxpayers to elect the ASC on an amended return (taxpayer favorable)
• CCA 201423023 provides IUS guidance- Essentially follows the decision in the FedEx case (taxpayer
favorable)• Suder case (taxpayer favorable)
- Software development is eligible for the research credit,- Expansive definition of eligible activities part of process of
experimentation, and- Credible documentation, survey data and witness testimony
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PwC
R&D Tax Credit Overview (cont.)
• 4-Part and Additional 3-Part “High Threshold of Innovation” Test for IUS- 4-Part Test◦ Permitted Purpose◦ Technological in Nature◦ Technical Uncertainty◦ Process of Experimentation
- Additional 3-Part Test◦ Innovative◦ Significant Economic Risk◦ Not Commercially Available
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2015 Proposed Regulations
• Defines IUS as software developed by the taxpayer for use in “general and administrative functions” that facilitate or support the conduct of the taxpayer’s trade or business- General and administrative functions are limited to:◦ Financial management functions◦ Human resource management functions, and◦ Support services functions
- Preamble explains that this list is intended to target “back-office functions” that most taxpayers would have regardless of the taxpayer’s industry
• Defines non-IUS- Software held for commercial sale, lease, or license, or- Software that enables a taxpayer to interact with third parties or
allows third parties to initiate functions or review data on the taxpayer’s system
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PwC
2015 Proposed Regulations (cont.)• Dual-function software
- It is not always possible to distinguish software sub-components based on function
- Presumption that dual-function software is designed primarily for a taxpayer’s internal use
◦ However, that presumption will not apply if the taxpayer can identify a subset of elements of the software that only enables the taxpayer to interact with third parties or allows third parties to initiate functions or review data
› The portion of expenditures allocable to this third-party subset needs meet only the less stringent four-part test
- Safe harbor
◦ For cases in which it is not possible to isolate the third party subset, the safe harbor allows a taxpayer to include 25% of the potential QREs associated with the dual-function subset through meeting the four-part test, while the remaining 75% would have to meet the high threshold of innovation test
◦ The safe harbor is met if the third-party-functional interaction is reasonably anticipated to constitute at least 10% of the dual-function subset’s use
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PwC
2015 Proposed Regulations (cont.)
• High Threshold of Innovation Test- Prong 1: Innovation◦ In line with the 2001 Final Regulations◦ Defines software as “innovative” if it would result in a reduction in
cost or improvement in speed or other measurable improvement that is substantial and economically significant, if the development is or would have been successful› The intent was to make this test “measurable and objective” in
order to reduce potential controversy
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PwC
2015 Proposed Regulations (cont.)• Prong 2: Significant Economic Risk
- Generally, in line with the 2001 Final Regulations and 2001 Proposed Regulations
- Provides that “significant economic risk” exists if the taxpayer commits substantial resources to the development and there is substantial uncertainty, because of technical risk, that such resources would be recovered within a reasonable period.◦ “Substantial” uncertainty exists if, at the beginning of the
taxpayer’s activities, the information available to the taxpayer does not establish the capability or method for developing or improving the software
◦ The uncertainty must relate to capability or methodology, not to the appropriate design
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PwC
2015 Proposed Regulations (cont.)• Prong 3: Commercially Available for Use
- No change- Prong 3 is met if commercially available software cannot be
purchased, leased, or licensed and used for the intended purpose without modifications that would satisfy the innovation and significant economic risk requirements
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PwC
2015 Proposed Regulations (cont.)
• Effective date- Effective for tax years ending on or after the date the Final
Regulations are published◦ However, “the IRS will not challenge return positions consistent
with these proposed regulation for taxable years ending on or after the date [January 20, 2015] these Proposed Regulations are published”
◦ For tax years ending before January 20, 2015, taxpayers may choose to follow either all the IUS provisions in the 2001 Final Regulations or all the IUS provisions in the 2001 Proposed Regulations
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PwC
Applicability to Insurance Industry
• Significant IT spend• Developing software for internal use, for use by customers and in some
cases developing software for sale, lease or license• Expenses typically limited to wages and contractors• Large portion of contractor costs often incurred outside the US
- Need to be performed on US soil to qualify for federal R&D tax credit• Healthcare, Life, P&C• IT employees typically required to track their time by project, by phase
and sometimes task• Project accounting often used for book purposes based on SOP 98-1
guidance• Taking advantage of ASC• Desire to obtain certainty
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PwC
IRS Point of View on IUS
• High risk• Receives lots of scrutiny• Claims receive even more scrutiny even though Tiered Issue Focus no
longer exists• Heavily focused on three of the tests including (1) Technical
Uncertainty, (2) Process of Experimentation and (3) Innovativeness• If IUS and over $500k of credit, IRS Engineer is required to refer to
MITRE- However, MITRE is not required to be involved
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IRS Point of View on IUS (cont.)
• Pre 2015 Proposed Regulations- Follow 2004 Advance Notice of Proposed Rulemaking (“ANPRM”)
(Internal Revenue Bulletin 2004-6)◦ Taxpayer must follow either the 2001 Final Regs (T.D. 8930) or the
2001 Proposed Regs› Do no accept FedEx› 2001 Final Regs, includes “Discovery” test – very high bar› 2001 Proposed Regs, no “Discovery” test but must be “unique or
novel”› Proposed Regs include examples of qualifying and non-
qualifying projects and activities – can be useful• Post 2015 Proposed Regulations
- ANPRM no longer applicable- No “Discovery” test
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IRS Point of View on IUS (cont.)
• Project accounting and contemporaneous documentation• Exams are time consuming• Credits are often disallowed entirely at exam (especially if MITRE
involved)• Appeals process is long
- Settlements around 50%
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PwC
CAP and PFA Program Approach
• Pre-Filing Agreement (PFA) allows a taxpayer to obtain certainty on an issue before the filing of its return
• PFA results in a closing agreement that precludes the IRS from challenging the issue in any subsequent examination of the taxpayer’s return
• Similar to having a Compliance Assurance Process (CAP) audit of a single issue- i.e., the compressed time frame for entering into a PFA generally
takes less than six months and eliminates protracted post-filing disputes
• Allows taxpayers to conserve precious controversy resources and better manage their reserves and uncertain tax positions
• Optimal time for requesting a PFA for a calendar year taxpayer is at the end of a filing year and the first two or three months following the close of the tax year
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CAP and PFA Program Approach (cont.)
• Key components of the PFA process- $50,000 user fee- IRS normally requires 30 days to consider a PFA application- The IRS expects transparency and a resource commitment from the
taxpayer- Either party may withdraw from the PFA any time prior to execution
of the PFA agreement- PFA applies to four subsequent tax years
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CAP and PFA Program Approach (cont.)
• Observations- PFA process has demonstrated numerous advantages for clients- Due to the tight time constraints on both parties, the IRS has been
persuaded to adopt time saving techniques that greatly reduce the difficulties associated with a normal IRS audit◦ Been able to successfully keep MITRE out
- For instance, the following techniques have proven very useful:◦ Holding a kick-off meeting with the IRS to discuss the timeline
and any methodologies as well as addressing any areas of contention
◦ Weekly or biweekly meetings with the IRS team to discuss issues as they arise
◦ The use of closing agreements or memoranda of understanding to memorialize interim resolutions of issues (e.g., reliance on Proposed Regs, recording of interviews)
77
PwC
CAP and PFA Program Approach (cont.)
◦ Allowing the IRS to participate in the selection and review of the areas under consideration (e.g., IRS sitting in on project interviews)
◦ Use of the PFA experience as a barometer for determining whether CAP would be a productive use of client resources
◦ Fostering a positive relationship with the IRS team by engaging them in the development of the issue and encouraging them to be active participants in the process
◦ Agree on methodology and technical issues on the front end (e.g., use of statistical sampling, project questionnaires and employee time surveys)
78
PwC
Other Issues
79
PwC
Other Issues
• What other tax controversies do health insurers typically face?
• What other tax controversies does YOUR company face?
• What means of resolving those controversies might be appropriate?
80
Thank you!
Robert P. AlperinTPDG Partner, Boston(617) [email protected]
Kevin M. BrownTCDR Partner, Washington(202) [email protected]
Mark S. SmithInsurance Managing Director, Washington(202) [email protected]
Breakout session
1b. Tax reform Q&A Session with Dave Camp
Accounting Methods Update including implications of New FASB Revenue Recognition Standards
Lee Grubbs, HCAGeorge Manousos, PwCHon. Dave Camp, Senior Policy Advisor, Washington National Tax Services, PwC
PwC
Accounting methods update
PwC
Agenda
• FASB/IASB revenue recognition update
• Repairs update
• Hospital/Provider assistance payments
• PLR 201518012: Termination payments not required to be capitalized
• Transaction cost hot topics
• Accounting methods procedural update
PwC
FASB/IASB Revenue recognition standard
PwC
Revenue recognition standard
• Joint FASB/IAS project to harmonize revenue recognition for Financial Statement purposes
- Intent is to allow better comparison across industries
- Allow better comparison with competitors traded on different exchanges
• Industries most impacted are Software, Government Contracting and Energy
• Delayed effective date for years beginning after 12/15/17. For example, Q1 2018. Non-public entities have an additional year
- Early adoption is allowed
- IASB has recently voted to comply as well
PwC
Repairs update
PwC
Repairs update
• Everyone on board for 2014, or 2015, or both?
• Retroactive partial disposition loss election only available for 2014 year.
• Section 481(a) adjustments:
- How far back must you go?
- IRS position on 481(a): Gross vs. net?
◦ What is the “item” of repair?
◦ Could reasonably argue no netting required.
PwC
Hospital/Provider assistance payments
PwC
Hospital/Provider assistance payments
• Payments often made to provide financial assistance to hospitals/healthcare providers
• Treatment of payments?
- Exam: Capital under 1.263(a)-4; no amortization
- Taxpayer:
◦ Deductible under 162; or
◦ Deductible under “promote and protect” doctrine
• Appeals: Agreed with the taxpayer
PwC
PLR 201518012
Termination payments not required to be capitalized
PwC
PLR 201518012
• Taxpayer entered into a Management Services Agreement (“MSA”) to receive management services from its shareholder (“Shareholder”).
- Services included attendance at BOD meetings, general consulting, legal, M&A, strategy, etc.
• MSA included a clause that a termination fee was payable to Shareholder if Taxpayer had a firm commitment to do an IPO, but didn’t have to complete the IPO.
• Stipulated that the termination payment was to approximate the future services to be provided under the MSA.
• Termination payment held to be deductible.
• Key IRS considerations:
- Services did not facilitate the IPO;
- Payment was akin to additional compensation for past services;
- Payment not contingent on successful IPO;
- MSA was in place before IPO, although unclear how far in advance; and
- Payment recorded as an expense.
• PLR does not discuss risk of Section 301 distribution.
PwC
Transaction cost hot topics
PwC
Previously capitalized transaction costs
• Costs incurred to facilitate an acquisition, IPO, spin, etc. required to be capitalized.
- Become a separate and distinct, unamortizable tax asset.
• Regulations “reserve” on treatment of these capitalized costs.
• What did Indopco say?
• Opportunity to recover such costs as a 165 abandonment loss?
- Sale of previously acquired entity?
- Privatization of public company?
• IRS experiences?
PwC
Proposed “Next Day Rule” regulations
• Target’s items arising ‘simultaneously’ with the transaction allocated to final target return.
• Target's items arising ‘after’ the transaction allocated to first target post-transaction return.
• Compensatory costs: Allocated to final target return.
• Target's success based fees: Allocated to final target return.
• Consideration: Is liability fixed ‘simultaneously’ with or ‘after’ the transaction?
PwC
Accounting methods procedural update
PwC
Accounting methods procedural update
• Rev. Procs 2015-13 and -14 issued on January 16, 2015
• Rev. Proc. 2015-13 obsoletes former accounting method change procedures under Rev. Proc. 97-27 (non automatic changes) and 2011-14 (automatic changes)
• Rev. Proc. 2015-14 contains the list of accounting method changes eligible for the automatic consent procedures contained in Rev. Proc. 2015-13
• Generally effective for Forms 3115 filed on or after January 16, 2015, for a year of change ending on or after May 31, 2014 (subject to transition rules)
• Old Rules: Taxpayers under IRS exam generally were restricted from filing a request for change in method unless they filed in one of two window periods or obtained the consent of the director
• New Rules: Broad eligibility rules that generally allow taxpayers under IRS exam to request changes in method at any time. However,
- Generally will not receive audit protection, unless file in one of two window periods or one of four other audit protection exceptions apply
- New two-year spread period of a positive (unfavorable) Section 481(a) adjustment will apply, unless file in a window period or eligible for certain audit protection
PwC
Accounting methods procedural update (continued)
• Audit protection received if:
- File in the new “90 day” window
◦ Begins the 15th day of the 7th month
- File in the unchanged 12o day window
- Present method not before the Director
- Change resulting in a negative Section 481(a) adjustment
- No exam imposed change and issue not under consideration
◦ “Springing” audit protection
- New member of a consolidated group in the Compliance Assurance Process
PwC
Lee GrubbsVice-President and Chief Tax Officer(615) [email protected]
George ManousosTax Partner(202) [email protected]
Thank you!
Breakout session1c. Best practices around charity care, community benefit reporting, and Community Health Needs Assessments on Form 990, Schedule H
www.pwc.com
Ron Schultz,PwCLaura Parello, PwCDonna Borgese, UPMC
PwC
Agenda
• Introductions and overview• Nonprofit hospital tax exemption – Background• Community benefit reporting by the sector
- IRS SOI data and IRS/Treasury report to Congress - Other reports/studies
• CHNAs- Basic requirements – Input, accountability, transparency- State reporting impacts
• Questions/Wrap up
PwC
Nonprofit hospital tax exemption –Background
Laura Parello
PwC
Comparison of community benefit elements
Rev. Rul. 56-185
• Nonprofit for care of the sick
• Not exclusively for those able to pay
• Must not refuse those unable to pay (free or discounted care)
• Bad debt not charitable
• Open medical staff
• No inurement
Rev. Rul. 69-545
• Nonprofit for care of the sick with an ER
• ER care available to all regardless of ability to pay (Rev. Rul. 83-157)
• Other care available to those able to pay (self pay, insured or Medicare)
• Open medical staff
• Training, education and research
• Community board
Rev. Rul. 83-157
• Medicaid and Medicare
• Open medical staff
• Training, education and research
• Community board
• No ER where state health agency determined it would be unnecessary and duplicative
• Note: no mention of charity care
PwC
Observations regarding charity care
Rev. Rul. 56-185
• “A nominal charity record for a given period of time, in the absence of charitable demands of the community, will not affect its right to continued exemption.”
• “The fact that its charity record is relatively low is not conclusive that a hospital is not operated for charitable purposes to the full extent of its financial ability.”
Rev. Rul. 69-545
• “By operating an emergency room open to all persons and by providing hospital care for all those persons in the community able to pay the cost thereof either directly or through third party reimbursement, Hospital A is promoting the health of a class of persons that is broad enough to benefit the community.”
PwC
Community benefit standard – Current state of play
• Facts and circumstances no bright lines
• Both quantitative and qualitative elements
• Financial ability of the hospital is relevant under the guidance
• Community’s needs regarding charity care also relevant
• CBE % varies based on community’s demographics
• Schedule H factors are grounded in longstanding guidance
- Charity care, Medicaid, needs-based care
- Health improvement and subsidized health services
- Research, education and training
- Grants for community benefit
- But not Medicare, bad debt, or costs for privately insured patients
PwC
IRC Section 501(r) for hospitals to obtain/maintain 501(c)(3) status – Additional exemption requirements
Section Requirement Effective date
501(r)(3) Community Health Needs Assessment – each tax exempt hospital must conduct a CHNA at least once every three years and adopt an "implementation strategy" to meet the needs identified by the assessment.
Taxable years beginning after March 23, 2012
501(r)(4) Financial Assistance Policy – each tax exempt hospital must establish, implement, and make widely available written policies regarding financial assistance and emergency medical care.
Taxable years beginning after March 23, 2010
501(r)(5) Limitation on Charges – each tax exempt hospital must limit the amount it charges for emergency or other medically necessary care provided to patients eligible for financial assistance to the amounts generally billed to insured patients, and cannot use gross charges.
Taxable years beginning after March 23, 2010
501(r)(6) Billing and Collections – a tax exempt hospital cannot take "extraordinary collection actions" (lawsuits, arrests, liens, or other similar actions) until it has made "reasonable efforts" to determine whether a patient is eligible for financial assistance.
Taxable years beginning after March 23, 2010
PwC
Community benefit reporting by the sector
Ron Schultz
PwC
Discussion of Community Benefit Expenditures (CBE) IRS SOI updated for 2011 data
1. IRS Statistics of Income releases Form 990 data points annually and has included Schedule CBE data releases for each of 2009, 2010 and 2011
2. Today’s data presentation is based on SOI data which is publicly available from the IRS report to Congress
- Use of aggregate sector Schedule H CBE data on IRS SOI can be used to do comparisons as follows:
◦ Sector wide (all reporting hospitals) year to year
◦ By hospital type (e.g., children’s, research, etc.) within the overall sector, year to year
◦ Comparison of a particular hospital or group of hospitals/peer group against the aggregate sector or aggregate of a hospital type
PwC
2011 Form 990, Schedule H, Part I, line 7 – Community Benefit Expenditures (Per Jan. 2015 IRS report to congress – Dollars in thousands)
7 Financial assistance and certain other company benefits at cost
Financial assistance and means-tested government programs
a. Number of activities or
programs (optional)
b. Persons served
(optional)
c. Total community
benefit expense
d. Direct offsetting
revenue
e. Net community
benefit expense
f. Percent of total
expense
a. Financial Assistance at cost (from Worksheet 1)….
$17,415,426 $2,500,841 $15,011,379 2.32
b. Medicaid (from worksheet3, column a)
82,406,170 63,769,821 18,736,792 2.90
c. Costs of other means-tested government programs (from worksheet 3, column b)….
4,225,182 2,916,334 1,305,880 0.20
d. Total Financial Assistance andMeans-Tested Government Programs
104,046,778 69,186,996 35,054,051 5.42
Other benefits
e. Community health improvement services and community benefit operations (from Worksheet 4)…..
3,029,646 369,626 2,659,025 0.41
f. Health professions education (from Worksheet 5)….
13,621,372 4,389,163 9,232,250 1.43
g. Subsidized health services (from Worksheet 6)….
17,113,507 11,916,218 5,113,403 0.79
h. Research (from Worksheet 7)…. 9,435,570 1,022,817 8,412,686 1.30
i. Cash and in-kind contributions for community benefit (from Worksheet 8)….
2,034,871 42,998 1,991,957 0.31
j. Total. Other Benefits…. 45,234,966 7,740,822 27,409,320 4.24
k. Total. Add lines 7d and 7j… $149,281,744 $86,927,818 $62,463,371 9.67
PwC
IRS/Treasury report to congress – Comparison of taxable, tax-exempt and government hospitals
Table Taxable Private tax-exempt Government owned
Charitable Care 1.31% 2.13% 6.56%
Bad Debt 1.81% 1.54% 3.42%
Medicaid/SCHIP/etc. 1.77% 1.94% 4.01%
Medicare 6.07% 1.21% 1.67%
Table: Comparison of Certain CMS - Reported Expense Data as a Percentage of Total Expenses
PwC
Possible shortcomings of the Schedule H Community Benefit Expense table (or why the CBE % is <100%)
• Medicare? • Bad debt?• Community building?• Restricted grants issue beginning in 2013?• Exclusion of costs pertaining to insured patient population?• Use of net costs rather than gross costs to measure CBE?• Inconsistent numerator/denominator (net costs in
numerator but gross costs in denominator)?• Other?
PwC
Other reports/studies
• 2005 GAO Report• 2006 Congressional Budget Office Report• 2009 IRS Nonprofit Hospital Final Report• Columbia Law Review Article
PwC
Recap of Community Benefit reporting
• Expect Congress and other stakeholders to continue reviewing the reported Schedule H community benefit expenditure data
• Expect researchers and perhaps media to attempt to slice and dice the data to break it down by types of hospitals, regions, hospital size, specialty, etc.
• As data is increasingly scrutinized, may put pressure on the overall nonprofit hospital sector and on individual hospitals to defend their CBE numbers
• Those hospitals with relatively small CBE percentages will be put in a position of justifying exemption based on other factors
PwC
CHNAs – Community Health Needs Assessments
Ron SchultzLaura Parello
PwC
Conducting the CHNA
i. Define the Community
vi. Make the CHNA Widely Available
v. Adopt the CHNA Report
iv. Document the CHNA (CHNA Report)
iii. Solicit and Account for Input
ii. Assess Community’s Health Needs
Community Health NeedsAssessments(CHNAs)
PwC
Key points regarding final regulations
• Facilities have already conducted the first CHNA. Next required CHNA, generally, must be completed by the end of the 2016 tax year and comply with the final regulations
• Two components – CHNA report and implementation strategy
• Some next steps
- Facility should review current CHNA and implementation strategy to identify areas requiring change
- Consider definition of community served, particularly low income, minority, and medically-underserved populations
- Consider opportunities to conduct joint CHNA and implementation strategy (whether related or not)
- Establish a system to obtain, review and incorporate public comments regarding the CHNA
- Need to address evaluation of impact of actions taken in the CHNA report
PwC
State community benefit reporting requirements
• Approximately 23 states require tax-exempt hospitals to provide some form of community benefit.
• Eleven states require by law or regulations that tax-exempt hospitals conduct CHNAs. Approaches vary widely by states.
• Ten states have laws that require community benefit plans (implementation strategies). In some cases the requirements for these are more stringent then those required under the ACA.
• Terminology and reporting vary greatly among states and differ from federal reporting.
- Differences in the definition of “community benefit”.
- Example: Certain states allow the inclusion of Medicare shortfall (California) others do not (Minnesota).
• Future of state reporting?
PwC
State community benefit reporting requirements State comparison
State Required reporting Are community building & community health services reported?
Is data publicly available?
California Private nonprofit hospitals must submit a community benefit plan
Goods and services that increase access, promote health, or meet a community need are included in the statute’s definition of community benefit
Yes
Illinois Nonprofit hospitals must submit annual community benefit plans, in addition to disclosing charity care provided, bad debt, and cost of government-sponsored indigent care
One line is included for “other community benefits” on the reporting form. A detailed description of how benefits are provided and calculated is required for the category
Yes – available upon request
Rhode Island
Annual report of uncompensated care required to support licensure
Community health improvement services and community building are not included
No
PwC
Questions/Wrap up
2015 Health Services Tax Conference
May 18-19, 2015The Drake HotelChicago, IL
Health ServicesTax Conference
Healthcare M&A Transactions and Convergence
Brett Hickman, Partner, PwC US Deals Leader, Healthcare
PwC
Objectives
Provide overview of the healthcare deal activity and volume during 2014 for the hospital, managed care, post acute, and private equity sectors.
Provide overview of the healthcare deal outlook for 2015 for the for the hospital, managed care, post acute, and private equity sectors and in addition, provide an in-depth analysis of the M&A drivers in the hospital and managed care sectors for the near term.
Provide overview of the key healthcare and business issues that are causing many healthcare stakeholders to rethink their business models.
Provide a list of key takeaways and answer questions from the audience.
Current Deals Trends
& Activity
Outlook for Healthcare
M&A
Key Healthcare
Issues
Questions and Closing
Remarks
1
2
3
4
PwC
Current Deals Trends & Activity
PwC
After a significant spike in 2009, worldwide M&A activity decline and plateaued between 2010 and 2013 but reached record levels in 2014
Ou
tloo
k Moody’s Investors Service“As hospital operators prepare for the implementation of the broader reaching aspects of healthcare reform, acquisition activity is likely to continue, in some cases driving up leverage and requiring considerable integration efforts.”
IDC“Consolidation among providers will accelerate, with the total number of hospitals and physician practices decreasing and moving toward accountable care. Private equity firms will continue to play a role.
Source: Moody’s Investors Service
PwC
Activity by sector – Hospitals While hospital deal volume declined since the high of 2012 (94 transactions in 2012 to 79 in 2014), there was a significant increase in Q4’14 with over half of the 2014 transactions occurring in the fourth quarter
$ in
mill
ions
PwC
Activity by sector – Managed CareDespite a lag behind some of the other sectors, Managed Care saw close to a 50% increase in M&A activity as 22 deals in 2014 were announced versus 15 in 2013
$ in
mill
ions
PwC
Activity by sector – Post AcuteFor the second straight year, the Post Acute sector had more than double the volume of the next comparable healthcare services sector in 2014
$ in
mill
ions
PwC
Activity by sector – Private EquityOverall for 2014, 62 announced transactions involving private equity (“PE”) firms compared to 58 in 2013. We continue to see stable and consistent year over year trends
PwC
Outlook for Healthcare M&A
PwC
Hospital M&A Outlook2014 Hospital M&A volume trailed that of previous years as hospitals shift toward more alliance based transactions, but regional deals are picking up in unconsolidated major markets, including Chicago, NYC, and LA
PwC Health Services 2014 Deal Insights Report
“We have seen a shift from traditional M&A within the hospital sector in terms of take control transactions towards more alliance based transactions. … Traditional M&A activity is still taking place, just to a lesser extent than in prior years in the hospital sector.”
– February 2015
Moody’s Investors Service
“For-profit and not-for-profit hospitals are increasing their M&A activity in response to declines in reimbursements and patient volumes. This activity will likely help the hospitals build scale and market share and lower their costs.”
– August 2014
PwC
Hospital Drivers and TrendsThe following five trends are affecting the industry now and in the future, but will put pressure on margins in the near term
Reform is bringing an influx of new patients, creating service capacity challenges — particularly in regions already facing physician shortages. In addition to Medicaid expansion, exchange contracts are driving utilization growth. Providers should also focus on how to operate on Medicare and Medicaid rates; think of physicians as partners in payment; open or expand clinics; and stay out of the bottom quartile on clinical quality.
Reimbursement rate pressure – between federal budget cuts and consolidating payers who now enjoy greater negotiating leverage – is creating a greater impetus for providers to adopt more aggressive cost-control initiatives. Rapid growth of high-deductible health plans also continues to create high levels of patient bad debt for providers to manage.
IDC’s top prediction for 2014 is that new business models – including ACOs/medical homes, ownership models, consumer engagement, and quality-based payment – will drive at least 50% of HIT growth. The shift to value-based care will also require investment in community-care solutions, including telehealth, remote health monitoring, mhealth, and social and advanced analytics.
Coordinating payer relationships, M&A, physician alignment, and investments are crucial to the future stability and strength of hospitals. As insurance carriers and new entrants continue to cross into areas traditionally dominated by health systems, providers will also need to explore new opportunities to capitalize on their own core expertise.
Providers are working to report and control quality and improve care due to increasing demands for transparency from payers and consumers; expanding pay-for-performance programs; and refusal by payers to pay for never events. Rapid adoption of electronic patient records and the increase in targeted cyber attacks also makes data security policies and procedures a high priority for providers.
Healthcare Reform
Cost Controls
IT Initiatives
Strategic Positioning
Quality Control & Reporting
PwC
US Health Systems Expand Globally Both for-profit and not-for-profit US health systems are expanding abroad to capitalize on maturing economies and demand for healthcare
Source: Company filings, Factiva, PwC Analysis
PwC
Managed Care M&A OutlookDeal activity in the managed care sector trended towards acquisitions of targeted small, specialty firms and health plans participating in government sponsored healthcare programs and is expected to continue in 2015
PwC Health Services 2014 Deal Insights Report
“The uptick in activity can be directly related to managed care companies seeking opportunities through acquisitions to balance uncertainty and potential financial losses as a result of ACA. Part of this evolved into a trend towards acquisition of targeted small, specialty firms and health plans participating in government sponsored healthcare programs. Moving forward into 2015, this trend is expected to continue as managed care companies seek opportunities to expand their member population to balance any financial uncertainty.”
– February 2015
PwC
Managed Care Drivers and TrendsWhile payers continue to adapt to reform-driven change, they’re also moving to counter health system consolidation and differentiate themselves in the increasingly consumer-driven marketplace
Payers continue to address multiple issues and opportunities related to the Affordable Care Act (ACA), including: population health management, ACA fees and state-level reimbursement, an influx of new enrollees, minimum Medical Loss Ratios, and modifying business, operational, and technology models.
Economies of scale in administration drove consolidation along with consumer expectations of large provider networks, which are difficult for smaller companies to assemble. Payer consolidation is also being driven by M&A activity in the provider space, which would otherwise give some health systems greater negotiating leverage over carriers.
Payers are structuring for the future of the industry with actions around: Payer/Provider Collaboration, Strategic Partnerships, M&A, ACOs, Private Exchanges, Restructuring to/from Non-profit Entities, and Global Expansion. MCOs are also attempting to influence costs and patient outcomes by acquiring healthcare providers and IT companies. And both direct-pay models and new entrants threaten to disrupt existing payer business models.
Consumerization, consumer education, new delivery models (like Duals, exchanges, change in employer coverage) and the move to retail markets/disintermediation are shifting the industry toward more direct distribution to the consumer. Narrow networks and defined contribution benefit strategies continue to gain traction among cost-conscious employers and consumers. Likewise, the aging population, rising healthcare costs, and the growing middle class in developing countries are driving demand for supplemental healthcare insurance around the globe.
Payers are promoting greater transparency and empowering members to take control of their own health and care decisions by offering convenient, personalized, and engaging digital tools. Carriers also continue to streamline IT systems not only to cut costs, but to implement analytics and workflows that improve health outcomes.
Healthcare Reform
Consolidation
Positioning for the Future
Product Development
HIT, Consumer Tools, & Analytics
PwC
Emerging Payer Priorities: OverviewIn the emerging health market, carriers’ ability to meet consumer needs will depend on how well they empower consumers and differentiate themselves across three key dimensions:
Source: PwC HRI Report
1. Personalized experiencesCreate simpler and connected experiences that enable people to make “best fit” heath care
choices, enabled by digital solutions and powered by personalized information.
2. Value based careLead the market in collaborating with doctors, hospitals, and other providers to build a
connected and consumer-centered health care system.
3. Community activationInvest in and improve the health of individuals and our community with a focus on reducing
health disparities and inequities.
PwC
Post Acute M&A OutlookThe post acute section continued to demonstrate impressive increases in deal volume and value in 2014 and it expected to continue as Private Equity firms seek to exit investments in 2015
PwC Health Services 2014 Deal Insights Report
“While long term care has always been a strong volume leader, what is unique about the sector as it ended 2014 is the anticipation for continued strong M&A trends in 2015 sub-sectors continue to look as promising as it experienced in 2014. An economic environment of low interest rate and available financing helped drive significant deal activity in 2014. Many analysts believe the increased level of M&A activity over the last two years will continue in 2015 as long as interest rates remain low, which it appears will likely happen through at least June 2015. Consolidation is also expected to continue among the health care real estate investment trusts (“REITs”) and private providers.”
– February 2015
PwC
Private Equity M&A OutlookCorporate carve-out are expected to be strong as another carve-out was announced in January with Madison Dearborn’s announced acquisition of Walgreens intravenous infusion service business
PwC Health Services 2014 Deal Insights Report
“Overall the financing markets remained favorable as rates on high-yield debt remained around 6% (evidenced by yields on high yield bond ETFs throughout the year). High stock market prices, strong corporate balance sheets and new entrants into the health care market have challenged private equity deal making in 2014. In fact, we’ve observed that market dynamics coupled with high EBITDA multiples allowed private equity funds to opportunistically sell portfolio companies in 2014 thus providing their investors with returned capital. In addition, private equity investments into the equipment and supply deals were headlined by corporate carve-outs.”
– February 2015
PwC
Key Business Issues
PwC
The only way to remain viable and relevant is for health systems to have an M&A strategy linked to their actions
Current state Future state
Strategy Rooted in the past, limited to vision and mission
Forward-looking, market-driven, disciplined and concrete
Value proposition “All things to all people” Differentiated value proposition for consumers, public and private payors
Basis of competition Volume, pricing power, breakthrough research
Value for a given quality and access level
Clinical focus Illness/hospital-based care Illness and wellness/retail, mobile and home health
Key capabilities MD affiliation, capital formation, revenue management, acute care operations
Informatics, care redesign, population and risk management, patient experience
Role of quality and process excellence
Differentiator Table stakes
What it does for the organization
Reflects our history and aspirations Helps make hard choices and aligns everyone to achieve high performance
New requirements for a M&A strategy
PwC
Arguably, most providers will end up in one of five models with M&A as a tool to achieve the ends for each model
Strategic model Value creation Examples
• Apply innovative care delivery model to non-adjacent geographies• Monetize intellectual property and brand globally – clinical, research,
teaching
Clinical innovation
• Expand footprint to drive central, tertiary hub, often an AMC• Leverage relatively more integrated chassis with IT to demonstrate
quality as a competitive advantage (not risk bearing)• Benefit from increased tertiary/quaternary volumes
Hub and spoke
• Build concentration in a reasonably contiguous regional market (typically outside major urban centers)
• Apply continuum and integration to enable risk bearing• Benefit from market power, lower-cost model and reduced leakage
Geographic cluster
• Apply superior operating model to undervalued assets• Benefit from efficient, replicable operating model• Pursue clinical integration at the local level• Tend to be geography-agnostic (growth/income preferred)
Scaled portfolio
Fully integrated
• Leverage owned assets and labor to create high value• Focus typically in dense markets• Includes insurance capabilities – fully risk-bearing
PwC
These macro trends are forcing healthcare participants to rethink business models and engaged in M&A activity
Convergence
Clinical Integration
Population Health
Capital Strategies
New Entrants
PwC
Convergence in health is the blurring of lines between traditional sector-based silos; it is new partnerships and new roles
ACOs• Partners HC & Neighborhood HP
• Highmark & West Penn
• Aetna & Carilion Clinic
• CIGNA & St. John’s Mercy
International
• UnitedHealth – acquired AMIL in Brazil
• Aetna - product launches in China and entered the India market in June
• Cigna - Global growth strategy includes launching an international health careplan for globally mobile individuals
Intra-payer M&A• Aetna’s acquisition of Coventry
• WellPoint’s acquisition of Amerigroup
• Wellcare Health Plans acquired UnitedHealth’s Florida Medicaid plan
Intra-payer M&A• Aetna’s acquisition of Coventry
• WellPoint’s acquisition of Amerigroup
• Wellcare Health Plans acquired UnitedHealth’s Florida Medicaid plan
International Strategies are being pursued to globally expand payers’
footprint while also allowing them to expand into new business models.
M&A has been anticipated by many in the industry,
both horizontal and vertical deals are picking up.
While most payers began ACO pilots a
while ago, the jockeying to pair off with providers and other organizations
has increased.
PwC
Clinically integrated networks have developed to work together, in unison, to provide more efficient and effective patient care
Source: Truven Health; Becker’s Hospital Review
Fee for Service Fee for Quality & ValueOngoing shift
PwC
There has been rapid growth of Medicare Accountable Care Organizations to drive quality, cost, and overall care of a defined population
Source: The Advisory Board
1 Accountable Care Organization.
PwC
Current/future capital strategies have transitioned focus to outpatient settings, population health, and new service offerings
Municipal Bonds
Direct Bank Loans
Operating Profits
Capital Leases
Gifts/Philanthropy
Grants
Sale of Assets
Tra
dit
ion
al/N
ew S
ourc
es o
f C
apit
al
1. Renovation and Expansion of Outpatient Facilities
2. Population Health Management (ex. clinically integrated networks, ACOs)
3. New Service Offerings (ex. retail health, direct-to-employer clinics)
4. New Technology Offerings (ex. telemedicine, Big Data)
New Uses of CapitalTraditional
SourcesNew
Sources
Private Equity
Real Estate Investment Trusts (REIT)
Business Partners
PwC
Nearly half of the Fortune 50 companies are new entrants into the healthcare landscape
Of the 38 Fortune 50 companies with a
major stake in healthcare, 24 are new
entrants, from retailers to technology
companies, to telecommunications
businesses to consumer products
companies.
Source: HRI Report
PwC
Major employers are also responding by making the move to high performance networks as a cost reduction method
According to PwC’s Touchstone Survey, 4% of employers have already implemented performance based networks but 33% plan to consider
over the next few years.
&Procedures: Orthopedics
Procedures: Transplants & Cardiac
&&
Procedures: Cardiac
Procedures: Cardiac & Joints
&Procedures: Diabetes Management
&
Procedures: Transplants & Cardiac
&
Source: PwC Health Research Institute
Large employers such as Lowe’s and Walmart are partnering directly with hospitals to provide services. Many of these are bundled payments for procedures such as heart surgeries or knee replacements. Some employers pay all related travel costs as well as waive deductibles.
PwC
Questions and closing remarks
PwC
Summary
Key Points:
• After a period of decline, worldwide M&A activity increased in 2014 and isexpected to continue to do so for the foreseeable future
• Participants in the New Health Economy must capitalize on key trends, includingconvergence, emerging capital strategies, population health, and clinicalintegration, to position themselves for future success
For More Information:
Medical Cost Trend: Behind the Numbers 2015
Healthcare’s new entrants: Who will be
healthcare’s Amazon.com?
Health Services Deals Insights: 2014 and 2015
PwC
Summary
Key contact:
PricewaterhouseCoopers LLPOne North WackerChicago, IL 60606
M: 317.509.2856 [email protected]
Brett HickmanUS Deals Leader, Healthcare
2015 Health Services Tax Conference
May 18-19, 2015The Drake HotelChicago, IL