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Re-tooling the Medicare/medicaid model

rdan

I read the Op-Ed in the Boston Globe and asked Doug to write a piece or pieces in a more detailed fashion. There have been allusions to this issue as a cost factor, but no policy consideration here to date.

Post by Doug Brown

Due to the complexity of organizations today, there is commonly a “silo mentality” that develops where one department often doesn’t know what another is doing. Employees are good at looking at the “trees” within their silo, but very few are seeing the forest. We have all seen it. The result is usually organizational dysfunction. Nowhere is this more pronounced than at one of our largest government agencies – the Centers for Medicare and Medicaid Services (CMS). What’s worse, this dysfunction has enormous consequences for the cost and quality of health care that is delivered in this country. And yet, as we embark on the most significant reform to our health care system in over forty years, no one is talking about this issue.

In a July 20 Op Ed in the Boston Globe entitled Retooling the Medicare/Medicaid Model, I explored this issue. Specifically, I highlighted a program in Massachusetts that successfully breaks down the silos between these two programs to do what’s best for patients.

This care delivery model, called Senior Care Options, pools funding from Medicare and Medicaid to allow private organization to integrate care for dually eligible individuals (those eligible for both Medicare and Medicaid, and some of the most costly individuals on our public programs) to provide truly coordinated care that is patient centered and cost effective. The model has been very successful in keeping seniors out of expensive nursing homes and making them happy and satisfied. So the question is: in light of what seems to me to be such an obvious opportunity, why aren’t more states doing something about it and why aren’t more people talking about it?

I received a number of interesting responses to my Op Ed, some of which speculate on this question. One was from Renee Markus Hodin of Community Catalyst, a well respected consumer advocacy organization. She reported that her organization has been trying to make headway on this issue for years. They even got a provision inserted into the original House health reform bill to specially protect and encourage more SCO programs. But the provision was eliminated, apparently due to a misunderstanding. I am told it was opposed by some beneficiary groups “who were wary of the provision being abused by states that want to dump their duals into private plans and/or by plans that were not committed to providing the kind of care delivery system that we see under the SCO program.” That has not been the experience of SCO at all. But unfortunately, it seems that some of the new “Special Needs Plans” (SNPs) that were created recently by Congress to try to address dual eligibles are not working as intended and do not fully integrate care like SCO does.

The beauty of the SCO program is that there is a three-way contract; between the state Medicaid agency, Medicare and the SCO. This is critical to ensure full integration among both programs. Renee tells me they are trying again and hoping to garner more support.

I received another response from Jennifer Baron, a senior researcher at the Harvard Business School. She too has been working on this issue for a number of years. Here was her post to the online version of my Op Ed:

In April 2008, Harvard Business School Professor Michael Porter and I published a case study profiling Commonwealth Care Alliance (CCA), one of the three organizations offering a SCO plan. This case is one of the few examples we’ve found of a high-value approach to insurance coupled with an innovative care delivery model. Invariably when the case study is taught, students approach us after class to inquire how they can become involved with CCA or SCO.

We’ve found it particularly inspiring that under the pooled Medicare/Medicaid payment model, CCA managed to successfully serve one of the most complex and costly patient populations on the planet. In 2006-7, the only patient population for which CCA’s costs exceeded average premiums was the institutionalized population. Average premiums for the frail elderly patients who remained outside of institutional settings all exceeded costs. Talk about aligning financial and patient incentives!

My understanding is that once SCO graduated from a demonstration to a Special Needs Plan in 2009, the single three-way contract with Medicare and Medicaid – one of the most innovative aspects of the reimbursement model – disappeared. Though both Medicare and Medicaid continue to fund the plan as a SNP, I believe they must now contract separately with participating organizations.

For additional information, the CCA case study abstract is posted on the Institute for Strategy & Competitiveness website.

My best judgment of why this is not getting better traction is twofold: first, Medicare and Medicaid are incredibly complex and few inside and outside of healthcare really understand either one, let alone the way they intersect (that is why I tried hard to make my Op Ed explain the issue as simply as possible; you can let me know whether I succeeded). Second, we have lacked leadership and focus at the federal level. CMS has become such a large bureaucracy that it is overwhelming to even think about how one might reorganize it so that it better serves patients. But in my view it must be done. I remain very hopeful that with a new administration and a new focus on health reform, we have a unique opportunity to finally address this issue. I would love to hear your thoughts and ideas on the subject, including ways we might try to help make this happen.
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by Doug Brown

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SILOs –more action needed?

Tax advantaged “sale-leasebacks” with strapped-for-cash municipalities (SILOs, in the ever-present tax acronym set) came back to light when the Washington Metro train crashed a week ago. The cars were ones that were involved in the metro authority’s SILO deals with various banks, and the authority didn’t have any spare cash left to fund replacements. See this A Taxing Matter posting on the Metro SILOs, Jun 25, 2009.

I won’t rehash the entire discussion of SILOs covered there. Just note that the transit SILO deals were contrived to permit banks to “buy” the federal income tax depreciation deductions on municipal equipment. The municipalites couldn’t use the deductions, since municipalities are tax-exempt entities. The buying corporations were subject to US tax (usually, a bank) and they were looking for every way possible to avoid paying tax–they would essentially pay a fee to the municipalities, sharing part of their tax savings, for serving as an accommodation party in these deals. They “purchased” the municipalities’ property with nonrecourse debt, and then had “lease income” that was offset by both interest deductions and depreciation deductions, generating artificial losses from the accelerated depreciation. Most of the purchase price was set aside to defease the seller’s obligation under the lease, with the excess the fee for accommodating the tax shelter.

Jim Lehrer covered transit agency SILOs in the March NewsHour, depicting many of the transit agencies as motivated by their desperate need for capital–and encouraged by the federal Dept. of Transportation to use these means to get some. So there is a vicious double circle of irony here, that as states and localities cut taxes during the GOP years, under the flawed assumption that lower taxes means higher revenues, the states and municipalities also cut back on the funding needed by these important public service agencies, and an arm of the federal government encouraged these transit agencies to enter these deals, and at least 30 of them did, serving as accommodation parties in tax shelter deals with banks, so that banks would pay even less taxes than they already did.

Future SILOs were generally undone by new section 470, one of the few revenue raising provisions in the 2004 tax act. (The 2004 Act otherwise amounted to a pile of tax breaks for US corporations, such as the rate cut on repatriating offshore profits. It was misleadingly labeled the “American Jobs Creation Act” to signal the purported justification for all the corporate tax breaks. It didn’t lead to the creation of many jobs.) The new section disallowed to U.S. taxpayers a “tax-exempt loss”, defined as the excess of deductions other than interest and interest deductions allocable to tax exempt use property over the aggregate income from the property. Exceptions allowed certain “true” leases–essentially, ones in which the obligation of the seller-renter had not been defeased by the payment from the buyer and where the buyer had actually put some equity into the deal (the provision requires only 20% of genuine, at-risk equity). There are fewer tax benefits to true leases, so even with the exception, the provision deters leasing deals.

One hitch–the act only applied prospectively, and the transit deals (just one of the varieties of SILOs that were being done at the time of the 2004 change) got special treatment, in that any deals in the pipeline were allowed to be grandfathered in as long as they were done by 2006!

The IRS pursued the old deals with pre-2004 Act tools and won SILO (and LILO–the earlier “lease in, lease out” deals) cases against Fifth Third Bank, BB&T, PNC and other banks. See, e.g., IRS Wins AWG SILO Tax Shelter Case, TaxProf Blog (May 28, 2008) (dealing with the Ohio court’s decision in 2008-1 USTC 50,370, in favor of the IRS in a SILO case involving two US national banks’ “purchase”, with nonrecourse loans from German banks whose proceeds were used by the “seller” to defease the lease obligation, of a German waste facility used to acquire beneficial tax deductions); Ohio Judge Rejects Tax Claims on $423 Million Alleged Purchase of German Facility Made by Cleveland & Pittsburgh-Based Banks, DOJ (May 30, 2008); DOJ, Ohio Jury Finds Cincinnati-based Bank not Entitled to $5.6 Million Tax Refund (LILO transctions); BB&T Corp, 2008-1 USTC 50,306 (4th Cir.) (striking down tax treatment of financial service company’s lease of Swedish wood-pulp manufacturing equipment as a LILO shelter); DOJ, Statement of Assistant Attorney General Nathan J. Hochman on Today’s Decision in BB&T Corporation v. United States (Apr. 29, 2008).

After the court victories, the IRS offered a SILO settlement for these deals that permitted them to keep 20% of their claimed tax losses and waived the penalties, if they terminated the transactions. IRS Commissioner’s Remarks Regarding LILO/SILO Settlement Initiative (Aug. 6, 2008); Donmoyer, IRS Offers to Settle 45 leasing Tax-Shelter Disputes, Bloomberg.com (Aug. 6, 2008); Service Launces LILO, SILO Settlement Initiative, J. Acct. (Oct. 13, 2008). It later announced that “hundreds of taxpayers settled similar cases involving tens of billions of dollars.” DOJ, Justice Department Highlights FY 2008 Tax Enforcement Results (Apr. 13, 2009). On leaving office, Korb statedthat “taxpayers representing over 80 percent of the dollars involved have elected to take advantage of the settlement initiative.” See Korb Interview. (Dec. 19, 2008).

The settlement offer required taxpayers to terminate the transactions by Dec. 31, 2008, else they would be deemed terminated by that date, with taxpayers still able to claim the partial loss benefit through the actual termination date if they terminated the transaction by Dec. 31, 2010. That’s a fairly strong incentive for termination, but the municipalities may be on the hook for hefty termination payments under their contracts. Even worse, the AIG situation provided a perfect trigger for causing a technical default to apply. AIG guaranteed these deals, so when its credit rating went down, the transit agencies are in technical default and liable for hefty penalty payments. (see NewsHour video, above).

There are real problems here, including the idea of one agency of the government supporting its “clients” (transit agents of municipalities) entering into deals like this that result in corporate tax cheats robbing the government of important revenues. Another problem is the idea of the banks that were instrumental in causing the fiscal crisis–by risky, speculative behavior that disregarded the systemic risks–using AIG’s collapse because of that fiscal mess as an excuse to get municipalities that are especially cash-strapped because of the fiscal crisis (and finding their ability to borrow or get tax revenues severely restricted) to pay over large penalty amounts under their shelter contracts. It seems like an unfair windfall for tax cheating Big Banks at the cost of the people.

And of course, just extending the 2004 provision to make grandfathered SILO/LILO transactions illegitimate and their tax deductions disallowed doesn’t solve this problem, since these are windfalls that the tax cheaters would get under their “lease” contracts.

Rep. Menendez of NJ has proposed a potential solution–the “Close the SILO/LILO Loophole Act” S. 1341, introduced in late June. His bill, he says, would “help protect WMATA and other transit agencies who are being threatened by banks seeking to gain a windfall from the current economic climate while potentially putting transit agencies at risk.” See press release, As Lease-Back Deals Are Raaised as an Issue in Metro Crash, Menendez Says legislation Can help Unwind Deals, PolitickerNJ.com (Jun 26, 2009); Davis, Bill Would Tax Banks that Sue Agencies , Star Ledger (Jun 24, 2009); Letter from Menendez to Hoyer (Jun 26, 2009) (noting a need to “protect transit agencies from banks who are seeking to exploit a technicality that would result in agencies having to pay banks millions of dollars that could otherwise be used to shore up equipment and ensure safe operations, even though they have not missed a single payment to the bank”). The bill imposes an excise tax equal to 100% of any “ineligible amount” collected by “any person other than a SILO/LILO lessee” as a party to a SILO/LILO transaction. Ineligible amounts are proceeds from terminations, rescissions, or remedial actions in excess of those under defeasance arrangements. The bill also would deny deductions for attorney fees and other costs attributable to seeking to recover ineligible amounts.

It’s messy, but it does end up with the right results, it seems. I note, though, that there are no additional co-sponsors at this time. Doesn’t look like Congress is hopping on the bandwagon.

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