Governor Walker is Wrong on Medicaid

In his April 21st Op-ed, ‘Our Obsolete Approach to Medicaid’, Governor Scott Walker characterized Medicaid and Medicare as obsolete for apparently nothing more than being created in 1965 while he tried to make a case for Medicaid block grants.

The letter touts a database created by the Wisconsin Health Information Organization (WHIO), an organization that compares quality and cost of care of participating Wisconsin medical providers.

While I applaud the transparency goals of the WHIO project, it simply does not allow health consumers to compare their 'costs across providers’ as Mr. Walker suggests.

According to Jo Musser, VP of Business Development at the WHIO, the database “does not provide reimbursement rates” but rather reflects the statewide “standard average cost of care based on mix and use” and does not factor the provider’s region or area of service.

In Mr. Walker’s letter, he claims to have “asked Washington to add its data to our database, but it has not done so.” However, federal data has been publicly and readily available for quite some time. The U.S. Department of Health and Human Services publishes provider reimbursement rates and offers quality information from participating hospitals for consumers. They also offer robust pricing tools. Further, the CMS data and the WHIO data are apples and oranges because they use different approaches in calculating cost of care. The Medicare and Medicaid reimbursement methodology considers the provider’s immediate demographic to help improve access to care in rural areas. CMS standards, guidelines and data are heavily used throughout the health care industry. In fact, many private insurance companies contract with providers using the CMS rates as a benchmark.

Although created in 1965, Medicare and Medicaid have constantly progressed, and today offer far more transparency on clinical standards, reimbursement rates and quality than anywhere else in our commercial health care market.

Now unfortunately, we have chosen to apply free market principles to health care. For discussion’s sake, let us forget that the crux of free market theory relies on rational choice. In reality, we all know that our health care system couldn’t be farther removed from anything resembling a free market. We also know that rational choices are unlikely when it comes to the care our loved ones, but I digress…

If we are going to continue operating health care under the auspices of the free market, let us begin to treat it as such.

If we really want to slow rising health care costs, let’s make insurance reimbursement rates readily available to consumers. After all, if we want to reap the efficiencies from our free market model, cost-effective providers and savvy consumers need to be rewarded. Many will argue that the consumer’s choice is made selecting a health plan ‘at the kitchen table,’ but these exchanges are not made pari passu. In fact, one could easily argue that health insurance policies fail to meet any of the secondary moral constraints of contract theory. And lastly, this exchange is just too far removed from the consumer-style decisions that could actually lower costs. Instead, insurers can pass along cost increases and there’s no incentive to economize.

The irony here is that while some will argue that exposing insurance reimbursement rates would drive some providers out of business because they won’t be able to compete on a cost scale, thus reducing access to care, particularly in rural areas -but block grants would effectively do the same thing! If states moved to block grants and used statewide average costs of care, it would drive some providers out of business who are unable to compete, thus reducing access to care in some areas. The CMS reimbursement methodology is better. State block grants would hurt accessibility to care by allowing individual states to effectively cut services under the guise of pushing “states to behave more responsibly.” And the last thing we need is reduced care.

Medicaid is not obsolete, but rather a progressive leader in the charge for better health care. They offer incentives to providers that use electronic health records. They offer pay for performance incentives to providers. They publish their clinical guidelines, reimbursement methodologies, reimbursement policies and their pricing tools. Ask yourself how many insurers do the same. I’ll admit the reimbursement amounts of Medicaid need to be improved. But if anything, we should be pushing our commercial markets to operate more like Medicare and Medicaid.

I hope Mr. Walker doesn’t feel the same about our Constitution.  After all, it was created all the way back in 1786.

Gitlitz v. Commissioner Tax Brief

Gitlitz v. Commissioner, (531 U.S. 206 (2001), A U.S. Supreme Court decision regarding the tax treatment of discharge of indebtedness income for insolvent subchapter S corporations. 

Summary

David Gitlitz and Philip Winn each owned a fifty percent stake in P.D.W.&A., Inc. (PDWA), a Subchapter S corporation and partner in Parker Properties, a real estate venture firm. In 1991, Parker Properties realized a discharge of indebtedness (DOI). PDWA realized a pro rata share of the discharge in the amount of $2,021,296. At the time of the discharge, PDWA was insolvent in the amount of $2,181,748, allowing the discharge to be excluded from gross income under section 108(a)(1)(B). Typically, such losses are passed through to shareholders as deductions on their personal returns, but may not exceed the shareholder’s basis.[1] Corporate losses in excess of shareholder basis are treated as suspended losses until the basis becomes large enough to permit the deduction.

However, citing specific terminology from § 1366(a)(1)(A), Gitlitz and Winn each maintained that the discharge was an “item of income (including tax exempt income),” and therefore could be used to raise their respective stock bases by $1,010,648 each. This increase in basis allowed each shareholder to then take ordinary loss deductions of the same amount from unrelated suspended losses on their personal returns. The IRS disallowed the deductions arguing that the discharge was not an “item of income” and thereby could not be used to increase shareholder bases.[2] The shareholders brought their case to the Tax Court. 

Initially, the Tax Court ruled in favor of the shareholders; that the DOI was an ‘item of income’ that could be used to increase shareholder stock basis.  However, the court later accepted the Commissioner’s motion for reconsideration following a review of their decision in Nelson v. Commissioner[3]. In Nelson, it was determined that the DOI and any accompanying tax attributes occurred at the corporate level and did not pass through to shareholders. Shareholders appealed to the Tenth Circuit.

The Tenth Circuit affirmed, holding that the discharge could be passed through to shareholders, but must first reduce any tax attributes at the corporate level. In Gitlitz, the NOL exceeded the DOI, and therefore none remained to passed through to shareholders. This prevened shareholders from deducting their current and suspended losses.[4] The court reasoned that reducing any tax attributes at the corporate level first would prevent a tax ‘windfall’ and special treatment only available to subchapter S shareholders. The sixth and seventh circuits agreed with the ruling; the third circuit ruled in favor of the shareholders. The case was then referred to, and accepted by the U.S. Supreme Court.

Key Issues

There were two key issues that needed to be decided by the Supreme Court. First, the court needed to decide whether the DOI of an insolvent subchapter S corporation was an ‘item of income’ under § 1366(a)(1)(A) and § 1367(a). Second, the court needed to decide on the timing issue of whether any tax attributes were realized at the corporate level or shareholder level. In brief, the shareholders argued the plain language of the statutes. The IRS essentially relied on the substance over form doctrine, an 80 year old precedent of characterizing transactions based on their underlying substance for federal tax purposes.[5] The Commissioner argued that it was not the intent of Congress to give solvent taxpayers this advantageous windfall treatment.

Supreme Court Decision

The United States Supreme Court ruled 8-1 in favor of the shareholders. In an opinion delivered by Justice Thomas, the court stated that DOI was an item of income as IRC 61(a)(12) specifically states that DOI is generally included in gross income. The opinion went on to proclaim that section 108 “merely permits insolvent S corporations to exclude DOI from gross income” and that 108(e)(1) specifically “presumes that DOI remains an ‘item an income.’” Therefore, because the DOI of an insolvent subchapter S corporation is an ‘item of income’, it is then subject to the pass through provisions as an ‘item of income’ under section 61. Under 108(b)(4)(A), the court determined that any tax attributes reductions were to be imposed at the corporate level, because in order for shareholders to determine shareholder taxable income, all items of income must first be passed through to shareholders.[6]

Justice Breyer issued a dissenting opinion, pointing out that if these statutes were to be taken literally in lieu of substance over form, ‘specific rules for S corporations’ under § 108(d)(7)(A) would specifically limit DOI exclusions to be taken at the corporate level under § 108(a) along with any tax attribute reductions under § 108(b).[7] Under the dissenting opinion, taking the literal translation of the statute, a DOI would not be available to increase shareholder basis of an insolvent subchapter S corporation, and thereby would prevent shareholders from taking otherwise unavailable personal deductions of suspended losses. The dissenting opinion also gives greater consideration to the congressional intent of section 108, pointing to a House Committee report that stated, “[T]he exclusion and basis reduction are both made at the S corporation level (sec. 108(d)(7)).  The shareholders’ basis in their stock is not adjusted by the amount of debt discharge income that is excluded at the corporate level.”[8]

Discussion of Significance

The court’s decision is significant because the court used a literal approach and applied the ‘plain meaning’ of the statute to reach a decision. Of course, there are problems with both sides of this argument. Using a strict literal approach puts a burden on Congress to write legislation that would presumably anticipate every possible deviation from the codes, which is unrealistic.  On the other hand, using substance over form may put an undue burden on the courts to create rules for gaps in the code left by Congress.

Reaching a reasonable balance between these two arguments is difficult, but I believe the court should interpret the congressional intent of the code. This case contrasts 80 years of legislative precedent where the substance over form doctrine has been used to interpret IRC and congressional intent rather than the plain language of the statute.[9] As Justice Breyer pointed out in the House Committee's communiqué, the pass through provisions were not intended by congress to provide a windfall tax benefit or special treatment to solvent shareholders.

In addition, oral arguments in the case revealed that such pass through provisions would have been disallowed prior to changes made to IRC section 108 in 1984 (effective 1998). The changes addressed how basis reductions from discharge of indebtedness were applied to shareholders under § 108(b)(2)(e), specifically, that the basis adjustments occur “at the beginning of the taxable year following the year in which the discharge occurs."[10] Prior to this change, adjustments to basis were taken immediately after the discharge occurred. This reader contends that the terminology has had unintended consequences in allowing solvent shareholders to realize ordinary losses without first taking adjustments to their subchapter S bases.

Either way, Gitlitz v. Commissioner is significant because it signals the potential of a new direction for tax jurisprudence.

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[1] 26 U.S.C. § 1366(d)(1)(A)

[2] David Gitlitz v. Comm., 182 F.3d 1143 (10th Cir. 1999)

[3] Nelson v. Commissioner, 110 T.C. 114, 128 (1998)

[4] David Gitlitz v. Comm., 182 F.3d 1143 (10th Cir. 1999)

[5] Gregory v. Helvering, 293 U.S. 465 (1935)

[6] Gitlitz v. Commissioner, 531 U.S. 206 (2001) (Opinion Announcement)

[7] Gitlitz v. Commissioner, 531 U.S. 206 (2001) (Breyer, C.J., dissenting)

[8] H.R.Rep. No. 103–111, pp. 624–625 (1993)

[9] Gregory v. Helvering, 293 U.S. 465 (1935)

    Paulsen v. Commissioner , 469 U.S. 131 (1985)

    Knetsch v. United States, 364 U.S. 361 (1960)

[10] Internal Revenue Service, T.D. 8787, 63 FR 56563, Oct. 22, 1998

An Ethical Argument for the Equitable Distribution of Subrogable Claims on Self-Funded ERISA Health Plans

What is Subrogation?

Subrogation essentially allows an insurer to “stand in the shoes” of their insured to recover from a tortfeasor. The underlying theories of subrogation are equitable in nature: 1) to place responsibility for a loss on the tortfeasor and reimburse any innocent party who was compelled to pay and 2.) prevent a party from receiving a ‘double recovery’, thus being unjustly enriched.

Premise:

The equitable theory of which subrogation relies or the desire to prevent unjust enrichment is Kantian in nature, but Utilitarian by design. For example, if a store patron accepts an additional $10 bill in change - knowingly or unknowingly - he has been unjustly enriched. The patron has a duty to return the additional $10 bill to which the store owner has a right. This can be willed universally without contradiction.

Uniquely, the function of subrogation and its use by insurance policies is utilitarian by design in that it reduces (theoretically) overall costs for all of its policy holders. Although healthcare subrogation hasn’t gained notoriety until recently, the practice of subrogation has been around for centuries. Its recent expansion can be attributed to the ever-increasing costs of health care and health insurers attempt to mitigate them. By transferring these savings to policy holders (don’t hold your breath) it essentially benefits the entire insurance pool. After all, the very concept of insurance is utilitarian by nature: balancing and managing risk.

Because insurance is regulated by the states, many have implemented regulations in place to protect consumers from insurers that try to overstep the equitable bounds of subrogation. For example, some states have implemented a “Made Whole Doctrine” that essentially bars subrogation in matters where the victim has not recovered an amount equal to their economic losses. The made-whole doctrine is common law but varies from state to state.

For example, in Wisconsin, subrogation is barred completely in made whole matters.  In other states, such as Indiana and Florida, there is a pro-rata system of reduction. For example, in Florida, if an injured party only recovers a portion of the value of their claim, the subrogee must accept a proportionate reduction of their interest. So if a person incurs $20,000 in medical damages and lost wages (total economic losses) and the tortfeasor only carried $10,000 in liability coverage, it could be said that the person is only able to recover 50% of the value of their claim. Therefore, any subrogee would be obligated under Florida’s “equitable distribution theory” to reduce the amount needed to satisfy their interest by the same 50% in addition to any ‘common fund doctrine’ (attorney fees). Of course, case valuations are somewhat arbitrary and open to interpretation and negotiations. I think most people would agree that this type of recovery is fair and just.

The Problem:

However, if a health benefit plan is self-funded, they can qualify for ERISA status. Although ERISA was never intended to regulate health benefits, ERISA is now most commonly associated with employer/employee self-funded health benefit plans. But I digress. The bottom line is: ERISA qualified plans are not governed by state insurance laws – including the consumer protections that come with them – thereby circumventing policy requirements and preempting any made whole doctrines or other distributive justice resolution techniques.

An increasing number of employers are opting to self fund their health benefit plan in lieu of traditional health insurance. The savings incentives and deregulatory attributes are attracting a much wider employer audience. At one time, only employers with 10,000 or more employees would consider self-funding, but today, it is not uncommon for firms as small as 200 employees to consider self-funding. The increase in health care costs has produced very creative plans utilizing various combinations of ‘consumer driven health plans’ and stop-loss protection. In 2008, approximately 17% of all health benefit plans were self-funded ERISA plans; that number has now grown to 49% in 2010.

Why We Should Subrogate Health Claims At All:

Being that some states ban health insurance subrogation in its entirety, it is apparent that the inherent value of human health is recognized by some as a sanctity that transcends equitable law. However, if health care subrogation exists, it should be subject to the equitable distribution and the common fund doctrines. I would argue that subrogation subject to this rule allows the greatest number of its members the benefits of lower premiums while not depriving the subrogee or the subrogor of their right to compensatory justice. I also contend that this practice would satisfy Kant’s first categorical imperative of being generally accepted universally. I say ‘generally’ because victims of torts who have sustained a personal injury often tend to demonstrate egoistic traits in their pursuit of justice. Many would argue that you can not assess the value of any injury or life – but sadly, yet realistically, we all know this is not the case. It’s necessary in order to award compensatory damage awards in the first place.

The problem, is that while ERISA plans may prove beneficial to employers, they often eliminate an injured party's ability to be find compensatory justice for incurred economic damages. In addition, ERISA does not require employers to provide or maintain benefit plans at any level. An employer is free to increase or decrease benefits without the consent of the employee.

An employer has no obligation to provide coverage for its employees (soon to change for larger employers thanks to Health Care Reform). However, if they choose to provide coverage they should not be able to disenfranchise those affected by chronic disease or similar cost intensive treatment. Health Care Reform has addressed some of these problems listed above, but existing plans will be ‘grandfathered in’.

In Closing:

As the trend to self-fund allows employers to circumvent consumer protections and prevent injured persons from being made whole at an exponential rate, Congress needs to implement legislation that would create a subrogation process for self-funded plans that is more in-line with the underlying theory that supports subrogation in the first place. 

Bush Tax Cuts And Their Devastating Economic Impact

If deficit spending and fiscal responsibility are your concern, you should not vote Republican.

• 82% of our Debt was accumulated by Republican Administrations.
• Bush swung the the federal budget from a $230 billion surplus in 2000 to a $1.2 trillion deficit in 2008.
• Bush tax cuts cost us $2.8 Trillion, or about $250 Billion Per Year - In comparison, unemployment extension cost $33 Billion
• Over Half of all the Bush tax cuts went to the top 5% of households (>$212,000/year), while the bottom 60% of households shared only 15%.
• Bush Tax Cuts DID NOT INCREASE REVENUES. Revenues would have been HIGHER without the Bush Cuts.
• Former Reagan and Bush era economists say there’s “No dispute among economists" that Bush tax cuts reduced revenue, including: Alan Greenspan (Former Fed Chair), David Stockman (Reagan Economist - Federal Reserve) and Alan D Viard (Bush Economist), the list goes on....
• Here is a Jobs Chart Comparison showing job losses/gains from the Bush and Obama Administration:
• And if you think it's health care, social programs or immigrants that are bankrupting this country, think again

To visually compare the cost of health care reform to the Bush tax cuts, the 1st and 2nd bar below are Bush Tax cuts, the 3rd is PPACA:

via EconBrower

To Summarize:

Between Jan 20 2001-2009 under Republican policies and leadership:

Unemployment doubled from 4.2% to 8.2% (source)
National debt doubled from 5.7 trillion to 10.6 trillion (source)
Yearly budget went from a $236 billion surplus to a $1.2 TRILLION deficit (a 1.4 trillion drop) (source)
Dow Jones plunged 25% from to 10,587 to 7949 (source)
Gasoline tripled from 1.44 to 4.11 per gallon on July 11, 2008 (source)
Losing 700,000 jobs monthly, Economy in total free fall ....

We can not afford any more of irresponsible and reckless Republican spending at the expense of average, middle-American tax payers.

Massey Energy - The Case for Campaign Finance Reform

Massey Energy, the 4^th largest coal company in the United States has a long history of safety and environmental violations. The only thing more shocking than Massey's safety and environmental record, is their uncanny ability to skirt and appeal EPA and MSHA fines and win court battles. You see, Massey Energy doesn't believe they have to play by the rules. Their unwillingness to play by the rules, and the West Virginia Supreme Courts unwillingness to hold them accountable has alloted Massey huge profits - all at the expense, burden and lives of American citizens.

Massey has been involved in a number of legal and environmental disputes including mountaintop removal mining. In January 2008, Massey Energy agreed to pay $20 million to the EPA, the largest civil penalty ever for water permit violations. Massey also lost a contract dispute by jury award to a rival competitor, Harman Coal. The contract dispute stemmed from Massey purchasing United Coal, then discontinuing a long term supply contract of its subsidiaries, Wellmore Coal, to Harman. In addition, Massey is appealing a $1.5 million dollar fine instituted by the MSHA (Miners Safety and Health Administration) as the result of a mine fire that killed two miners in early 2006.

Because the government does not have the resources to regulate compliance in all instances, federal judges are given the power to impose fines on an organization based on the seriousness of the offense and the culpability of the organization. Obviously, this punitive system largely depends on the assumption that the federal judges are purely objective and will make appropriate decisions that serve the best interest of the public.

However; recently, members of the West Virginia Supreme Court have been under pressure to remove themselves from hearing a case involving Massey Energy due to blatant conflicts of interest.

Last November, the West Virginia Supreme Court overturned the lower courts contract dispute jury verdict referenced above in a 3-2 decision, ultimately relieving Massey Energy of a $76.3 million liability. The plaintiff, now-defunct Harmon Mining, requested the court reconsider hearing the case after presenting photographs of Chief Justice Elliot Maynard and Massey CEO Don Blankenship together on vacation in the French Riviera during the time the case was being heard.

As a result, Chief Justice Maynard was asked recuse himself from this case. Both Maynard and Blakenship reiterated that they have not hidden their friendship and have been friends for over 30 years. Ironically, Massey Energy has been vocal in seeking to get Justice Larry Starcher to recuse himself from the proceedings for some time, because he loudly criticized Massey (he called Blankenship a ‘Clown’) for allegedly ‘buying’ a seat on the State of West Virginia Supreme Court expending $3.5 million in 2004 to elect Supreme Court Justice Brent Benjamin.

Chief Justice Maynard finally removed himself last month after the photos surfaced. In following, Justice Starcher voluntarily removed himself due to his public criticism of Massey, stating that they have not been a good corporate citizen. In removing himself from this case, Starcher also recommended that Justice Benjamin also recuse himself, given that Massey helped him get elected in 2004. Justice Benjamin has twice refused to remove himself from this case.

As stated so eloquently in an online discussion about the matter, one reader states, “Seriously, what’s the point of buying a judge if he up and recuses himself when you need him…”.

Alone, in their attempts to remove Justice Starcher, Massey clearly demonstrated their comprehension of the concept “conflict of interest” yet, doesn’t seem to realize how their relationships with Justice Benjamin or Chief Justice Maynard presents a problem.

Given Massey’s history of violations and disregard for environmental protections, a reasonable, objective court would find them significantly culpable. But because Massey ‘has’ the West Virginia Supreme Court, they have no incentive to self-monitor or engage in an Ethical Compliance Program.

Now, here we are a couple of years later, and Massey Energy is responsible for the deaths of seven miners in a mine blast that occurred on April 5, 2010. Mine Safety and Health News, claimed that the Massey Mine has had a number of violations related to its ventilation plan over the past years.

This company has no incentive to conform to any safety standards, laws or social contracts because they're not held accountable. The people of West Virginia have been burdened with the residue, costs - and now lives - of Massey's disregard for the rules.

This is an excellent example of why we desperately need Campaign Finance reform. When corporations influence elections, people lose. And die.

Firms Use "Socially Responsibility" as Means To Price Gouge

In defining Social Responsibility, Milton Friedman provides an example in his article, “The Social Responsibility of Business Is to Increase Profits”, of a corporate executive refraining from increasing price in order to contribute to the social objective of preventing inflation - even though a price increase would be in the best interest of the corporation.

The LA Times reported that Exxon and Chevron both saw record earning profits for 2007. Exxon’s net income exceed that of any corporation ever came while the economy grows unstable, either on the verge of, or possibly already in a recession. This recession, or possible recession, is often attributed to the rising price of fuel. These record earnings have brought much criticism from politicians and consumer rights organizations. The criticism is largely fueled by the large tax subsidies that the industry receives from the government. Exxon company spokesman, Ken Cohen, indicated that they were challenged by meeting the increase in oil demand, prompting the price increases. He further commentated that the industry has always been the focus of attention.

Exxon is failing to optimally balance the interests of all stakeholders. I contend that Exxon is exploiting social concerns in order to increase their profits through what amounts to false regulatory taxation. In response to criticism, Exxon spokesperson Ken Cohen explains that they are attempting to “meet increased demands that are also consonant with people’s expectations in the environmental area…..” Essentially, they are using society’s environmental concerns to substantiate their price increases to curb demand, when in fact; I believe they are simply using it as an opportunity to increase profits. Regulation is a function of the government, and here, Exxon is assuming a regulatory role. If the government needed to curb oil consumption, they may decide to implement additional taxes – this is not an activity that should be used by a private corporation involving such a captive market. However asinine, it reminds me of McDonald’s opportunistic method of reducing portion sizes when they received some heat for America’s obesity problem

One of Exxon company spokesperson, Ken Cohen’s, rebuttal to criticism was that they spent $20.9 billion on exploration and other projects. Again, I believe Exxon is using representing these expenses under the false pretense that they are socially driven. Just like Friedman describes, this is a way for Exxon to generate goodwill as a by-product of expenditures that are entirely justified in its own self-interest. Here, Exxon is translating profit-generating research and development expenditures into an opportunity to bolster their public image.

In Hasnan's “Two Normative Theories of Business”, he points out that laissez faire should not be argued to demonstrate the vulnerability of the utilitarian’s defense of stockholder theory, for the lack of a true free market renders the point moot. Here, Exxon’s business is not only subsidized by the government and lacks competitors. There is no true market, but a captive, dependent marekt. Many consumers are unaware as to which oil companies products they are buying. There is no market for oil by the end consumer.

While Freeman says that the laws have been progressively increasing the rights to those groups that have a claim in the firm, this is the opposite when it comes to the oil industry. In fact, the government capitalizes on our dependence of oil through taxation.

While I can say that Exxon is failing to optimally balance the interest of all stakeholders, they have a fiduciary responsibility to maximize profits for shareholders-and I believe they did just that. Exxon distributed more than $35.6 billion to its shareholders through dividends and stock buy-backs throughout the year 2007.

As far as known information permits, Exxon played within the “rules of the game” - the game just needs better rules.