Tax

Pharmacos, Health Insurers: The Bad Boys of Health Reform?

For tax purposes, the fees paid by the two industries under the Patient Protection Act are comparable to fines paid to the government for the viola...
Robert WillensOctober 3, 2011

In July the Financial Accounting Standards Board issued an accounting-standards update (ASU No. 2011-06) that provides guidance on how to account for certain fees that must be remitted to the U.S. Treasury by pharmaceutical manufacturers and health insurers under the Patient Protection and Affordable Health Care Act, as amended by the Health Care and Education Reconciliation Act. In a narrow sense, at least, you could say that when it comes to the taxation of pharmacos and health underwriters, the board’s interpretation of the new health-care law is punitive.

The acts impose yearly fees on the pharmaceutical-manufacturing industry for each calendar year beginning on or after January 1, 2011, and on the health-insurance industry for each calendar year beginning on or after January 1, 2014. An entity’s portion of the annual fee is payable not later than September 30th of the applicable calendar year. In essence, the fee is comparable for tax purposes to a fine or similar penalty paid to a government for the violation of any law in that it’s non-tax-deductible.

For the pharmaceutical-manufacturing industry, the annual fee will be allocated to individual pharmaceutical manufacturers on the basis of the amount of their branded prescription-drug sales for the preceding year as a percentage of the industry’s branded prescription-drug sales for the same period. A pharmaceutical-manufacturing entity’s portion of the annual fee becomes payable to the U.S. Treasury once the entity has a gross receipt from branded prescription-drug sales to any specified government program or in accordance with coverage under any government program for each calendar year beginning on or after January 1, 2011.

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For the insurance industry, the annual fee will be allocated to individual health insurers based on the ratio of the amount of an entity’s net premiums written during the preceding calendar year to the amount of health insurance for any U.S. health risk written during the preceding calendar year. A health-insurance entity’s portion of the annual fee becomes payable to the U.S. Treasury once the entity provides health insurance for any U.S. health risk for each calendar year beginning on or after January 1, 2014.

The liability related to the annual fee must be estimated and recorded in full upon the first qualifying sale for pharmaceutical manufacturers. For health insurers,  the liability must be estimated and recorded once the entity provides qualifying health insurance in the applicable calendar year in which the fee is payable. For both, there must be a corresponding deferred cost that is amortized to expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable.

It’s often said that a government can use its tax system to pick winners and losers. While making the fees non-tax-deductible doesn’t mean that  they’re portraying the two industries as criminals, are FASB and the Treasury characterizing health insurers and pharmaceutical companies as the bad boys of health reform?

Robert Willens, founder and principal of Robert Willens LLC, writes a tax column for CFO.com.