3

2. Excise tax on certain unsafe needle devices

Present Law

There is currently no Federal excise tax on medical equipment
relating to syringes and intravenous systems.

D. tion of Pr 1

The proposal would impose an excise tax of 10 cents per item on
taxable sales.of syringes and certain components of other intravenous
systems which do not satisfy certain safety requirements. Only the
first sale after manufacture or importation of an item to health care
providers for use in the United States would be taxable. The safety
standards relate specifically to the prevention of accidental
needlestick injuries to health care providers, and would be prescribed
by the Commissioner of the Food and Drug Administration and reviewed
annually.

Eff ve D.

The proposal would apply to sales after December 31, 1996
through December 31, 1999.


8
6. Discounting of loss reserves by medical malpractice insurers

Present Law
Discounting methodology

Property and casualty insurance companies may deduct additions to
their reserves for unpaid losses (sec. 832). Section 846 (as added by
The Tax Reform Act of 1986) generally requires the deduction for such
reserves to be discounted to take account in part the time value of
money. Discounting is separately applied with respect to each line of
business for each accident year.* The amount of discounted unpaid
losses is determined based upon a loss payment pattern (for the
applicable line of business) and a statutorily prescribed rate of
interest.

The Code requires the Secretary of the Treasury to determine and
publish the loss payment pattern applicable to each line of business
on an industry-wide basis once every five years beginning in 1987.
This determination is based upon (1) the aggregate experience reported
on the annual statements of insurance companies to which the discount
provisions apply, (2) the most recent published aggregate data from
the annual statements relating to loss payment patterns available on
the first day of the determination year, (3) the assumption that all
losses paid in a given year are paid in the middle of such year, and
(4) certain other computational rules and assumptions.

In certain cases, an insurance company may elect to discount
unpaid losses using its own historical loss payment pattern, rather
than the industry-wide loss payment pattern published by the
Secretary.

Medical malpractice insurers

During the 1980s, many medical malpractice insurers changed from
writing contracts on an occurrence basis to a claims-made basis.
Because little or no historical data has been available with respect
to the claims-made form of insurance, however, the payment pattern for
the medical malpractice line of business published by the Secretary
has been determined largely on the basis of insurance contracts
written on an occurrence basis. The payment pattern for claims made
insurance differs from the payment pattern occurence basis insurance
because the former covers claims made (as opposed to occurrence of the
event giving rise to the claim) during the accident year.
Consequently, the Internal Revenue Service permitted eligible medical
malpractice insurers to discount unpaid losses for a qualified line of
business using "Composite Schedule P" discount factors published by
the Secretary for taxable years beginning prior to January 1, 1992.
(See Rev. Proc. 91-21, 1991-1 C.B. 525).

4 The term "accident year" means the calendar year in which

the incident occurs giving rise to the related unpaid loss.



5

4. Treatment of certain health maintenance organizations

Present Law

Present law provides that an organization described in sections
501(c) (3) and (4) of the Code is exempt from tax only if no
substantial part of its activities consists of providing commercial-
type insurance (sec. 501(m)). The activity of providing commercial-
type insurance is treated as an unrelated trade or business but, in
lieu of the usual tax on unrelated trade or business taxable income,
the unrelated trade or business activity is taxed under the rules
relating to insurance companies (subchapter L of the Code).

When this provision was enacted as part of the Tax Reform Act of
1986, the legislative history stated, "the Act is not intended to
alter the tax-exempt status of an ordinary health maintenance
organization that provides health care to its members predominantly at
its own facility through the use of health care professionals and
other workers employed by the organization. HMOs provide physician
services in a variety of practice settings primarily though physicians
who are either employees or partners of the HMO or through contracts
with individual physicians or one or more groups of physicians
(organized on a group practice or individual practice basis).
Similarly, organizations that provide supplemental health maintenance
organization-type services (such as dental services) would not be
affected if they operate in the same manner as a health maintenance
organization. "?

In the Technical and Miscellaneous Revenue Act of 1988,
legislative history to a technical correction under section 501(m)
restated the last sentence of the above 1986 Act legislative history
as follows: "organizations that provide supplemental health
maintenance organization-type services (such as dental or vision
services) are not treated as providing commercial-type insurance if
they operate in the same manner as a health maintenance
organization. "3

The 1986 Act provided several exceptions under section 501(m),
including an exception (as modified by the technical correction in the

? General Explanation of the Tax Reform Act of 1986 (H.R.
3838, 99th Cong., 2d Sess.) 585.

3 Report of the House Committee on Ways and Means,
Miscellaneous Revenue Act of 1988 (100th Cong., 2d Sess., Rpt.
110-795) 116; Report of the Senate Committee on Finance,
Technical Corrections Act of 1988 (100th Cong., 2d Sess., Rpt.
100-445) 121; Conference Report to accompany H.R. 4333, Technical
and Miscellaneous Revenue Act of 1988 (100th Cong., 2d Sess.,
H.R. Rpt. 100-1104) 9.



4

3. Treatment of certain charitable risk pools

Present Law

An organization described in section 501(c) (3) or 501(c) (4) of
the Code is exempt from tax only if no substantial part of its
activities consists of providing commercial-type insurance (sec.
501(m)). In the case of an organization that remains exempt from tax,
the activity of providing commercial-type insurance is treated as an
unrelated trade or business but, in lieu of the usual tax on unrelated
trade or business taxable income, the unrelated trade or business
activity is taxed under the rules relating to insurance companies
(subchapter L of the Code).

Commercial-type insurance generally includes any insurance of a
type provided by commercial insurance companies, although certain
exceptions are provided (for example, commercial-type insurance does
not include insurance provided at substantially below cost to a class
of charitable recipients) .

Description of Proposal

Under the proposal, a charitable risk pool would be treated as an
organization exempt from tax under section 501(c) (3) of the Code, and
section 501(m) would not apply to it. A charitable risk pool would
mean an organization (1) organized under State law as a nonprofit
charitable risk pool and that is exempt from State income tax (if
any); (2) operated solely to pool the insurable risks of its members
(other than risks relating to medical malpractice) and to provide
information to members with respect to loss control and risk
Management; (3) no part of the net earnings of the organization
inures to the benefit of members other than as reduced insurance
rates; (4) at least $1 million of the capital of which was provided by
organizations that are exempt from tax under section 501(c) (3) and
that do not benefit, directly or indirectly, from the insurance
coverage provided by the pool; (5) all the members of which are
organizations exempt from tax under section 501({c) (3); and (6) that is
controlled by a board of directors elected by its members. Rules
would be provided for the treatment of members of the charitable risk
pool that lose tax-exempt status during any taxable year.

Effective Date

The proposal would be effective for taxable years beginning after
December 31, 1991.



7
5. Provide organ donor information to taxpayers

Present Law

Organ donor information is not required to be included in income
tax refund mailings.

Description of Proposal

The proposal would require organ donor information to be included
in income tax refund mailings between February 1 and June 30 of the
first’ calendar year beginning more than four months after date of
enactment. The information would "encourage organ donation" and would
include an organ donor card.

Effective Date

The proposal would be effective on the date of enactment.


DESCRIPTION OF TAX PROPOSALS
RELATING TO THE HEALTH AND SAFETY OF INNER-CITY RESIDENTS
AND OTHER MISCELLANEOUS HEALTH-RELATED TAX ISSUES

Scheduled for a Hearing
Before the
SUBCOMMITTEE ON SELECT REVENUE MEASURES
of the
HOUSE COMMITTEE ON WAYS AND MEANS

On June 29, 1993

Prepared by the Staff
of the

JOINT COMMITTEE ON TAXATION

JCX-8-93

June 28, 1993



9

In certain cases, a medical malpractice insurer may compute its
discounted unpaid losses based on its own historical payment pattern.
The IRS has set forth certain requirements to qualify for such
treatment, including: (1) the company must have at least five accident
years of loss and loss expenses incurred for the line of business; and
(2) the company’s cumulative fraction of loss and loss expense
payments in each of at least two accident years for the line of
business must equal or exceed the cumulative fraction of loss and loss
expense payments for the earliest accident year shown on the table
published by the IRS for the line of business. (See Rev. Proc. 92-76,
1992-38 I.R.B. 28.)

D. ripti of P:

The proposal would permit certain medical malpractice insurers to
elect to discount unpaid losses for a qualified line of business using
"Composite Schedule P" discount factors published by the Secretary of
the Treasury. To qualify for the election under the proposal, a
company must currently write claims-made policies and must not be able
to calculate its own discount factors under present law.

Effective Date

The proposal would apply to taxable years beginning on or after
January 1, 1992 and before January 1, 1994.

With respect to subsequent taxable years, the Secretary would be
required to issue separate discount factors applicable to claims-made
medical malpractice insurance.


6

1988 Act) for dental benefit coverage by Delta Dental Plans
Association organizations that are members of the Delta Dental Plans
Association through contracts with independent service providers so
long as the provision of such coverage is the principal activity of
such organization.

Description of Proposal

The proposal would modify the exception to section 501(m) to
provide an exception for dental benefit coverage provided by a Delta
Dental Plans Association organization and vision benefit coverage
provided by a Vision Service Plan association organization through
contracts with independent professional service providers so long as
the provision of such coverages is the principal activity of such
organizations.

Effective Date

The proposal would be effective as if enacted with the Tax Reform
Act of 1986.



2

DESCRIPTION OF PROPOSALS

1. Increase excise tax on firearms; Hospital Gunshot Cost Relief
Trust Fund (Title III of H.R. 737)
Present Law

A Federal excise tax is imposed at 10 percent of the
manufacturer's or importer’s price on the sale of pistols and
revolvers and at 11 percent of the manufacturer's or importer’s price
on the sale of rifles, shotguns, and ammunition (sec. 4181). Revenue
equivalent to the 10-percent and li-percent excise taxes are dedicated
(in the year following receipt) to financing of the Federal Aid to
Wildlife Program for support of State wildlife programs.

tion ae}

Excise tax rate

The bill would increase the excise tax on pistols and revolvers
from 10 percent to 20 percent and the tax on other regular firearms
{rifles and shotguns) from 11 percent to 20 percent. The proposal
would not increase the 11l-percent tax on ammunition. A floor stocks
tax would apply to such firearms on the date of the tax increase.

Trust Fund

The bill would establish a new Hospital Gunshot Cost Relief Trust
Fund ("Gunshot Trust Fund") in the Internal Revenue Code, to be
financed by amounts equivalent to 50 percent of the "net" revenues
from all the taxes on firearms (under sec. 4181). Net revenues are
defined as the gross revenue from the excise tax on firearms less the
decrease in income tax resulting from the firearms tax.

Amounts in the Gunshot Trust Fund would be available, as provided
in appropriation Acts, for expenditures to assist urban hospitals in
defraying the costs of providing medical care to gunshot victims not
covered under any health plan.

Eff vi e

The bill would be effective on the first day of the first
calendar month beginning more than 30 days after the date of
enactment. The floor stocks tax would be payable before the end of
the 6-month period after the tax-increase date.



INTRODUCTION

The Subcommittee on Select Revenue Measures of the House
Committee on Ways and Means has scheduled a public hearing on tax
issues affecting the health and safety of inner-city residents and
other miscellaneous health-related tax issues on June 29, 1993.

In announcing this hearing, Subcommittee Chairman Rangel stated:
"Residents of distressed neighborhoods in this country face severe and
relatively unique threats to their well-being on a daily basis because
of the difficult health and social problems confronting these
neighborhoods. The Subcommittee is holding this hearing to focus
attention on these problems and on possible ways to ameliorate them
through the use of the tax laws."

In particular, the Subcommittee indicated its interest in
receiving testimony on proposals to tax firearms, drugs, and unsafe
needles, as well as proposals to enhance the provision of charity care
and other services benefiting the community by tax-exempt hospitals.
In addition to the specific proposals described in this document, the
Subcommittee invited testimony on related issues and any alternative
solutions to the problems addressed by these proposals.

This document,' prepared by the staff of the Joint Committee on
Taxation, provides a description of present law and certain specific
proposals, based on proposals submitted to Chairman Rostenkowski by
Members of the Committee on Ways and Means.

q This document may be cited as follows: Joint Committee
on Taxation, i ax i Health
ni of -Ci Ri nt r Mi an

Health-Related Tax Issues (JCX-8-93), June 28, 1993.


CONTENTS

INTRODUCTION

DESCRIPTION OF PROPOSALS .... rs
1. Increase excise tax on firearms;
Hospital Gunshot Cost Relief Trust Fund
(Title III of H.R. 737) .

2. Excise tax on certain unsafe
needle devices... ... 2.2.2...
3. Treatment of certain charitable risk pools
4. Treatment of certain health maintenance
organizations ..............

5. Provide organ donor information to taxpayers

6. Discounting of loss reserves by medical
malpractice insurers ..........