Tax 'Em All: The "IRS Army"

Written By Brian Hicks

Posted March 22, 2010

Funny how things work out.

Despite American opposition, the “Washington Knows Best” bill had many feeling like it was rammed down their throats…

But while millions were busy complaining about those large tax increases, $500 billion in Medicare cuts, and “dangerous interference in the doctor-patient relationship,” we paid less attention to the new and massive powers that’ll be granted to the IRS, (the U.S. version of the KGB?)

Some of the highlights of the new IRS powers, include:

  • IRS agents will verify if you have “acceptable”health care coverage

  • IRS has the authority to fine you up to $2,250 or 2% of your income for failure to prove you have “minimum essential coverage”

  • IRS can confiscate your tax refund

  • IRS audits are likely to increase

And there are more, which you can learn more about here.

This isn’t to say there aren’t some “good” parts to the overhaul. We present the good below, too.

Here’s more from other Wall Street “experts” as highlighted by Business Week… as well as some investing opportunities.

Ralph Giacobbe, Credit Suisse

On Sunday, the House passed the Patient Protection & Affordable Care Act (H.R. 3590) and the Health Care & Education Affordability Reconciliation Act of 2010 (H.R. 4872). The combined legislation would cover 19 million uninsured beginning in 2014, with a majority of uninsured covered by 2016 (30 million). The Congressional Budget Office has scored the bill to cost $940 billion.

In our view, coverage of 32 million uninsured provides the greatest benefit to hospitals. The final bill has some incremental adjustments/reductions to the group. … [N]onetheless, we believe health-care reform could provide hospitals with slight upside to numbers. More importantly, greater coverage of the uninsured should alleviate a large portion of bad debt expense.

Jeff Kleintop, LPL Financial

A catalyst for another 5%-10% stock market pullback that weighed on the stock market late last week is the health-care legislation that was passed in the House on Sunday. Within the Health Care sector, the impact is mixed, the HMO industry is negatively impacted while the hospital companies, along with other beneficiaries of increasing health-care volumes, benefit. However, much of this impact has already been priced into the sector. The potential negative outcome for the broader market stems from the tax and deficit impacts of the legislation.

The new taxes are a negative for investors. The legislation imposes a new 3.8% tax on investment income. In addition it adds a 0.9% tax on wages for those earning more than $250,000, set to take effect in 2013.

Another macroeconomic impact is the potential to increase the deficit. The bill establishes new insurance exchanges for the purchase of health insurance by those who do not have insurance offered through their employer. The bill caps the share of family income spent on health-care premiums. Two important facts are necessary to understand the concern evident in the markets over the deficit impact of the legislation:

  • The average cost of a family health insurance policy offered by employers was $13,375 in 2009, according to the Kaiser Family Foundation and the Health Research & Educational Trust. On average, employees pay about 20% of premiums with the employer making up the rest (an average of $10,700 per employee).
  • Under the exchange, the cost of a policy would be subsidized by the taxpayers for individuals and families with incomes up to 400% of the poverty level. This means a family of four with the national average income of about $70,000 (at 317% of the poverty level of about $22,000) would have their spending capped at 9.5% of income, which would be about $6,650. The other half of the cost of the insurance would be picked up by taxpayers.

Tom Gallucci, Lazard Capital

The long period of time between the passage and implementation of the bill inherently lends itself to some level of uncertainty. The debate around health care will persist even after this legislation is behind us. Polls suggest much of the public has been opposed to reform as passed, and Republicans have vowed to make the legislation a centerpiece of the November elections. We suspect it will be a material aspect of the debate for the 2012 presidential race as well.

Depending on how the political winds blow in the next two years and whether government budget deficits grow or narrow, changes to the legislation are possible. Even without formal adjustments to the bill, the real-life effects of large federal bills tend to be difficult to predict, as there are typically unintended consequences. Given the sheer size of this legislation, the number of constituents it affects and the authority it leaves to regulators, analyzing the long-term impact of the bill is more difficult than it may at first appear.

Scott Fidel, Deutsche Bank

The House vote sets the stage for health reform to soon become law. Our long-standing view is that the reform bill will be a net long-term negative for industry profitability; the benefits of covering more than 30 million uninsured will likely be more than offset by the negative impact of Medicare Advantage payment cuts, industry taxes, and stringent new regulations on underwriting practices.

At the same time, these risks are already well understood by investors after more than a year of rancorous debate; our buy side survey showed nearly 80% of investors expecting reform to be approved into law.

However, while many investors believe the approval of the bill will allow for clarity after more than a year of anxiety-producing debate, we view the House vote as marking only the end of the beginning of this process. The next phase will include the release of thousands of pages of regulations at the agency level translating the law into a new regulatory framework.

Phillip Seligman, Standard & Poor’s Equity Research

We view the passage by the House of Representatives of the health reform package as positive for managed care organizations (MCOs), on balance. The MCOs will face fees, which are delayed until 2014, and will have restrictions such as the ban on rescissions, no lifetime caps, and inability to bar coverage based on health status, which can pressure margins.

But we think these negatives may be offset by enrollment gains, providing economies of scale, leverage over general and administrative costs, and greater negotiating clout with providers. We also see potential opportunities for consolidation.

And here’s another investor positive reported by the Wall Street Journal.

The health care package passed on Sunday contains few provisions that are poisonous to the pharmaceutical industry, though drug makers may have to pony up several billion dollars more than previously expected.

Absent from the legislation are provisions that would allow American consumers to buy re-imported drugs from abroad and let the federal government negotiate drug prices, two controversial issues that the industry has said would devastate their balance sheets.

The approval of the bill is likely to be applauded by Wall Street and could benefit the stocks of drug makers in the short-term.

“I was unable to find anything in there that would cause me to have anxiety if I were a shareholder in a pharmaceutical company,” said Ira Loss, a senior health-care analyst at the research firm Washington Analysis.

The legislation, which still has to be signed by President Barack Obama, also gives drug makers 12 years of protection, or exclusivity, to sell biologic medicines before facing the threat of cheaper, off-brand alternatives.

Billy Tauzin, who led the industry’s negotiations on health care with lawmakers, said overall drug makers fare well. “While we’re not totally happy,” Tauzin began, “we generally feel like it tracks with out principles.”

Sanofi-Aventis SA (SNY) Chief Executive Christopher Viehbacher said in an interview that the impact of the legislation will be neutral to slightly negative “but better for the industry than if healthcare reform didn’t pass.”

Tauzin, head of the Pharmaceutical Research and Manufacturers of America or PhRMA, and Viehbacher said getting protection for brand-name biologics is among the important provisions for the industry. Drug makers pushed hard to get 12 years of exclusive market protection while the White House and some lawmakers wanted to lower the protection to seven years.

Tauzin acknowledged, however, that drug makers will take a “severe hit” in the form of fees on their profits and rebates they’ll have to pay the government. Tauzin is the outgoing president of the Pharmaceutical Research and Manufacturers of America, or PhRMA, the main lobby for the drug industry.

Such fees total about $80 billion under the bill passed Sunday and would be divided among drug makers.

Still, many analysts say drug makers will end up recouping those costs through new customers: The bill would provide insurance coverage to an additional 32 million Americans.

“Chalk up another good round for Pharma and Biotech in health care reform,” began a note to clients Friday from Concept Capital, a research firm.

Ken Tsuboi, co-manager of the Allianz RCM Wellness Fund, sees the impact of bill, and its $90 billion in concessions over 10 years, as relatively minor in an industry that has annual global sales of about $750 billion, with about $300 billion in the U.S., and margins close to 30%.

“I think that it is actually a pretty good deal for Pharma,” Tsuboi said.

The stocks of large pharmaceutical companies generally have trailed the overall market over the past year. That likely reflects the projected impact of losing patent protection on several key drugs in coming years, more so than any concerns related to the health bill.

Tauzin said the industry is concerned that a federal advisory board created by the legislation would end up limiting patient choices. He added, however, that it’s too early to tell exactly how the board would operate.

Another plus for drug makers is a proposal to close the so-called Medicare “donut hole”—the gap in coverage that forces seniors to pay out of pocket for drugs after a certain threshold is reached. Closing this gap is an industry priority; it will likely increase sales for drug companies because people frequently stop taking their medication or switch to generics once they have to pay for them out of pocket.

Miller Tabak analyst Les Funtleyder took a sanguine view of the bill’s impact on drug makers.

“When you dig into it, the fact remains that more people are going to get covered and there doesn’t seem to be regulation in costs,” Funtleyder said. “If you have more people and limited cost control, that is good for the sector.”

We’d love to hear your thoughts on this very emotional issue, too. You can leave comments below.

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