WASHINGTON - Health care alliances and state guaranty funds generally would be prevented from using tax-exempt bonds under President Clinton's health care reform legislation because they would perform what traditionally have been private functions, according to a draft explanation of the bill.
"It is inappropriate to provide the indirect federal subsidy implicit in tax-exempt bonds to the individuals who benefit from the alliances and guaranty funds," administration officials said in the draft document which explains provisions of the proposed Clinton reform bill that was sent to Congress in late October.
The administration has not yet released the document to the general public, but a draft of it was obtained late last week and printed in a daily publication by a Reston, Va.-based group, Tax Analysts.
Treasury officials are expected to discuss some of the points made in the document when they testify today on tax aspects of the health care reform measure before the House Ways and Means Committee's subcommittee on select revenue measures.
In the draft explanation, administration officials described the private aspects of the health care alliances and the state guaranty funds.
The alliances would be organized for, and financially supported by, their individual members, the draft document said. The state guaranty funds, it said, would be operated for the benefit of those covered by the fund.
The Clinton bill generally would prevent tax-exempt financing by the alliances and guaranty funds by tying the use of bond proceeds to private-activity bond restrictions in the tax law.
When the preliminary version of the health care reform plan became public in September, some thought the health care alliances and state guaranty funds might be allowed to issue tax-exempt debt.
But when the formal legislation was sent to Congress in late October, the measure made clear that the alliances and state guaranty funds would be required to use taxable, rather than tax-exempt, borrowings.
Under the proposed bill, the health care alliances and state guaranty funds would be treated as private businesses if they used bond proceeds.
Current tax law provisions say that bonds are private - activity bonds - and taxable unless used for certain specified purposes - if more than 10% of the proceeds are used by private businesses and if more than 10% of the debt service is secured by, or derived from, payments by private businesses.
In addition, a Treasury official said in an interview, bonds are private-activity bonds if more than 5% of the proceeds are for private business use that is unrelated to the governmental purpose of the bond issue and if more than 5% or $5 million of bond proceeds, whichever is less, is used for a private loan.
As a result, any bonds used by the health care alliances or state guaranty funds probably would have to be taxable, the draft document and the Treasury official said.
The document also said that the tax-exempt status of a health care maintenance organization could be jeopardized if it provided too many "point of service" benefits - that is, benefits for members that choose to go to doctors outside of the HMO network.
The problem is that under the proposed reform bill, point of service benefits would be treated as commercial insurance - which would amount to business income unrelated to its exempt status, the draft document said.
The document explained the rationale for this policy by saying that an HMO probably would only be providing a lot of point of service benefits if its network of providers was "inadequate or unresponsive" to the needs of its members. In such cases, the document said, "the justification for continued tax exemption would be questionable."
Treasury officials, however, said in an interview that this explanation was not meant to be harsh" and that Treasury "is very sympathetic" to the concerns of HMOs that they could both be required by the legislation to provide point of service benefits and then face the loss of tax-exemption by complying with the requirement.
The Treasury officials said they probably will provide relief to HMOs to ensure they do not face this dilemma.
"We're already thinking about the possibility of some sort of relief because we agree this is an issue," said one of the Treasury officials.
In a related matter, the document said that an HMO could qualify for tax-exempt status as a charitable organization under section 501(c)(3) of the tax code - the one section under which nonprofit organizations can issue tax-exempt bonds - only if it provides health care services to its own members at its own facilities through professionals who do not provide a substantial amount of health care outside of the HMO. Other HMOs would have to qualify for tax-exempt status under alternative sections of the tax code.
Administration officials also noted that HMOs, in order to qualify for tax-exempt status under 501(c)(3) of the code, would have to annually assess the health care needs of its community and develop a plan to meet those needs.
