House passes bill to stop 3% withholding rule on Medicare pay

The American Medical Association supports repealing the tax provision. Senators disagree over how to offset the revenue loss.

By Charles Fiegl — Posted Nov. 7, 2011

Print  |   Email  |   Respond  |   Reprints  |   Like Facebook  |   Share Twitter  |   Tweet Linkedin

Legislation approved by the House would eliminate a tax provision set to withhold 3% of Medicare payments starting in 2013. However, the bill initially stalled in the Senate as lawmakers disagreed over how to offset the $11 billion in lost tax revenues that would result from a repeal.

Congress has wrestled with plans to strike the 3% withholding rule since the legislating body first authorized it in 2006. The tax law was intended to prevent delinquent government contractors from neglecting to pay their back taxes and continuing to receive government pay even though they provide substandard services. One example cited of the type of contractor to be targeted was a defense company that continued to be paid despite failing to deliver what it had promised. But since then, the requirement has been viewed as overly burdensome and harmful to many small businesses that accept government money.

The 2006 law required the Internal Revenue Service to apply a 3% withholding rule by 2011, but the start date has been delayed twice. Most recently, the IRS announced in May that it will delay implementation to 2013. Starting that year, the IRS will require the government to pay those billing for services at 97% of the amount due and reconcile the 3% when processing the following year's tax bill. So unless contractors are found to have outstanding tax obligations that must be paid using the withheld amount, they eventually would receive the 3% back in the form of a tax return.

The definition of government contractors includes doctors who bill Medicare for health services, although the withholding would not apply to any payment that is less than $10,000. Most individual payments for physicians don't rise to that level, but when practices aggregate claims, they easily can exceed that threshold, said Miranda Franco, government affairs representative with the Medical Group Management Assn. in Washington.

Just because practices eventually will receive the full amount they are owed by the government doesn't mean the withholding wouldn't have a negative impact, Franco said. "It amounts to an interest-free loan for the government and a cash strain on providers."

The MGMA, the American Medical Association and several other health care organizations have supported efforts to eliminate the law. Physicians and hospitals have warned lawmakers that the withholding requirement would cause cash-flow problems at practices and facilities once implemented.

The House repealed the statute on Oct. 27 by a 405-16 vote. AMA President Peter W. Carmel, MD, applauded the House action and urged the Senate to follow suit quickly.

"This additional burden is simply untenable in our current Medicare system," Dr. Carmel said. "There is already a 20% gap between Medicare's payments to physicians and the cost of providing care to seniors, and physicians now face a nearly 30% cut on Jan. 1 due to the broken Medicare physician payment formula."

In another Oct. 27 vote, the House moved a separate bill designed to offset the cost of the withholding repeal by adjusting the health system reform law's calculation for determining eligibility for Medicaid and health insurance exchange subsidy programs. The measure would close a loophole that would allow some individuals with incomes up to 400% of the federal poverty level to qualify for a Medicaid expansion starting in 2014, said Rep. Diane Black (R, Tenn.).

"By passing my bill, we will save $13 billion over 10 years, all without taking away a benefit from anyone who currently relies on Medicaid," she said.

But it wasn't immediately clear how the Democratic-controlled Senate would proceed with the House bills. A majority of House Democrats voted against Black's Medicaid bill, and senators have continued to argue about where to find revenue for offsetting the cost of the withholding repeal.

Senate Minority Leader Mitch McConnell (R, Ky.) had proposed authorizing $30 billion in unobligated discretionary funds, excluding Defense Dept. spending, to pay for the projected loss in tax revenues that would result from repeal. His bill failed to overcome a procedural hurdle on Oct. 20.

Senate Majority Leader Harry Reid (D, Nev.) has said that he would pay for repeal by closing tax loopholes.

McConnell said during an Oct. 31 floor speech that his colleagues should pass the House bills immediately. Both Republicans and Democrats, including President Obama, support repealing the withholding rule, he noted.

"There is no reason the Senate shouldn't take it up right now," McConnell said. "This is one small thing we can do right now to reduce the burden on employers across the country."

Sen. Scott Brown (R, Mass.) formally introduced the House repeal bill in the Senate on Oct. 31.

Back to top


Unintended costs of tax withholding

Although an upcoming 3% withholding requirement on government payments to contractors would increase tax collection rates, it also would cause federal agencies to incur some additional expenses, according to an Oct. 25 Congressional Budget Office analysis. Operating costs for government contractors would rise after implementation, which could be passed on to the government. The CBO analysis stated that:

  • An estimated 300,000 contractors would choose not to do business with the federal government.
  • Vendors would incur $400 million in annual interest charges after borrowing money to cover the withheld amounts.
  • Upfront administration costs, such as accounting expenses, for the Defense Dept. alone would total $80 million.

Source: H.R. 674, Congressional Budget Office Cost Estimate, October (link)

Back to top



Read story

Confronting bias against obese patients

Medical educators are starting to raise awareness about how weight-related stigma can impair patient-physician communication and the treatment of obesity. Read story

Read story


American Medical News is ceasing publication after 55 years of serving physicians by keeping them informed of their rapidly changing profession. Read story

Read story

Policing medical practice employees after work

Doctors can try to regulate staff actions outside the office, but they must watch what they try to stamp out and how they do it. Read story

Read story

Diabetes prevention: Set on a course for lifestyle change

The YMCA's evidence-based program is helping prediabetic patients eat right, get active and lose weight. Read story

Read story

Medicaid's muddled preventive care picture

The health system reform law promises no-cost coverage of a lengthy list of screenings and other prevention services, but some beneficiaries still might miss out. Read story

Read story

How to get tax breaks for your medical practice

Federal, state and local governments offer doctors incentives because practices are recognized as economic engines. But physicians must know how and where to find them. Read story

Read story

Advance pay ACOs: A down payment on Medicare's future

Accountable care organizations that pay doctors up-front bring practice improvements, but it's unclear yet if program actuaries will see a return on investment. Read story

Read story

Physician liability: Your team, your legal risk

When health care team members drop the ball, it's often doctors who end up in court. How can physicians improve such care and avoid risks? Read story

  • Stay informed
  • Twitter
  • Facebook
  • RSS
  • LinkedIn