Healthcare News & Insights

IRS to bite off 3% of your payments


Hospitals and practices are likely to see Medicare reimbursements shaved by 3% starting in 2012. And there’s not much you can do about it.  

The reduction is due to implementation of an IRS rule from 2005 that’s scheduled to be implemented Jan. 1, 2012. The rule requires an additional 3% withholding of payments to contractors working for local, state and federal governments. Payments under Medicaid would be exempt, but Medicare falls squarely under the umbrella.

The withheld money won’t be gone forever — it’s applied to the payee’s tax obligations for that year. Any money due to be refunded after that would be available once a practice or hospital submits its annual tax forms.

The real problem is that for many health care organizations with thin margins, especially small practices and sole proprietors, even a temporary loss of access to that 3% could have a devastating effect on their cash flow.

What’s ahead

The good news is, as with all things from the federal government, the “final” rule may not be completely final. There are two good reasons to hope that the feds will cut health care providers some slack:

  1. The real targets of the IRS rule were defense contractors and similar large companies who were less-than-compliant with their taxes. Health care providers just got caught up in the broadly written rule. Many organizations are calling for Congress to amend the rule so it exempts health professionals, but with the economy still shaky, there’s no telling if Congress will be open to cutting its own cash flow to help health care providers.
  2. One part of the rule stipulates that only payments over $10k are subject to the withholding. However, it’s not clear if a physician’s total bill to Medicare would count as one payment (and most likely be subject to withholding), or if each individual claim for each patient would be treated separately (avoiding withholding on the vast majority of payments). The American Medical Association has asked IRS for clarification of the rule.

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  1. Doug Bishoff says:

    I wonder if this will apply to non profits and RHC’s. We are both and don’t pay income taxes, so we wouldn’t get it back.

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