engaged jointly with the insurance industry in an investigation of reporting of medical care payments.

Permit me to say that, insofar as this abuse continues to exist, it is not the fault of the Commission on Finance or of the U.S. Senate. If it were to be defended, I think it would have to be defended by the House Committee on Ways and Means which declined to go along with the provision that was put into the law or at least put into the bill by this committee and by the U.S. Senate.

Our first witness this morning will be the Honorable Meade Whitaker, tax legislative counsel of the Treasury Department. He is accompanied by Mr. Jerry L. Oppenheimer, associate tax legislative counsel. Mr. Whitaker, you are recognized and will you proceed, sir. STATEMENT OF HON. MEADE WHITAKER, TAX LEGISLATIVE COUNSEL OF THE TREASURY DEPARTMENT; ACCOMPANIED BY JERRY L. OPPENHEIMER, ASSOCIATE TAX LEGISLATIVE COUNSEL

Mr. WHITAKER. Mr. Chairman and members of the committee, I am pleased to present to the committee the views of the Treasury Department on the need for additional legislation to require insurance companies and others to file information returns with the Internal Revenue Service with respect to the amount of payments made directly and indirectly to doctors and other health care providers.

During consideration of the Tax Reform Act of 1969, the Committee on Finance adopted an amendment designed to broaden the existing statutory information reporting requirements covering health care payments. This provision, which would have required insurance carriers to file information reports with respect to payments made directly to health care providers as well as to insured individuals, was deleted by the conference committee.

Our continuing study of this problem has confirmed our view that more effective information reporting of health care payments is essential. We have also concluded that it can only be accomplished by legislation.

The background of this problem is cogently set forth on pages 145– 149 of the report dated February 3, 1970, of the staff to the Committee on Finance entitled, "Medicare and Medicaid-Problems, Issues, and Alternatives." The Internal Revenue Code provides that every person making payments of certain types in the course of his trade or business to another person, amounting to $600 or more in a calendar year, must file an information return showing the amounts paid and the name, address, and identification number of the recipient. However, until late in 1969 the Internal Revenue Service did not apply the information return requirements to payments to doctors, dentists, and other suppliers of health care services.

This matter was reconsidered last year and on November 13, 1969, the Internal Revenue Service announced the issuance of Revenue Ruling 69-595 (1962-2, Cum. Bull. 242). That ruling applied section 6041 of the Internal Revenue Code to insurance companies, including those participating in medicare, Blue Cross-Blue Shield organizations, State agencies participating in the medicaid program, and unions and em

ployers having self-insured or self-administered plans. The ruling requires these payers to file the form 1099 information return with respect to payments aggregating $600 or more annually made directly to doctors and other health care providers. Direct payments are sometimes described as assigned payments. Under this ruling, no return is required for or with respect to amounts paid as reimbursement of amounts paid or payable to a provider. These payments are known as indirect or unassigned payments.

For insurers under the Government-sponsored health care programs, the ruling applies to payments made after January 1, 1969, except that in the case of carriers whose accounting systems were not geared to retrieving and reporting information on payments made in 1969, the ruling applied only to payments made on and after January 1, 1970. An additional 1-year extension was granted to payers not under medicare and medicaid programs, so that the ruling will not be fully effective until January 1, 1971. The prospective application of the ruling was in response to the representation of many insurers that a reporting system could not be installed within a shorter leadtime without undue cost. The year's extension was used, in part, for a study by a joint Internal Revenue Service/insurance industry task force of the systemic and procedural aspects of information reporting. I am pleased to present the committee with copies of this task force report.

The staff of the Senate Finance Committee and the Internal Revenue Service have separately concluded that information reporting of health care payments, as authorized by present law, leaves a good deal to be desired. Chief among the defects, in our judgment, is the absence of a reporting requirement for unassigned payments for health care services.

At present, unassigned payments account for approximately 60 percent of all payments made by commerical carriers, other than Blue Cross and Blue Shield. Aside from this large gap in information reporting, the omission of unassigned payments may lead to massive shifts in billing practices by providers of health care services seeking to avoid the impact of information reporting, including the cost to the payer. Such a shift would increase the information reporting gap. It would also tend to have serious implications for those patients who may be without sufficient financial resources to pay medical costs prior to reimbursement under health insurance. This is, of course, the group for whom health insurance is most necessary and for whom the present trend toward assigned payments is most beneficial.

The Treasury Department recognizes that the 1969 revenue ruling, in its application to assigned payments, has certain deficiencies and inadequacies. These result in part from provisions of existing regulations and in part from lack of statutory authority. For example, reporting is not required of payments to corporations, such as professional service corporations. We believe this problem can be corrected administratively.

The ruling does not impose a reporting requirement upon payees acting as conduits. For example, many clinics or associations of doctors may designate a single individual to receive payments for services by each member of the group. The reporting of large payments to such an agent or nominee without a requirement for a further report

ing of his redistribution of the payments makes the information less beneficial to the Internal Revenue Service. Also, the ruling omits a requirement that the payers furnish copies of information returns to the payees, which, of course, is an eminently desirable aspect of information reporting.

Except for extending the reporting requirement to corporations, it is, at best, uncertain how far the Internal Revenue Service can achieve administrative solutions to these problems. In fact, it has been suggested that there is some question as to the statutory authority for the issuance of this ruling. And, in any event, it is clear that legislation is needed to authorize information reporting with respect to unassigned payments.

Unassigned payments present a somewhat different information reporting problem than assigned payments. Since an assigned payment is paid directly to the health care provider, it is that amount which is useful to the Service. In the case of an unassigned payment, it is not the reimbursement to the insured which is significant but, rather, it is the separate charges for health care which provide the Service with useful information. Thus, information reporting with respect to unassigned payments requires classification, storage, and retrieval of the various charges to the payee by the health care providers.

We are aware of the concern expressed by the insurance industry with respect to the costs of implementing a reporting system with respect to the full amount of unassigned payments. However, prior cost estimates were based on the reporting of all payments to health care providers aggregating $600 or more in a single year. That would require classification, storage, and retrieval of data on all such reimbursed charges. The major influence on the cost is the number of items processed.

In an effort to reduce the burden on the payers without materially reducing the value and usefulness of the information furnished, we are proposing a reporting system based on the amount of each statement rendered by a provider included in a claim with respect to which reimbursement is made. For the first 2 years, separate statements under $100 would not be reported. This amount would drop to $50 for the succeeding 2 years, after which it would be fixed at a floor of $25. This would mean, for example, that as the insurance carrier analyzed each claim, it would eliminate for reporting purposes during the first 2 years every separate statement under $10. We believe that this approach, which requires the collection and retrieval of significant transactions only, rather than all amounts aggregating at least $600, together with the transitional phasein, will materially reduce the burden on the insurance industry while providing the Service with an important aid to compliance.

Questions have also been raised as to the ability of the Internal Revenue Service to use effectively the information required to be furnished. We fully concur with the view that neither taxpayers nor the Internal Revenue Service should be burdened with returns or documents which serve no useful purpose. However, experience has demonstrated that information reporting can effect an almost miraculous reversal of a series deficiency in voluntary reporting of income.

The statistics of income reveal that, from 1960 to 1963, the number of individual income tax returns reporting interest income increased more than 100 percent, from 10.3 million to 21.4 million, while the dollars of reported interest income increased from $5.1 million to $9.2 million. During this same period, the number of returns filed increased less than 3 percent and adjusted gross income about 10 percent. The important event during that period was that the level of information reporting on interest was reduced from $600 to $10 per year. The conclusion which can be drawn is obvious. Information reporting on items of income has a direct and beneficial effect on voluntary reporting for income tax purposes.

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That there is a need to improve the level of compliance in the reporting of health care payments is also clear. During the past year, Internal Revenue Service has processed returns of about 11,000 physicians receiving medicare and medicaid payments. Preliminary results indicate a number of instances of substantial, unreported income, including some where the omission exceeded $100,000. This confirms other indications of noncompliance on the part of health care practitioners.

The salutary effect on the level of voluntary compliance resulting from commencement of information reporting is too well demonstrated in other areas to require justification. Moreover, the availability of the information itself, even to the limited extent provided by the 1969 revenue ruling alone, will measurably assist in efficient and effective utilization of revenue agent man-hours assigned to the audit process. However, for the reasons already stated, reporting should not be limited to the narrow scope of this revenue ruling. Neither should any doubt as to the authority of the Internal Revenue Service to enforce reasonable information reporting requirements be permitted to exist.

If this legislation is enacted, arrangements will be made by the Internal Revenue Service to match data from the information returns against the individual master file to detect those providers of health care services who have failed to file an income tax return. The data will also be associated with individual tax returns selected for audit in the regular classification process, which will, as stated, improve the ability of the agent to effect a thorough and speedy audit. In addition, it is anticipated that analysis of the information from the various programs utilizing these documents will lead to the identification of special return selection criteria which will facilitate the selection of highyield returns for audit. These factors together will contribute substantially to the ability of the Internal Revenue Service to maintain its responsibility in the compliance area.

The need for this legislation is clear. An effective information reporting system is probably the strongest available incentive to support the voluntary reporting of income. Where it becomes feasible, as now in the case of health care payments, it should be adopted. Accordingly, I am recommending to the committee legislation similar to section 944 of H.R. 13270, as reported out by this committee in 1969 but deleted in conference, modified as I have indicated.

I would now like to discuss in more detail our specific recommendations.

1. AUTHORIZATION

(a) Information reporting by insurance companies, Blue CrossBlue Shield organizations, medicare and medicaid agencies, employers, and unions operating health insurance plans and similar payers with respect to unassigned payments should be authorized:

(i) Reporting should be made annually of the amount of each health care statement in excess of the specified minimum amount with respect to which a payment is made, with all charges by each separate provider reflected by such statements aggregated for the year;

(ii) Reporting should commence with respect to charges reimbursed after December 31, 1971;

(iii) For the years 1972 and 1973, the reporting should exclude all statements less than $100; for the years 1974 and 1975 all statements less than $50; and thereafter all statements less than $25 should be excluded;

(iv) Reporting should not be required with respect to any charge on account of health care services furnished by an instrumentality of the Federal Government or by any State or local government or by any tax-exempt organization;

(v) The $600 floor of existing law should not apply.

(b) Information reporting by the same group of payers of assigned payments should similarly be authorized, with the same exclusions phased in during the same periods, except that such reporting should be commenced at the $100 level for all assigned payments made on and after January 1, 1971. Each separate payment in excess of the excluded amounts to each payee should be aggregated and reported annually.

2. COPIES OF INFORMATION RETURNS

Copies of information returns should be supplied to each payee in the case of assigned payments. In the case of unassigned payments, each provider of health care services with respect to whom an information return is filed should be furnished a copy of the return.

3. NOMINEE REPORTING

A further reporting requirement should be imposed on each health care provider who receives any payment in excess of the prescribed amounts which such provider is obligated to disburse to one or more other providers.

4. SEPARATE PAYMENTS FOR MERCHANDISE

Reporting should not be required with respect to any separate payment-assigned or unassigned-for merchandise or property such as drugs, eye glasses, prosthetic devices, wheelchairs, beds, crutches and the like.

5. EXCLUSION OF TORT CLAIMS

Payments in settlement of tort claims shall not be subject to information reporting under this provision even though such payments may include amounts referable to the cost of health care services.