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Health care IT: Regulatory changes may mean R&D tax credit opportunities

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Regulatory changes can translate to real tax savings for those developing health care IT software. While many companies take advantage of the R&D tax credit when developing or implementing new IT products/solutions, many health care leaders aren’t aware of newly defined qualified development activities that could significantly increase R&D tax credits. As a result, reviewing new or improved R&D projects may lead to tremendous savings opportunities for health care IT organizations.

Areas of focus for 2015
The pace of change for health care IT is accelerating due to frequently updated laws like the Affordable Care Act (ACA), HIPAA, and the American Recovery and Reinvestment Act (ARRA). New or updated regulations often result in the need for new data and new personnel, which in turn may affect R&D tax credits. Two regulatory developments that may significantly affect health care IT and the related R&D tax credits this year are:

  • Meaningful Use 2 (MU2). Medicare and Medicaid Electronic Health Record (EHR) Incentive Programs are designed to spur the “meaningful use” of certified EHR technology that stores data in a structured format. Providers now must show that they are using their EHRs in a meaningful way by meeting thresholds for a number of objectives. Commonly referred to as Meaningful Use 2 (MU2), health care IT companies are required to develop new electronic reporting tools and also spend a significant amount of time designing and developing new EHR software processes. There will likely be significant R&D tax credit opportunities for compliance.
  • ICD-10. Health care providers also face the daunting task of implementing the 10th version of the International Statistical Classification of Diseases and Related Health Problems (ICD-10) classification system in 2015. ICD-10 increases the number of classification codes by nearly 20 times and is the first major overhaul for the U.S. since the adoption of ICD-9 in 1979. These classification codes are pervasive throughout EHR software and might in and of themselves require an overhaul in the way the software gathers, uses and communicates the codes.
There may be many more areas of focus as the year goes by, and health care IT companies must continue to monitor new or updated regulations as they emerge and assess them for additional R&D tax credit eligibility.

Reviewing new or improved R&D projects may lead to tremendous savings opportunities for health care IT organization.A re-energized R&D tax credit
In the past, health care providers invested in new systems less frequently, and used the R&D tax credit mostly on those occasions. Given the velocity of change in the industry (currently due to MU2 and ICD-10), R&D tax credit opportunities have proliferated. Today, activities by a broad range of employees potentially qualify — not just computer science engineers and developers writing code, but also individuals directly supporting or supervising them. Significant amounts of time are spent by these individuals performing tasks such as gathering requirements from providers, performing beta and sandbox testing, and translating regulatory requirements into actionable tasks for the engineering group. All of these activities have the potential to drive significant increases in the amount of a company’s R&D tax credit.

CASE STUDY
ALMOST $200,000 IN SAVINGS FOR A LARGE HEALTH CARE PROVIDER
To deal with increased regulations, an established U.S. health care provider increased its qualified hours by 15% throughout the company, with the most notable increases seen in the R&D product development group, quality assurance, the software testing groups, and the user interface product development groups. Most of this growth was attributed to MU2 and ICD-10. Grant Thornton professionals were engaged to evaluate the organization’s R&D tax credits, performing a thorough review of health care IT costs, processes and personnel. Because of the swift pace of regulatory change, our team took a fresh look at everyone’s job and tasks, even if they weren’t covered in a previous year. Because of regulatory changes and the additional people required to meet them, our review helped the company achieve savings of almost $200,000 in the R&D tax credit amount (after 280C) and identified an additional $2 million in wage QREs. The company now feels confident that it is taking advantage of the available credits and is continuing to look to Grant Thornton to stay on top of evolving regulations and bring the right solutions.
Finding savings for your company
The majority of companies in the U.S. are taking the R&D credit — and the numbers are only growing. Other issues may have taken precedence in the past few years, but now is the time to focus on the R&D tax credit. Some potential benefits include:

  • Reduced effective tax rates (federal and state, if applicable)
  • Increased earnings per share
  • Increased cash flows
  • The ability to fund future or additional research activities

Here’s how to start:

  1. Identify qualified research activities. Congress has enacted a fairly broad definition, but it is important to fully understand the complexities for best results. The first step is to determine which aspects of your company’s operations meet the qualification tests. Taxpayers can take currentyear tax credits and amend any open prior year returns (typically the past three years) to claim missed credits. Unused credits have a 20-year carryforward if not available for current use or prior years.
  2. Gather and categorize qualified research expenditures. Segment your expenses across three main categories:
    • Wages. Taxable wages for employees with direct involvement, direct supervision and direct support of R&D activities.
    • Supplies. Qualified supply expenses include tangible supplies used in R&D activity. Depreciable assets are not qualified supplies.
    • Contract research. Amounts paid to third parties for direct involvement, direct supervision or direct support of R&D activities are qualified and included in the R&D credit at 65% of eligible expenditures.

MEDICARE AND MEDICAID EHR INCENTIVE PROGRAMS
EHR allows health care providers to record patient information electronically instead of using paper records. However, EHRs are often capable of doing much more than just recording information. The EHR Incentive Program asks providers to use the capabilities of their EHRs to achieve benchmarks that can lead to improved patient care. According to the Centers for Medicare & Medicaid Services (CMS), “structured data allows patient information to be easily retrieved and transferred, and it allows the provider to use the EHR in ways that can aid patient care. Certified EHR technology … helps providers and patients be confident that the electronic health IT products and systems they use are secure, can maintain data confidentially and can work with other systems to share information.”1

The EHR programs are being rolled out in three stages, each with increasing requirements that health care providers must meet to receive incentive payments:

• Stage 1. In their first year of participation, providers can adopt, implement, upgrade to, or demonstrate meaningful use of certified EHR technology. Health care professionals and/or hospitals and critical access hospitals must meet lists of required core objectives and then choose additional objectives from a menu to show compliance with Stage 1.
• Stage 2. MU2 is implemented in Stage 2, requiring the development of new electronic reporting tools and new EHR software processes.
• Stage 3. CMS is currently developing Stage 3 objectives.
Moving forward
In this constantly evolving regulatory environment, companies that develop health care IT software must stay on their toes to keep up. For example, the R&D tax credit was used mainly for core IT personnel and activities in the past — this is no longer true, and determining the tax credit now also involves looking at many people (and their tasks) that support the core IT team or are supervised by that team. In addition, to comply with new regulations such as MU2 and ICD-10, companies need to build in a process to monitor evolving regulations and make swift changes when necessary. Because of the swift regulatory pace, you may qualify for more R&D tax credits than you realize, with more coming. Now is the time to jump in — there may be money on the table for you.





Health care IT





Contact

Rob Levin
Managing Director
Strategic Federal Tax Services
T +1 404 475 0190
E rob.levin@us.gt.com
The author would like to acknowledge the contributions of Max Coursey to the research underlying this article.



1 For more information, see the Centers for Medicare & Medicaid Services website at www.cms.gov for details.



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