EMR / EHR Incentives: Federal & State, and Available Tax Deductions

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The manner in which health care providers qualify for Medicare and Medicaid EMR “meaningful use” payments is detailed in The Health Information Technology for Economic and Clinical Health (HITECH) Act, which in turn is part of the American Recovery and Reinvestment Act of 2009 (ARRA).There are other governmental incentives for health care providers who adopt and implement EMR systems. Broadly speaking, incentives can be in the form of cash grants or in the form of tax credits or adjustments. All health care providers who provide Medicare services are eligible for federally funded incentives; many states offer grants or tax credits, as well.

Federal EMR Incentives & Tax Issues

Federally funded payments under the American Recovery and Reinvestment Act of 2009 (ARRA) are available for qualifying health care providers under either Medicare or Medicaid programs. All (Medicare) or the majority (Medicaid) of payments under either plan require “meaningful use” of an EMR system accredited by a proper certification authority. It’s important to note that there are several stages to meaningful use, all of which must be met for ongoing payments. The regulations for Stage Two meaningful use have not been formalized as of January, 2012, but the deadline for meeting these Phase 2 meaningful Use rules is not until the end of calendar year 2014.

Maximum available payments vary depending on whether a health care provider qualifies and applies for payment under Medicare or under Medicaid grants. Providers can choose to apply for whichever program they are eligible.

  • Under Medicare, a maximum of the lesser of 75% of Medicare Part B claims or $44,000 is available to medical providers over a period of five years, with the majority of payments made in the first two years. The purchase price of the EMR system does not enter into the calculation of Medicare payments available to health care providers, and all payments are made through and contingent upon meeting ongoing Meaningful Use rules as set by the federal Centers for Medicare & Medicaid Services (CMS). Note that maximum available grants decrease for those who install EMRs and start their Medicare EMR funds application after calendar year 2012.
  • Under Medicaid, a maximum of the lesser of 85% of the purchased EMR cost or $63,750 is available to medical providers over a period of six years, with a maximum of $25,000 in the first year and the lesser of 85% of yearly costs or $10,000 for the following five years. Unlike Medicaid payments, which are entirely contingent on meeting meaningful use rules in all years, up to $21,250 of Medicaid payments are eligible for purchase reimbursement, regardless of actual use. Application for and distribution of Medicaid funds is made through individual states and territories after registering with the CMS. You must then apply through the CMS designated agency for the state in which your practice resides.

Since the amount, timing, and possible variability of these payments differ substantially, it’s important to model the likely payments under both methods carefully if you qualify under both programs. You may switch programs before 2015, but only once after the first incentive payment is initiated. Many eligible professionals will maximize their incentive payments by participating in the Medicaid EHR Incentive Program.

There are various provisions of the US Tax Code, including Section 179 and the related Bonus Depreciation provisions, which can allow health care providers to deduct the full purchase price of EMR systems immediately on their business tax returns. This deductibility of a major capital purchase can substantially improve near term cash flow for most health care providers. However, this is a complex area of the tax code, made even more complex by the uncertain status of Section 179 deductibility for purchases made after Dec 31, 2011, since final Congressional approval of extending this deduction had not occurred as of January, 2012.

State Incentives & Tax Issues

In addition to federal payments for EMR use administered by each state, there are additional state specific payments available from government agencies and health insurers as outlined in this PDF. These vary widely, but in general are substantially lower than federal payments, if available at all, and are often geared towards reimbursing training and setup costs. Likewise, state tax laws and regulations vary widely and, as for federal tax guidance, you need to talk with an accredited tax professional to fully evaluate these issues.

While state EMR purchase incentives can almost always be viewed as being in addition to federal payment opportunities, there can be complex interactions between federal taxable income and state tax liabilities, which make examining these issues carefully with a tax professional critical.