The Internal Revenue Service is cutting red tape for health insurers that want to make incentive payments to health care providers.[@@]

A new guidance, Revenue Procedure 2004-41, explains that health insurers can simplify incentive payment accounting by treating the payments as discounted unpaid losses.

In the past, some tax experts had suggested that health insurers ought to treat the doctors and other providers receiving the incentive payments as members of incentive plans based on Section 404 of the Internal Revenue Code. Under Section 404(d), a company that makes incentive payments to outsiders who are not employees can end up subjecting the outsiders to the Section 404 incentive plan tax rules, according to Gary Geisler and William Schmidt, the IRS officials who wrote the revenue procedure.

But, under statutory accounting rules, health insurers and health maintenance organizations treat the provider incentive payments as part of claims paid, the officials write.

The officials note that carriers base the incentive payments on detailed actuarial calculations.

“Applying Section 404 and the regulations thereunder to incentive payments made by the taxpayers would create a substantial administrative burden for the taxpayers and the [IRS], since the liabilities for incentive payments shown on the annual statements filed by health insurance companies and HMOs generally are not broken down into amounts that will be owed to specific health care providers,” Geisler and Schmidt write.

To ease the burden, the IRS has decided it will not apply Section 404 to provider incentive payments that meet certain requirements, the officials conclude.

One requirement is that the carrier must make the incentive payments to providers within 12 months after the end of the providers’ performance measurement period. Another requirement is that the carrier must include the payments in its statutory income statement.

The revenue procedure is on the Web at http://www.irs.gov/pub/irs-drop/rp-04-41.pdf