What Was the Omnibus Budget Reconciliation Act of 1987?

The Omnibus Budget Reconciliation Act of 1987 (OBRA ’87) was a response to large federal budget deficits throughout the 1980s. A budget reconciliation act is a legislative tool created under the Congressional Budget Act of 1974 that allows Congress to align existing laws with the revenue and spending targets of the annual budget. The process uses expedited procedures in the House and Senate to facilitate deficit reduction.

The urgency to pass OBRA ’87 was amplified by the stock market crash of October 19, 1987. The act’s primary objective was to achieve deficit reduction targets for fiscal year 1988. This was accomplished through a package of spending cuts across various federal programs and targeted tax increases.

Nursing Home Reform Act Provisions

A component of OBRA ’87 was the Nursing Home Reform Act, which established the first comprehensive federal standards for nursing homes in the Medicare and Medicaid programs. This legislation responded to a 1986 study that found inadequate care and abuse in facilities. The law shifted regulatory focus from a facility’s structural capabilities to the actual quality of care and the well-being of residents, mandating that facilities help each resident attain their highest practicable well-being.

The act established a resident “Bill of Rights” to ensure individuals live with dignity and self-determination. These protections include:

• Freedom from physical and chemical restraints used for discipline or convenience.
• The right to manage one’s own financial affairs.
• Privacy in communications and personal care.
• The ability to voice grievances without fear of reprisal.
• Participation in the planning of their own care and treatment.

To tailor care to individual needs, the law mandated a standardized assessment process for every resident using the Resident Assessment Instrument (RAI). A core component is the Minimum Data Set (MDS), a collection of clinical information used for care planning. This assessment is conducted upon admission, periodically, and when a resident’s condition changes.

The legislation also established new requirements for facility staffing and employee training. It mandated that nursing homes provide licensed nursing services sufficient to meet residents’ needs and required specific training and competency evaluation programs for nurse aides. Facilities with more than 120 beds were also required to employ a full-time social worker.

Pension Plan Funding and Termination Rules

Prior to 1987, many private-sector defined benefit pension plans, which promise a specific monthly benefit at retirement, were underfunded. This created mounting liabilities for the Pension Benefit Guaranty Corporation (PBGC), the federal agency that insures these pensions. OBRA ’87 introduced reforms to address these issues by tightening funding rules and increasing costs for employers with underfunded plans.

The act established stricter funding requirements to ensure employers made more consistent contributions. A new “additional funding charge” was created for underfunded single-employer plans with more than 100 participants. This rule required sponsors of plans with assets below a certain level to make accelerated contributions to close the funding gap. The law also mandated that employers make pension contributions on a quarterly basis.

The act also increased the insurance premiums that plan sponsors must pay to the PBGC. It raised both the flat-rate premium, which is paid per plan participant, and the variable-rate premium, an additional amount assessed on underfunded plans. This variable-rate premium created a direct financial incentive for companies to keep their pension plans well-funded.

Restrictions were also placed on an employer’s ability to terminate a pension plan. The law made it more difficult for a company to end an underfunded plan and shift the liability to the PBGC. It also tightened rules on how employers could access surplus assets from overfunded plans. These rules were later reformed by the Pension Protection Act of 2006.

Corporate and Business Taxation Changes

OBRA ’87 contained provisions that altered the federal income taxation of corporations and other business structures. A change involved the tax treatment of Master Limited Partnerships (MLPs), which are partnerships with interests traded on public markets. Before the act, MLPs combined the tax benefits of partnerships with the liquidity of public stock.

The act reclassified most publicly traded partnerships as corporations for federal income tax purposes. This subjected them to corporate income tax and created two layers of taxation on income. The law did provide an exception for MLPs earning at least 90 percent of their gross income from specific passive sources, such as interest, dividends, and certain natural resource activities.

A provision tightened the limitations on a corporation’s ability to use its Net Operating Loss (NOL) carryforwards after a major change in ownership. An NOL occurs when expenses exceed revenues and can be carried forward to offset future taxable income. The changes to Section 382 of the Internal Revenue Code were intended to prevent companies from being acquired solely for their tax losses.

The act also restricted the completed-contract method of accounting for long-term contracts. Rather than allowing contractors to defer all income until a contract was finished, the law required that a large portion of contract items be accounted for under the percentage-of-completion method. This forced income to be recognized more evenly over a project’s life. Additionally, the law modified the rules for corporate estimated tax payments.

Medicare and Medicaid Program Adjustments

OBRA ’87 implemented direct budgetary adjustments to the Medicare and Medicaid programs to control federal spending. The changes focused on slowing the rate of growth in payments to healthcare providers, including physicians and hospitals.

For physicians, the act temporarily froze certain charges for services under Medicare Part B. It later established different update factors for the Medicare Economic Index, which is used to determine annual payment increases. The law provided a higher update for primary care services compared to other services to incentivize primary care. It also created incentive payments for physicians practicing in designated rural health shortage areas.

Hospitals also saw changes in their reimbursement under Medicare’s Prospective Payment System (PPS), which pays a predetermined rate for each inpatient case. OBRA ’87 reduced the rate of increase for these payments to slow spending on inpatient services. It also adjusted the amount paid to hospitals to account for their capital-related costs, setting a specific percentage reduction for fiscal years 1988 and 1989.

The act also contained provisions affecting Medicaid, separate from the nursing home standards. It required states to submit specific state plan amendments to authorize Disproportionate Share Hospital (DSH) payments. These DSH payments provide additional funding to hospitals that serve a large number of Medicaid and uninsured patients.