Skip to main content
Subscribe
  • Sign Up Free
  • Login
  • Subscribe
  • News
    • Current News
    • Providers
    • Insurance
    • Government
    • Finance
    • Technology
    • Safety & Quality
    • Digital Health
    • Transformation
    • ESG
    • People
    • Regional News
    • Digital Edition (Web Version)
    • Patients
    • Operations
    • Care Delivery
    • Payment
    • Midwest
    • Northeast
    • South
    • West
  • Blogs
    • AI
    • Deals
    • Layoff Tracker
    • HIMSS 2023
  • Opinion
    • Breaking Bias
    • Commentaries
    • Letters
    • From the Editor
  • Events & Awards
    • Awards
    • Conferences
    • Galas
    • Virtual Briefings
    • Webinars
    • Nominate/Eligibility
    • 100 Most Influential People
    • 50 Most Influential Clinical Executives
    • Best Places to Work in Healthcare
    • Excellence in Governance
    • Health Care Hall of Fame
    • Healthcare Marketing Impact Awards
    • Top 25 Emerging Leaders
    • Top Innovators
    • Diversity in Healthcare
      • - Luminaries
      • - Top 25 Diversity Leaders
      • - Leaders to Watch
    • Women in Healthcare
      • - Luminaries
      • - Top 25 Women Leaders
      • - Women to Watch
    • Digital Health Transformation Summit
    • ESG: The Implementation Imperative Summit
    • Leadership Symposium
    • Social Determinants of Health Symposium
    • Women Leaders in Healthcare Conference
    • Best Places to Work Awards Gala
    • Health Care Hall of Fame Gala
    • Top 25 Diversity Leaders Gala
    • Top 25 Women Leaders Gala
    • - Hospital of the Future
    • - Value Based Care
    • - Hospital at Home
    • - Workplace of the Future
    • - AI and Digital Health
    • - Future of Staffing
    • - Hospital of the Future (Fall)
  • Multimedia
    • Podcast - Beyond the Byline
    • Sponsored Podcast - Healthcare Insider
    • Sponsored Video Series - One on One
    • Sponsored Video Series - Checking In with Dan Peres
  • Data & Insights
    • Data & Insights Home
    • Hospital Financials
    • Staffing & Compensation
    • Quality & Safety
    • Mergers & Acquisitions
    • Data Archive
    • Resource Guide: By the Numbers
    • Surveys
    • Data Points
  • Newsletters
  • MORE+
    • Contact Us
    • Advertise
    • Media Kit
    • Jobs
    • People on the Move
    • Reprints & Licensing
MENU
Breadcrumb
  1. Home
  2. Finance
July 19, 2014 12:00 AM

Healthcare winners and losers in tax reform

Merrill Goozner, Editor
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Goozner

    One can only hope the spate of tax-motivated mergers in the pharmaceutical and medical-device industries finally will motivate Congress to reform the corporate tax code—a long-sought goal of the business community.

    Some healthcare-related firms have a lot to lose from tax reform, and their maneuverings to avoid the tax man have drawn justifiable anger from the Obama administration.

    For the mainstream business community, the issue driving reform is the U.S.' nominal 35% tax rate on corporate profits—the highest among advanced industrial countries. Switzerland, Ireland and Germany, for instance, have tax rates of 15% or less.

    But there is less to those nominal rates than meets the eye, especially in the healthcare sector. Health insurers, for-profit hospital chains and other providers, drug and devicemakers, distributors and suppliers pay very different effective tax rates depending on the nature of their business.

    For most healthcare providers, corporate taxes are not a major issue. About 80% of hospital capacity is housed in not-for-profit organizations and most non-salaried physicians are not incorporated.

    But for the rest of the for-profit healthcare sector whose operations are almost entirely domestic—think hospital chains, post-acute-care provider chains, pharmacy retailers and supply distributors, for instance—high nominal tax rates matter a lot. They have small research and development budgets and are labor-intensive, not capital-intensive.

    Drug, device and medical-equipment firms, on the other hand, tend to have global operations and sales. They spend up to 20% of their total budgets on researching new products. Their manufacturing processes usually require lots of capital equipment.

    The current tax code provides numerous advantages for these globally oriented firms. It gives special tax breaks for R&D and capital investment. The code also doesn't tax overseas profits until they are repatriated to the U.S.

    Tax reform threatens to upend the tax calculations of these globalized firms. As Modern Healthcare reporter Beth Kutscher's story in this week's issue notes, the specter of tax reform drove a slew of big-ticket mergers and acquisitions in the second quarter. The biggest transactions involved U.S. drug and device firms buying overseas rivals so they could relocate their headquarters to their acquisitions' home countries, thus permanently avoiding paying taxes to the Internal Revenue Service on their overseas earnings.

    That wouldn't be necessary if tax reform lowered rates close to their effective rates now, which are often under 20% because of the other tax breaks in the code. Most pharmaceutical, biotechnology and medical-device companies are international in scope, have tons of taxable income, and get numerous tax incentives in the current code for research and development and equipment depreciation.

    When the tax debate began a few years ago, reform advocates focused on lowering the corporate tax rate to make it internationally competitive. The only way to do that is by eliminating some tax breaks. Research- and capital-intensive healthcare firms had the most to lose under reform. A company paying taxes at a 10% or 15% overall rate because of R&D and other tax credits might wind up losing under a scenario that eliminated those tax breaks in exchange for a lower rate of, say, 25% or 28%, the numbers most frequently bandied about in Washington.

    For-profit health insurers and hospital chains, on the other hand, pay taxes at or near the statutory maximum of 35% because they have little R&D and no overseas operations. They would benefit substantially from a reform bill that lowered rates while eliminating tax breaks they rarely use.

    Clearly, tax reform will have winners and losers. That's why the rush by so many pharmaceutical, biotechnology and medical-device firms to merge or acquire their way into a foreign domicile—dubbed “inversion” in the mainstream press—is probably best understood as a hedge against the outcome of the tax-reform debate that will unfold over the next few years.

    With hundreds of billions in corporate earnings already parked abroad and tens of billions of tax revenue at stake, Treasury Secretary Jacob Lew asked Congress last week to pass a retrospective law preventing U.S. firms from shifting their incorporation abroad to avoid paying taxes on already-earned income. While that's not likely to happen, here's hoping the tax-motivated merger wave will finally spur Congress to tackle tax reform and create a corporate tax code that isn't riddled with unnecessary loopholes.

    Follow Merrill Goozner on Twitter: @MHgoozner

    Letter
    to the
    Editor

    Send us a letter

    Have an opinion about this story? Click here to submit a Letter to the Editor, and we may publish it in print.

    Recommended for You
    Copy of states hospital costs_WEB_i.jpg
    Mark Cuban-backed study finds price discrepancies in hospital services
    transparency rx
    PBMs form Transparency-Rx to push for drug pricing reform
    Most Popular
    1
    Centene to lay off 2,000 workers
    2
    How health systems are battling price-gouging allegations
    3
    Senate advances bill to temporarily aid hospitals, health centers
    4
    Elevance, Blue Cross Louisiana halt $2.5B proposed deal
    5
    Tower Health to sell urgent care centers, close others
    Sponsored Content
    Daily Finance Newsletter: Sign up to receive daily news and data that has a direct impact on the business and financing of healthcare.
    Get Newsletters

    Sign up for enewsletters and alerts to receive breaking news and in-depth coverage of healthcare events and trends, as they happen, right to your inbox.

    Subscribe Today
    MH Magazine Cover

    MH magazine offers content that sheds light on healthcare leaders’ complex choices and touch points—from strategy, governance, leadership development and finance to operations, clinical care, and marketing.

    Subscribe
    Connect with Us
    • LinkedIn
    • Twitter
    • Facebook
    • RSS

    Our Mission

    Modern Healthcare empowers industry leaders to succeed by providing unbiased reporting of the news, insights, analysis and data.

    Contact Us

    (877) 812-1581

    Email us

     

    Resources
    • Contact Us
    • Help Center
    • Advertise with Us
    • Ad Choices
    • Sitemap
    Editorial Dept
    • Submission Guidelines
    • Code of Ethics
    • Awards
    • About Us
    Legal
    • Terms and Conditions
    • Privacy Policy
    • Privacy Request
    Modern Healthcare
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • News
      • Current News
      • Providers
      • Insurance
      • Government
      • Finance
      • Technology
      • Safety & Quality
      • Digital Health
      • Transformation
        • Patients
        • Operations
        • Care Delivery
        • Payment
      • ESG
      • People
      • Regional News
        • Midwest
        • Northeast
        • South
        • West
      • Digital Edition (Web Version)
    • Blogs
      • AI
      • Deals
      • Layoff Tracker
      • HIMSS 2023
    • Opinion
      • Breaking Bias
      • Commentaries
      • Letters
      • From the Editor
    • Events & Awards
      • Awards
        • Nominate/Eligibility
        • 100 Most Influential People
        • 50 Most Influential Clinical Executives
        • Best Places to Work in Healthcare
        • Excellence in Governance
        • Health Care Hall of Fame
        • Healthcare Marketing Impact Awards
        • Top 25 Emerging Leaders
        • Top Innovators
        • Diversity in Healthcare
          • - Luminaries
          • - Top 25 Diversity Leaders
          • - Leaders to Watch
        • Women in Healthcare
          • - Luminaries
          • - Top 25 Women Leaders
          • - Women to Watch
      • Conferences
        • Digital Health Transformation Summit
        • ESG: The Implementation Imperative Summit
        • Leadership Symposium
        • Social Determinants of Health Symposium
        • Women Leaders in Healthcare Conference
      • Galas
        • Best Places to Work Awards Gala
        • Health Care Hall of Fame Gala
        • Top 25 Diversity Leaders Gala
        • Top 25 Women Leaders Gala
      • Virtual Briefings
        • - Hospital of the Future
        • - Value Based Care
        • - Hospital at Home
        • - Workplace of the Future
        • - AI and Digital Health
        • - Future of Staffing
        • - Hospital of the Future (Fall)
      • Webinars
    • Multimedia
      • Podcast - Beyond the Byline
      • Sponsored Podcast - Healthcare Insider
      • Sponsored Video Series - One on One
      • Sponsored Video Series - Checking In with Dan Peres
    • Data & Insights
      • Data & Insights Home
      • Hospital Financials
      • Staffing & Compensation
      • Quality & Safety
      • Mergers & Acquisitions
      • Data Archive
      • Resource Guide: By the Numbers
      • Surveys
      • Data Points
    • Newsletters
    • MORE+
      • Contact Us
      • Advertise
      • Media Kit
      • Jobs
      • People on the Move
      • Reprints & Licensing