House GOP tax cut bill has pluses and pitfalls for healthcare stakeholders
Healthcare companies, executives and professionals could enjoy lower business and personal taxes while facing reduced revenue due to Medicare and Medicaid cuts that may be used to pay for the tax reductions, under the House Republican tax reform bill released Thursday.
The 429-page Tax Cuts and Jobs Act—which congressional Republicans hope to pass quickly through the expedited budget reconciliation process with little or no Democratic support—would slash the corporate tax rate from 35% to 20%. That would benefit profitable companies like UnitedHealth Group, HCA and Universal Health Services, according to an analysis by Mizuho Securities.
The tax plan also would sharply raise the income threshold for individuals and families paying the top personal tax rate of 39.6%, to $500,000 for individuals and $1 million for married couples. In addition, it would abolish the alternative minimum tax. Those provisions would reduce personal income taxes for many healthcare executives and professionals.
But at the same time, the bill would cap corporate interest deductions at 30% of earnings before interest, taxes, depreciation and amortization. That could hurt companies carrying large debt loads such as Tenet Healthcare Corp. and Community Health Systems, which declined to comment on the bill.
"For companies that are profitable, the lower corporate tax rate is a powerful generator of cash flow," said Sheryl Skolnick, managing director at Mizuho. "But for highly levered companies, the interest deduction is quite powerful for them in reducing their tax bill. If that deduction is no longer available, that would be a negative for money-losing companies with little cash flow to begin with."
Healthcare industry groups will have to consider how the long-term budget impact of the tax cuts will affect broader health policies.
"This is clearly a package that will increase the deficit significantly," said Matt Fiedler, an economist at the Brookings Institution's Center on Health Policy. "Ultimately the lower revenues need to be financed by reduced federal spending. Since healthcare programs are a large portion of the budget, this will create pressure for cuts in those programs."
The release of the House GOP bill Thursday was the first step in what's likely to be a politically difficult process of passing a bill in the House and reconciling it with a separate Senate GOP tax bill scheduled for release as early as next week. The legislation is likely to come under heavy fire from various industry and consumer groups as well as Democrats as the winners and losers are identified.
But congressional GOP leaders and President Donald Trump believe they can't afford another legislative failure following the collapse of their efforts to repeal and replace the Affordable Care Act. "We made a promise to deliver tax reform that creates more jobs, fairer taxes, and bigger paychecks," House Ways and Means Committee Chairman Kevin Brady (R-Texas) said in a written statement accompany the bill's release.
Paul Keckley, a veteran industry analyst, said healthcare companies will hold off on making any financial adjustments based on this bill because it's certain to undergo substantial changes before anything is passed. "With all the darts that will be thrown at this thing, it's a long way from the finish line," he said.
Beyond the immediate tax impact, however, analysts cautioned that healthcare companies should beware of big cuts in Medicare, Medicaid and Affordable Care Act funding that Congress may consider to offset the revenue losses from the bill's tax cuts. The House and Senate budget resolutions capped the 10-year cost of the tax cut package at $1.5 trillion.
A Democratic analysis of the Senate budget blueprint passed by Republicans last month found that it would cut Medicaid by $1 trillion and Medicare by $473 billion over 10 years.
"This massive tax cut for the rich would add trillions of dollars to the national debt, allowing Republicans to then come after Medicare, Medicaid, Social Security, and other middle-class priorities," Sen. Patty Murray (D-Wash.) said in a written statement.
"There's no way you can offset $1.5 trillion in tax cuts without looking at entitlements," said Anders Gilberg, senior vice president for government affairs at the Medical Group Management Association.
He worried that if congressional Republicans seek to cut Medicare to recoup those revenue losses, that could destabilize the current transition of physicians from fee-for-service to value-based payment. "We'll be looking at what the offsets are," he said. "This sounds easy until you have tension between cutting taxes and being accountable for the deficit."
Skolnick agreed that hospital leaders need to watch out for possible cuts in federal healthcare programs as a way to pay for the tax cuts. "Unless you pay a whole lot of whopping taxes, tax reform will be a net negative for the hospital sector, both for-profit and not-for-profit," she predicted. "Careful what you wish for, you may get it."
The American Hospital Association raised objections to two provisions of the bill affecting hospitals. One would stop treating tax-exempt bonds as investment property. The AHA warned that if hospitals' access to tax-exempt financing is limited or eliminated, they would have a harder time investing in new technologies and renovations.
The other measure would impose a 20% excise tax on executive compensation above $1 million. The AHA said the law already requires a rigorous process for hospital boards to set compensation based on competitive market rates for top talent.
Physician groups were left behind on the bill's provision reducing tax rates for pass-through entities. Passive owners of S corporations and limited liability corporations — the structures used by many medical groups — would be able to pay just a 25% tax rate rather than the 39.6% top rate for personal income. But medical groups and other professional service firms would not receive that reduced rate unless they were able to show the income was not labor-related.
"I'm disappointed we wouldn't see a benefit for our members," said Tina Hogeman, the MGMA's chief financial officer.
She also worried about the bill's $500,000 cap on home mortgage interest deductions, down from the current $1 million. "That's a real problem for our members," she said. "The average physician has a home that cost more than $500,000."
A controversial provision of the House GOP bill that affects consumers is the proposed elimination of itemized deductions for high medical expenses, including long-term care costs. That deduction costs the Treasury about $10 billion a year. The AHA opposes ending that deduction.
The Brookings Institution's Fiedler said that while the deduction isn't well-targeted to help people with high medical costs, it's a bad idea to repeal it to help pay for tax cuts for corporations and wealthier Americans.
"It could be sensible policy to repeal the deduction, but here it's just financing regressive tax cuts," Fiedler said.
Healthcare industry groups and supporters of the Affordable Care Act were relieved that the House GOP tax bill did not include provisions Republicans were considering to repeal the ACA's individual mandate or erase the ACA's taxes on wealthier people's investment earnings. Those provisions could have undermined the individual insurance market and the financing for the law's coverage subsidies.
"The bill is most notable for what's not in there," Fiedler said.
An edited version of this story can also be found in Modern Healthcare's Nov. 6 print edition.
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