Estimates differ on the impact of eliminating the tax penalty for the individual mandate.

Nov. 21—Fast-moving tax bills in Congress could affect for-profit and not-for-profit hospitals very differently.

The House of Representatives and the Senate Finance Committee both advanced separate tax overhaul bills (the House’s Tax Cuts and Jobs Act and the Senate's version) on Nov. 16, just before Congress left town for the Thanksgiving holiday.

The Senate version would impact both for-profit and not-for-profit hospitals by repealing the Affordable Care Act’s (ACA’s) individual mandate and the accompanying tax penalty for not having insurance. Senate leaders plan to have the full chamber vote after the Thanksgiving holiday and aim for Congress to clear a final bill by the end of the year, according to published reports.

According to a Congressional Budget Office analysis, repealing the penalty would lead 13 million to drop their healthcare coverage over 10 years, while premiums would increase by an average of 10 percent.

But that projection was met by skepticism by some, including S&P Global Ratings, which issued its own projection that the policy change would lead 4-5 million to drop their coverage over 10 years.

“Our estimates are lower because we believe that it is not the mandate penalty, but the intrinsic financial incentives available to most eligible enrollees that drive enrollment” in Medicaid and the ACA marketplaces, the S&P analysts wrote.

Specifically, S&P analysts doubted that enrollees with largely no-cost Medicaid coverage or heavily subsidized individual-market coverage would drop their policies in the absence of the mandate penalty. S&P forecasted an enrollment drop of 2 million, or 10 percent, in the individual market.

The projected effects of weakening the mandate have drawn concern from hospital advocates.

“We believe this provision ultimately will increase uncompensated care significantly at essential hospitals,” Bruce Siegel, MD, president and CEO of America’s Essential Hospitals, wrote in a Nov. 17 letter to Senate tax policy leaders.

Another potential impact on hospitals from the tax reform bills is a $1.5 trillion increase in the federal budget deficit over 10 years, which would break statutory budget caps and lead to an automatic cut of an estimated $25 billion from Medicare, according to another CBO analysis.

The Senate bill would create a new tax deduction for pass-through businesses, including physician practices.

Meanwhile, the House bill in 2018 would end the tax deduction for certain medical expenses.

For-Profit Impacts

Many other provisions of the tax bills were expected to affect for-profit and not-for-profit hospitals very differently.

Mark Rountree, leader of the U.S. Health Sector Tax Practice at EY, said tax reform could portend the best of times at for-profit hospitals.

“While there are provisions that could negatively impact for-profit hospitals, such as the limitation on the deductibility of business interest expense, most provisions—including the reduction of the corporate tax rate to 20 percent, the repeal of AMT [alternative minimum tax], and 100 percent expensing of qualified property and capital expenditures—would be good news for taxable hospitals,” Rountree said in an interview.

Not-for-Profit Impacts

Meanwhile, tax-exempt hospitals could face several significantly adverse impacts from tax reform.

Most applicable provisions in both the House and Senate bills “could have a very negative impact on tax-exempt hospitals,” Rountree said.

Potentially adverse provisions include:

  • Limiting the use or refunding of tax-exempt bonds
  • Expanding unrelated business income (UBI) taxation
  • Creating new excise taxes related to executive compensation

One area where not-for-profit hospitals could benefit is from a provision that would apply a lower corporate tax rate to UBI taxation, according to Rountree.

Safety-net hospitals would expect to see an especially sharp impact from the elimination of the tax exemption for advanced refunding bonds, according to AEH. The association’s 325 safety-net hospitals operated with a 3.2 percent margin, compared with a 7.4 percent margin for all other hospitals, leaving the AEH member hospitals more reliant on bonds to fund necessary capital projects, Siegel wrote.

“Without tax-exempt status for bonds, essential hospitals could not make improvements or invest in local economies through capital projects and would have fewer resources to care for their communities,” Siegel wrote.

Although some tax experts expected little impact from the provision in the current low-rate environment, interest rates are expected to rise.

“More costly alternatives, such as taxable bonds and bank loans, are out of reach for many community hospitals,” Thomas Nickels, executive vice president for the American Hospital Association, wrote in a letter to House tax bill writers.

Not-for-profit hospitals also could face a new tax on executive compensation pay of over $1 million and, therefore, new risks for board members of tax-exempt organizations when determining executive compensation, according to analysts.

“As significant an impact as many of the tax reform provisions may have on hospitals, it is a bit premature for hospitals to take concrete action now in anticipation of reform legislation passing,” Rountree said. “For now, hospitals should carefully monitor the progress of relevant provisions as tax reform continues to wind its way through Congress, model out the financial impact of the various provisions, and, where inclined, voice their protest—through associations, direct lobbying, and the like—against provisions that could materially, negatively impact the organization.”

Rich Daly is a senior writer/editor in HFMA’s Washington, D.C., office. Follow Rich on Twitter: @rdalyhealthcare

Publication Date: Wednesday, November 22, 2017