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November 3, 2017

What the GOP's once-in-a-generation tax overhaul means for health care

Daily Briefing

    House Republicans on Thursday unveiled their tax reform measure (HR 1), called the Tax Cuts and Job Act, which would end the deductibility of health care expenses and includes several other provisions with major implications for health care.


    Congress last month approved a fiscal year (FY) 2018 budget resolution allowing Republicans to pass a tax reform bill under the budget reconciliation process, which requires only a simple majority vote to pass the Senate.

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    As unveiled by Republicans, the tax reform bill would reduce the number of federal income tax brackets from seven to four, increase the standard deduction to $12,000 for individuals and $24,000 for married couples, repeal the estate tax effective in 2024, and reduce the corporate tax rate from 35% to 20%. 

    Health care-related provisions

    The bill would not change any of the taxes or penalties implemented under the Affordable Care Act, nor would it change tax exclusions for employer-sponsored health plans, Axios' "Vitals" reports—but it nonetheless includes several provisions directly related to health care.

    End of deductibility of high health care expenses

    The measure would end as of 2018 U.S. residents' ability to deduct from their taxes certain health care expenses that total more than 10% of their annual adjusted gross incomes. IRS data show that about 8.8 million people claimed a total of $87 billion in health care deductions on their 2015 taxes.

    Larry Levitt, senior vice president for special initiatives at the Kaiser Family Foundation, said the change could harm individuals with chronic diseases or those who require long-term care, as well as those who pay for the care of family members with costly conditions, such as Alzheimer's disease.

    Republicans argued, however, that for many taxpayers the bill's increase in the standard deduction would make up for their inability to deduct health care expenses. Rep. Bill Flores (R-Texas) said, "By doubling the standard deduction you eliminated the need of people having to go through the hassle of going through those arduous complications."

    Nicole Kaeding, an economist at the Tax Foundation, agreed that such provisions of the bill would offer "offsetting tax cuts," but noted those cuts might not equal the deductions individuals could receive for their medical expenses, Kaiser Health News reports.

    Repeal of the "orphan drug" tax credit

    The bill also would eliminate a tax credit available to drugmakers that develop so-called "orphan drugs" intended to treat rare conditions, effective January 2018. According to "Vitals," the federal government would save about $54 billion over 10 years by eliminating the tax credit.

    Industry stakeholders expressed concerns about the proposal. The National Organization for Rare Disorders (NORD) predicted that eliminating the tax credit for drugmakers that develop orphan drugs could result in 33 percent fewer orphan drugs being introduced to the U.S. market, which the group in a statement said would be "an unprecedented decrease in the development of these life-improving therapies."

    The Biotechnology Industry Organization (BIO) on Thursday said it would work to prevent the credit's elimination, arguing that lawmakers should keep it in place "to ensure that our nation's tax code most effectively encourages innovation."

    However, James Love of Knowledge Ecology International said repealing the orphan drug tax credit could spark conversation about "deeper reform" for financial incentives to develop treatments for rare diseases, noting that "huge blockbuster drugs (have) qualified for orphan tax credit(s) … and certainly provided no relief from high prices."

    Implications of broader tax provisions for health care

    In addition to the bill's provisions that relate directly to health care, many other policy changes could have implications for insurers, drugmakers, hospitals, and other industry stakeholders.

    Reduction of corporate tax rate and limitation of corporate tax deductions

    The bill's proposal to reduce the corporate tax rate from 35% to 20% likely would benefit major health insurers, according to an analysis by Mizuho Securities, Modern Healthcare reports.

    However, the bill also proposes to limit corporate interest tax deductions to 30% of companies' earnings before amortization, depreciation, interest, and taxes—which could harm companies that have significant amounts of debt, including some hospital systems.

    Sheryl Skolnick, managing director at Mizuho, said, "For companies that are profitable, the lower corporate tax rate is a powerful generator of cash flow," adding, "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."

    New tax on high-income executives at tax-exempt organizations

    The bill also would implement a 20% excise tax on executive incomes over $1 million at tax-exempt organizations. That provision could affect some hospital CEOs, "Vitals" reports.

    The American Hospital Association (AHA) said it was "concerned" about the excise tax, noting that "there is already a rigorous process prescribed by [IRS] for setting up executive compensation."

    Change to treatment of tax-exempt investment bonds

    Another provision would change federal policy that considers tax-exempt bonds as investment property, according to Modern Healthcare.

    AHA expressed concerns about the provision, saying the change could make it more difficult for hospitals to invest in renovations or technology.

    Additional perspectives on health care implications

    Matt Fiedler, an economist at the Brookings Institution's Center on Health Policy, raised concerns about how the bill could affect federal health care programs in the future. "This is clearly a package that will increase the deficit significantly," Fiedler said. He continued, "Ultimately the lower revenues need to be financed by reduced federal spending. Since health care programs are a large portion of the budget, this will create pressure for cuts in those programs."

    Sen. Patty Murray (D-Wash.) expressed similar concerns, saying, "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."

    Skolnick said hospital leaders will need to watch for potential cuts to federal health care programs if the bill is enacted, warning, "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" (Baker, "Vitals," Axios, 11/3; Rubin, Wall Street Journal, 11/2; Meyer, Modern Healthcare, 11/2; Rovner, Kaiser Health News, 11/2; Weixel, The Hill, 11/2; Tribble, Kaiser Health News, 11/2; Rappeport, New York Times, 11/3; Diamond, "Pulse" Politico, 11/3).

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