Congress sent the GOP tax reform bill to President Donald Trump's desk, and he's expected to sign the bill in the near future. The bill will have major implications for organizations, including healthcare providers, in the coming years.
"In general, it appears that most for-profit enterprises and corporations will be better off because there will be a lower tax rate, but the details behind that suggest, for nonprofit providers, that there will be more significant taxes they need to worry about with respect to their compensation arrangements and unrelated business taxable income," says Gurpreet Singh, U.S. partner and health services sector leader of PwC. "The benefits of being a nonprofit will be impacted by these provisions in the future."
PwC developed a website with up-to-date information and analysis on tax reform. Based on Mr. Singh's analysis, here are eight ways the tax bill will shape healthcare in the future:
1. The corporate tax rate is lowered from 35 percent to 21 percent, and the corporate alternative minimum tax was repealed, which creates opportunities for healthcare organizations. "There could be short- and long-term advantages for organizations that are proactive in understanding what the laws are," says Mr. Singh. Changes to the tax code will require providers to reconsider the efficiency of their organizational structure. There will be impact to their financial statements, and there could be some short-term benefits.”
2. Limitations are placed on interest deductions, which may make select financing options more costly. Some organizations use debt financing to fund their new capabilities, and will have fewer deductions associated with that financing in the future. "We have clients that will begin to think twice about what the best investment to make is because of those limitations," says Mr. Singh.
3. The bill repeals or modifies certain employee benefits, which will require organizations to evaluate and potentially make adjustments to their employee benefits and associated policies. International provisions will change under the new tax bill as well, including that health systems with international operations will face new rules that may affect mandatory repatriation.
4. Penalties for the individual mandate are eliminated, which handcuffs the ACA's effectiveness. The Congressional Budget Office estimates the move will leave around 13 million Americans uninsured, but could reduce government spending by $300 billion over the next 10 years. "For healthcare providers, this means bad debt potentially goes up," says Mr. Singh. "The way you manage your financials changes when bad debt goes up. I fully expect most providers aren't going to turn uninsured patients away from the ER; they'll take on that responsibility."
5. Hospitals and health systems with tax-exempt status face new challenges in using tax-exempt bonds. "While the ability to use tax-exempt financing remains, advance refunding bonds will no longer be permissible," says Mr. Singh. "As the number of individuals with health insurance may decrease, new capabilities will be important, whether it's investing in artificial intelligence or cybersecurity, or creating new capabilities to engage patients. Some of the new investments could be curtailed."
There is an excise tax being proposed on colleges and universities that meet certain qualifications. This may impact some academic medical centers associated with these universities, says Mr. Singh.
6. A new 20 percent excise tax on the top five earners ("covered employees") in tax-exempt organizations who earn more than $1 million could have implications on nonprofit health system structure; many health systems have multiple hospitals and high earners at the executive level, which may result in a high excise tax due.
"You might have 10 to 20 individuals in a multi-entity tax-exempt healthcare system which meet the definition of covered employee instead of five because of the governance and employment structure," says Mr. Singh. "Organizations will have to look at restructuring legal entities to evaluate the impact of the tax, evaluate the timing of compensation amounts, and address other implications of the tax bill."
7. Hospitals and health systems at the forefront of value-based care are already thinking about medical cost and value, which will drive their metrics going forward. Mr. Singh predicts healthcare organizations will invest more in data analytics and artificial intelligence platforms to improve operational efficiency and reduce variability in care.
"I don't expect tax reform to fully derail hospitals from this strategy, but I would expect some of their investments to be curtailed until they are stabilized on the new platform," says Mr. Singh.
8. The reduction on income tax and new credit provisions could affect the insurance company's medical loss ratio rebates and calculation on those rebates. "Specifically for payers, MLR is important for them to manage, so those rebate calculations may get adjusted," says Mr. Singh. "That's just one example that payers specifically will be looking at, but as a large corporation, they'll have the accounting method opportunities, they're going to have compensation deductions to look at, and all of those provisions with respect to business capital income will be top of mind for them."