GOP Tax Cuts: Will Hospitals Be Hit the Hardest?

By Mike Stankiewicz

Hospitals could be dealt a financial blow under congressional Republicans’ attempts to overhaul federal tax law due to increased taxes on employees and automatic cuts to Medicare.

The House version of the bill ( H.R. 1), which the chamber approved Nov. 16, would remove tax exemptions for private activity bonds, a major source of infrastructure funding for nonprofit hospitals.

The bonds are used to “improve community access to new technological advances, improve and update the infrastructure of the hospital, and increase jobs with hospital expansion and which support the local economy,” John Washlick, a health-care attorney at Buchanan, Ingersoll & Rooney PC, told Bloomberg Law Nov. 16. “Remove this funding tool, and many hospitals will not have access to needed capital to stay competitive and provide necessary medical services to their service community, which could result in the potential closure of hospitals or another ramp-up of consolidation in the market.” The Senate bill keeps the tax exemptions.

Taxation of the bonds and other changes, including lowering the corporate tax rate, might entice some nonprofit hospitals to seek for-profit status, Washlick added. Some of the largest hospital companies that would be affected by the tax overhaul include Kindred Healthcare in Washington, HCA Healthcare in Nashville, Tenn., and Ascension Health in St. Louis.

Meanwhile, in the Senate, lawmakers have moved forward with including repeal of the Affordable Care Act’s individual mandate in their version of the bill. The House bill does not include such a provision. Hospital groups have banded together in opposing the mandate repeal and said it would lead to higher levels of uncompensated care, which would cause greater financial hardship for hospitals.

Loss of Mandate

If repeal of the mandate comes to fruition, a report by the Congressional Budget Office said, the number of people with health insurance would decrease by 13 million by 2027, and average premiums would increase by 10 percent every year following the repeal, making insurance more difficult to afford and leading hospitals to have to serve more uninsured patients.

“If fewer people have insurance, those people may still end up in hospitals and would increase bad debts for hospitals,” John Feore, a director at Avalere, a Washington-based consulting company, told Bloomberg Law Nov. 17. “Many hospitals, including disproportionate share and low-income hospitals, already struggle with bad debt and uncompensated care.”

Several hospital groups have urged lawmakers to maintain the individual mandate unless Congress enacts a package of reforms to assure a balanced risk pool and prevent skyrocketing premium increases. One such option includes the bipartisan bill from Sens. Lamar Alexander (R-Tenn.) and Patty Murray (D-Wash.) that would authorize cost-sharing reduction (CSR) payments for two years and make several changes to the Affordable Care Act’s waiver system. CSRs are paid to insurers to help make premiums more affordable for low-income people.

“Eliminating the individual mandate by itself likely will result in a significant increase in premiums, which would in turn substantially increase the number of uninsured Americans,” the groups said in a letter to congressional leaders in both chambers. “Repealing the individual mandate without a workable alternative will reduce enrollment, further destabilizing an already fragile individual and small group health insurance market on which more than 10 million Americans rely.” Groups signed onto the letter include the American Hospital Association, the American Medical Association, and Federation of American Hospitals.

Automatic Cuts to Medicare

But hospitals may not need to wait long to feel the sting of lost funds.

The CBO also said the $1.5 trillion tax-cut proposal would trigger an automatic 4 percent cut, or $25 billion, to Medicare next year if the tax cuts aren’t fully offset, due to a 2010 law known as PAYGO.

Democratic support would be needed to waive the automatic cuts, which require 60 votes in the Senate, as Republicans only hold 52 seats in the chamber. Senate Democrats have been strongly opposed to the mandate’s repeal, making a waiver unlikely. Even if the pay-go cuts are not automatically triggered, Congress could still make cuts to Medicare and Medicaid to offset the deficits.

“Even if the pay-go rules are waived and tax reform passes, there will be tremendous pressure to cut Medicare and providers, most certainly, will be impacted,” David A. Lipschutz, senior policy attorney for the Center for Medicare Advocacy, an advocacy group for Medicare patients, told Bloomberg Law Nov. 17. “It is a sign of things to come, particularly if tax reform goes through.”

AARP, the seniors’ lobbying group, in a letter also expressed concern that the increase in the deficit will “inevitably lead to calls for greater spending cuts, which are likely to include dramatic cuts to Medicare, Medicaid and other critical programs serving older Americans.”

20 Percent Tax on Hospital Employees

Both the House and Senate bills would impose a 20 percent excise tax on tax-exempt organizations, including nonprofit hospitals, for salaries in excess of $1 million for each organization’s five highest-paid employees.

Washlick said such a tax increase would make recruitment for hospital CEOs and other highly compensated positions difficult.

“Nonprofit hospitals require the same level of sophistication as for-profit hospitals,” he said. “If a for-profit competes over the same personnel, it will lead to nonprofits not getting the best employees and leaders and puts for-profits at an even higher advantage than they already have.”

Washlick added some nonprofit hospitals might seek to change to for-profit status, due to the pressures under the tax bill. “If exempt financing is repealed and the corporate tax rolled back to 20 percent, some tax-exempt, nonprofit hospitals may consider converting to for-profit and avoid various regulatory restrictions under the Internal Revenue Code,” he said.

Feore was less sure. “For-profit hospitals would certainly see a benefit in the lower corporate tax rate,” he said. “But I doubt it’ll spur corporate changes. Nonprofits are nonprofits for a reason.”

To contact the reporter on this story: Mike Stankiewicz in Washington at mstankiewicz@bna.com

To contact the editor responsible for this story: Brian Broderick at bbroderick@bna.com

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