Although the final form of the tax bills in Congress has not been determined, it appears that discussion is progressing quickly. As it stands now, the final tax bill could affect not-for-profit and for-profit hospitals very differently, according to the Healthcare Financial Management Association.
The Senate’s version of the bill would repeal the Affordable Care Act’s individual mandate and the tax penalty for not having insurance. According to a Congressional Budget Office analysis, this would result in 13 million dropping healthcare coverage over 10 years, while premiums would increase by an average of 10 percent. (Repealing the Individual Health Insurance Mandate: An Updated Estimate, Congressional Budget Office, November 8, 2017)
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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. (Effects of legislation that would raise deficits by an estimated $1.5 trillion over the 2018-2027 period, Congressional Budget Office, November 14, 2017)
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Tax reform would be a boon for for-profit hospitals, according to an expert at the U.S. Health Sector Tax Practice at EY.
Some of the benefits he noted include:
- Reduction of the corporate tax rate to 20 percent
- Repeal of the Alternate Minimum Tax
- 100 percent expensing of qualified property and capital expenditures
The EY tax expert also noted that tax-exempt hospitals could face several significantly adverse effects including:
- Limiting the use or refunding of tax-exempt bonds
- Expanding unrelated business income taxation
- Creating new excise taxes related to executive compensation
Safety-net hospitals would be hurt significantly primarily because of the elimination of tax exemption for advanced refunding bonds. The America’s Essential Hospitals (AEH) 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, wrote the president and CEO of AEH.
“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.”
Although some tax experts expected little impact from the provision in the current low-rate environment, interest rates are expected to rise. (“Tax Impacts to Differ at For-Profit, Not-For-Profit Hospitals,” HFMA Weekly, November 22, 2017)
AHA wrote in a letter to House tax bill writers: “More costly alternatives, such as taxable bonds and bank loans, are out of reach for many community hospitals,” To read the letter, click here.
Finally, 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. (“Tax Impacts to Differ at For-Profit, Not-For-Profit Hospitals,” HFMA Weekly, November 22, 2017)
Congress wants to clear a final bill by the end of the year, according to published reports.
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