What Does Tax Reform Portend for Hospitals?

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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For-Profit Hospitals

 

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

 

Not-for-Profit Hospitals

 

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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Administration Slows Shift to Value-Based Payments

The Obama Administration used the Affordable Care Act (ACA) to advance value-based payments. The current administration, however, has been making a series of regulatory changes that “slow or shrink some of these initiatives and let many doctors delay adopting the new system.”

 

Decreased incentives to participate in value-based care and a reduction in reimbursement under the various pay policies outlined in the rulemakings may cause some to scale back the number of Medicare patients they treat, noted a hospital executive.

 

Health and Human Services (HHS) has been issuing changes to mandatory payment programs, but these actions have attracted far less attention from the general public than attempts to dismantle ACA. Analysts note that the changes have the potential to affect far more people, because private insurers tend to follow what Medicare does.

 

The burgeoning rules have added fuel to a debate on how committed the agency is to moving from a fee-for-service system to one that focuses on value and quality.

 

Changes to bundled payment programs will affect more than 1,100 hospitals that were scheduled to take part in the cardiac initiative next year, and 800 hospitals that have been participating in the joint replacement programs.

 

While Congress passed a bipartisan law in 2015 creating a new payment framework that is supposed to reward doctors for value over volume, CMS recently finalized a rule that exempts more than 900,000 providers from having to report under the Merit-based Incentive Payment System.

 

Research has shown that the traditional fee-for-service model of paying doctors often results in unnecessary or inappropriate care. The federal government has been slowly moving away from it since 1983, when Medicare changed some of its payments to hospitals.

 

Some analysts note there has been little demand from hospitals or physicians to cancel the bundled payment program or to delay merit-based payments. In fact, “many doctors are still subject to the rules of the merit-based system, which passed with bipartisan support in Congress in 2015. Other value-based programs are continuing.”

 

“New rules from HHS and CMS seem to undermine statements from agency officials that they want to make Medicare less burdensome.”

 

“The overall theme is that the one thing hospitals have to count on is that we’re going to have significantly lower revenue in the future,” a health system executive noted.

 

(Sources: Trump Administration Moving To Slow Down Shift To Value-Based Payments, AHLA Member Services, November 13, 2017; “Unsure of CMS’ strategy, providers may retreat on risk models, Modern Healthcare, November 11, 2017; “Trump Health Agency Challenges Consensus on Reducing Costs,” New York Times, November 12, 2017.

 

 

 

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Final OPPS Rule Has Significant Financial Impact on Hospitals

CMS’s final rule for the Hospital Outpatient Prospective Payment System (OPPS) will increase overall 2018 hospital OPPS payment rates by 1.35 percent, according to a CMS fact sheet. However, hospitals are expected to see financial losses from Medicare payment changes related to drugs and knee replacements under the rule finalized this week.

 

According to the final rule, Medicare will cut the payment rate for Medicare Part B drugs purchased by hospitals through the 340B program. It will reduce the payment rate for non-pass-through drugs and biologicals (other than vaccines) purchased through the 340B program to the average sales price (ASP) minus 22.5 percent. The current standard is ASP plus 6 percent.

 

The change goes into effect at the beginning of 2018.

 

The 340B change will cut 2018 Medicare payments to 1,979 not-for-profit hospitals by 0.3 percent and to 493 government-run hospitals by 1.6 percent, while increasing payments to 1,293 for-profit hospitals by 2.7 percent, according to CMS. Additionally, hospitals that Medicare classifies as teaching hospitals or disproportionate share hospitals will have a 1.1 percent cut under the policy.

 

Hospitals have voiced concerns over the financial impacts, in part because the savings from the 340B program would be redistributed to all hospital types. Safety net hospitals pose the largest concern.

 

The American Hospital Association (AHA), America’s Essential Hospitals and the Association of American Medical Colleges said they were planning to file suit to reverse the policy changes.

 

The hospitals’ case would be bolstered by congressional intent in establishing the 340B program, which specifically defined the “covered entities” that were entitled to the drug discounts. The redistribution of the 340B discount savings among all hospitals appears to run counter to that legislative intent, said an attorney familiar with the issues.

“That really subverts Congress’s expressed intent to give the benefits of these discounts to very specifically defined hospitals within the 340B program,” he added.

 

Many members of the Senate and House of Representatives signed letters to CMS that underscored the intent and particularly highlighted the detrimental anticipated impacts of the new 340B policy on rural hospitals. (“Hospitals Take Hit on Drugs, Joint Replacements in Final OPPS Rule,” HFMA Weekly, November 3, 2017)

 

Also in the final rule, CMS removed total knee arthroplasty (TKA) and five other procedures from Medicare inpatient-only list of procedures. These procedures typically are provided only in the inpatient setting and not paid under OPPS. CMS will bar recovery audit contractors from conducting “site of service” reviews of TKA procedures for two years.

 

An investment advisory firm noted that the change could expose hospitals and device manufacturers to about a 30 percent payment cut.

 

So far, CMS has not added TKA to the list of surgical procedures that can be performed in an ambulatory surgery center. However, it is expected that CMS will do so as soon as the 2019 payment, with commercial insurers following suit.

 

AHA warned CMS in a comment letter that the TKA change could undermine the Comprehensive Care for Joint Replacement (CJR) and the Bundled Payments for Care Improvement (BPCI) programs.

 

To read the AHA comment letter, click here.

 

 

To read the CMS fact sheet, click here.

 

 

(Major source: (“Hospitals Take Hit on Drugs, Joint Replacements in Final OPPS Rule,” HFMA Weekly, November 3, 2017)

 

 

 

Strategic Issues for Boards, iProtean’s latest advanced Mission & Strategy course, now appears in your library. It features speakers on cyber-security and the Medicare Access and CHIP Reauthorization Act of 2015—complex topics that stymie many of us! Martin Liutermoza, Global Head of Information Security at Nasdaq, discusses IT security and risk management as well preparing for and mitigating cyber attacks. Seth Edwards talks about MACRA and MIPS versus the Advanced Alternative Payment model.

 

 

For a complete list of iProtean courses, click here.

 

 

For more information about iProtean, click here.