President Donald Trump on Friday signed Republicans' tax bill into law. The $1.3 trillion measure is the most significant overhaul of the U.S tax code in 30 years.
Here are five things for healthcare leaders to know about the tax plan.
1. The new law limits the tax deduction companies take for the interest they pay on their debt to 30 percent of earnings before interest, taxes, depreciation and amortization. This change will put pressure on healthcare companies with heavy debt loads. In 2022, interest expense deductions will be further reduced, which could cause companies' tax bills to increase further, according to The Wall Street Journal.
2. The tax law repeals the ACA's individual insurance mandate. This will cause the uninsured population to rise and raise uncompensated care costs, which will negatively affect healthcare organizations' operating margins and cash flow, according to Moody's Investors Service. 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.
3. The new law slashes the corporate tax rate to 21 percent from 35 percent. This change will benefit profitable, domestically geared healthcare companies. Universal Health Services, a for-profit hospital operator based in King of Prussia, Pa.; Madison, N.J.-based lab testing company Quest Diagnostics; and Cardinal Health, a drug wholesaler based in Dublin, Ohio, are among the healthcare service companies that will benefit the most from the lower corporate tax rate, according to Mizuho Securities. Nashville, Tenn.-based HCA Healthcare; St. Louis-based pharmacy benefit manager Express Scripts; and Louisville, Ky.-based based home healthcare provider Almost Family are also expected to significantly benefit from the lower tax rate.
However, this change has negative implications for nonprofit hospitals and health systems. "The decrease in the corporate income tax rate … makes tax-exempt bonds a less attractive investment for banks and other financial institutions, which will weaken demand, especially for direct bank loans and private placements," according to Moody's.
4. The tax plan includes a 20 percent excise tax on the top five earners in tax-exempt organizations who earn more than $1 million. This could negatively affect nonprofit health systems, as many systems include several hospitals and high earners at the executive level. "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," Gurpreet Singh, U.S. partner and health services leader of PwC, told Becker's Hospital Review. "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."
5. The tax law puts limits on tax-exempt refundings. This change is negative for all issuers of tax-exempt debt, including nonprofit hospitals and health systems, as these financings have been used to reduce long-term borrowing costs and take advantage of lower interest rates, according to Moody's.
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