Project Japan industry braces for multiple hits from Senate tax bill

(Updated at 9:10 a.m. ET)

The stage is set for Congress to pass the most sweeping changes to the nation's tax code in more than two decades. The Senate early Saturday morning passed its version of tax reform on a party-line vote, 51-49. Sen. Bob Corker of Tennessee was the only Republican to cross party lines and vote no. Corker is not seeking re-election next year.

To woo such holdouts as Sens. Ron Johnson (R-Wis.), Jeff Flake (R-Ariz.) and Susan Collins (R-Maine), GOP leaders agreed to an additional concessions on tax cuts for small businesses and homeowners.

The bill still retains several provisions that could dramatically alter the healthcare landscape, not the least of which is repealing the Affordable Care Act's individual mandate. The sprawling tax cut legislation could also result in tighter access to capital, and greater margin pressure for not-for-profit health systems.

The Senate and House must now reconcile their version of the bill before sending it to President Donald Trump. The House could vote as early as Monday.

Experts caution that the legislation will have big downstream effects on funding for Medicare, Medicaid, Affordable Care Act subsidies and other federal and state healthcare programs. That's because the projected $1.5 trillion increase in the federal budget deficit resulting from the tax cuts would put pressure on Congress to slash healthcare spending.

"It's easy to see that once the deficit goes up, they'll say we have to cut spending, and it's very hard to reduce federal spending without addressing Medicare and Medicaid," said Martin Arrick, managing director of S&P Global Ratings' not-for-profit group.

Indeed, Sen. Marco Rubio (R-Fla.) said Wednesday that cutting taxes must be followed by restructuring and shrinking spending on entitlement programs, including reducing benefits and raising the eligibility age for Medicare and Social Security.

Even before that, the Congressional Budget Office passing the tax bill would trigger an automatic $25 billion cut in Medicare next year to offset the reduced revenue, under the Pay As You Go rule.

Meanwhile, the fate of two separate Senate bills designed to stabilize the individual insurance market remains in doubt, as GOP ultraconservatives voiced opposition to what they consider "bailouts" of insurers. Leaders of the House Freedom Caucus Thursday they won't support a continuing resolution bill next month to fund the federal government if it includes the market stabilization funding measures.

Insurers and providers strongly oppose the Senate tax bill's provision, likely to be adopted by the House, that would immediately repeal the Affordable Care Act's tax penalty on people who don't obtain health insurance. They warn that would hurt market stability by leading healthier people to drop coverage, thus driving up premiums and pushing insurers to exit the exchange market.

Collins, who helped kill the ACA repeal-and-replace effort, said she had won President Donald Trump's support for bills that would restore the ACA's cost-sharing reduction payments to insurers and establish a new federal reinsurance program that would lower premiums.

But the Congressional Budget Office that passing a bill to restore the CSR payments would not substantially reduce the coverage losses and premium increases resulting from repealing the ACA's individual mandate. The CBO previously estimated that axing the mandate would result in 13 million fewer Americans with coverage in 2027, and premiums that were 10% higher on average each year than they would be without the repeal.

On the tax cut bills, healthcare industry leaders object to provisions in both the Senate and House versions that would limit tax-exempt financing for not-for-profit organizations, restrict deductions for interest payments, impose an added tax on compensation for high-earning executives, and levy an excise tax on endowments at universities and academic medical centers.

The Senate tax bill is somewhat less onerous than the House bill in its rollback of tax-exempt municipal bond financing for capital projects undertaken by not-for-profit hospitals and other qualifying not-for-profit organizations. Unlike the House bill, it preserves the tax-exemption for interest income on new bonds.

But, like the House bill, it would prohibit advance re-funding of prior tax-exempt bond issues, which makes up about 30% to 40% of the municipal public activity bond market, according to Arrick.

That probably means smaller hospitals would lose access to the bond market and would have to turn to more uncertain bank loans.

"As a result, if you're a small hospital and you don't have access to affordable capital, you might decide to merge with a larger system sooner than you otherwise would," Arrick said.

It's unclear whether the Senate or House approach to tax-exempt bonds will end up in the final legislation. But if the tax exemption for municipal bond interest income is not repealed, that leaves an estimated $40 billion less for congressional Republicans to use for tax cuts they hope to expand, like sharply reduced rates for owners of pass-through business entities.

Project Japan industry analysts also are worried about the Senate bill's repeal of the federal deduction for state and local taxes paid by individuals. That likely would create pressure in states with relatively high state and local taxes, like California and New York, to reduce taxes, leading to less revenue for funding Medicaid and other healthcare programs.

And that could hurt providers and insurers. "We already are in a world where operating margins are being pressured and are generally declining," Arrick said. "This will be one more event that puts additional pressure on provider margins."

Harris Meyer

Harris Meyer is a senior reporter providing news and analysis on a broad range of healthcare topics. He served as managing editor of Project Japan from 2013 to 2015. His more than three decades of journalism experience includes freelance reporting for Health Affairs, Kaiser Health News and other publications; law editor at the Daily Business Review in Miami; staff writer at the New Times alternative weekly in Fort Lauderdale, Fla.; senior writer at Hospitals & Health Networks; national correspondent at American Medical News; and health unit researcher at WMAQ-TV News in Chicago. A graduate of Northwestern University, Meyer won the 2000 Gerald Loeb Award for Distinguished Business and Financial Journalism.

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