The recent enactment of the Tax Cuts and Jobs Act (the “Act”) represents the most sweeping reform of tax laws in over 30 years. It also represents, by far, the most significant legislative accomplishment of the Trump administration in 2017. The following paragraphs highlight the Act’s impact on the healthcare industry:
1. Starting in 2019, the Act repeals the Obamacare “individual mandate” that requires all Americans under 65 to have health insurance or pay an annual penalty, $695 per person or 2.5 percent of income—whichever is higher. Per the Congressional Budget Office’s November 2017 analysis, “Repealing the Individual Health Insurance Mandate: An Updated Estimate,” the repeal of the individual mandate in 2019 would increase the number of uninsured Americans by approximately 4 million in 2019. This figure is expected to grow to 13 million in 2025 and remaining at that level thru 2027.
An increase in the number of uninsured Americans would contribute to increased uncompensated care (charity care and bad debt) for hospitals and health systems. As a result, hospitals may want to consider adjusting their charity care policies to limit or exclude assistance for patients who qualify for subsidized Affordable Care Act, Medicaid or other coverage but choose not to seek to obtain it.
2. Tax-exempt health systems will now be liable for a new 21% excise tax on employee compensation exceeding $1 million paid to their five (5) highest-paid employees. This new provision could be particularly problematic for larger systems with multiple tax-exempt entities, because they could have to pay this excise tax on the highest-paid employees in each entity.
The new excise tax on high-earning employees does not apply to compensation for the direct provision of professional medical services (i.e., physicians providing patient care services). These organizations, however, will need to report the portion of compensation for physician executives that relates to patient care services versus management duties and responsibilities.
3. For-profit health systems are now more limited in their ability to deduct False Claims Act settlements. For a portion of such settlements to be deductible, defense attorneys must identify the portion to be deductible in settlement documents or court orders.
4. For-profit health care organizations’ ability to deduct interest payments is capped at 30% of adjusted taxable income starting in 2018. As a result, such companies may consider taking steps to reduce their outstanding debt obligations.
5. Tax-exempt health systems will no longer will be able to offset income from unrelated business activities with losses from other unrelated business activities.
6. Publicly traded hospital companies will have to take the tax law changes into account for their 2017 financial statement audits. The Securities and Exchange Commission recently said companies can provide reasonable estimates in their audited statements of the impact of the Act and will be provided extensions to complete these 2017 audits.