Companies should brace for change.
Republicans in Congress passed their $1.5 trillion tax cut bill this week, including repeal of the Affordable Care Act's individual mandate.
The bill slashes the corporate tax rate from 35% to 21%, and also includes massive changes to how income earned or kept offshore is treated.
Every industry could see effects — including healthcare. Here's a 60-second overview of what the bill could change, and where industry associations stand on it:
IMPACT: Repeal of the Affordable Care Act’s individual mandate is likely to upset payer risk pools and ripple to other players, but hospitals averted elimination of their ability to use tax-exempt bonds.
POSITION: Hospitals and insurers overwhelmingly oppose repealing the individual mandate, but in general the industry stands to gain substantially from the bill’s cut to the corporate tax rate.
ANALYSIS: Repealing the individual mandate would result in about 14 million fewer people with coverage in 2026 and premium increases of about 20%, according to the Congressional Budget Office. Fewer people with health plans means fewer people seeking care services. Mandate repeal is likely to pull younger and healthier consumers out of the market, resulting in higher premiums and an increase in high-deductible health plans. The rate of insured could also be compromised if the changes to the tax code trigger automatic cuts to Medicare that could reach $25 billion a year under congressional budget rules.
One big win for industry: The final bill keeps the ability of hospitals to use so-called private activity bonds to finance infrastructure and other investments.
Healthcare companies will also be pleased the final product retains the deduction for certain medical expenses and also lowers the threshold from 10% to 7.5% for two years.
Republican leaders have said separate budget legislation will address destabilization of ACA exchange markets by funding cost sharing reduction payments and reinsurance programs. Analyses, however, have shown those measures aren't enough to give the market a sound structure.
THE BIGGER PICTURE
The tax reform does not just affect healthcare. Here's how the bill may alter other industries.
IMPACT: The GOP tax plan is largely a win for pharma and biotech companies, which stand to benefit from a lower tax rate on cash they have parked abroad.
POSITION: The trade group BIO backed the Senate version of the bill, praising the corporate tax rate cut. But plenty of big pharma CEOs have publicly stated their support for tax reform.
ANALYSIS: The industry will benefit in large part due to a reduced tax rate on foreign income, allowing companies to repatriate cash. Analysts estimate that large-cap pharma alone keeps nearly $98 billion offshore. The new plan lowers that rate from 35% to 15.5%.
During a 2005 tax holiday allowing companies to bring some profits back at a 5.25% tax rate, Pfizer Inc., Merck & Co. and Johnson & Johnson were among the biggest beneficiaries. A study later found companies tended to cut jobs and use the money for stock buybacks.
Some top pharma players, including Pfizer, have said they were holding off on any meaningful M&A this year until they had clarity on tax reform, since they can use the offshore cash for such transactions.
The new bill cuts the overall corporate tax rate to 21% from 35%. Yet, most biopharmas typically pay far less than the statutory rate already. Data compiled by a professor from NYU recently showed that across 164 drugmakers, the aggregate effective tax rate was 19.41% — so for most big pharmas, in particular, the lower rate will be a neutral/negative development.
Orphan drug credit: The final bill also trims the 50% write-off enjoyed by companies that develop orphan drugs to 25%. One version of the bill cut it altogether, so the trim is a win. The credit applies to R&D for rare disease drugs with the intent of spurring development in orphan indications.
Lisa LaMotta / BioPharma Dive
IMPACT: Tax reform is expected to impact several areas of interest to HR: paid leave, fringe benefits, automation and offshoring.
POSITION: The tax proposal could, on balance, be good for companies and in turn good for HR professionals. The industry has not taken a specific stance on the issue to date.
ANALYSIS: Tax reform is expected to impact several areas of interest to HR including some core issues such as paid leave, fringe benefits, automation and offshoring.
One proposal would give employers a tax credit equal to 25% of an employee's salary if it paid them during FMLA leave. There are several proposals to scrap deductions for benefits employers often are involved in, like transportation and relocation expenses.
Some thought the bill might create new tax incentives to encourage employers to create jobs. (That's what the Trump administration promised, after all.) Instead, it proposes to allow employers to write off the full value of machines right away, perhaps encouraging automation without an accompanying incentive for hiring humans.
The bill proposes to exempt some income from U.S. companies with operations outside the country. This encourages business to send work overseas, some experts have said.
HR will probably like the paid leave proposal, as it gets at an existing problem without a mandate. Instead, it's an incentive to do something many are already doing anyway. On the flip side, the fringe benefit exclusions do the opposite, creating a disincentive for employers to offer those benefits.
The automation and offshoring items are, on their face, good news for companies. Some, however, say they're not as useful without an incentive to hire people, too. After all, machines can't be upskilled when needs shift.
Kate Tornone / HR Dive