What the Tax Cuts and Jobs Act Means for Health Care

The dramatic vote cast by Sen. John McCain (R-Ariz.) against the Health Care Freedom Act on July 28, 2017, which sealed the bill’s defeat, seemed to put an end to the efforts of congressional Republicans and the Trump administration to repeal and replace the Affordable Care Act (ACA). But five months later, a different piece of legislation dismantled one of the cornerstones of the ACA, a move that will have a significant impact on health policy going forward.

On Dec. 20, 2017, H.R.1, the Tax Cuts and Jobs Act (TCJA), gained passage in the Senate and the House largely along party lines, and two days later, President Trump signed the bill into law.

The TCJA is the biggest tax reform legislation in three decades for the United States and was unquestionably the most significant legislative accomplishment of the Trump administration in 2017. Two provisions of the TCJA are particularly relevant to the healthcare industry: the decrease in the corporate tax rate from 35 percent to 21 percent and the repeal of the ACA’s individual mandate.

The reduction in the corporate tax rate, excluding other provisions of the law, will benefit for-profit hospitals and health systems. Nonetheless, the Federation of American Hospitals, the trade association for investor-owned hospitals in the United States, opposed the TCJA primarily because of concerns about the potential adverse financial impact on hospitals of the repeal of the individual mandate, the more significant of the two provisions of the TCJA affecting health care.

The individual mandate requires all Americans under 65 to have health insurance or pay an annual penalty. According to the Congressional Budget Office (CBO), repeal of the individual mandate in 2019 will increase the number of uninsured Americans—relative to a baseline that assumes continuation of cost-sharing reduction (CSR) subsidies in the ACA marketplaces—by 4 million in 2019, with that figure growing to 13 million in 2025 and remaining at that level through 2027. ^a

Per the CBO, the 13 million would comprise 5 million people who would opt out of obtaining coverage through the individual insurance market, 5 million people who would not enroll in Medicaid—not due to a pullback of the ACA’s Medicaid expansion, which was not included in the TCJA—and 3 million people who would choose to drop their employer-sponsored health insurance. The CBO admits that its projections are uncertain, stating, “The preliminary results of analysis using revised methods indicates that the estimated effects on the budget and health insurance coverage would probably be smaller than the numbers reported in this document.” ^b

With regard to the CSR subsidies, in October 2017, the Trump administration made a decision to halt CSR payments, so the baseline used by the CBO does not actually reflect the status quo, and the CBO analysis therefore somewhat overstates the impact of the tax reform bill.

The CBO’s assessment also does not take into account the economic benefits of the tax reform law for lower-income Americans—especially single-filers and married taxpayers filing jointly who are in the second-lowest income bracket—which could actually help boost enrollment in health plans. Thus, the actual extent to which the TCJA will increase the number of uninsured Americans is unclear.

Of course, any rise in the number of uninsured Americans would contribute to increased uncompensated care (charity care and bad debt) for hospitals and health systems. The American Hospital Association has commented: “We are also disappointed that the tax legislation passed with a provision that would eliminate the individual mandate, which would result in the loss of health insurance coverage for millions of Americans. The goal of the ACA was to extend coverage and, as a result, millions have benefited from access to needed care.” ^c

Pressure on Healthcare Spending

According to the Joint Committee on Taxation, the TCJA will increase the federal debt by $1.0 trillion from 2018 to 2027, after taking into account increased federal revenues resulting from added economic growth. ^d The projected increase to the nation’s debt will put pressure on Congress to rein in federal expenditures, in turn shining a spotlight on the need to curb healthcare spending. Toward the end of 2017, Speaker of the House Paul Ryan (R-Wisc.) said, “Frankly, it’s the healthcare entitlements that are the big drivers of our debt, so we spend more time on the healthcare entitlements—because that’s really where the problem lies, fiscally speaking.” ^e

A Steeper Hill to Climb for Single-Payer Health Care

It is a truism in Washington, D.C., that it is hard, if not impossible, to take back something that has been given to the public. Congressional Republicans found it more difficult than expected to repeal and replace the ACA primarily because of opposition to a pullback of the Medicaid expansion.

In like manner, the prospects of a single-payer healthcare system would appear to be dimmer because such a major expansion of the federal government would require not only the repeal of the TCJA’s tax breaks for individuals and corporations, but also the imposition of additional tax increases.

Conclusion

Given the Trump administration’s stated legislative priorities of infrastructure and immigration for this year, the tax reform law will likely have the biggest impact on healthcare legislation passed under this administration over the next two years. For hospitals, the TCJA may mean slightly higher uncompensated care starting in 2019, a continued push for value-based care, and downward pressure on utilization. Faced with these pressures, hospitals more than ever must innovate to successfully navigate increasingly challenging waters.

Footnotes

a. Pear, R., “Without the Insurance Mandate, Health Care’s Future May Be in Doubt,” The New York Times,  Dec. 18, 2017.

b. Congressional Budget Office, “Repealing the Individual Health Insurance Mandate: An Updated Estimate,” November 2017.

c. Pollack, R., “Statement on Tax Cuts and Job Acts of 2017,” Press Release, Dec. 2, 2017.

d. Joint Committee on Taxation, Macroeconomic Analysis of the ‘Tax Cut And Jobs Act’ As Ordered Reported by the Senate Committee on Finance on November 16, 2017 , Nov. 30, 2017.

e. Stein, J., “Ryan Says Republicans to Target Welfare, Medicare, Medicaid Spending in 2018,” Washington Post, Dec. 6, 2017.