[Updated] The Trickle-Down Effect of Tax Reform on Home Health

The home health industry is one step closer to witnessing sweeping tax reform, with the bill on its way to President Trump’s desk. As such, the industry could see a windfall—though some cuts to Medicare and Medicaid could be triggered down the line.

House and Senate lawmakers voted in favor of the Tax Cuts and Jobs Act—a piece of legislation that updates the nations tax code after three decades and adds nearly $1.5 trillion to the national deficit.

The final stretch of the bill’s passage was not all smooth sailing.

The House passed the bill mid-Tuesday, sending it to the Senate. But in a turn of events later in the day, Senate Democrats ruled that three provisions in the bill violated Senate budget rules, according to an Associated Press report. The Senate passed the bill early Wednesday morning, however, and sent it back to the House, which passed the measure again in a 224-201 vote. No Democrats in either chamber voted for the bill, The Hill reported.

The bill is now headed to President Donald Trump’s desk to be signed into law; however, various news outlet report that he will not sign the bill until a later date.

In an official statement following the passage of the bill, Trump called the legislation a “big, beautiful tax cut for Christmas,” and an “extraordinary victory” for American families, workers and businesses.

Further, the tax reform will bring at least $4 trillion back to the U.S. economy, Trump said at bill passage event in Washington Wednesday afternoon.

House Speaker Paul Ryan explained that Americans can expect to see the result of the tax reform in their paychecks as soon as February 2018, while Vice President Mike Pence called the legislation a “middle-class miracle.”

Lower tax rates

Perhaps the most notable provision within the bill is the new lower corporate income tax rate, which will be set permanently from 35% to 21% starting in 2018.

In its review of the bill, Washington, D.C.-based The Tax Foundation—a non-profit, independent tax policy analyst firm—projected that the bill would reduce marginal tax rates on labor and investment. In broad strokes, this translates into an overall increase in both wages and jobs, the organization explained.

“The larger economy would translate into 1.5% higher wages and result in an additional 339,000 full-time equivalent jobs,” according to the foundation’s analysis.

For the health care services sector, this benefit could result in an overall increase in a business’ value, as reducing the corporate tax rate would drive an approximate 23% increase in earnings per share, according to a published note on the bill by financial services giant JPMorgan.

In terms of its impact on home health, Chicago-based financial firm UBS expects the industry to emerge as a winner from this new lower corporate tax rate.

The reduced corporate tax rate could be a “windfall” for such organizations, leading to an increase in cashflow, which they could use to reinvest in themselves or used for acquisitions, according to Frank Morgan, managing director of health care services equity research at Nashville, Tennessee-based RBC Capital Markets.

And because publicly traded home health companies generally have low financial leverage—or the amount of debt that they have—they stand to get the maximum benefit of a reduction in the corporate tax rate, Morgan explained to Home Health Care News.

“The tax rate going down, that’s good for everybody—but there is an offset: a cap on the deductibility of interest expense,” Morgan said. “If you have high levels of debt or high levels of leverage, you may be capped out on how much of your interest expense you can deduct from your pre-tax income. So, [for companies that have] higher leverage, they would not see as much of a positive impact as companies that have low leverage.”

An enormous burden

While the tax reform bill can be considered a “Christmas present” for some middle-income citizens as well as businesses, those benefiting from Medicare and Medicaid might consider the bill a lump of coal, as it puts such programs at risk.

The AARP projects that the tax overhaul would lead to automatic spending cuts to key programs mandated by the 2010 “pay-as-you-go” law, including $25 billion to Medicare in 2018.

The cuts are the biggest concern for the industry at large, according to Darby Anderson, executive vice president and chief development officer at Frisco, Texas-based Addus HomeCare, Inc. (Nasdaq: ADUS), and vice chairman at the Partnership for Medicaid Home-Based Care (PMHC).

“The concern is how or where any budget cuts would be implemented, should the tax cuts not drive equivalent economic growth to fully offset the cost,” Anderson said.

Katie Smith Sloan, CEO of LeadingAge, a non-profit organization that represents the aging services industry, called the tax legislation “ill-conceived,” in a statement following its passage.

“LeadingAge is concerned about the impact it will have on the federal budget and the availability of resources for Medicaid, Medicare, senior housing and other public programs serving older adults,” Sloan said.

However, Sloan was relieved that Congress preserved the medical expense deduction and tax-exempt private activity bonds in the final language of the legislation—items she said are “crucial” to non-profit providers who care for older adults.

Overall, the possibility of cuts to Medicare and Medicaid should put the industry on alert, Morgan explained.

“That is absolutely something we need to watch because when this tax rate drops and the tax revenues go down, then it’s going to add an enormous burden to the deficit in the near term,” he said. “So, absolutely, it’s something that we’ll watch very closely.”

Discussion on the matter will play out over the course of 2018, and quite possibly into 2019, Morgan predicted.

But policymakers have already taken measures to curb the possibility, with Sen. Susan Collins (R-ME) fighting to ensure no such cuts to Medicare would be triggered by the tax bill.

Bill Dombi, president of the National Association for Home Care & Hospice (NAHC), hopes Congress honors her efforts.

“As it is currently structured, the tax bill can trigger huge Medicare cuts for all providers unless Congress waives the so-called ‘pay-go’ rules when the deficit is increased,” Dombi told HHCN. “Both Speaker Paul Ryan and Majority Leader Mitch McConnell has said that the waiver will happen, but that will take place outside this bill.”

Written by Carlo Calma