Republicans in the U.S. Senate and House of Representatives have passed dueling tax reform bills that will reduce marginal tax rates. However, both bills could cause insurance premiums to increase, hinder new drug development, and threaten Medicare. Learn more about this bill and how it could affect your healthcare.
The mandate goes
The House kept tax reform separate from healthcare reform, but the Senate bill includes repealing the Affordable Care Act's health insurance mandate to help pay for tax cuts, including a lowering of the top marginal tax rate to 38.5% from 39.6% today.
Including the repeal in the Senate bill will save the U.S. government $338 billion over 10 years, according to the Congressional Budget Office. Those savings will come from fewer people enrolling in insurance plans that are eligible for government subsidies that then reduce premiums.
Those savings are important because Republicans can only pass tax reform in the Senate with a simple majority if the tax reform bill increases the U.S. budget deficit by $1.5 trillion or less in 10 years. With the deficit associated with the Senate bill clocking in at north of $1.4 trillion, removing repeal would eliminate the ability for the Senate to get tax reform passed with only 51 votes.
Doing away with the mandate, however, could cause your health insurance premiums to spike. Healthy Americans are most likely to forgo health insurance if the mandate is repealed, and if that happens, the insurance pool will tilt dramatically toward sicker and thus costlier patients.
Absent premium revenue from healthy members that can be used to cover the costs associated with caring for sicker members, insurers will need to hike premiums to make up for the shortfall. The CBO estimates that repeal will cause insurance premiums to increase 10% per year, and according to AARP, that means an extra $1,500 per year for the average 64-year-old. That's not chump change. In fact, the premium increase could end up being bigger than the savings associated with a lower marginal income tax rate.
Abandoning the orphan drug credit
Congress passed the Orphan Drug Act in 1983 to provide incentives for drugmakers so that they'd invest in researching treatments for uncommon diseases, such as muscular dystrophy.
As part of that legislation, drugmakers were granted a 50% tax credit for research costs associated with developing drugs for orphan indications. Those credits are popular with biopharmaceutical companies, but they could be on the chopping block. The House tax reform does away with them entirely while the Senate plan reduces the credit to 27.5%.
The Treasury Department estimates that orphan drug credits will cost the government $2.8 billion in 2018 and $75 billion between 2018 to 2027. If the Senate's approach is embraced and the credit shrinks, it's expected that it will save $30 billion over the coming decade.
Although those savings will offset some of the lost revenue because of tax cuts, it could make investing in orphan drug research less appealing. Historically, about 90% of medicines that enter clinical trials fail to make it to market. Those odds suggest that some drugmakers might crimp their research and development activity if the tax credit disappears. According to the National Organization for Rare Disorders, a complete elimination of the credit will result in 33% fewer drugs being discovered for orphan indications.
A money crunch at Medicare
The tax reform bills may not impact Medicare directly, but that doesn't mean that tax reform won't have a big impact on Medicare patients.
If tax reform is passed that causes the budget deficit to increase, then another law requiring across-the-board cuts in spending to Medicare will be triggered. The CBO estimates that signing the Senate plan into law would cause $25 billion in Medicare cuts next year alone.
Medicare budget cuts would come at a bad time for the program because retiring baby boomers mean more people are enrolling in it than ever before. There are currently about 59 million Americans on Medicare, but that number is expected to increase to 67 million by 2030 because of aging baby boomers. Because of the risk to the latter, the AARP to sent a letter to senators on Nov. 30 asking them to vote against the Senate bill. In it, it also criticized the House bill for doing away with the medical expense deduction, which allows people to write off medical expenses that exceed 10% of their income. According to AARP, nearly three-quarters of the people who claim this deduction are over age 50. The Senate plan keeps the medical expense deduction and reduces the income threshold to 7.5%.
Overall, the House and Senate can still make changes to tax reform to address these issues. If they don't, tax reform could be a bitter pill for many Americans to swallow.
The Motley Fool has a disclosure policy.
More from The Motley Fool
Why Fossil Group Inc Stock Spiked Today
Rumors that a private equity firm was interested in the watchmaker sent shares higher.
Why IBM, GNC Holdings, and Intrexon Slumped Today
Find out more about how earnings results held back Big Blue.
Why Square, Groupon, and Fossil Group Jumped Today
Find out which of these stocks rose on takeover speculation.