Six months into tax reform, what do life sciences and health care companies intend to do with the savings?

Health Care Current | July 24, 2018

This weekly series explores breaking news and developments in the US health care industry, examines key issues facing life sciences and health care companies, and provides updates and insights on policy, regulatory, and legislative changes.

My Take

Six months into tax reform, what do life sciences and health care companies intend to do with the savings?

By David Green, partner, life sciences and health care industry leader, Deloitte Tax LLP

More than six months have passed since key provisions of the Tax Cuts and Jobs Act went into effect and the corporate tax rate dropped from 35 to 21 percent. But what do life sciences and health care companies intend to do with their tax savings?

While the change to the corporate tax rate applies to all corporations doing business in the US, it could have significant implications for global biopharmaceutical and medical device firms. I suspect some of these companies will use the tax savings for mergers and acquisitions (M&A), or to boost research and development investments. Other companies might buy back company stock, reduce debt, or invest in new manufacturing sites. Expected tax savings might also be used to increase wages, provide bonuses, or add more employees.

Shortly after the law was enacted, some companies outside of life sciences announced plans to raise wages, pay one-time bonuses, or strengthen their US infrastructure. But I have seen little uniformity among corporations’ strategies.

During Deloitte’s Life Sciences Tax Conference this spring, we got a glimpse into how companies in this industry are viewing the new law and the reduced corporate taxes. Half of the attendees who participated in an informal survey said they expect to reinvest additional financial resources into business operations. However, nearly 40 percent of participants said they didn’t know how the savings would be used. Most respondents said they expect impacts on their supply chains. About half of respondents said tax reform would have a “very impactful” (29 percent) or “moderately impactful” (21 percent) effect on their global manufacturing footprint and supply chain.

This summer, the Deloitte Center for Health Solutions is digging deeper into this issue with a survey of chief financial officers (CFOs) from life sciences companies to determine what they see as the biggest strategic implications of the 2017 tax law and how they expect tax savings will be used. We also hope to find out if the job-growth and business-incentive goals of the new law will prompt some companies to invest in additional research and development or manufacturing operations in the US. We will share our research findings in a future issue of the Health Care Current.

Tax reform could add fuel to M&A fire

Here are some ways the tax changes could play out for life sciences and health care firms:

  • Hospitals and health systems: M&A activity has been picking up steam for the past couple of years—particularly among hospitals and health systems. According to a 2017 report from the Deloitte Center for Health Solutions, improved cost efficiencies and access to various patient populations are among the top drivers of M&A among hospitals and health systems. Among the 21 percent of hospitals that are for-profit,1 the lower corporate tax rate could lead to an improved financial position that in turn could drive an M&A uptick among or with for-profits.
  • Health plans: The lower corporate tax rate could lead some for-profit health plans to reduce insurance premiums to comply with the ACA’s medical loss ratio (MLR) rules. The MLR rules require that at least 80 percent of individual and small-group premium revenue (85 percent for large-group) be spent on medical expenses. The MLR formula counts taxes as part of the denominator. A lower corporate tax rate would increase the denominator and result in a higher MLR.

    But other issues could have a counterweight on premiums. The new tax law also included the elimination of the ACA’s individual-mandate penalty beginning January 1, 2019. Removing the penalty could increase the ranks of the uninsured by 4 million Americans in 2019, and by as many as 13 million by 2027, according to estimates from the Congressional Budget Office (CBO). If healthy people leave the risk pool as a result, CBO estimates health plans could be forced to respond by increasing premiums by 10 percent or more in the individual market. This might also drive additional health plan M&A as organizations attempt to spread risk over a larger insured base and streamline administrative costs.
  • Biopharmaceutical companies and medical device manufacturers: I expect we will see M&A activity heat up among biopharmaceutical companies and medical device manufacturers. In addition to the overall lower corporate tax burden, a relatively stable interest-rate and the need to manage the high cost and risk associated with delivering more effective therapies could cause further industry consolidation through both research collaborations and additional M&A.

Tax changes could require tech updates for LS companies

A good portion of our spring tax conference focused on how advancements in technology could impact the corporate tax function. Additional data requirements and new tax computations could drive life sciences companies to reconfigure accounting information systems. Many of the new international tax provisions are complex and interrelated, requiring numerous parallel computations that will likely make modeling and analysis more challenging than what was required under prior law.

This could be an added burden for some life science companies given that existing processes for data capture, aggregation, and calculation tend to be manual and spreadsheet driven. As life sciences companies release quarterly earnings and provide updated guidance to analysts and investors, they will likely need to accurately calculate and communicate the impact tax changes will have on earnings, effective tax rates, and liquidity. Companies that invest in their information technology (IT) systems could see more efficiencies in the requisite processes. IT improvements also could help generate deeper insight into key drivers of tax liability and provide decision-support for broader financial planning and analysis.

Guidance may be needed in three key areas

It is not surprising that many CEOs and CFOs are anxious to find out how the new rules will affect their companies. We are awaiting additional guidance in a number of areas, such as the one-time transition tax on the un-repatriated foreign earnings of US-based multinationals, but I see the following three issues as potentially being among the most important for life sciences companies:

  1. Global Intangible Low-Taxed Income (GILTI): This is a new worldwide tax on the income of US-based multinationals. Calculating it, including the impact of associated foreign tax credits, will require aggregation and analysis of many different data points on an ongoing basis. Government guidance is critical to help determine how various provisions should be treated in this new taxation system.
  2. Foreign Derived Intangible Income (FDTI): This deduction reduces the effective tax rate on eligible income from 21 percent to 13.125 percent. Both the calculation and documentation are complex. This can be an especially formidable task for life sciences companies, which tend to have complex supply chains.
  3. Base Erosion and Anti-abuse Tax (BEAT): This is a new minimum tax on certain companies making outbound intercompany payments to foreign affiliates. It can impact both US-based and foreign-based companies. Calculation and monitoring of BEAT will require companies to classify various intercompany transactions, which in turn requires access to intercompany transaction data, segmentation of the costs, and forecasting and planning for potential BEAT liabilities.

In the tax world, this law is a major life event. It is the largest overhaul of the US tax code in more than three decades. While the lower corporate tax rate is welcome news for many companies, the new law also creates a number of potential obstacles that could be difficult to navigate without the right data. Our Washington National Tax specialists expect we could see some guidance from the IRS and the Treasury Department over the summer and into this fall. We will keep you posted.

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In the news

FDA issues final guidance on using EHRs in clinical studies

On July 18, the US Food and Drug Administration (FDA) released the final version of “Use of Electronic Health Record Data in Clinical Investigations.” FDA says this guidance is meant to encourage the use of EHR data in clinical investigations, promote interoperability between EHR and electronic data capture (EDC) systems, and satisfy a requirement under the 21st Century Cures Act to issue guidance on real-world evidence (RWE) in regulatory decision-making. It provides recommendations for sponsors, clinical investigators, contract research organizations (CROs), institutional review boards (IRBs), and other parties on the use of EHR data in FDA-regulated clinical investigations. The earlier draft came out in May 2016.

According to FDA, conclusions drawn from data sourced from EHRs could help support the approval of new indications for approved drugs or satisfy post-approval study requirements. Patient information found in EHRs, such as diagnoses, pharmacy records, immunization history, and test results, are acceptable as evidence.

The document clarifies several issues raised in comments submitted in response to the earlier draft. These include the types of studies that fall under the scope of the guidance, how interoperable or fully-integrated EHR and electronic data capture (EDC) systems are to be used, and information regarding electronic source data principles. The document also recommends approaches for inspection, recordkeeping, and record-retention for EHRs used as source data for clinical investigations.

House and Senate hold hearings on value-based care, Medicare fraud, and health care spending

  • House Ways and Means holds hearing on modernizing Stark law, shift from volume to value
    On July 17, the House Ways and Means Health Subcommittee held a hearing to discuss modernizing the “Stark law,” an anti-kickback law that prohibits doctors from referring Medicare patients to hospitals, labs, and colleagues with whom they have financial relationships. The law also prevents hospitals from paying clinicians more for meeting certain quality measures and less to those who miss the goals. Clinicians and hospitals can be found liable for violating Stark without intent, and offenses can carry significant financial penalties.

    A urologist from Cincinnati told lawmakers that the 30-year-old Stark law was written during the fee-for-service era and is now making it difficult for physicians to participate in alternative payment models (APMs). He said the law does not reflect the vision of coordinated care, noting that only 5 percent of US physicians participate in an APM, and recommended that Congress allow hospitals to use Medicare funds to reward or penalize physicians who are part of value-based care models.

    US Department of Health and Human Services (HHS) Deputy Secretary Eric Hargan agreed that the law was not designed for a health care system that is transitioning toward a value-based payment model. While he said the law needs to be updated, he urged lawmakers to ensure that competition in the health care marketplace is preserved.

    The chief integration officer of Midwestern health system raised concern that the law can discourage physicians who fear potential financial penalties from entering into value-based arrangements. He also suggested that legislation defining “noncompliance” could help clarify regulatory enforcement and allow government entities to focus on violations that harm patient care.

    In the coming months, HHS plans to draft a rule to reduce the burden of the law, which also will reflect responses to its earlier request for information (RFI).

    House committee holds hearing on CMS’s efforts to target Medicare fraud

    The House Ways and Means Oversight Subcommittee held a hearing on July 17 to discuss strategies for combating Medicare fraud. Committee Chair Lynn Jenkins (R-Kan.) noted that there is no risk-based strategy for combating fraud in Medicare. Lawmakers discussed the US Centers for Medicare and Medicaid Services’ (CMS) antifraud efforts and alignment with the “Fraud Risk Framework,” an initiative developed by the Government Accountability Office (GAO) in 2015 to provide agencies with guidance for targeting fraud.

    Alec Alexander, director of CMS’s Center for Program Integrity, told committee members that the agency is taking steps to improve its ability to conduct fraud assessments. He pointed to a recent joint effort between HHS and the Department of Justice that led to 600 defendants being charged with participating in fraud schemes that involved about $2 billion in losses to Medicare and Medicaid.

    Other witnesses represented GAO and the HHS Office of Inspector General (OIG). GAO’s perspective is that CMS has not conducted a fraud risk assessment or developed a risk-based antifraud strategy. Gloria Jarmon, deputy inspector general for audit services at HHS’s OIG, focused on the agency’s need to reduce the rate of improper payments and improve antifraud efforts in Medicare. While the error rate for Medicare has fallen from 11 percent in 2016 to 9.5 percent in 2017, she told committee members that the percentage it is still too high.
  • Senate committee holds hearing on reducing heath care spending
    On July 17, the Senate Committee on Health, Education, Labor & Pensions (HELP) held the second in a series of hearings on policies and efforts to reduce health care costs, with a focus on unnecessary spending from waste and lack of preventive care.

    Witnesses represented two major teaching hospitals, a business association, and a renowned expert on quality and value-based care. These witnesses spoke to their experiences with reducing costs through programs like accountable care organizations (ACOs). Members and witnesses discussed several ideas, including:
    • Paying only for necessary treatments, which could make providers less likely to prescribe unnecessary care or medication.
    • Reducing fraud and administrative costs. A 2009 report from the National Academies determined that as much as 30 percent of US total health care funding can be attributed to fraud or excessive administrative costs.
    • Addressing social determinants of health for patient populations.

Appeals court upholds ruling to allow 340B cuts

On July 17, the DC Circuit Court of Appeals upheld a ruling that allows HHS to cut $1.6 billion from 340B, a federal drug-discount program (see the July 17, 2018 Health Care Current).

The three-judge panel confirmed that the American Hospital Association (AHA) and other hospital groups lack standing to challenge the planned reductions to 340B. This decision is in line with a lower-court decision issued last December. This earlier conclusion ruled that the hospital industry cannot take legal action until it has a claim that’s been rejected by the Medicare program under the new rule. Since CMS's hospital outpatient payment rule did not take effect until January 1, 2018, the lower court ruled that hospitals did not have standing.

Under the ruling, HHS can proceed with a Medicare rule that reduces payments for certain drugs by nearly 30 percent to hospitals that benefit from the discounts. The court determined this rule would make hospital payments more in line with their costs for purchasing the drugs. However, the court’s decision allows the hospitals to refile the lawsuit once the cuts take effect.

Voter initiatives could lead more states to expand Medicaid program

A voter initiative on Medicaid expansion in Idaho will appear on the November ballot, state officials announced on July 17. Idaho is the second state to put the question before voters, following Utah, which certified a Medicaid expansion initiative in May. In Nebraska, a petition is still pending, and Maine's referendum, which passed last year, has been tied up in court as Governor Paul LePage (R) argues the state cannot afford to expand the program.

The Idaho ballot measure had 56,192 valid signatures—about 6 percent of the state’s total registered voters at the time of the last general election. The signatures met a state rule requiring that a petition must have signatures from at least 18 legislative districts with at least 6 percent of registered voters from each district. If approved, 62,000 Idaho residents would gain access to Medicaid, according to consumer advocacy group Families USA, and the federal government would pay 90 percent of the cost.

CMS seeks physician feedback on proposed efforts to reduce administrative burden

On July 17, CMS Administrator Seema Verma released a letter to doctors reaffirming the agency’s efforts to reduce the administrative burden on physicians. In the letter, Verma referenced a recent Medscape survey of more than 15,000 physicians in which 42 percent reported burnout.

The letter discussed CMS’s proposed changes to Evaluation & Management (E/M) documentation and coding, noting that E/M visits make up 40 percent of all charges for Medicare physician payment. Verma reiterated CMS’s advancement of the MyHealthEData Initiative to improve interoperability and patient access to electronic health records (EHRs). She also noted the agency’s proposed redesign of the Merit-Based Incentive Payment System (MIPS) initiatives to reward clinicians for engaging in health data exchange.

RELATED: Physician burnout is linked to safety issues, Mayo study finds

Physician burnout is linked to medical errors, according to a study published this month in Mayo Clinic Proceedings. From August 2014 through October 2014, researchers conducted a population-based survey of US physicians who are in active practice. The study focused on burnout, fatigue, suicidal thoughts, and recent medical errors. Among other findings, researchers determined:

  • 54.3 percent of physicians had symptoms of burnout
  • 32.8 percent of physicians suffered from excessive fatigue 
  • 6.5 percent physicians had recent thoughts of suicide

Additionally, 10.5 percent of respondents reported a major medical error in the prior three months. Physicians who reported errors were more likely to have symptoms of burnout, fatigue, and suicidal thoughts. 

RELATED: A 2017 survey conducted by the Physicians Foundation found that 80 percent of physicians consider themselves to be overextended, and half say they often feel, or always feel, burned out. According to the survey results, loss of control in practicing medicine, inefficient EHRs, and increased performance measurement can contribute to this issue. The Deloitte Center for Health Solutions 2017 survey of health system CEOs noted that this level of frustration indicates that health systems might benefit from transforming their relationships with physicians.

Breaking Boundaries

HHS invests $24 million in development of at-home flu test

If an at-home influenza test was as easy and accessible as a pregnancy test, then surveillance of—and treatment for—the flu could be much more efficient. Right now, if people suspect they have the flu, they have to take their achy, feverish selves to a clinic (potentially exposing others), get tested, wait for the results, and possibly go on anti-viral medication. While approved medications can shorten the duration and lesson the severity of flu symptoms, they are most effective when taken within 48 hours of infection. Many people miss that window because of the barriers related to getting a flu test. The Biomedical Advanced Research and Development Authority, a division of HHS, is investing $24 million with two companies that are working on different approaches to an at-home flu test. With an at-home test, patients could use an app or device to send information to their physician, who could then prescribe medication that can be delivered to the patient’s door; patients would not have to leave their houses. Slowing the spread of the flu could reduce the seasonal—and potentially a pandemic—flu’s impact on health. Health care providers and public health officials could identify influenza hot spots around the country and direct medical supplies, vaccines, and treatments to areas where they are needed most. Most people who get the flu don’t visit a doctor, which makes it difficult to produce real-time data on outbreaks.

The HHS funding is going to two companies, Cue Health, Inc., and Diassess, Inc. Cue Health has an in-home health monitoring technology platform and is developing a flu test to add to its suite. Diassess is designing an at-home test that can be used once and discarded. HHS would like future tests to be connected to both a physician’s office and to federal databases. If these at-home flu tests work as envisioned, and if patients see the benefits of a convenient test and quicker access to prescription drugs, we could see the development of at-home tests for other diseases and viruses. Over the next five years, the agreement with Cue Health can be extended for up to a total of $30 million, and the agreement with Diassess can be extended for up to a total of $21.9 million.

RELATED: Deloitte’s 2018 US Survey of Health Care Consumers shows that about half of all consumers (51 percent) are interested in/comfortable with the idea of using at-home tests to diagnose infections. Millennials (i.e., people born between 1982-2000) are more likely to be comfortable with these tests compared to seniors (those born in or before 1945). Sixty percent of millennials said they are comfortable with these tests vs. 34 percent of seniors. For the online survey, Deloitte contacted a nationally-representative sample of US adults (18 and older) from February to March 2018 and asked about experiences and attitudes related to their health, health insurance, and health care.

(Source: HHS, “At-home influenza tests take leap forward,” July 11, 2018)

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