All eyes are focused on how proposed tax and healthcare changes will affect owners and operators.
By Jane Adler
As a new administration takes shape in Washington, D.C., tax reform and healthcare are the big issues that could impact the senior living industry. No laws have been enacted yet, but the proposals now emerging are getting widespread attention.
Real estate investors could be affected by plans that would change the depreciation of the value of commercial real estate. Low-income housing tax credits and 1031 exchanges are two other areas to watch.
The final shape of healthcare reform remains uncertain, but the push to curb costs will continue. Skilled nursing operators are already feeling the effects of payment system reform under the Affordable Care Act (ACA), a trend expected to trickle down to assisted living operators. And new proposals to make significant cuts to Medicaid could be a blow in the years ahead to nursing homes that rely heavily on the program for revenue.
Other issues are on the legislative radar screen.
The financing of long-term care is a concern as baby boomers, many without sufficient savings, reach an age where they need help. The industry is also watching Fannie Mae and Freddie Mac, crucial sources of permanent loans for the seniors housing industry. Discussions continue about whether the agencies, which operate as quasi-government enterprises, should finally be restructured.
Meanwhile, legislative initiatives are bubbling up in the states. Local lawmakers are looking at residents’ rights, financial disclosure rules and a number of changes to healthcare regulations. And new laws in response to social trends are presenting tricky new issues for operators to navigate (see sidebar).
“There are a bucket of issues included in individual pieces of federal legislation,” says Jeanne McGlynn Delgado, vice president of government affairs at the American Seniors Housing Association (ASHA), an advocacy group for the industry based in Washington, D.C. “We need to take a thoughtful approach.”
Though the tax code last underwent a major overhaul 31 years ago, in 1986, broad blueprints for reform are emerging. Nothing specific has been proposed, but the overall goal of Republican legislation would be to simplify the tax code, provide tax relief for middle-income families, and lower corporate tax rates in an effort to boost economic growth. Lower tax rates would be partially offset by allowing fewer deductions, though exactly which deductions would be disallowed is a point of contention.
As a starting point, President Trump issued an order in April for a review of tax regulations to identify those that are unnecessarily burdensome or complex.
Specific provisions regarding the tax treatment of commercial real estate, including seniors housing, haven’t been recommended yet. “The jury is still out,” says Delgado. But, she adds, the issue of depreciation is worth watching. She explains that seniors housing is currently treated like a multifamily property, and depreciated for 27.5 years.
One proposal would allow the full write-off of development or acquisition costs in the first year. Owners would not be able to deduct the interest expense, however. The operating loss from the first year could be carried over, but at some point it would run out. This could alter the timing of investment decisions. “This would be a major change,” says Delgado.
ASHA is working with a coalition of 11 real estate organizations to research the impact of various tax proposals on property values and rates of return. Preliminary research shows that a change in depreciation schedules may not be a positive for current owners. New owners may enjoy some benefits, however.
“The key is the transition and how that is handled,” says Delgado. “An owner could be in the middle of depreciating a property, and how that transition is made to a new schedule will be key.”
Specific tax changes must be viewed in the context of wider reforms. A lower tax rate on corporations, for example, could more than offset changes to depreciation schedules. “It’s like a Rubik’s Cube,” says Delgado. “You have to weigh one change here versus another over there.”
Healthcare reform impact
At the intersection of taxes and healthcare, ASHA is working to maintain the deductibility of medical expenses to keep more money in seniors’ pockets to pay for care.
The deduction for unreimbursed medical and dental expenses is limited to the excess above 7.5 percent of a person’s adjusted gross income. The ACA raised this threshold to 10 percent, but retained the 7.5 percent level for seniors. The provision for seniors is set to expire, though various proposals would maintain the break for seniors.
“We are trying to make the 7.5 percent level permanent, or extend it,” says Delgado.
Skilled nursing providers are closely watching the healthcare debate in Congress. The bill passed by the U.S. House of Representatives cuts Medicaid spending by $880 billion over 10 years, according to the Congressional Budget Office.
The cuts could impact skilled nursing providers that rely on Medicaid payments for a large percentage of their revenues. Medicaid pays for 63 percent of people receiving nursing center care and about 19 percent of assisted living residents, and this number is only expected to increase over the next few decades.
Under the proposal, states would either receive a set amount of funding per enrollee, known as a per capita grant, or fixed funding in the form of a block grant. This would have the effect of shifting the increase in medical costs to the states, experts say.
While further discussions continue on healthcare reform, changes in the payment system are already taking hold.
Under the provisions of the ACA, payments by the Centers for Medicaid & Medicare Services (CMS) are being shifted from a fee-for-service to value-based care delivery system. The new system, which has bipartisan support in Congress, aims to improve care and reduce costs by linking payments to quality outcomes.
About half of CMS payments are now value-based, experts say, and the shift is expected to accelerate. If new healthcare legislation is enacted, no one expects a return to a fee-for-service system.
Insurers, accountable care organizations and health systems are already working with skilled nursing providers to reduce hospitalizations and curb spending. Payors want to know they are working with post-acute care providers that can produce results. That effort will most likely eventually trickle down to assisted living providers too.
The broad effect of payment reform will be that assisted living and nursing care providers will be required to demonstrate quality outcomes. “Our industry is getting more interconnected with healthcare issues,” says Adam Kane, a member of ASHA’s public policy committee and senior vice president at Erickson Living based in Catonsville, Md.
Besides the shift in how federal payments are made, changes are being enacted on the state level too. A number of states have passed legislation to create health information exchanges. These allow care providers to share clinical data among hospitals, nursing homes and physicians.
Other rules are being changed.
So-called self-referral legislation prohibits doctors and other healthcare providers from referring patients to other providers in which they have a financial interest. But these laws are being relaxed by the states in order to allow accountable care organizations and other provider networks to work within the new payment frameworks. “These changes are coming,” says Kane.
Beyond healthcare, states are tackling the issues common in senior living. Legislation falls into certain categories or themes. Many of the new laws focus on licensing, employee relations, arbitration agreements, affordability, dementia care licensing and training, safety, and the financial arrangements related to entrance fees at continuing care retirement communities (CCRCs).
In Florida, sweeping legislation was introduced in March by state senator Tom Lee and house representative Cyndi Stevenson to regulate entrance fees at CCRCs. The law would require more financial reserves to be set aside in order to guarantee the repayment of entrance fees. The bill was not successful, but garnered widespread attention.
The Florida CCRC proposal brought together companies and industry groups to work with the legislature to educate them about the industry, says Kane. “It takes a major education effort for state regulators to understand the CCRC business model.” Kane expects the bill to be reintroduced, though in a different format in the next legislative session.
In Texas, a Medicaid bed tax for skilled nursing facilities is being debated. The fee, in theory, would make nursing homes eligible for more matching dollars from the federal government. But private pay facilities that don’t receive reimbursements, such as CCRCs, object to the tax. “Other states have a Medicaid bed tax already,” says Kane, adding it’s something to watch.
Here are some other issues being addressed by the states:
- Arkansas, Missouri, and Washington are considering the use of monitoring devices and nanny cams in long-term care facilities.
- Massachusetts is considering the authorization of the option for assisted living facilities to provide health services such as injections, management of oxygen and application of wound dressings.
- Arizona has a new law, effective July 6, 2017, that specifies requirements for using the results of a state compliance survey in assisted living or skilled nursing advertisements.
In California, a series of bills were introduced and passed over the last several years that relate to resident rights and enforcement of regulations. The legislation grew out of a series of media reports related to substandard care at assisted living facilities in the state.
“There’s a lot more zeal in enforcing regulations that were on the books,” says Paul Gordon, partner at Hanson Bridgett LLP, a San Francisco-based law firm that focuses on healthcare and senior living.
A common area of dispute is resident transfers to a different level of care at CCRCs. New legislation has been proposed in California that would require CCRCs to use specified assessment tools during the transfer evaluation process.
Gordon notes that disputes over transfers continue to be one of the most common legal pitfalls for senior living operators. And, he says, it’s only getting more difficult as the age of residents continues to rise along with their disabilities.
“People think they have the right to age in place,” says Hanson. “But that’s not in the U.S. Constitution.”