As the 46th president of the United States, Joe Biden has set some ambitious policy goals that will have far-reaching effects on the healthcare real estate market and the operations of nursing homes and senior living communities. As a result, many seniors housing and care owner/operators are turning their focus in 2021 to adapting their business models and strategic decisions to a Democratic president and Democratic Congress. In this article, we explore what owner/operators can expect from the Biden administration on three fronts: taxes, regulation and spending. In the process, we examine how the administration’s policies under each of these categories may affect the industry in a negative, neutral or positive manner.
TAXES
Capital Gains and Carried Interest
Under current law, the maximum effective federal income tax rate on net long-term capital gains and qualified dividends recognized by individual taxpayers is 23.8% (capital gains rate of 20% plus 3.8% net investment income tax (NIIT)). Under the new proposed tax plan, President Biden will seek to increase that rate to 43.4% (39.6% capital gains rate plus 3.8% NIIT) for those who earn $1 million or more. On a $50 million acquisition, the result could be a hefty $4.9 million increase in capital gains taxes. To net the same proceeds as one would have under the current law, the sale price would need to be increased to $58.7 million. These are substantial changes, and owner/operators considering merger and acquisition (M&A) activity in 2021 and beyond should pay close attention to the timing of these potential developments.
In addition, the administration wants to revise the income tax treatment of “carried interest” (a common form of compensation for hedge fund and private equity managers) from capital gains to ordinary income. This proposal could slightly modify the investment thesis or business model of private equity firms that invest in the senior care sector.
Estate Taxes
Owner/operators, especially those with family businesses, should be aware that they could be impacted by a proposed estate tax policy from the Biden administration. Under current law, the income tax basis of property held by a decedent on the date of death generally is stepped-up to its fair market value. However, President Biden has proposed to cap this basis “step-up” on death at $1 million, or $2.5 million per couple when the estate includes a primary residence. This policy could mean a significant increase in taxes when an heir receives a business following an owner’s death.
When could these new tax policies be enacted? Although difficult to predict, many experts believe this policy will not be introduced until 2022, giving owners of closely held businesses time to search for a more tax efficient transfer of ownership, such as tax efficient M&A structures or an employee stock ownership plan (ESOP). ESOP structures, in particular, are gaining popularity, as evident by this recent example.
Taxes – 1031 Exchanges and Depreciation Schedules
Another potential Biden policy that would impact investors in the seniors housing and care industry is the potential elimination of 1031 exchanges (when the capital gain is greater than $500,000) and rules that allow faster depreciation write-offs for certain real property. 1031 exchanges, under current law, are used by investors to defer capital gain recognition and ultimately encourage continued investment in the real estate market. If 1031 exchanges are eliminated, real estate investors might think twice before selling investment properties, which could slow down the deal market. In fact, a study prepared by Ernst & Young in 2015 indicated that GDP would fall by $8.1 billion per year if 1031 exchanges were eliminated.[1] The good news is that 1031 exchanges have been targeted before in previous tax law changes, but the economic importance of such exchanges has overshadowed previous attempts to eliminate them. In 2020 alone, there was $3.2 billion raised to invest in 1031 exchange transactions from 40 equity sponsors, per a report prepared by Mountain Dell Consulting, of which $140 million was raised to invest in the senior care sector.[2]
If policies and laws change around depreciation and slow down the depreciation schedule, then owners of real estate will have to pay more taxes, as owners would then show greater cash flow on their tax returns. While this is not as significant as the other proposed laws and policies, it is still something owners of real estate should consider when plotting out their plans for 2021 and beyond.
Corporate Taxes
Proposals to raise the corporate income tax can additionally create performance pressures on owner-operators. These include raising the rate from 21% to 28% and imposing a 15% minimum tax on the book income of large corporations. These proposals are being considered to raise revenue for new spending programs and would repeal changes to the corporate tax made by the Tax Cuts and Jobs Act (TCJA) in late 2017. An increase in the federal corporate tax rate to 28% would raise the U.S. federal-state combined tax rate to 32.34%. If this legislation takes effect, it will have a decidedly negative impact on both sellers and buyers if tax-efficient M&A structures are not employed.
REGULATION
The previous administration supported healthcare providers fighting the COVID-19 pandemic through the bipartisan CARES Act Provider Relief Fund, the Paycheck Protection Program, and Health Care Enhancement Act. That strong support gave investors’ confidence of the viability of the healthcare real estate sector moving forward, as stock prices rose considerably following the lows of April 2020.
The Biden administration is committed to providing older Americans with a safe and dignified community to live in during the pandemic and plans to improve on the COVID-19 policies set by the previous administration. Specifically, the Biden administration will invest $25 billion in a vaccine manufacturing and distributions plan with the goal of having 2.5 million doses administered per day. President Biden’s COVID-19 policies for the seniors housing and care sector include:
- Ensure effective point-of-care testing and contract tracing
- Ensure updated public health guidance is followed
- Invoke Defense Production Act to increase PPE
- Effective medical supply chain
- Ensure adequate staffing and training
The new administration also plans to improve the transparency that will be expected from owners and operators from a regulatory perspective, which should provide greater stability to the sector. During Ventas’ third quarter 2020 earnings call, Ventas CEO Debra Cafaro said “With a moderate Democratic president, a Democratic House, and what will certainly be a closely divided Senate, that will push us toward more consistency in policy, more moderation in policy, more likely to be steady as she goes — and that’s quite a favorable backdrop for Ventas, and hopefully for the country as well.” Her comments illustrate the desire for greater regulatory transparency among owners and operators. Some of the Biden administration’s proposed policies and regulations as it relates to general oversight include:
- Ensure adequate staffing and training
- Increase frequency and scope of CMS surveys
- Increase data collection
- Restore levels of penalties needed to obtain compliance
- Require OIG audits of nursing home cost reports
- Enhance protections against inappropriate discharge
- Reauthorize the Elder Justice Act
- Require an infectious disease specialist in every regulated setting
Limitations of Liability
Although the increase in regulatory transparency from the Biden administration can be viewed as a positive from a stability standpoint, owner/operators need to be aware that they will be held accountable for the outcomes of their patients. The Biden administration will now reject limitations of liability that formerly made it hard for individuals harmed or killed due to nursing home negligence to hold providers accountable by pursuing legal remedies. This change in policy will open the door to the plaintiff’s attorney and will likely result in many more lawsuits in the industry.
SPENDING
Medicaid Expansion
Among the provisions in the $1.9 trillion COVID-19 relief package relief package is a new incentive for states that have not yet expanded their Medicaid programs. Currently there are 12 states – Alabama, Florida, Georgia, Kansas, Mississippi, North Carolina, South Carolina, South Dakota, Tennessee, Texas, Wisconsin and Wyoming – that have not expanded their Medicaid programs.
Under the existing system, the federal government shares Medicaid costs with states and covers 90% of the costs for each state’s expansion group. The proposal put forth in the relief package makes that more generous: it proposes that for any state that newly expands Medicaid, the federal government would increase what it pays for all non-expansion Medicaid enrollees by five percentage points for two years. That is in addition to still covering 90% of the costs for expansion and on top of a 6.2 percentage point bump in federal Medicaid matching funds that Congress allocated last spring in response to COVID-19. This proposal can be viewed as a positive for the senior care industry. If states elect for Medicaid expansion, then access to a greater patient population and more generous reimbursement rates could be achieved.
Aggressive Capital Deployment at Agency Level
It is likely that organizations such as the United States Department of Agriculture (USDA) will allocate capital aggressively under the Biden administration. In 2020, under the Trump administration, there was a significant shortfall of capital deployed. In fiscal year 2020, only $1.2 billion of direct loans was committed out of an appropriated $2.4 billion, and only $100 million of guaranteed loans was committed out of an appropriated $500 million. The appointment of Tom Vilsack as Secretary of Agriculture (the previous Secretary during the Obama administration) makes it likely that the program will take a more traditional and historical approach to deploying its capital, thereby increasing access to capital for rural seniors housing and care communities.
Home Health to Receive Funding and Incentivized to Innovate
While the Biden administration is committed to supporting the nursing home and senior living space, the administration has also indicated its plans of making sure home health and community-based healthcare services, which can be viewed as competitors to traditional nursing homes and senior living communities, also receive adequate funding and support. On the campaign trail, Biden proposed a $450 million plan to boost home and community-based healthcare services. In addition, Biden’s plan seeks to increase the workforce providing care in the home by 1.5 million people, while simultaneously eliminating the current 800,000 person waitlist for home and community-based healthcare services under Medicaid.
The Biden administration will not only provide direct government funding to the home health space, but will also support innovation. The Biden administration has announced that they will establish a long-term services and supports innovation fund to help expand home-and-community based alternatives to institutional care, such as skilled nursing. While the fund size has not been announced, the administration indicated that it will dedicate substantial resources to this fund to help states and local-based entities test innovative models that expand home and community-based alternatives to institutional care. These could include approaches that provide care while allowing individuals to retain independence, such as day programs and respite services that enable unpaid caregivers to work, alternative home and community models that coordinate or directly provide care, and Medicaid buy-in models.
Telehealth to Receive Support
Telehealth is another area where support is expected from the Biden administration. Throughout his campaign, he made commitments to reinforce and expand the Affordable Care Act (ACA), which portends to expand the amount of telehealth users and support the growth of the industry overall. As the ACA expands and covers more connected care applications, telehealth and digital health companies and connected health systems can extend to a wide range of users, which could serve as a replacement to assisted living in some instances.
In Summary
Change is the law of life and those who look only to the past and present are certain to miss the future. Overall, based on the policies examined above, it appears the Biden administration will have a negative impact on the industry in regard to taxes, neutral in regard to regulation, and positive when it comes to spending. Whether good, bad or neutral, the proposed policies have the potential to create strategic opportunities for owners and operators, especially those considering divesting non-core assets and estate planning. As always, working with a lender and financial advisor with extensive products and deep experience within the healthcare sector is paramount for turning strategic advice into accomplished objectives.
[1] Economic Impact of Repealing Like-Kind Exchange Rules, Ernst & Young, November 2015.
[2] Market Report Securitized 1031 Industry, Mountain Dell Consulting, LLC, 2021.
