Magazine Article | January 9, 2019

New Congress Wrestles With ACA And Budget Challenges: Rich Universities A Funding Source?

Source: Life Science Leader

By John McManus, The McManus Group

The 116th Congress convened under the shadow of a partial government shutdown with Republicans handing the gavel to newly elected Speaker Nancy Pelosi (D-CA). House Democrats have made it clear that healthcare will be a key priority, second only to investigating the Trump administration.

On January 3, the House of Representatives passed a sweeping rules package, which delineates how Democrats will approach two key issues:

  1. direction to the House general counsel to defend the Affordable Care Act from the recent Texas ruling, which held that the ACA is unconstitutional
  2. reimposition of “PAYGO” (pay as you go) rules, which require new entitlement spending or tax cuts to be financed with tax increases or other entitlement spending cuts.

Texas Lawsuit Declares ACA Unconstitutional

In mid-December, the Texas Federal District Court found the ACA to be unconstitutional on the basis that Congress’ elimination of the individual mandate’s penalty for failure to carry health insurance in the omnibus 2017 Tax Cuts and Jobs Act makes the underlying mandate unconstitutional. The court reasoned that since Chief Justice Roberts’ landmark opinion (National Federation of Independent Businesses v. Sebelius), which held that Congress’ power to tax made the mandate constitutional, removing that penalty tax would therefore make the entire ACA statute unconstitutional.

The Trump administration is not defending the lawsuit but argued that some, but not all, of the ACA should be declared unconstitutional. However, the Texas ruling does not parse the individual mandate from the plethora of ACA provisions, which span everything from insurance reforms and subsidies, Medicaid expansion, Medicare payment cuts, and Part D provisions related to the coverage gap.

But 16 state attorney generals defending the ACA will appeal the Texas ruling to the Fifth Circuit Court of Appeals, where most experts believe the Texas ruling will be overturned. It seems a stretch to argue that a subsequent Congress cannot selectively and deliberately amend a statute without rendering that underlying statute unconstitutional. If the ACA defendants win, the case could go to the Supreme Court, but only if four Supreme Court justices agree to hear the case.  

The Energy & Commerce Committee’s first hearing in January will focus on the case. Democrats are convinced defense of the ACA’s preexisting conditions was a principal reason for winning back the majority and may force additional votes on Obamacare.
PAYGO Provisions and the Mounting Deficits

Bucking opposition from their left flank (notably Rep. Alexandria Ocasio-Cortez, a Democratic socialist who defeated high-ranking Rep. Crowley [D-NY] in an upset primary), House Democrats adopted a budget rule requiring new spending and tax cuts to be offset with tax increases or spending cuts. Ocasio-Cortez and other liberals argued that this rule would hamper their ability to pass their $32.6 trillion “Medicare for All” and other leftist spending priorities. The PAYGO rule calls for more fiscal discipline than the Republican version, which applied only to spending, not tax cuts.

Certainly, no one can debate that greater fiscal discipline is required as Congress’ bipartisan profligacy has massively ballooned the budget deficit. The Congressional Budget Office projects the annual budget deficit to escalate from $800 billion in 2018 to $1.5 trillion in 2028. These are staggering figures during a period of peace and prosperity. If a recession hits, prompting tax revenue to fall and entitlement spending on programs for the poor and uninsured to escalate, the bottom could fall out.

But there is little bipartisan interest to close the deficit. PAYGO just requires that new spending programs and tax cuts be paid for. The list of those programs is substantial, and Congress’ gimmicks to shroud the true cost of spending and tax provisions make the need to find offsets even more urgent.

For example, the ACA created a formula to restrain the growth of the Part D catastrophic threshold where 95 percent of beneficiary costs are covered until 2020. Why 2020? That’s when the ACA’s (enacted in 2010) 10-year budget window expires, and the old formula snaps back into place. Therefore, Congress is now grappling with how to finance the catastrophic “cliff” where beneficiary cost-sharing obligations jump by about $1,500 next year. No doubt the industry will be asked to finance that provision and any other “improvements” to Part D.

Similarly, other ACA taxes, such as the medical device excise tax, health insurance tax, and “Cadillac tax” on munificent health plans, which were temporarily suspended, are scheduled to spring back to life in the coming years. But now, continued suspension or repeal of those taxes will require tax increases or cuts to entitlement spending. This makes it much harder to keep these punitive taxes from rising from their shallow graves.

Rich Universities: A New Source of Revenue?

The 2017 tax reform bill is best known for reducing corporate rates from 35 to 21 percent and capping state and local tax deductions at $10,000. But it also opened the door to a previously untapped revenue source: investment earnings from massive university endowments.

Harvard has an endowment of $36 billion, Yale $27 billion, Princeton $24 billion. But the list of staggering endowments is not limited to the Ivies. University of Texas is $26.5 billion, University of Michigan $10.9 billion, Notre Dame $9.5 billion. Even smaller schools have substantial resources: Emory $6.9 billion, Rice $5.8 billion, Washington & Lee (my alma mater) $1.5 billion.

These endowments are, of course, invested and their compounding returns, until 2018, had never been taxed. It’s a classic case of the rich getting richer.

How are those resources being deployed? Apparently not to restrain tuition growth. Over the past 10 years, average tuition at private four-year colleges grew by 26 percent (or $7,390).

These costs ripple through to federal spending programs, which help finance escalating tuition costs. Total federal grant aid rose by 88 percent between 2007 and 2017, even after accounting for inflation. During this 10-year period, Pell Grants increased by 64 percent and total financial aid to undergraduates grew 47 percent ($58.6 billion), while enrollment grew by only 6 percent.

Despite all this government spending, the percentage of undergraduate students graduating with student loan debt is 61 percent — at the cost of about $32,600 per borrower.

The 2017 tax law initiated a modest reform, which imposes a 1.4 percent excise tax on investment income at private colleges with an enrollment of at least 500 students and with assets valued at $500,000 per full-time student. In other words, if resources are not deployed by the university based on their enrolled student population, endowment earnings are subject to a small tax. The provision is projected to raise just $1.8 billion over 10 years and expected to impact only 35 universities.

But why should universities pay a capital gains rate of 1.4 percent while individuals and corporations pay 20 percent for long-term gains? No one is suggesting taxing voluntary charitable contributions to universities and colleges, but once received, earnings on university endowment investments should receive equal treatment. If that seems too radical, why not change the formula along the lines of the House-passed bill that values assets at $250,000 per full-time student? That would affect many more colleges and universities and require those with the largest endowments to pay more on their investment earnings.

John McManus is president and founder of The McManus Group, a consulting firm specializing in strategic policy and political counsel and advocacy for healthcare clients with issues before Congress and the administration. Prior to founding his firm, McManus served Chairman Bill Thomas as the staff director of the Ways and Means Health Subcommittee, where he led the policy development, negotiations, and drafting of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. Before working for Chairman Thomas, McManus worked for Eli Lilly & Company as a senior associate and for the Maryland House of Delegates as a research analyst. He earned his Master of Public Policy from Duke University and Bachelor of Arts from Washington and Lee University.