Nonprofit hospitals have had much to fear from Congress recently. The Senate came within one vote of repealing much of the Affordable Care Act, which would have left millions of patients uninsured and unable to pay for hospital care. And Congress may soon consider major cuts to Medicare and Medicaid, which could slash reimbursement for many hospital services.
Now, nonprofit hospitals face a new threat in the tax reform plans unveiled recently by House and Senate Republicans. Nonprofit hospitals include most of the largest and most prestigious ones in the Philadelphia area.
Like all major tax changes, the Republican proposals would create winner and losers. Some of those winners and losers had been expected, but the changes that put nonprofit hospitals in the losers' column came as a surprise. They could be in for significant hits in at least two ways.
First, the plans would limit an important source of financing for expansion. Nonprofit hospitals raise money for construction projects by issuing tax-exempt bonds that allow investors to avoid paying tax on the interest. This reduces the interest rates they have to pay to attract investors, which saves them large amounts in project costs. The House plan would eliminate the exemption for interest on most of these bonds and the Senate plan would eliminate it on many of them. This would force nonprofit hospitals to pay prevailing market rates, which could make many major new construction projects unaffordable.
Second, they stand to lose many of their donations. Donors to nonprofit hospitals receive a tax deduction for their contributions but only if they itemize deductions on their tax returns. Itemization is only worthwhile if deductible expenses add up to more than a standard amount. The tax plan would raise that amount to almost double its present size (to $12,000 if single and $24,000 if married), which would take away the benefit of itemizing for almost 90 percent of taxpayers. Without itemizing, the tax incentive for making smaller donations would disappear. And the House plan would eliminate the estate tax, which would reduce the benefit to extremely wealthy donors of leaving large bequests.
Tax exemptions for bonds and donations are benefits that for-profit hospitals do not enjoy. In that regard, the changes would put nonprofits and for-profit facilities on a more equal footing. But for-profit hospitals can raise money by issuing stock to private investors, a funding source they rely on extensively. Nonprofits have no stock to sell, so the proposed changes would put them at a significant disadvantage.
On top of these threats, the Senate plan would repeal the individual mandate under the Affordable Care Act. The Congressional Budget Office estimates that this would cause 13 million American to lose coverage over the next 10 years. Without insurance, these people would lack the means to pay for hospital care.
And because both tax bills would significantly increase the federal deficit, they could trigger automatic cuts to Medicare of $25 billion in 2018 alone. If tax reform is followed by further cuts to Medicare and Medicaid, the losses in reimbursement could be substantial.