Overview
The US House of Representatives passed its One Big Beautiful Bill Act on May 22, 2025 (the Act), but nonprofit health systems may not find much about the Act that’s attractive. If passed by the US Senate and signed into law, the Act would threaten already thin operating margins at nonprofit hospitals and health systems by expanding the executive compensation excise tax, taxing parking and similar employee benefits, potentially altering funds flow arrangements for academic medical centers, and increasing demand for financial assistance through sweeping Medicaid and Health Insurance Marketplace changes.
In Depth
Nonprofit Hospitals Face Challenging Financial Environment
Nonprofit hospitals have made slow but steady progress in recovering from the financial hangover that COVID-19 induced, exacerbated by increased contract labor expenses and lingering inflation. Fitch Ratings determined that even with this improvement, the median operating margin for nonprofit hospitals was only 1.2% in 2024. Any increase in operating expenses or decrease in reimbursement that results from the Act may push many nonprofit hospitals across the thin line that separates profitability from financial distress.
The Act May Increase Nonprofit Hospital Operating Expenses
The Act would increase nonprofit hospital operating expenses in two primary ways:
- Expanding the executive compensation excise tax.
- Taxing parking and similar employee benefits.
As part of the Tax Cuts and Jobs Act of 2017 (TCJA), Congress imposed a 21% excise tax on compensation paid by charitable organizations exceeding $1 million and on certain excess parachute payments. The excise tax applies to the organization’s top five highest compensated employees during both the current tax year and any prior tax year beginning after December 31, 2016. The excise tax does not apply to compensation provided in exchange for medical services.
The One Big Beautiful Bill Act would significantly expand the scope of the excise tax by applying it to all employees of a charitable organization who receive compensation exceeding $1 million or an excess parachute payment. The Act would not eliminate the medical services compensation exception, but the reach and financial consequences of the expanded excise tax could be significant for nonprofit hospitals and health systems that compete with privately held or publicly traded organizations for executive or administrative talent.
The Act also threatens to increase nonprofit hospitals’ operating expenses by resurrecting a tax on parking and other qualified transportation fringe benefits made available to employees. Congress first included this so-called “parking tax” as part of the TCJA. The tax requires charitable organizations to treat the amount of qualified parking and transportation fringe benefits as unrelated business income for federal tax purposes. The complexities of taxing a business expense as income led to widespread criticism of the parking tax, and Congress retroactively repealed the tax in 2019.
The Act May Disrupt Funds Flow Arrangements, Charitable Conditions
The Act contains other provisions that may have a direct or indirect impact on nonprofit health system operations or funds flow, such as:
- Increasing the tax on net investment of colleges and universities from 1.4% up to 21% (based on endowment value per student). The magnitude of this tax may result in university sponsors of academic medical systems seeking to renegotiate funds flow arrangements to recapture a portion of revenue lost to the tax.
- Increasing the excise tax on private foundations up to 10% (based on assets of $5 billion). This tax may decrease the amount of funding that private foundations are willing to contribute to nonprofit health systems.
Medicaid, Health Insurance Marketplace Changes May Increase Demand for Financial Assistance
The Act contains sweeping changes to Medicaid and Health Insurance Marketplaces, as discussed in greater detail here. The Congressional Budget Office has not conducted a full analysis of the passed bill but estimated an increase in the number of uninsured by each committee proposal, with 7.6 million uninsured as a result of the Medicaid provisions and, at a minimum, an additional 2.1 million individuals under the Marketplace reforms by 2034. As a result, nonprofit hospitals and health systems can expect to bear the financial burden of caring for those displaced by these cuts.
What’s Not in the Act and What May Come Next
Earlier versions of the Act contained provisions that likely would have resulted in decreased revenue or increased operating expenses for nonprofit hospitals and health systems. For example, the version of the Act that passed the House Ways and Means Committee would have automatically taxed name and logo revenue as unrelated business income.
The Act now moves to the Senate, where notable Republicans, including Senator Rand Paul (R-KY) and Senator Ron Johnson (R-WI) have already called for significant changes to the Act. The goal remains to finish and pass the reconciliation package by July 4, 2025.
