Nonprofit Medicine: Is Government About to Throw It under the Bus?

Unfortunately, that appears to be the case—unless we do something about it. Action Alert!

Who controls healthcare? We wish we could say it was consumers, but they have less and less of a voice. Actually, healthcare today is controlled by three entities: government, for-profit businesses, and nonprofits—and before long, the first two may muscle out the third.
Should those of us following a natural health approach worry about this? Yes, definitely—for two reasons. First, conventional medicine has wandered far from the old ideal of being a caring profession, but that perspective is more likely to be rediscovered in a nonprofit setting than in one controlled by government or by for-profits. Second, having different kinds of healthcare providers increases our options and reduces the chance of having one-size-fits-all medicine forced on us.
How much nonprofit medicine is there now? A lot. Fully 62% of hospitals are nonprofit (20% are government-run and the rest are for-profits), as are 30% of nursing homes, 17% of home healthcare agencies, and so on. The medical practices that President Obama has praised as role models that others should emulate are nonprofit.
Yet President Obama is trying to undercut nonprofit medicine. And so are the Republicans. They are both doing it at a time when the donations to nonprofit medicine, decimated by the Crash of ’08, have still not recovered—and at a time when states and localities are upping taxes on nonprofits to try to reduce their deficits.
Presidents Bush and Obama decided to bail out auto companies and Wall Street. So why try to tear down the whole nonprofit sector at the same time? That sector represents about 11% of the economy; it employs 13.5 million people, about 10% of the workforce. Is their work—devoted to the general welfare, typically done with lower pay and benefits than in either government or business—less important than the auto workers or Wall Streeters? The president famously said, “These aren’t games we are playing here. Folks are out of work.” Exactly—and they’re out of work in the charitable sector too, where we really need them working.
First let’s look at Obama on nonprofits in general, then the Republicans. Then we’ll come back to nonprofit medicine.
President Obama seemed to be praising charities in his Democratic Convention acceptance speech. He said, “We know that churches and charities can often make more of a difference than a poverty program alone.” But look at that more closely, especially the words “often” and “more.” The president was really saying that charities do not always make a difference and if they do it is by adding to what government is already doing.
That was actually pretty dismissive. Most studies show that nonprofit social agencies are much more effective than government agencies, whether it is rehabbing drug addicts or delivering medicine to the poor. Furthermore, charities offer diversity. They are a laboratory of ideas and approaches, something that the government can never be. They also represent people-to-people solutions, the democratic ideal in action.
Earlier, the president had proposed a sharp curtailment in the ability of single people with incomes over $200,000 or families with incomes over $250,000 to take a tax deduction on charitable gifts. He proposed this several times, but most recently as a way to pay for his proposed 2011 jobs stimulus bill. And this reduction in the charitable deduction would be on top of another reduction (the “Pease limitation”) that was already scheduled to come back with the end of the Bush tax cuts.
In 2009, Obama said, “I think it [reducing the charitable deduction] is a realistic way for us to raise some revenue from people who have benefited enormously over the last several years.” But that doesn’t make any sense. Taking away the charitable deduction doesn’t penalize the rich; it penalizes the charities and the people being served by the charities. If the rich don’t give, they will end up with more money, not less. They do not suffer at all.
Obama’s budget director at the time, Peter Orszag, seemed to acknowledge this—that it was the charities, not the big donors, who would suffer under this proposal—when he said that charities should be willing to make this sacrifice in return for more people getting health insurance under the Patient Protection and Affordable Care Act (“ObamaCare”). But this didn’t make any sense either. First, yanking the charitable tax deduction was not part of the president’s plan to finance broader healthcare. Second, reducing the deduction actually makes it harder to cover more people.
This last point only requires a moment’s thought. If you want to cover more people, you need more doctors and nurses and clinics. In economic terms, if you increase demand, you should increase supply. Otherwise, people with the new health coverage still won’t be able to see a doctor, or they will have to wait for weeks and weeks, and prices will likely soar.
This is not an abstract idea. It is already happening just this way in Massachusetts under RomneyCare. Newly covered people can’t find a doctor, and prices are rising so rapidly that the legislature has just passed a price control system (even though price controls almost always fail). So if you need more healthcare supply nationally, how does it help to take a hatchet to nonprofit healthcare providers?
Obama also said that “there is very little evidence that this [cutting the charitable deduction] has a significant impact on charitable giving.” In fact, the evidence says the opposite, that for every 1% reduction in the deduction, gifts from wealthy people fall 1%. That kind of drop in charitable giving would be devastating for nonprofits. As David Harris, executive director of the American Jewish Committee, wrote to the president, “Most nonprofits derive 70 to 80 percent of their donations from a small proportion of their donors who are major givers. This proposal will deal a major blow.”
Moreover, “taxing” major donors’ gifts would not even produce that much revenue for the government, only an estimated $54 billion a year. Compare that to the $300 billion in tax subsidies for health insurance or the overall budget deficit of $1.2 trillion. And let’s remember that charities would be expected to lose at least $54 billion and possibly much more.
President Obama added that he doesn’t think it is fair that someone in the 35% tax bracket gets a 35% deduction while someone in the 28% tax bracket gets a 28% deduction. Before we get too worried about this, let’s remember that the employer tax deduction for health insurance works the same way—the higher your income, the bigger deduction you get—and involves much more money. But the president did nothing to change that in his healthcare legislation because unions did not want it changed.
Also, speaking of fairness, why was the Affordable Care Act set up so that two families at the very same income level may receive government insurance subsidies that vary by $10,000 or even as much as $20,000? That doesn’t seem very fair.
Furthermore, there is an easy fix to put everyone’s tax treatment for charitable giving on the exact same footing. Independent Sector, representing nonprofits as a whole, has proposed that “charitable contributions should not be included in an individual’s adjusted gross income [subject to tax].” This change from a tax deduction to a tax credit would treat everyone alike and produce a torrent of income for charities. If government doesn’t want to go that far, how about a tax credit for charities that directly help the needy?
The president’s proposal to “tax” charities harder was first made when he had Democratic majorities in both the House and the Senate. Despite the majorities, it did not go anywhere. No one seemed to back it until Mitt Romney suddenly embraced it toward the end of the presidential campaign. But did he in fact embrace it?
What Romney actually said was that tax rates for everyone, including the highest earners, should be reduced in order to help the economy. In return, he would propose to cap itemized deductions to a maximum of $17,000, $25,000, or $50,000 (all three figures were “examples” rather than proposals). Romney also wasn’t clear about whether the cap would apply to all itemized tax deductions (e.g., state income taxes, mortgage interest, and charitable gift deductions, but not health insurance deductions) or just some of them.
Here is how an online reader reacted to the Romney proposal, which he assumed meant that charitable deductions would be cut. “[Let’s say you give 5% of your income to charity and I give none. The Romney plan] stops rewarding you for being a better human being than me and [instead] rewards me for being a jerk.”
Regardless of what Romney actually intended, his remarks suddenly put the charitable deduction, part of the tax code since 1917, in grave peril. Only a few days after the 2008 presidential election, Democrats started pointing out that eliminating deductions was a Republican proposal, although they conveniently left out the part about cutting tax rates first.
Republican House Speaker Boehner (R-OH) said he would be open to increasing government revenues, but not increasing tax rates. This was code for saying that tax deductions in general would be on the chopping block. Congressman and vice presidential candidate Paul Ryan said the same. And now Mitt Romney’s chief economic advisor, Glenn Hubbard, has also come out in favor of cutting deductions.
How much nonprofit medicine will be wiped out if the charitable deduction falls? Potentially, quite a lot. It is hard to get firm figures on gifts for medicine, but as much as $32 billion may be going there, with about a third of that going to nonprofit hospitals. These hospitals are already endangered by threatened reimbursement cuts under the Affordable Care Act and many of them could be forced to close. How will low-wage earners benefit if they have “coverage” but don’t even have a hospital emergency room to go to?
Will the charitable deduction survive? It depends on how the American public reacts. Do we want more charity, or less? Do we want social services, including medicine, to be provided only by government or for-profit businesses, or do we want a thriving nonprofit sector?
Most countries do not have a thriving nonprofit sector. Europe does not have it, nor Japan. This has been a uniquely American phenomenon, recognized and encouraged by our tax laws. Now it is under attack. Whether that attack succeeds will make a big difference in the kind of country we are. If we care, and we should, we have to make our views known on Capitol Hill.
It is possible that Congress will decide this in the next few weeks. We need to tell Congress not to throw charity under the bus! Please contact your senators and representative immediately.