The U.S. budget reconciliation bill includes major reforms to healthcare funding and the tax treatment of compensation. Specifically, it introduces material financial and operational shifts for tax-exempt healthcare provider organizations. In turn, these pressures are likely to affect how these organizations design and manage executive compensation programs.
The bill includes several provisions aimed at reducing fraud and improving enrollment processes in Medicaid and other health programs. However, these changes come with financial implications that may challenge providers’ fiscal solvency or operational stability.
The bill delays the implementation of certain rules related to eligibility and enrollment in Medicare Savings Programs (MSPs) and Medicaid. This delay could reduce MSP enrollment among low-income seniors, potentially decreasing reimbursements to providers that serve these populations.
Reductions in Medicaid funding could place additional strain on the finances of tax-exempt providers. In response, organizations may need to reduce services, explore philanthropic support or re-evaluate program priorities — all of which could affect operational scope and financial forecasting.
The legislation expands the 21% excise tax on “excessive compensation” (defined as remuneration over $1 million, excluding payments made for certain medical services). Previously applied only to the five highest-paid employees, the tax would extend to all employees or any related person or entity. This expansion could meaningfully increase tax exposure on healthcare providers, particularly those with large executive teams.
Academic medical centers affiliated with universities holding substantial endowments may be affected by a shift in endowment taxation. The current 1.4% excise tax on net investment income for private colleges and universities will be replaced with a tiered system based on the institution's “student-adjusted endowment” (i.e., total endowment divided by number of full-time students). For institutions with a student-adjusted endowment of more than $2 million, the excise tax could increase to as high as 21%.
The financial and regulatory pressures outlined above introduce both risk and complexity for executive pay strategies in tax-exempt healthcare. While responses will vary, most systems likely will need to reassess how they allocate and justify leadership compensation in light of tighter margins and heightened expectations for transparency from stakeholders and governance bodies.
As cost pressures mount, many organizations may turn to workforce restructuring — including voluntary retirement programs or selective reductions in force. These decisions, combined with heightened financial oversight, may lead to capped salary increases, deferral of incentive awards or redesigns to executive pay programs to mitigate reputational risk.
With tighter budgets and increased scrutiny on financial management, boards of directors may gravitate toward heavier weighting on financial metrics within balanced scorecard frameworks. While patient safety, clinical quality and satisfaction measures likely will remain core to incentive design, greater emphasis may be placed on operating margin or cost containment as indicators of fiscal leadership.
Even though performance-based pay remains subject to the excise tax, its alignment with financial resilience may help support defensibility under board and public scrutiny, as well as provide a greater link between organizational performance and compensation spend.
With the expanded excise tax provisions, employers will need to revisit how they define, track and report executive compensation. This may prompt structural changes to employment agreements, severance or retirement plans to mitigate tax liability.
While many tax-exempt healthcare providers are still regaining financial footing post-pandemic, the bill introduces new layers of complexity — particularly for organizations operating near margin thresholds or with sizable leadership teams.
Boards and compensation committees should be proactive in reassessing compensation plan competitiveness, conducting stress-testing for tax exposure, and preparing alternative retention mechanisms. This includes reconsidering high-dollar compensation structures, assessing retention risks both within and outside the healthcare sector, and ensuring that incentive plans balance mission and margin.
As external visibility and stakeholder expectations rise, compensation governance will increasingly be expected to defend pay decisions not just to regulators, but to employees, donors and the communities they serve.
