Mile High Expenses: What A Proposed Health Tax Could Mean for CFOs

Could a sales tax solve hospitals' financial crisis?

Denver Health is turning to its city council as it faces a financial crisis.

The nonprofit hospital is working with members of the city council to implement a 0.34% sales tax increase that would help pay for uncompensated care. If approved, the tax will be added to the ballot in November.

Denver Health has been struggling with uncompensated care costs for a while. In 2020, the hospital lost $60 million from uncompensated care costs, and saw that number double to $120 million in 2022. Last year its uncompensated care costs soared to $136 million, with $35 million of that sum coming from patients who live outside the city. Over half—65%—of Denver Health’s patients are covered by Medicaid or are uninsured.

Medical Costs Hitting Nonprofits

Denver Health is one of many nonprofit health systems across the country feeling the effects of soaring costs. Nonprofits seemed to be doing okay after the pandemic, with one study showing 73% of nonprofit hospitals and health systems had at least “strong” days of cash on hand in 2022.

Although margins have increased, and some nonprofits have had luck pivoting elsewhere to increase operating margins, some are still dealing with rising labor costs. Labor expenses continue to weigh down hospitals and with nonprofits unable to cut services, cost caps are coming into play.

However, cost caps may even be further damaging to nonprofits. A report from Fitch Ratings shows how state benchmarks could hurt nonprofit revenue and operating margins during a time when operators are combating rising expenses.

Denver’s Dilemma

The proposed tax would increase Denver's sales tax to over 9%, with the tax collection capped at $70 million. According to NBC affiliate KUSA, a city council member has advanced the proposal, which still requires full council approval before it gets on the ballot.

According to the Denver Gazette, this tax would make Denver the highest-taxed major city in the wider metro area, and some council members worry that Denver voters may recoil at the prospect of a tax hike. 

According to the report, earlier this year Denver Health CEO Donna Lynne put pressure on state and federal policymakers to pay for the uncompensated care costs. In March, the state accelerated $5 million to the hospital when state health care leaders warned that the hospital was nearing a financial “death spiral”

According to Lynne, the sales tax would ensure that patients outside the city are helping to cover the payments.

"There is a possibility that there would have to be service reductions, if we are not successful in all of those fronts," she said, according to the report.