Congress Is Urging Hospitals To Earn Their Tax-Exempt Status. But How?

In a recent hearing, Congress expressed significant concern over the responsibilities of nonprofit hospitals in serving their communities effectively. These institutions benefit from a tacit agreement with taxpayers: they are granted various tax exemptions—including income, property, and sales taxes—on the condition that they deliver charitable services to the public. A pivotal study I co-authored, published in JAMA, revealed that in 2021, the cumulative tax savings for these hospitals reached a staggering $37.4 billion, with over half of this amount originating from state and local governments.

Thanks to the ability to borrow at favorable tax-exempt interest rates, nonprofit hospitals can make substantial investments without the burden of taxes on returns. Our upcoming research in Tax Notes indicates that these entities collectively managed close to half a trillion dollars in investment assets, issued around $180 billion in tax-exempt bonds, and realized nearly $10 billion in tax-arbitrage profit in 2022.

Moreover, they can capitalize on programs such as the 340B Drug Pricing Program. Our research in Health Affairs further highlights that urban nonprofit hospitals, including distinguished academic centers like New York-Presbyterian and Cleveland Clinic, are resorting to a dual-classification as rural to take advantage of more lenient eligibility criteria for the 340B program, in addition to other benefits earmarked for rural facilities.

The Affordable Care Act mandated that nonprofit hospitals report community benefits on IRS Form 990, which includes eight distinct categories. Charity care stands out as the most telling measure of whether these hospitals fulfill their charitable missions. Unlike other categories, which may include inflated consulting costs and marketing expenses disguised as community benefit, charity care directly quantifies support provided to disadvantaged individuals.

In an additional Health Affairs study I co-authored, we found that nonprofit hospitals delivered a smaller share of charity care relative to their overall expenses compared to their for-profit counterparts. Even when examining Medicaid shortfalls—often included as community benefits—our findings indicate that there was no significant difference between nonprofit and for-profit hospitals.

Presently, nonprofit hospitals mirror the behaviors of for-profit entities, engaging in strategic pricing, financial investments, and anticompetitive contracting practices. This shift in operations diverges sharply from the past, where nonprofit hospitals primarily catered to the underprivileged and were staffed by volunteers—an era when their tax-exempt status was instituted. Today’s reality grants nonprofits a competitive edge that exacerbates hospital market consolidation and elevates healthcare costs.

So, what legislative actions should Congress take? Simply tallying up charity care dollars and implementing a federal benchmark will likely fall short, as larger hospitals might adeptly navigate around such stipulations. The vast disparities among hospitals and their respective communities cannot be overlooked.

To foster transparency, Congress should mandate that hospitals disclose their property tax and sales tax savings on IRS Form 990. These figures are relatively easy to estimate and would provide local authorities with critical insight regarding tax subsidies, aiding tailored community policies.

Furthermore, Congress could consider levying an excise tax on financial investments made by hospitals, akin to the tax applied to university endowments. Additionally, it should eliminate the loophole that allows urban hospitals to dual-classify as rural to access the 340B program and other rural benefits.

If Congress genuinely aims for hospitals to cater effectively to their communities, embracing competition is essential. It is vital to dismantle anticompetitive regulations, establish a level playing field, and permit nonprofit hospitals to compete on equal terms with their for-profit counterparts, physician-owned entities, and other facilities. A shift from subsidizing hospitals to directly funding patients is also essential.

Once we establish a competitive and patient-centered environment, hospitals—including nonprofits—will be motivated to prioritize patient needs to remain viable, rather than merely adhering to compliance regulations. With the advancement of technology, competition can drive innovation, reduce prices, and enhance quality. Ultimately, patients will benefit through increased affordability and access, which aligns with the true essence of community service for the American populace.

This article is adapted from my testimony given before the U.S. House Ways and Means Committee’s Oversight Subcommittee on September 16, 2025.