CFE Hosts Congressional Briefing on Reforming Tax-Exempt Hospitals

Large tax-exempt hospital systems receive billions of dollars in tax benefits each year, despite many operating extensive investment portfolios, accumulating substantial assets, and competing directly with taxpaying health care providers. New research from the Tax Foundation raises questions about whether these tax preferences remain justified and identifies several reforms that could generate significant federal revenue.

The Center for a Free Economy (CFE) will bring this issue to Capitol Hill on October 27 with a congressional briefing titled “Tax-Exempt Hospitals: Hedge Funds with Hospital Beds?” The event will feature the Tax Foundation's latest research, along with policy perspectives from the Paragon Health Institute and Committee to Unleash Prosperity.

The briefing comes as policymakers examine whether the current tax treatment of tax-exempt hospitals adequately serves taxpayers and the communities these institutions are intended to benefit.

The Cost of Hospital Tax Exemptions

Tax-exempt hospitals enjoy several tax advantages unavailable to their for-profit competitors. These include exemptions from federal corporate income taxes, state and local taxes, access to tax-exempt bond financing, and the ability to receive tax-deductible charitable contributions.

These benefits are intended to support hospitals that provide charitable care and other community services. However, the financial scale of many tax-exempt hospital systems has raised questions about whether the existing tax structure provides benefits beyond what is necessary to support those activities.

According to the Tax Foundation, 2,271 hospital tax filers reported approximately $1.4 trillion in revenue, $1.8 trillion in assets, and $87.9 billion in combined net income in 2024. Previous research has estimated that the federal corporate income tax exemption alone costs between $8.3 billion and $11.5 billion annually.

These figures illustrate the substantial financial resources controlled by tax-exempt hospitals and the importance of examining how their tax advantages affect competition within the health care market.

For-profit hospitals must account for corporate income taxes and other obligations that tax-exempt competitors generally avoid. That difference can influence investment decisions, expansion opportunities, and competition among providers, even when they serve similar patients and offer comparable services.

Tax Foundation Examines Options for Reform

The Tax Foundation's new study evaluates several approaches to reforming the federal tax treatment of large tax-exempt hospital systems. Its analysis focuses on systems with average annual revenue exceeding $1 billion over the preceding three years, a threshold expected to include approximately 287 systems in 2027.

One proposal would subject these systems to the existing 21 percent federal corporate income tax, generating an estimated $147.6 billion over ten years. Another would impose an 8 percent excise tax on net investment income, raising approximately $45.6 billion over the same period.

The study also examines proposals to limit tax-exempt financing, restrict charitable deductions, and recover tax benefits that exceed the value of certain community services. One such approach, tied to hospitals' charity care contributions, could generate an estimated $64.2 billion over ten years.

The proposals would affect hospital finances differently, and policymakers would need to consider their implications for patient care, investment, and charitable services. Nevertheless, the research provides a basis for reconsidering whether the current tax code gives large tax-exempt hospital systems advantages that are difficult to justify.

A more neutral tax structure would reduce differences in the treatment of hospitals performing similar economic activities while preserving appropriate incentives for genuine charitable care.

Are Hospitals Providing Enough Community Benefit?

Federal law requires tax-exempt hospitals to satisfy community benefit standards to maintain their tax-exempt status. These requirements are intended to ensure that hospitals provide services that justify the public revenue forgone through their exemptions.

However, community benefit can include a broad range of expenditures beyond direct financial assistance to patients. Hospitals may count certain unreimbursed Medicaid costs, community health programs, research, and other qualifying activities toward their reported contributions.

This broad definition makes it difficult to determine whether hospitals are providing community benefits proportionate to their tax advantages. It also complicates comparisons between institutions, particularly when hospitals report different combinations of charitable services and other expenditures.

The issue becomes more significant when large hospital systems maintain substantial investment portfolios and generate considerable income while retaining the same general tax exemptions available to smaller charitable institutions.

Congress should examine whether existing standards provide adequate accountability and whether tax benefits could be more closely tied to clearly defined charitable activities. Greater transparency surrounding hospital finances and community benefit spending would help policymakers assess whether current exemptions are accomplishing their intended purpose.

CFE Takeaway

Tax-exempt status should reflect a hospital's charitable mission, not provide a permanent tax advantage for large health care systems engaged in activities comparable to those of their for-profit competitors. The Tax Foundation's research provides Congress with several options to reconsider these preferences while protecting genuine charitable care and promoting fair competition.