As the American healthcare landscape continues to evolve through rapid consolidation and rising revenues, tax-exempt hospitals are facing intense scrutiny from lawmakers across the political spectrum. Representing a substantial share of medical care across the United States, nongovernment tax-exempt community hospitals account for nearly half of the approximately 6,100 hospitals operating nationwide. However, as these health systems grow larger and more financially robust, policymakers are increasingly questioning whether the public benefits they deliver justify the substantial value of their federal, state, and local tax exemptions.
A comprehensive new analysis and economic modeling by the Tax Foundation examines five distinct options for reforming the tax treatment of large tax-exempt hospital systems. The study explores how applying corporate income taxes, excise taxes on investment income, limitations on tax-exempt bond financing, restrictions on charitable deductions, or mechanisms to recapture excess tax benefits could alter federal revenues and shape the broader healthcare market.
Tax-exempt hospitals generally do not pay federal income taxes, state income taxes, or local property taxes. They also enjoy access to tax-exempt bond financing and benefit from tax-deductible charitable donations. Numerous studies measuring the value of these exemptions between 2018 and 2022 estimated the federal corporate income tax exemption alone was worth between $8.3 billion and $11.5 billion annually, while broader estimates incorporating other tax preferences reached significantly higher figures.
Lawmakers in Washington have debated these policies amid growing concerns over market concentration. Studies have shown that one or two health systems control the entire market for inpatient hospital care in nearly half of all metropolitan areas. In response, policymakers have weighed proposals ranging from enhanced transparency and stricter community benefit reporting requirements to targeted tax changes aimed at the largest hospital conglomerates.
A Brief History of Hospital Tax Exemptions
The modern framework for hospital tax exemptions has roots tracing back more than a century. The first federal corporate income tax exemption for charitable organizations was enacted alongside a temporary corporate income tax in 1894, which the Supreme Court subsequently struck down. Congress re-established exemptions for charitable organizations in a 1909 excise tax on corporations, carrying the provision forward into the modern income tax levied under the Sixteenth Amendment in 1913.
While hospitals were not explicitly named in the 1909 or 1913 statutes, they routinely received tax-exempt status as nonprofit institutions affiliated with religious groups or philanthropic foundations. In 1956, the Internal Revenue Service issued a revenue ruling establishing the charity care standard, requiring hospitals to provide free or discounted care to indigent patients to maintain their tax-exempt status. The IRS later replaced this standard in 1969 with the broader community benefit standard, which remains the governing framework today.
Modern hospital systems, however, operate on a vastly different scale than their historical counterparts. In 2024, thousands of hospital filers collectively reported billions in net income. Without tax-exempt status, much of this income would be subject to the 21 percent federal corporate income tax rate, alongside state corporate income taxes, local property taxes, and federal unemployment taxes.
Over the years, various independent researchers, academic institutions, and policy organizations have attempted to quantify the total value of these tax exemptions. Estimates compiled between 2011 and 2022 highlight a wide variance depending on methodologies, definitions of tax benefits, and inclusion of state and local exemptions. For instance, analyses by researchers and institutions such as the Kaiser Family Foundation, the Lown Institute, and academic researchers published in major medical journals have underscored the growing economic footprint of these exemptions as hospital revenues have climbed.
Modeling Reform Options for Large Hospital Systems
To evaluate potential policy shifts, the Tax Foundation modeled the conventional revenue effects of five primary reform approaches, targeting hospital systems with average total revenues exceeding $1 billion over three preceding years, indexed for inflation. In 2027, this threshold would cover roughly 287 systems, which collectively hold between 85 percent and 89 percent of the sector’s total revenue, income, assets, bonds, and gifts.
The first option—applying the standard 21 percent federal corporate income tax to large hospital systems—would raise an estimated $147.6 billion in federal revenue over a ten-year window from 2027 through 2036.
More targeted reforms would yield more modest federal revenue. Imposing a 4 percent excise tax on the net investment income of large hospital systems would generate an estimated $14.2 billion over the decade. Increasing that excise tax rate to 8 percent would raise roughly $28.3 billion.
Restricting the ability of covered hospital systems to receive tax-deductible charitable contributions would also generate federal revenue. Disallowing charitable deductions for donations made to these large systems would raise an estimated $28.9 billion over ten years. If policymakers chose a more gradual approach, such as limiting the deduction to contributions exceeding a certain percentage of donor income or restricting specific types of gifts, the revenue impact would adjust accordingly.
Another targeted approach involves ending the issuance of tax-exempt bonds for large hospital systems. Because this proposal would apply prospectively to newly issued debt while exempting existing bonds and refundings, its revenue impact would start small and grow gradually over time, raising an estimated $12.3 billion over the decade.
Finally, the analysis examined a federal benefit recapture mechanism modeled after approaches developed by the Lown Institute. This option would recapture tax benefits that exceed the verifiable community benefits provided by a hospital system. Depending on whether community benefits are defined narrowly around charity care or more broadly to include various community investments, the federal revenue generated by recapturing excess benefits would vary.
Design Considerations and Tradeoffs
Policymakers considering these reforms face complex structural choices regarding tax bases, definitions, and potential economic impacts. For example, levying the 21 percent income tax on large systems based on financial statement book income rather than taxable income would significantly increase projected federal revenue, largely due to differences in depreciation schedules, such as the application of bonus depreciation for machinery and equipment.
Furthermore, applying taxes to individual hospital facilities that surpass the revenue threshold rather than consolidated parent systems would alter the number of affected entities and reduce overall revenue collections.
The debate over community benefits remains one of the most contentious aspects of hospital tax exemption reform. While the hospital sector advocates for a broad definition that encompasses charity care, medical education, research, and unreimbursed costs from public programs like Medicaid and Medicare, critics and independent watchdogs argue for narrower definitions. Groups like the Lown Institute emphasize direct financial assistance, subsidized health services, and community health improvement, while excluding bad debt and Medicare shortfalls from their calculations.
Economists also note that hospitals would likely adjust their behavior in response to new tax pressures. Systems near the $1 billion revenue threshold might restructure, spin off affiliated facilities, or alter their corporate status to remain beneath the threshold. Moreover, while these reform options would enhance horizontal equity between tax-exempt healthcare providers and for-profit entities, lawmakers would need to carefully craft the policies to avoid discouraging crucial capital investments in medical infrastructure and patient care.
As Congress and state legislatures weigh the future of healthcare taxation, the debate highlights the ongoing challenge of balancing the vital services provided by community hospitals with the principles of tax neutrality and fair fiscal treatment across the broader economy.
