Congress Should Close the Big Hospitals Tax Loophole

Over the past several months, Congress has launched a series of investigations into health-care affordability and costs. These hearings are revealing an important finding about soaring care costs: The biggest recipients of taxpayer health subsidies are large nonprofit hospital networks.

Hospital pricing is the biggest driver of America’s health-care cost crisis. Since 2000, hospital service prices have increased by more than 270 percent, nearly double the pace of medical services generally (144 percent), and far outpacing inflation (90 percent) and wage growth (130 percent). In addition to direct government cash, these giant entities benefit from some of the most generous tax loopholes in the Internal Revenue Code.

Nonprofit hospitals are exempt from federal income tax, state income and sales tax, and local property taxes. They have access to tax-exempt bond financing, and they qualify for a growing set of federal health programs, such as Medicaid Disproportionate Share Hospital (DSH) funds, 340B drug pricing program coverage, and special payments for uncompensated care. In exchange, they are supposed to operate as charities, delivering care to indigent patients who cannot afford it. Instead, the largest hospital networks leverage these subsidies for financial gains and political advantage, with minimal IRS oversight or enforcement.

Large nonprofit hospital networks are deeply embedded in progressive health-policy coalitions and closely aligned with Democratic lawmakers. Recent fights over Medicaid financing, provider taxes, and other aspects of last year’s One Big Beautiful Bill have shown how quickly hospital networks mobilize to defend their revenue streams.

When proposals threaten to constrain spending or impose transparency or accountability, hospital lobbyists and allied lawmakers swoop into action to preserve the status quo, a classic Iron Triangle in the Beltway influence blob. This year, when the Trump administration launched a survey on drug acquisition costs by hospitals, the American Hospital Association was quick to advise its members not to fill it out.

The financial scale involved is substantial. In the Covid year of 2021, large nonprofit hospital networks received roughly $37 billion in federal, state, and local tax benefits — yet they provided just $15 billion in charity care. It gets worse the bigger the networks get: The most profitable 5 percent of large nonprofit hospital networks generated more than half of all net income in the sector while delivering only about one-fifth of total hospital charity care.

The biggest tax-exempt hospitals also profit massively from the 340B “buy-low, sell-high” drug discount program. According to Senator Bill Cassidy’s (R., La.) oversight report, the Cleveland Clinic amassed close to $1 billion over the course of three years and did not account for how it spent that money. Wealthy, urban hospitals use a loophole to classify themselves as both urban and rural, benefiting from programs originally intended for struggling rural settings. Meanwhile, nonprofit hospital networks very aggressively pursue medical debts from working people.

Executive compensation in these systems routinely reaches eight figures. Large nonprofit hospital networks collectively hold hundreds of billions of dollars in assets, with more than 80 percent of assets concentrated among the largest institutions. Tax-exempt status has enabled these systems to accumulate capital, expand aggressively, and consolidate competitors while continuing to claim charitable status.

The legal framework that permits this rests on a policy choice made more than 50 years ago. In Revenue Ruling 69-545, the IRS moved away from a charity-care requirement and adopted a “community benefit” standard for nonprofit hospitals. A hospital can now qualify as charitable even if it provides limited free or discounted care, so long as it can claim to promote health for the community at large. Economic development, leadership training, community organizing, and environmental activism all count as activities with a “community benefit,” even if they do not contribute at all to patient care.

Congress has begun to take notice. At a 2025 House Ways and Means Oversight subcommittee hearing, lawmakers raised concerns about all the issues raised above, while witnesses told of a system with weak reporting standards and outdated IRS guidance.

The obvious health-care spending reforms address hospital-driven cost growth directly: 340B reform, expanded site-neutral Medicare payments, and reforming limits on anti-competitive contracting practices that entrench hospital market power while straining Medicare and Medicaid.

But that addresses only part of the problem.

The tax code created the large nonprofit hospital behemoth in the first place. Large nonprofit hospital networks should be required to disclose — in a standardized and auditable manner — the full value of their tax benefits, including avoided federal, state, and local taxes, savings from tax-exempt bond financing, and gross revenues derived from programs such as 340B. For large nonprofit hospital networks, their charity care should at least be equivalent to all of the public support they are getting. If it’s not, what is the point of having a tax-exempt charitable status?

The IRS should revise the community benefit standard to re-center charity care, clearly defined, as the primary test of exempt purpose for hospitals. Oversight of financial-assistance policies should be strengthened. Penalties for noncompliance should escalate from excise taxes, to loss of access to federal programs, to, for repeat offenders, revocation of tax-exempt status entirely.

It is time for lawmakers to rethink whether nonprofit status still fits today’s largest hospital networks. When these organizations act like businesses, amass wealth, and offer little charitable care compared with their fiscal windfalls, tax exemptions lose their purpose. Updating these tax rules would help restore accountability and bring discipline back to a health-care system which is bankrupting taxpayers.