Tax Reform Options for Nonprofit Hospitals
About half of all U.S. hospitals are designated as “charitable” nonprofit institutions by the Internal Revenue Service (IRS). Their status means that they are exempt from most taxes and are eligible to receive tax-deductible donations and issue tax-exempt bonds. Although nonprofit hospitals are supposed to deliver “community benefits” in exchange for this tax-preferred status, our research showed they often fail to meaningfully do so. They do, however, impose significant fiscal cost on the federal government despite being more profitable than actual for-profit hospitals.
Last week, the Tax Foundation released a report outlining options to reform the tax status of non-profit hospitals – building on several options we released in 2024. They estimate these options could generate from $5 to $225 billion in revenue over the next decade.
The Tax Foundation finds that non-profit hospital systems generated about $1.4 trillion of revenue in 2024 and held $1.8 trillion of assets in 2024. Most of this – $900 billion of the income and $1.2 trillion of the assets – comes from the top 100 largest nonprofit hospital systems.
The Tax Foundation looked at several approaches to reduce or remove this tax advantage for the 100 largest nonprofit hospital systems. Revenue would be even higher if applied to all nonprofit hospitals.
Under the most aggressive option, lawmakers could tax large hospital nonprofits as if they were for-profit corporations. This would generate an estimated $150 billion if profits were taxed under the normal 21% corporate tax, or as much as $225 billion if the hospitals were charged a 21% book income tax on their financial statement income.
A narrower approach would maintain the tax-free status of hospitals’ health care related revenue and expenses, but count their investment income as profits. Because investment income makes up a large share of their total income, this option would generate $120 billion at a 21% rate and tens of billions at lower rates. Applying a 4% or 8% excise tax on investment – similar to the tax applied to some university endowments – would generate $25 to $45 billion.
Options for Taxing Large Nonprofit Hospital Systems
| Policy Option | Savings (2027-2036) |
|---|---|
| Tax Hospital Systems' Net Income | |
| Apply the 21% Corporate Income Tax | $150 billion |
| Apply a 21% Book Income Tax | $225 billion |
| Tax Hospitals' Investment Income | |
| Apply 21% Tax on Hospitals’ Net Investment Income | $120 billion |
| Apply 8% Excise Tax on Net Investment Income | $45 billion |
| Apply 4% Excise Tax on Net Investment Income | $25 billion |
| Tax Hospitals' Income in Excess of Community Benefits Delivered | |
| Tax Income in Excess of Charitable Care | $65 billion |
| Tax Income in Excess of Charitable Care, Financial Assistance, Subsidized Health Services, and other Community Benefits | $20 billion |
| Reduce Tax Benefits to Donors and Lenders | |
| Deny the Charitable Deduction for Giving to Nonprofit Hospitals | $30 billion |
| End Tax-Exempt Bond Financing for Nonprofit Hospitals | $5 billion |
Source: Tax Foundation.
*Tax Foundation defines “large hospital systems” as those with at least $1 billion in average total revenue over the three years prior to enactment of the reforms.
Policymakers could also consider a more targeted approach that would recapture nonprofit hospitals’ tax benefits in excess of the community benefits they provide. That is, nonprofit hospitals would pay the difference between the value of the community benefits they provide and their total tax benefit from nonprofit status. The Tax Foundation estimates this could raise between $20 and $65 billion over ten years depending on how community benefits are defined. On the high end, the estimate counts only charity care as a community benefit; on the low end, it also counts financial assistance, subsidized health services, community health improvement services, cash and in-kind contributions, and community-building activities (the Lown Institute definition).
Lastly, policymakers could limit the tax benefits for those who give or lend to hospitals. Denying the charitable deduction for giving to large nonprofit hospitals would save $30 billion over a decade, and ending tax-exempt bond financing for these hospitals would save $5 billion – and more over time.
The Tax Foundation’s estimates are in line with those from our 2024 paper on the topic, which found that all tax benefits (including those related to income, donations, and loans) for all (not just large) nonprofit hospitals would cost the federal government $260 billion of lost revenue over a decade. Our paper outlined several possible reforms beyond those discussed by the Tax Foundation, including: refining nonprofit hospitals’ reporting requirements and requiring greater transparency; issuing IRS rules on valuing the nonprofit hospital tax exemption; issuing an official, plain definition of community benefit; setting minimum levels of community benefit spending; and expanding IRS enforcement of these requirements. Nonprofit status could also be made conditional on achieving certain cost goals or charging below certain rates – the state of Indiana recently implemented a similar policy for state-level nonprofit taxes.
These and other options should be considered as part of any discussion to lower health care costs and reduce deficits. The latest estimates from the Tax Foundation make an important contribution to this debate.
