Tax Exempt Status for Not-for-Profit Hospitals: The Debate Ahead

Tax exemptions for hospitals are not a new topic inside healthcare, but lately they’ve drawn outside attention from regulators and in media. They seem to be asking ‘Do not-for-profit hospitals deserve their tax breaks?’

For at least the last half century, not for profit hospitals have enjoyed tax exempt status as a legacy of religious sponsorship. In recent years, critics have challenged the designation for some based on media reports about their business practices–patient debt collection policies, CEO compensation, investment activity and profits to name a few. Concurrently, per industry studies, consolidation of NFP hospitals into multi-hospital systems has reduced competition and increased hospital costs to consumers, insurers, employers and others.

Given that hospitals account for the largest share (30%) of all healthcare spending, and 58% of the 5112 U.S. community hospitals are classified as ‘not-for-profit’ (24% are investor owned, 18% are state/local government owned hospitals), justification for tax exemptions is a critical issue for hospitals. And the current debate comes at a precarious time…

DOGE cuts to Medicaid will increase hospital bad debt in every hospital, especially rural, safety net and teaching hospitals. Coupled with anticipated year-end suspension of subsidized marketplace coverage for lower income households, the post-pandemic recovery is likely short-lived.
New White House executive orders requiring increased hospital price transparency will add to administrative operating costs, especially where hospital price wars loom.
Higher than expected Medicare Advantage enrollee medical costs will intensify acrimony between insurers and hospitals as payers try to protect their margins.
Disparaging media coverage derived from reports by Paragon Health, Lown Institute, Arnold Ventures and others will continue to dampen public trust for hospitals and prompt elected officials’ interest.
And the fallout surrounding the FY2026 budgeting process now underway appears to favor Medicare Advantage sponsors over hospitals and physicians (including half they employ).

Hospitals face a headwind, especially those that are tax-exempt. Every U.S. hospital is reeling from the uncertainty surrounding the Kennedy (HHS)-Oz (CMS)-Makary (FDA) trifecta that will regulate hospital affairs in the next few months. Every hospital is feeling heat from disgruntled physicians and worn-out frontline caregivers. Every hospital is worried about how tariffs will impact supply chain costs and all are taking a cautious approach to major capital projects. And all face increased pushback from state legislators who think price controls on hospitals might be the answer.

For Rick Pollack and team at the American Hospital Association, it’s not business as usual. The hospital big tent is under duress. And NFP tax exempt hospitals might be where it’s hottest. Large employers have targeted large NFP systems for cost reduction and Congress appears poised to impose restrictions on NFPs intended to rein-in what some consider excesses under the protection of tax-exempt status.

Looking forward, making the case for NFP hospitals will require more than tit-for-tat news releases about sponsored studies that each uses to make their cases. It seems to me NFP health systems should invest in three sets of activities to maintain their tax exemptions:

1-Modernzing the regulatory process for NFP hospitals: Not-for-profit hospitals are exempted from certain federal and state taxes by the Internal Revenue Service if they qualify under Section 501(c)(3):

Earnings from operating margins and/or investments cannot inure to the benefit of private shareholders/individuals.
NFPs may not use funds for partisan advocacy or for a political campaign in support of a candidate for office.

Eligibility is premised on two sets of activities which hospitals report to the IRS annually in their Form 990 filings: charity care and community benefit. Charity care is defined as hospital services provided to patients with no expectation of payment. Community benefit, per the IRS Rul. 69-545, includes a wide range of activities deemed necessary to a community’s health, including but not limited to:

Operating an emergency room open to all, regardless of ability to pay
Maintaining a board of directors drawn from the community
Maintaining an open medical staff policy
Providing hospital care for all patients able to pay, including those who pay their bills through public programs such as Medicaid and Medicare
Using surplus funds to improve facilities, equipment, and patient care; and
Using surplus funds to advance medical training, education, and research.”

The standards for community benefit need modernizing: to start, a set federally-mandated minimum thresholds for charity care or community benefits. And, in many states, additional requirements are used to authorize exemptions from state and/or property and income taxes. Defining minimum standards for charity care and community benefits is a start.

2-Integrating public health and the local NFP delivery system: Duplicative public and private primary and preventive health services should be eliminated so as to manage the population’s health regardless of income status or circumstance. In tandem, government payers and private employers should integrate value-based purchasing programs to consistently measure and manage quality improvements and reduced costs across the entire population (not just those on Medicare/Medicaid).

The current system is a duopoly: a health system for those with insurance, and a second for those who can’t. Thus, CMS should drive its chronic care agenda through a unified systems of health developed by NFP systems. As academics have noted, most of the alternative payment models have focused on Medicare only and delivered modest results at best. NFP systems can justify their tax exemptions more precisely in the integration of public health and local, community-based delivery systems.

3-Moving the public debate about healthcare funding to global capitation: The health system is a bottomless pit in which profiteering is rewarded. That runs afoul of the mission of not-for-profit organizations that compete against all comers.

Spending in healthcare at current levels is not sustainable. NFP system say the health of the communities they serve is their highest priority, though many limit their attention to lucrative services while neglecting others that might pay longer-term dividends in public health.

Utopian? Yes, but necessary. Actions not taken by NFP systems to demonstrate they deserve their tax exemptions is risky. And lack of will to adopt minimal standards will ultimately mean exemptions are linked to charity-care only.

In 2025 and beyond, tax exemptions for not-for-profit hospitals will garner attention. They’re not guaranteed and they’re under attack.

Paul

Resources

Fast Facts on U.S. Hospitals, 2025 | AHA

Kenan Institute www.kenaninstitute.unc.edu

The Value of Tax Breaks for Not-for-Profit Hospitals National Bureau of Economic Research March 1, 1999 https://www.nber.org/digest/mar99/value-tax-breaks-not-profit-hospitals

Estimation of Tax Benefit of US Nonprofit Hospitals | Health Care Economics, Insurance, Payment | JAMA | JAMA Network

Charitable hospitals – general requirements for tax-exemption under Section 501(c)(3) IRS https://www.irs.gov/charities-non-profits/charitable-hospitals-general-requirements-for-tax-exemption-under-section-501c3

Requirements for 501(c)(3) hospitals under the Affordable Care Act – Section 501(r) August 19, 2024 https://www.irs.gov/charities-non-profits/charitable-organizations/requirements-for-501c3-hospitals-under-the-affordable-care-act-section-501r

The Estimated Value of Tax Exemption for Nonprofit Hospitals Was About $28 Billion in 2020 March 14, 2023 https://www.kff.org/health-costs/issue-brief/the-estimated-value-of-tax-exemption-for-nonprofit-hospitals-was-about-28-billion-in-2020/

New EY Analysis: Tax-Exempt Hospitals’ Community Benefits Nine Times Greater Than Value of Federal Tax Exemption | AHA June 6,2022 12.4 billion tax exemption vs. $110 billion benefit based on 2019 data

JAMA study: Nonprofit hospitals get big federal, state tax breaks| STAT (statnews.com) Elizabeth Plummer, PhD, CPA^1,2; Mariana P. Socal, MD, PhD³; Ge Bai, PhD, CPA^3,4 JAMA. Published online September 26, 2024. doi:10.1001/jama.2024.13413

Beyond the Bottom Line: Evaluating Charity Care, Community Benefits, and Tax Exemptions in Nonprofit Hospitals Johns Hopkins Bloomberg School of Public Health November 26, 2024 https://publichealth.jhu.edu/2024/evaluating-tax-exemptions-in-nonprofit-hospitals

Quotables

RFK on medical system, measles outbreak: “A lot of the negative behavior and self-destructive behavior in both the medical system — how we pay for healthcare — and how we eat is driven by perverse incentives. Today, we have a healthcare system that reimburses doctors and hospitals for procedures rather than for health outcomes. We have to change that.”

“People get measles because they don’t vaccinate. They get measles because the vaccine wanes — the vaccine wanes about 4.8% per year, so you know that problem is always going to be around. We need to also make sure that doctors know how to treat measles and how to treat the associated diseases, the pulmonary disease that often comes with measles, and [the] bacteriological [ones] — we can’t rely simply on the vaccine.”

“We are going to improve the surveillance,” Kennedy said. “We’re going to get the data sets from everybody we can. We’re going to make data-sharing agreements with scientists all over the world, with the best scientists, and we’re going to find out what contribution vaccines and everything else make — mold, EMF [electromagnetic fields], food, all of these other exposures — which one of those are the culprits? I suspect we’re going to see that there’s a lot of culprits, but we need to know.”

RFK Jr. Says the Medical System Has ‘Perverse Incentives’ for Doctors | MedPage Today

Trust in sciences now partisan: “Amid the familiar lines of political division in America—immigration, abortion, taxes, regulation, and the like—a new divide has emerged over trust in science. Concerns about the politicization of science and the “scientization” of politics can be traced back decades. But more recent trends indicate that we are entering a new era in the politics of science, one that breaks with the past in important ways and demands new kinds of responses. Survey data show that, in general, public trust in science has fallen recently. Over the last half century, Americans overall have expressed high levels of confidence in science— particularly in comparison with other major societal institutions such as the mainstream media and the federal government, which experienced notable declines in trust during that time. Today, although 76% of the public still expresses a “great deal” or a “fair amount” of confidence in scientists to act in the public’s best interests, according to the Pew Research Center, that number has fallen by 11 percentage points since the pandemic began in 2020. And the decline has been most pronounced among Republicans. Despite a slight rebound in 2024, they remain 22 percentage points less likely than Democrats to express a “great deal” or a “fair amount” of confidence in scientists. is a deviation from historical trends…”

40-48-Mills-St.-Clair-The-Strange-New-Politics-of-Science-Spring-2025.pdf

Pitchbook on healthcare market volatility: “Market volatility and uncertainty regarding current and future policy decisions have created skepticism about whether this year will see a return of liquidity—and rightly so. As public companies experience collapsing share prices, the market becomes increasingly difficult to assess and price.”

Pitchbook www.pitchbook.com

Health Economy

Avalere report: CMMI alternative payment model results: Avalere studied clinical and financial results for 18 models chosen for analysis because they were in use for at least two years with published evaluation reports, and affected more than 25,000 beneficiaries. The 18 selected models cost the federal government $7.7 billion, including $6.4 billion in model net expenses as well as $1.3 billion in model-specific implementation and evaluation costs. Results:

Net costs, which include the costs to implement and evaluate each model, aligned with the CBO’s findings: CMMI models, in aggregate, are not generating direct savings to Medicare. However, select models were effective at reducing net costs and offer specific positive indications for CMMI’s ability to generate savings in future models. Of the 18 models analyzed:

One-third of the models yielded substantial net savings for the federal government
One-third of the models generated substantial net losses
One-third of the models had nominal financial impacts as of their latest evaluation report

There were measurable improvements in quality measures across several CMMI models, although there was little-to-no impact reflected in patient experience surveys and, where available, there were mixed results in outcomes across patient demographics. Of the 18 models analyzed:

Four showed quality performance improvement
Three showed nominal quality performance improvement
Four had no statistically significant impact on quality performance
Seven showed mixed results on quality performance

There were limited opportunities for public input during the design stage of these models. There were also mixed results in the extent of publicly available financial and quality data during a model’s performance period. Of the 18 models analyzed:

Nine solicited comments on model development or refinement via rulemaking or Requests for Information
No models in the analysis were endorsed by the Physician-Focused Payment Model Technical Advisory Committee

Analysis of CMMI Model Costs, Quality Performance, and Transparency | Avalere Health Advisory

Hospitals

Lown Report: 2024-2025 Social Responsibility Index: “Nonprofit hospitals are exempt from most taxes, a benefit worth billions each year. In exchange for this investment, we expect hospitals to give back to their communities in financial assistance and community health programs. However, with little regulation in place, some hospitals spend far and above their tax breaks, while others fall millions short.

To better understand how hospitals are giving back to communities compared to their tax benefits, the Lown Institute examined the federal, state, and local tax benefits of more than 1,800 hospitals across twenty states from 2020-2022, and compared them to hospital spending on meaningful community investment. Key takeaways

Most hospitals in the analysis (54%) received more in tax benefits than they spent on meaningful community investment—what we call having a “fair share deficit.”
In some cases, hospitals with large fair share deficits and hospitals with large surpluses are located in the same metro area, reflecting financial inequality in these markets.
The total fair share deficit in 20 states amounted to $11.5 billion per year. That’s enough to wipe out the medical debt of nearly 10 million Americans, feed 15 million people facing food insecurity, or build 150,000 more affordable housing units.
Twelve hospitals in our data set had fair share deficits greater than $100 million; these hospitals alone make up about 20% of the nation’s fair share deficit.
46% of hospitals gave back to communities in excess of their tax breaks, what we call a “fair share surplus.

REPORT: Making hospital tax breaks work for communities.

AHA on Lown Report April 16: “. Consistent Every day, all of America’s hospitals and health systems demonstrate their commitment to patients and the pursuit of advancing health with this mission, nonprofit hospitals take their accountability for the federal tax exemption they receive very seriously. The benefits these hospitals provide include a broad range of activities chosen based on community input about community need. And these activities are publicly reported every year. Yet some organizations continue to distort and diminish the value of these activities.

The truth is reports like today’s from Lown that focus on nonprofit hospitals serve as distractions. These reports often rely on methodology that directly omits essential information, data and other factors that can seriously skew results, allowing them to apply an arbitrary ‘fair share’ threshold that is anything but ‘fair.’ This undermines genuine efforts to improve health care access for millions of patients. What is clear and consistent is this: Nonprofit hospitals deliver significant community benefits, far exceeding their tax exemptions.”

AHA Today April 16, 2025 www.aha.org

Insurers

JPM: small business and health insurance “Health insurance remains a vital component of the American workforce’s well-being… Approximately 55% of workers are covered through these plans, highlighting the critical role that employers play in providing access to healthcare services. The current policy landscape encourages employers with 50 or more employees to offer health insurance by imposing penalties on those that fail to provide it. This approach aims to ensure that a significant segment of the workforce has access to necessary and affordable healthcare services.

However, a notable gap exists in the coverage system for employees working at firms with fewer than 50 employees. These employees account for 27% of the private sector workforce, yet there is no established framework to ensure their access to employer-sponsored health insurance. This lack of coverage can lead to disparities in healthcare access and financial security for a significant portion of the workforce.²

JPM sensitivity analysis: a 10% increase in a health insurance burden does to the likelihood of dropping premium payments: on average, that 10% increase would lead to 1.3% of employer firms dropping health insurance across all industries.

The consistency of health insurance coverage in small businesses: industry challenges and insights

Physicians

Medscape: Physician compensation in 2024:

	’24 Avg. Patient Visits/week	% Say they’re Fairly Paid	Chg. from ‘23	2024 ($000)	2023 ($000)	2022 ($000)
All physicians	72	47%	+3.6%	376	363	$352
PCPs	79	44%	+1.4%	281	277	265
Specialists	70	48%	+1.0%	398	394	382

Medscape Physician Compensation Report 2025 based on 7322 physician surveys conducted October 3, 2024 to January 15, 2025

Population Health

Study: Medical Debt and Forgone Mental Health: This study evaluated the association between medical debt and forgone mental health care due to cost in the subsequent year based on surveys conducted in 2023 and 2024. Highlights:

Among 1821 adults (mean [SD] age, 51.6 [16.7] years; 805 females [50.5% weighted]), 276 (15.3% weighted) reported medical debt in 2023. Forgone mental health care was significantly higher among adults with past-year medical debt (33.8% vs 6.3% weighted). Any medical debt was associated with an increase of 17.3 (95% CI, 11.8-22.8) percentage points in the probability of forgone mental health care due to cost, with an increase in the probability of unmet mental health care needs with increasing medical debt.

More than 1 in 7 adults reported carrying medical debt in 2023, of whom 1 in 3 went mental health care in the subsequent year. Medical debt may exacerbate the treatment gap⁴ by potentially (1) raising the threshold for seeking care, (2) eroding patient trust in the health system, or (3) being denied care due to outstanding debts.

Medical Debt and Forgone Mental Health Care Due to Cost Among Adults | Health Policy | JAMA Health Forum | JAMA Network

KFF: Rural Health: A new KFF analysis explores data about rural hospitals’ financial health and stability at a time when Congress is considering potential federal budget cuts that could affect Medicaid and other health care funding. The findings include:

Rural hospitals are more likely than urban ones to have negative operative margins, but there is quite a bit of diversity in their finances, as most rural hospitals had positive margins in 2023 (the most recent year of data available), and nearly one fifth had margins of at least 10%.
Rural hospitals in states that have not adopted the Affordable Care Act (ACA) Medicaid expansion were more likely to have negative margins than those in expansion states. In addition, about two thirds of rural hospital closures since 2014 occurred in states that had not expanded Medicaid at the time.
Among rural hospitals, those in the most remote areas were most likely to report negative margins, while positive margins were more common among those that had more beds, higher occupancy, were affiliated with a health system, and were not government-owned in 2023.

10 Things to Know About Rural Hospitals

Care Act (ACA) mandates that private insurers cover specific preventive services without cost sharing. In 2022, a Texas district court ruled in Braidwood v Becerra that mandating coverage of services recommended by the US Preventive Services Task Force (USPSTF) was unconstitutional and barred mandate enforcement for post-ACA USPSTF recommendations.¹ The ruling was partially upheld on 2024 appeal, and the Supreme Court will hear the case (now Kennedy v Braidwood) in April 2025.

“Prior studies have estimated how many people receive any ACA-mandated services² or selected USPSTF-recommended services.³ Here, we assess how rolling back the ACA mandate in Braidwood or subsequent cases could directly impact privately insured individuals by estimating how many enrollees have received, at no cost, any of 10 preventive services jeopardized by this case.

“This cross-sectional study presented a detailed, comprehensive assessment of ACA-mandated no-cost preventive service use potentially jeopardized by Braidwood and future challenges. Among ESHI enrollees in 2018 aged 18 to 64 years, nearly 1 in 3 (and nearly half of women) received no-cost preventive services from 2018 to 2022 covered under the ACA mandate but threatened by Braidwood. While results varied across states, proportions were higher than 20% in every state.

Our estimates may be considered lower bounds for several reasons. Some jeopardized services (e.g., anxiety screenings) were not analyzed because of difficult discernment in claims. Individuals enrolled in 2018 could be right-censored in the data due to changes in either individual employment status or data provider participation in MarketScan, biasing cumulative estimates downward. We included only people aged 15 to 64 years, consistent with the focus on ESHI and USPSTF recommendations covering adolescents and adults, but potentially excluding some services received by children or older adults. Another limitation was absence of data relevant to evaluating health disparities.

Extensive literature indicates that providing preventive services without cost sharing can increase uptake.⁵ The ACA preventive services mandate has been consistently popular in public opinion polls. Removing the no-cost coverage requirement would affect millions of individuals who benefit from preventive services across all states. Potential downstream consequences should be considered,

Use of No-Cost Preventive Services Jeopardized by Kennedy v Braidwood JAMA Health Forum. 2025;6(4):e251559. doi:10.1001/jamahealthforum.2025.1559

Regulators

CMS proposed FY2026 adjustments: The effective reimbursement increase for inpatient hospital care would be 2.4%, a 3.2% increase with a 0.8% productivity adjustment. The proposed rule also presented a 2.6% pay increase for long-term care facilities and 2.4% increase to inpatient psychiatric facilities.

HHS Budget, Program Changes for FY26: Per unconfirmed details in a “Not for Distribution, 04/10/2025,” document, these appear to be the major changes:

The overall budget for HHS would decrease by approximately $40 billion to $80 billion.
The newest agency, the Administration for a Healthy America (AHA), would have a budget of approximately $14 billion. The National Institutes of Health (NIH) budget will decrease by about 40%, from $47 billion to $27 billion, reportsThe Washington Post
Eliminated agencies include the Health Resources Services Administration (HRSA), the Administration for Community Living (ACL), the Substance Abuse and Mental Health Services Administration, the Agency for Healthcare Research and Quality and the Administration for Strategic Preparedness and Response.
The new AHA will include components of these agencies. It will house the surgeon general and a primary care department made up of former HRSA offices, the Centers for Disease Control and Prevention (CDC) National Center for Injury Prevention and Control and an Office of Minority Health. It will also include departments for policy and research, maternal and child health, mental health, environmental health, HIV/AIDS and the workforce.

Leaked HHS budget projects $40B in cuts, ACA subsidies expire

Oz priorities for CMS: CMS Administrator Mehmet Oz last week issued a press release outlining his agenda and vision for the agency, saying that CMS is “dedicated to delivering superior health outcomes across each program we administer.”

Specifically, Oz outlined four things for CMS:

Providing “personalized solutions” to Americans so they can “better manage their health and navigate the complex health care system.” Oz said CMS will implement President Donald Trump’s executive orderon price transparency.
Equipping healthcare providers with better information about their patients and “holding them accountable for health outcomes, rather than unnecessary paperwork that distracts them from their mission.”
Identifying and eliminating fraud, waste, and abuse.
Shifting the healthcare paradigm from focusing on “sick care” to focusing instead on “prevention, wellness, and chronic disease management.”

CMS press release, 4/10)

FTC Joins DOJ In Targeting Anticompetitive Regulations: The Federal Trade Commission launched a public inquiry last Monday to look into reducing regulations that are hindering competition, following a similar move by the U.S. Department of Justice last month.

DOC on pharma oversight: “ In a Federal Register notice published Monday, the U.S. Department of Commerce disclosed it had formally opened an investigation into whether the importation of certain pharmaceuticals could threaten national security. This move will likely come ahead of imposing tariffs on a potentially large number of medications.

In the notice, the Department of Commerce said the investigation started on April 1 and encompasses medicines, active pharmaceutical ingredients, key starting materials, and derivative products. The investigation will examine current and projected demand for pharmaceuticals and pharmaceutical ingredients in the United States, whether domestic production is able to meet demand, the role foreign supply chains plan in meeting U.S. demand, and the concentration of imports from a small number of suppliers and any associated risk.

Trump administration opens investigation into pharmaceutical imports

Related: White House EO on drug costs: Last Tuesday, President Trump signed a wide-ranging executive order to reduce drug costs, including changes to Medicare drug price negotiation, drug importation, and more.

The order directs HHS Secretary Robert F. Kennedy Jr. to work with Congress to address the “pill penalty” in Medicare drug price negotiations, where small molecule drugs (typically pills) are eligible for drug price negotiation seven years after FDA approval compared to 11 years for biologics.

The order also targets drug importation and approvals of generic drugs. Under the order, FDA has been directed to expand state drug importation programs, which would provide a pathway for states to import drugs from Canada. So far, Florida has a program to import drugs from Canada, and several other states, including Colorado, New Mexico, and Vermont, have submitted similar proposals.

The agency has also been directed to streamline approvals for generic drugs and biosimilars. However, HHS recently shut down a division of generic drug regulatory experts, which could make streamlining the approval process for these drugs more difficult.

Other provisions of the order target broker fees from pharmacy benefit managers, the 340B drug program, and site-neutral payments. Currently, many of the provisions of the order require additional rulemaking or other actions to go into effect.

Trump signs wide-ranging executive order targeting drug costs

CMS’ Center for Medicare and Medicaid Innovation (CMMI) was created by the Affordable Care Act to test new payment and care delivery models in a bid to lower costs and improve quality in government healthcare programs. Most models have focused on Medicare. Per Avalere, the agency’s work has driven up federal spending. CMMI’s activities increased direct spending by $5.4 billion, or about 0.1% of the net spending on Medicare, between 2011 and 2020, according to a report from the Congressional Budget Office. And although models can be expanded nationwide if they’re shown to lower costs without hurting care quality, improve quality without increasing spending, or both, only four out of 50 models have been selected for expansion.

Tax Exempt Status for Not-for-Profit Hospitals: The Debate Ahead

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