The hospital tax exemption comes under scrutiny in Congress

At a time when concerns over reimbursement and costs already are intensifying, Congress recently held a hearing to discuss policy changes that could exert further pressure on the not-for-profit (NFP) hospital sector.

A subcommittee of the House Ways and Means Committee met Sept. 16 to examine the NFP hospital tax exemption, soliciting proposals that could add conditions for hospitals to remain exempt. While they may disagree with some of the views expressed, hospitals should take note of the discussion as a sign of where some in Congress are looking to go.

A recurring argument

The issue of the tax exemption crops up periodically in healthcare policy circles.

Back in January, near the start of the 119^th Congress, the Ways and Means Committee included a blanket elimination of nonprofit-hospital status on a large menu of cost-saving options for what became the budget reconciliation law known as the One Big Beautiful Bill Act. The preliminary projection was that such a move would save $260 billion over 10 years.

The provision never gained traction as the bill was drafted, but this week’s hearing showed Republicans are still mulling the issue.

“The generous benefits bestowed on tax-exempt hospitals come with an obligation on their part to provide charitable benefits to their communities,” said Rep. Jason Smith (R-Mo.), chair of the Ways and Means Committee. “Yet we have data showing that from 2020 to 2022, over half of hospitals got more in tax benefits than they invested in their communities.”

Smith likely was referring to findings from a report by the Lown Institute, which examined roughly 1,800 hospitals in 20 states. Past iterations of the report have drawn strong criticism by hospital advocates such as the American Hospital Association (AHA).

This month, the AHA published its own report showing that hospitals provided $149 billion in community benefit in 2022 — dwarfing the Lown Institute’s reported number of $22 billion per year from 2020 through 2022. The difference stems from methodological distinctions as to what counts as community benefit.

Criticisms of the exemption

At the hearing, panelists representing conservative-leaning organizations Do No Harm and Consumers’ Research said NFP hospitals sometimes divert community-benefit spending away from charity care in favor of programs involving DEI, climate activism and gender-affirming care for minors.

CMS has drafted — but not yet published — a proposed rule that would terminate Medicare and Medicaid eligibility for providers that offer gender-affirming surgery and medications for children. Rep. Greg Murphy (R-N.C.), a physician, said Congress ideally would enact the same policy with respect to the hospital tax exemption.

Among panelists with more financially focused views, one critique was that the IRS’s definition of community benefit is vague, potentially covering marketing, compensation and other activities that do not have measurable patient outcomes.

Remarks also posited that NFP hospitals should provide more charity care, given the amount of their tax breaks. In 2020, hospitals received $28 billion in tax benefits and provided $16 billion in charity care, according to a KFF analysis that was cited during the hearing.

Panelists also said NFP hospitals too often resemble for-profit companies in their billing and debt collection practices.

Defense of the exemption

Several Democrats on the committee, along with at least one Republican (Rep. Nicole Malliotakis of New York) and one panelist, said community benefit cannot be measured only based on charity care.

A point that critics miss, said Jill Horwitz, JD, PhD, professor of law and of emergency medicine with Northwestern University, is the extent to which NFP hospitals incur financial strain from bypassing opportunities to maximize revenue and profit. They offer services, ranging from obstetrics to trauma care, that are less likely to be available at facilities where profit is a driver.

“Nonprofits do not act like for-profits where it counts: the provision of medical care,” Horwitz said.

In remote areas, NFP hospitals frequently are the sole provider of care and a top employer, supporters said. In all markets, they play vital roles in managing widespread threats such as the COVID-19 pandemic, and they bolster public health through services such as addiction treatment and food insecurity programs.

Their mission increasingly is endangered due to developments such as a nearly $1 trillion reduction in projected 10-year Medicaid spending and the potential expiration of enhanced subsidies for buying Affordable Care Act marketplace insurance, according to comments made at the hearing. Possible outcomes include increased risk of closure and a greater likelihood that facilities will be sold to private-equity interests.

In such a landscape, Democratic committee members said, policies affecting the tax exemption could pose a further existential threat. Ge Bai, PhD, professor with the Johns Hopkins Bloomberg School of Public Health and generally a critic of the exemption, noted that smaller hospitals would be at greater risk of bankruptcy if they’re obligated to provide a specific amount of charity care as dictated by revenue. Bai instead has argued for steps such as an excise tax on investments.

Potential policy approaches

If Congress acts on the issue, initial steps could be planned to provide greater insight into the business operations of NFP hospitals, although several committee members and panelists spoke of needing to avoid administratively burdensome regulations.

Rep. David Schweikert (R-Ariz.), chair of the subcommittee that conducted the hearing, appeared to be leaning in the direction of requiring ramped-up disclosures on IRS Form 990 Schedule H.

“We’ve had a running discussion on redesigning the 990 form just so you as professors, as researchers actually have better-quality [information], and we as policymakers know what we’re talking about,” he said to the panel. “The IRS is supposed to be auditing these things every three or four years, but what would you audit? The quality of the information is just not there.”

He said many hospitals have not responded to requests for feedback on improving the form.

“Help us build another way [that] the IRS can collect data,” Schweikert said. “So we as policymakers on the Ways and Means know the value of tax-exempt status and that we’re truly meeting the community good standard.”

Other criticisms of the form included the lack of facility-level data in some instances, with some large health systems settling for reporting at the system level.

Rep. Suzan DelBene (D-Wash.) said expecting improved oversight by the IRS is difficult at a time when Republicans seem intent on thinning out the agency.

“An IRS focused on major medical services would be very helpful to the system and would help channel nonprofit hospitals to do the very important work that they need to do,” Horwitz responded. “But we need enough staff in the exempt-organizations division to be able to issue guidance to help the hospitals do their jobs.”