Government meddling and bad economics threaten patient care

Across the country, lawmakers are rushing to reexamine the tax-exempt status of nonprofit hospitals. They claim these hospitals aren’t providing enough in community benefits to justify the breaks and are charging too much for their services. But these efforts are not grounded in sound policy or economic reasoning, and they risk making healthcare access worse, not better.

Nowhere is this trend more visible than in Indiana, where House Bill 1004 threatens to strip nonprofit hospitals of their tax-exempt status if even a single service they provide is billed at a rate that is 300% or more above what Medicare pays. On its face, this might sound like a way to protect consumers from high prices. In practice, it’s a crude form of government price control masquerading as reform.

Any finance professor could tell you that tying something as critical to a hospital as its nonprofit status to a single pricing benchmark is a dangerous policy. Markets are dynamic. Costs vary by service line, geography, labor inputs, and infrastructure overhead. Some procedures require expensive technology and highly trained specialists. Others are subsidized by those very services. Targeting one figure, without context, ignores the economic realities hospitals face and how cross-subsidization helps maintain care in areas that lose money, like trauma care or labor and delivery.

Even lawmakers see the problem. Indiana Rep. Ethan Manning rightly warned that codifying price caps into law is “poor economic policy.” The Indiana Hospital Association echoed this concern, noting the bill could inflict “substantial financial damage” on hospitals already under pressure. And yet, the bill is advancing.

Pennsylvania offers another cautionary tale. In 2023, a state court stripped Pottstown Hospital of its property tax exemption, arguing that executive compensation at its parent nonprofit, Tower Health, disqualified it from charitable status. The case is still under appeal, but the ruling sent shockwaves through the nonprofit healthcare sector. If administrative compensation packages — set to compete for leadership talent — can invalidate nonprofit status, no hospital is safe from subjective reinterpretations of charity law.

These state-level initiatives are, unfortunately, part of a broader national push to scrutinize the value of tax exemptions provided to nonprofit hospitals. Critics point to studies claiming that nonprofit hospitals provide less charity care than their tax breaks are worth. But this analysis is misleading, and it fundamentally misunderstands the full scope of what nonprofit hospitals contribute.

Let’s be clear: the dollar value of the community benefits that nonprofit hospitals provide extends far beyond the $16-$19 billion of direct charity care they perform annually. It also includes absorbing shortfalls in reimbursements from Medicaid and Medicare, keeping emergency departments open in rural areas, running mental health clinics, investing in opioid treatment, and launching housing programs for the chronically ill. In 2020 alone, nonprofit hospitals provided an estimated $129 billion in community benefits — nearly ten times the $ 13.2 billion in federal tax revenue they would have otherwise owed.

Many of these services are not just unprofitable — they are financial liabilities that for-profit hospitals routinely avoid. And yet nonprofit hospitals maintain them, year after year, often with negative operating margins. They do this because their mission requires it — and because no one else will.

Furthermore, nonprofit hospitals are already subject to rigorous federal standards under the Affordable Care Act. They must conduct regular community health needs assessments, maintain financial assistance policies, and make reasonable attempts to determine if patients are eligible for this assistance before taking more direct actions to collect on debts. These are not suggestions, but legal obligations. The idea that these institutions operate with no accountability is simply false.

Yet instead of acknowledging the cost of these mandates — or the role nonprofit hospitals play in sustaining fragile healthcare ecosystems — some lawmakers are eager to impose more red tape. More audits. More reporting. More arbitrary thresholds. All in the name of “transparency” or “fairness.”

But fairness cuts both ways. If states and localities begin revoking nonprofit status based on ill-defined metrics or political pressure, they will soon discover the true cost of those decisions. Rural communities could lose their only hospital. Emergency rooms could close. Safety-net programs could vanish. And the very patients these lawmakers claim to be helping will be the first to suffer.

Healthcare in the U.S. is not perfect, but slapping punitive taxes and arbitrary mandates on nonprofit hospitals won’t fix it. We don’t fix housing shortages by taxing affordable housing developers and making them jump through unnecessary hoops. We don’t address high grocery prices by penalizing food banks or saddling them with more reporting requirements. So why are we treating nonprofit hospitals any differently?

Federal lawmakers should view these state efforts with skepticism. Rather than following Indiana or Pennsylvania’s lead and embracing price controls and mandates under a different name, Congress should reinforce the nonprofit hospital model — strengthening accountability, yes, but also preserving the financial flexibility these institutions need to survive.

Anything less is not reform. It’s reckless.

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