On April 28, 2026, the House Ways and Means Committee summoned the chief executives of four major hospital systems to testify on hospital prices and consolidation. Chairman Jason Smith told them the prices they charge patients are “borderline extortion” and, the same day, said large not-for-profit systems look “like hedge funds with hospital beds.” In the Senate, members of both parties have pressed a parallel inquiry into whether tax-exempt hospitals deliver community benefits sufficient to justify their status. The stakes are large: the tax subsidy for nonprofit hospitals was worth roughly $37 billion in 2021, and these hospitals deliver about two-thirds of U.S. hospital care in a sector that accounts for more than 5% of U.S. GDP in recent years.
In exchange for tax exemption, nonprofit hospitals are expected to serve their communities in ways a for-profit hospital might not. But many of them are also highly profitable enterprises, and unlike most of the economy they are barred from having shareholders—the very owners who elsewhere monitor management and insist that surplus resources be used well or returned. As the head of one large nonprofit system put it, “‘nonprofit healthcare’ is a misnomer. It’s tax-exempt healthcare. It still makes profits.” With no owners to discipline how those profits are spent, however, the question for policymakers is whether they flow toward community benefit or toward the priorities of the institutions themselves.
In new research, we examine how this ownership structure shapes hospital behavior. Using financial data covering nearly every U.S. hospital, we compare tax-exempt and taxable facilities operating in the same markets across what they spend, what they invest, and how they perform. We also test whether state oversight can substitute for the discipline that shareholders normally provide.
We find that the exemption buys real but modest benefits: tax-exempt hospitals provide more charity care and devote a somewhat larger share of their spending to patient care and other mission-related activity. But those benefits come with real costs. Tax-exempt hospitals run larger administrative operations, invest more heavily in buildings and equipment, and hold far more cash than comparable for-profit peers, and they perform worse financially. Stronger state oversight reins in some of these costs without crowding out the mission, but it cannot fully substitute for the discipline an owner provides.
For a public subsidy of this size, the community benefit it buys is modest next to the resources it leaves under management’s control. For policymakers weighing the exemption’s future, the question is whether those resources can be steered toward public purposes.
Hospitals are the giant of the tax-exempt sector
Hospitals are a small slice of the nonprofit world by count but the dominant force by scale. They make up just 1% of tax-exempt organizations, yet they hold nearly a quarter of all tax-exempt assets and account for roughly a third of the sector’s revenue and employment, making them its single largest component (Figure 1). Whatever the rules governing tax-exempt status do, or fail to do, they matter most where the financial stakes are highest.
What sets hospitals apart from the rest of the nonprofit world is that they have a genuine for-profit mirror. In some sectors, like higher education, for-profit providers operate a distinctly different model from their nonprofit peers, and few would argue the two deliver comparable quality. Hospitals are not like that: a for-profit hospital and a nonprofit hospital in the same market deliver broadly the same care to broadly the same patients, and research finds little systematic difference in patient outcomes between the two. They are, of course, not identical. Nonprofits are somewhat more likely to offer unprofitable or standby service lines, a difference that itself reflects mission.
For-profit hospitals are a substantial enough presence to serve as a benchmark. They make up close to a third of all facilities, and up to one-fifth of capacity and volume (Figure 2). Because the two compete in the same markets, treat similar patients, and file the same financial and utilization reports with the federal government, the for-profit segment offers a way to ask how much of a tax-exempt hospital’s behavior reflects its mission, and how much reflects the absence of an owner.
The tax exemption for nonprofit hospitals is meant to purchase community benefit. Most familiarly, that benefit takes the form of charity care, or the cost of treating patients who qualify for free or discounted care under a hospital’s financial assistance policy. But charity care is modest and largely undifferentiated by ownership: among general short-term hospitals, it comes to 1.2% at the typical facility, a share that is nearly identical for nonprofit and for-profit facilities. Charity care, in short, does not seem to be what sets nonprofit hospitals apart. Community benefit is broader than charity care, though. It also includes medical research and the training of physicians, and here nonprofits do somewhat more: they are modestly more likely to run teaching programs (about one third versus nearly three in ten for for-profits), but they train more than twice as many residents per bed.
Where tax-exempt hospitals genuinely differ is in how their spending is monitored. In most large enterprises, shareholders are the check on how managers spend. They monitor management, push back on spending that doesn’t pay off, and insist that profits be reinvested productively or returned to them. Tax-exempt organizations lack this owner discipline by design. Barred from having shareholders, they have no owner with a financial claim on the surplus. Lenders, bondholders, and trustees still impose some discipline, but it is partial. Creditors care mainly about being repaid, not about whether retained earnings are put to their most productive use, and trustees, unlike owners, have no financial stake in how the surplus is spent.
Economists have long predicted what tends to follow: when no owner can reclaim the surplus, it is either stockpiled or spent internally. What cannot be paid out and is not spent might simply pile up as cash and reserves that no one has a claim on. What is spent can show up as larger administrative operations and payrolls, or capital projects that expand the institution’s footprint more than its mission. To be sure, a bigger footprint is not by itself evidence of waste: new facilities can broaden the services a hospital offers and expand access to care, which may itself be part of the mission. The concern is that without an owner weighing each project’s cost against its benefit, mission-driven growth and empire building are hard to tell apart. The larger the organization and the wider the manager’s discretion, the more likely this is to matter. Hospitals, where the average tax-exempt facility holds nearly $350 million in assets and earns nearly $300 million in annual revenue, are where it should be easiest to see.
These predictions are already visible in current data. Among general hospitals serving similar patients, the typical tax-exempt facility holds far more cash in reserve, invests more per bed in buildings and equipment, and spends more per bed on administration than its for-profit counterpart (Figure 3). This is a raw snapshot, not a like-for-like comparison, but it is the pattern the theory predicts.
The picture so far describes the sector as it looks today. To isolate how tax-exempt status shapes behavior, we compare nonprofit and for-profit hospitals that operated in similar markets and provided similar care from 2012 to 2017, using national data from the Hospital Cost Report Information System, maintained by the Centers for Medicare and Medicaid Services. These annual data cover nearly every U.S. hospital facility and, while they carry known limitations, they are the most comprehensive financial records available on the industry. Every hospital files the same forms, which makes nonprofit and for-profit facilities directly comparable, exactly what our comparison requires. Because the two types differ along a number of dimensions, including size, patient mix, teaching role, and system affiliation, we statistically match them, so that the differences that remain reflect ownership rather than the kind of hospital each one is.
The pattern that emerges is consistent with weak surplus discipline. Tax-exempt hospitals invest 104% more in land and buildings than comparable for-profit facilities, and they report administrative wage costs that are roughly 26% higher. We treat the administrative finding with more caution than the others: it is concentrated among the largest hospitals and is sensitive to how the data are modeled. The capital-investment result is far more robust, and it is exactly where you would expect surplus resources to surface when no owner is asking whether a project is worth its cost.
The higher administrative and capital outlays don’t show up as greater efficiency or financial strength; they show up as money spent. Some of that spending may be deliberate mission strategy: lower margins can reflect pricing restraint or the cross-subsidy of unprofitable services, and capital investment can broaden the services a hospital offers. Our comparisons allow for this by matching hospitals on patient mix and the complexity of the care they deliver. Even so, the gaps that remain are large. Tax-exempt hospitals post operating margins about 5 percentage points lower than their for-profit peers. The gap in returns on assets is wider still, at nearly 9 percentage points.
What tax-exempt hospitals do deliver is a modest mission premium. They provide roughly 36% more charity care per year than comparable for-profit hospitals, and they devote a slightly larger share of total spending to patient care and other mission-related activity, with program-expense ratios about 2.5 percentage points higher. These differences are real and statistically meaningful. But in aggregate, charity care is a small line in hospital budgets, only a few percent of expenses, so even a sizable dollar increase remains a thin slice of overall spending.
With little of the surplus flowing to mission, and no owners to distribute it to, profitable hospitals are likely to accumulate cash with no natural claim on it. Tax-exempt hospitals hold roughly six times as much cash as comparable for-profit hospitals, a large gap for institutions operating in the same markets with similar capital needs. This pattern is consistent with surplus building up inside tax-exempt hospitals rather than being deployed or returned.
The most direct evidence of this accumulation comes from hospitals that switch sides. Eighty-nine hospitals in our sample converted from tax-exempt to taxable status between 2012 and 2017, and because we observe each institution before and after its conversion, we can watch what happens to the same hospital’s balance sheet once the constraint on distributing surplus is lifted. The answer is a rapid drawdown: in the first year after conversion, cash balances fall by roughly $20 million, about 60% of the typical converting hospital’s pre-conversion holdings. The timing sharpens the interpretation. Cash balances show no unusual movement in the three years before conversion, so the decline tracks the conversion itself rather than a pre-existing trend.
We read this evidence as descriptive rather than causal. Hospitals choose to convert, chain affiliation and reporting practices often change around these events, and our data cannot trace where the cash ultimately goes; some may fund operations or retire debt rather than flow to new owners. But the pattern is hard to square with the idea that the accumulated surplus was already committed to productive use. When an owner arrives, much of the cash leaves.
A new measure of state oversight, and what it reveals
If the core problem is that no owner monitors how the surplus is spent, the natural question is whether something else can supply that discipline. States are the leading candidates: through attorneys general, reporting requirements, and governance rules, many already hold tools that could substitute, at least in part, for the monitoring an owner would provide. Where these tools exist and whether they actually work is an empirical question, and answering it required data that did not exist. No standard measure captures how much oversight each state imposes on its tax-exempt hospitals. We therefore hand-collected the governance and oversight rules in force in each state, coding whether four distinct mechanisms were in place by 2017:
- Attorney general authority: whether the state empowers its AG to review hospital transactions for antitrust and community impact, monitor charitable assets, and regulate service reductions or closures.
- Enhanced community-benefit reporting: whether the state requires hospitals to report community benefits in more detail than the federal Form 990 demands, including their geographic distribution or an assessment of local health needs.
- Board composition rules: whether the state regulates who sits on a hospital’s board, such as requiring community representation or limiting the number of affiliated insiders.
- Certificate-of-need laws: whether the state requires regulatory approval before a hospital builds or expands a facility.
We combine these into a single oversight index, the O-Score, which runs from 0 (none of the four mechanisms) to 4 (all of them). The index weights each mechanism equally, a simplification that is agnostic about their relative importance.
States differ widely in the oversight they impose. The average state has two of the four mechanisms in place, but the range spans the full spectrum (Figure 4). Colorado, Utah, and Wyoming have none; Maine and Rhode Island have all four. Several large states fall in between: California, Illinois, and New York score three, while Florida and Pennsylvania score just one. This variation is what lets us ask whether more oversight actually changes hospital behavior, by comparing tax-exempt hospitals that operate under stricter regimes with those that face looser ones.
We find that where oversight is stronger, tax-exempt hospitals show more financial discipline without giving up their mission. Higher O-Scores are associated with better operating margins and with lower administrative physician compensation, the spending category most exposed to managerial discretion. Crucially, that discipline does not come at the mission’s expense: we find no reduction in the share of spending devoted to mission-related activity, and charity care spending actually rises as oversight intensifies. The same financial behavior that looks like weak discipline where oversight is absent is muted where it is present.
A related pattern appears around the hospital conversions described earlier. State attorneys general are often charged with reviewing these transactions to protect charitable assets. Among hospitals that convert to for-profit status, the first-year decline in cash is smaller where the attorney general reviews the deal, about $15 million, against roughly $38 million where there is no such review. Because we cannot observe why any particular hospital converts, we read this as descriptive rather than causal, but it is consistent with oversight shaping how much surplus moves, and how quickly.
Two cautions are in order. Oversight is a partial substitute for ownership, not a replacement for it: it is associated with tighter financial discipline along the dimensions we measure, but it leaves the underlying governance gap in place. And because the O-Score reflects the rules in place as of 2017, it describes the oversight landscape of that period rather than the reforms several states have adopted since. Even so, the result is encouraging for policymakers, because it points to levers that states already hold — attorney general authority, reporting requirements, board rules — and shows them associated with more disciplined finances and no loss of mission.
Matching oversight to the scale of the stakes
These findings speak directly to the question Congress is now asking. Tax-exempt and for-profit hospitals deliver broadly similar care, but they manage their finances differently. Tax-exempt hospitals spend more on administration and capital and perform worse financially, while the additional charity care the exemption appears to buy is real but small against the scale of the subsidy. For a federal commitment of roughly $37 billion a year, the public return measured in additional community benefit is modest relative to the additional resources the exemption leaves under management’s discretion. That asymmetry sits at the center of our results.
This does not settle whether the exemption is justified, and our results caution against a simple verdict. Mission-oriented behavior is genuinely present, even if modest, and the patterns vary across the sector: the most pronounced differences are concentrated among the largest hospitals, and oversight disciplines some behaviors but not others. The policy question is therefore less whether to tax nonprofit hospitals than how to ensure that the resources their exemption shelters are used for the public purposes that justify it.
Our evidence points to a range of responses. The state oversight tools that already exist (attorney general review of major transactions, stronger community-benefit reporting, and board-independence requirements) are associated with tighter financial discipline and, if anything, more charitable activity rather than less. In many states, though, the basic step of adopting these tools at all is as much a political question as a policy one. But strengthening them where they exist, and concentrating them on the large institutions where the stakes are greatest, is a step states can take now.
The same logic also supports more structural reform. Because the core problem is the absence of an owner with a claim on the surplus, an approach that treats hospital operations as taxable while preserving deductions for uncompensated care would import that discipline directly, while protecting the charitable activity the exemption is meant to encourage. Short of that, transparency is the minimum. Taxpayers should be able to see both what the exemption costs and what it buys: regularly published tax-expenditure estimates would establish the first, and requiring hospitals to account for how the sheltered surplus is deployed (across charity care, capital projects, administration, and cash reserves) would establish the second.
Congress has already begun moving in this direction. The Tax-Exempt Hospital Transparency Act, advanced in July, reserves the most demanding requirements for hospitals of more than 100 beds. That targeting echoes our own finding that the governance concerns are most acute at the largest institutions.
Hospitals sit where public mission meets commercial scale, and the rules that govern them have not kept pace with the second. Our results argue for oversight that is careful but tempered: strong enough to substitute in part for the monitoring owners would provide, targeted at the large institutions and the discretionary spending where the stakes are greatest, and light enough not to burden the mission it is meant to protect. The evidence suggests that balance is achievable, since where states oversee more, finances tighten and charity care, if anything, rises. As policymakers weigh the future of the exemption, and as private equity brings its own governance concerns to other corners of the sector, the goal is oversight that aligns the behavior of tax-exempt hospitals with the public benefits that justify their exemption.
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