Hospitals Face a Legal Land Grab Under the ‘Big Beautiful Bill’

A looming $31 billion surge in uncompensated care and expanded IRS penalties are forcing hospitals into the most consequential legal restructuring since the 1990s. The Republican-sponsored budget reconciliation package wouldn’t just cut funding—it would redraw the legal map that determines which hospitals will survive, consolidate, or vanish.

Under the bill, hospitals would have 18 months to decide whether to:

• Reclassify compliance as competitive positioning
• Align legal operations with executive compensation and tax strategy
• Use federal waiver law as a growth lever
• Turn documentation into acquisition currency

Most health-care executives are still waiting to see what happens. But those delays will define whether they lead the next consolidation wave—or manage someone else’s strategy.

Those who recognize this as a legal and business inflection point have the potential to emerge as consolidators and policy authors. But institutions that treat this as simple compliance paperwork risk getting acquired.

The Congressional Budget Office estimates that 8.6 million Americans will lose Medicaid coverage under the House version of the bill, generating an additional $31 billion in uncompensated care costs by 2034, a 32% spike that nonprofit hospitals, operating on razor-thin margins, can’t absorb.

That alone triggers survival calculus. But the real transformation is legal.

The bill expands tax penalties, restricts federal Medicaid support for immigrant care, and rewrites what counts as “community benefit” under tax code Section 501(r) rules for nonprofit hospitals. These shifts would give prepared systems an 18-month head start to convert compliance risks into strategic gains.

Under Section 501(r), nonprofit hospitals must conduct community health needs assessments, or CHNAs, every three years and report community benefits. But the regulations allow health systems to document revenue-generating services as “community health improvement” if they align with local health needs.

Legal agility, not size, separates acquisition targets from acquirers. Hospital boards should use CHNAs to reclassify preventive services such as diabetes education or maternal health programs as community benefits. Hospitals such as Kaiser Permanente use this framework to position these services as both mission-aligned and revenue-producing.

The bill’s new immigration penalties would create a federal-state Medicaid conflict. The bill would double the state share of costs for covering Medicaid expansion populations if states provide comprehensive health coverage to people who aren’t US citizens or don’t have “qualified alien” status.

States that continue to cover certain immigrant populations may face federal penalties, but Social Security Act Section 1115 demonstration waivers offer a legal workaround. Section 1115 waivers allow states to design Medicaid programs that fit local needs and policy goals, including maintaining coverage for populations that might otherwise be excluded under federal rules. By filing early for waiver approval, health systems can position themselves to weather federal funding changes and regulatory shifts.

States including Hawaii and Arizona have proven that health systems can use waivers to act as both insurers and providers. Filing early gives systems flexibility during the 18–24-month CMS review window while competitors scramble to adjust to shrinking federal reimbursements.

Health systems that apply early for waiver modifications gain strategic advantages. They can position themselves as essential partners in state waiver strategies, influence waiver design, and prepare operational changes. At the same time, competitors scramble to adjust to shrinking federal reimbursements.

Hospitals with large Medicaid populations should move before state budgets lock in reactive cuts. States typically finalize their budgets 12 to 18 months in advance. When federal Medicaid cuts hit, states facing sudden funding shortfalls often make across-the-board reductions to hospital reimbursement rates, provider payments, or eligibility criteria.

However, hospitals that proactively engage in state waiver planning before budget cycles lock in can position themselves as essential partners in the state’s strategy to maintain federal funding through waivers. This gives them preferential treatment in state contracts, protected reimbursement rates, and influence over which services get prioritized when cuts become inevitable. The window is narrow because most states are now finalizing 2026–2027 budgets.

The bill expands the 21% excise tax on nonprofit executive compensation to all employees earning over $1 million, potentially costing large systems tens of millions annually. Legal experts warn that few institutions are prepared.

Hospitals should consider converting high-salary roles into qualified performance-based compensation packages tied to community health metrics. This eliminates most tax exposure while boosting mission alignment and retention—two metrics every board is already tracking.

Expect to see nonprofit systems with weak profit margins in Medicaid expansion states become prime acquisition targets. Their community ties and compliance documentation create regulatory goodwill, but also make them vulnerable.

Institutions may frame acquisitions as community partnerships, not takeovers. This accelerates regulatory approval, reduces antitrust scrutiny, and bolsters stakeholder alignment.

Most hospitals still view IRS forms and CHNA reports as compliance burdens—an outdated notion. Sophisticated systems treat documentation as a strategic infrastructure that supports waiver applications, acquisition narratives, and tax optimization.

Hospitals that treat legal documentation like a business asset can pivot during policy shifts. Those that don’t are left scrambling—and increasingly dependent on others.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Stacey B. Lee is a professor of practice at Johns Hopkins Carey Business School and Bloomberg School of Public Health, a former health-care attorney, and CEO of Praxis Pacisci.

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