Not-for-profit hospitals enjoy federal, state, and local tax exemptions, but they face challenges from governments in both courtrooms and statehouses (Santos 2016). Contemporary hospitals differ markedly from those that existed at the turn of the twentieth century, which were truly charitable institutions. They were supported almost entirely by donations and largely staffed by volunteers. Thus, it can be argued that tax exemption for not-for-profit hospitals is a historical relic. When the income tax started in 1894, there was no Medicare, no Medicaid, and no insurance. Most people with money got care at home. The role of hospitals was to care for the poor.

These days, hospitals serve paying customers, and for-profits, which pay income and property taxes, provide about as much uncompensated care as not-for-profits (Valdovinos, Le, and Hsia 2015). (Notfor- profits do appear to offer more charity care—1.9 percent of total expenses—than for-profits, at 1.4 percent.) Not surprisingly, not-forprofits’ de facto tax-exempt status has come into question.

The case of Provena Covenant Medical Center illustrates this. After a lengthy court battle, in 2010 the Supreme Court of Illinois upheld the Illinois Department of Revenue’s denial of an application for exemption in 2002, finding that Provena was not a charitable institution and the property was not used for charitable purposes (Santos 2016). Two factors influenced the decision. First, of the hospital’s $118 million in total revenue, more than 96 percent came from patient and insurer payments, and less than $10,000 came from charitable donations. Second, Provena Covenant Medical Center did not actively promote its charity care program. The hospital routinely billed indigent patients and forced them to apply for discounts under the terms of the financial assistance program. In short, Provena Covenant Medical Center did not appear to be a charity.

In recent years, increasing numbers of localities have asked notfor- profits to make payments in lieu of taxes. For example, Boston received $32.4 million of these payments in 2017 (City of Boston 2018). Such arrangements are becoming more common as localities seek to cover the cost of services. Furthermore, many health systems look no more like charities than Provena Covenant Medical Center did.

One response to this situation was the changes in the community benefit standard specified by the Affordable Care Act (ACA). First, hospitals must prepare a community health needs assessment every three years. This report identifies the major health challenges facing that community and lays out a plan for the hospital to address them in the coming years. Second, hospitals must create a financial assistance plan that explains the criteria for offering financial assistance and must make the plan freely accessible to the public. Third, hospitals cannot charge patients that qualify for assistance more than they charge insured patients. Fourth, hospitals must make reasonable efforts to establish that a patient is not eligible for assistance before initiating extraordinary collection actions. However, the ACA did not specify the terms of financial assistance plans. 

This issue is not likely to go away. In states that expanded Medicaid after 2014, uncompensated care fell from 3.9 percent to 2.3 percent (Dranove, Garthwaite, and Ody 2017). It fell only 0.12 percent in states that did not expand Medicaid. As more and more people gain health insurance, the case for tax-exempt status gets harder to make.

Discussion Questions

• How much community benefit do not-for-profit hospitals provide?

• How much community benefit do for-profit hospitals provide?

• Why does using list prices tend to inflate estimates of community benefit?

• Are there other important differences between not-for-profit and for-profit hospitals?

• Would local governments be better off if they taxed hospitals and paid for charity care?

• Is tax exemption a good way to encourage private organizations to serve the public interest?

• Can you find examples of controversies about hospitals’ tax-exempt status?

• Can you find examples of payments in lieu of taxes?

• Does tax exemption for not-for-profit hospitals still make sense?

• Can you propose an alternative to tax exemption?