Distinguishing Community Benefits: Tax Exemption Versus Organizational Legitimacy

Abstract

US policymakers continue to call into question the tax-exempt status of hospitals. As nonprofit tax-exempt entities, hospitals are required by the Internal Revenue Service (IRS) to report the type and cost of community benefits they provide. Institutional theory indicates that organizations derive organizational legitimacy from conforming to the expectations of their environment. Expectations from the state and federal regulators (the IRS, state and local taxing authorities in particular) and the community require hospitals to provide community benefits to achieve legitimacy. This article examines community benefit through an institutional theory framework, which includes regulative (laws and regulation), normative (certification and accreditation), and cultural-cognitive (relationship with the community including the provision of community benefits) pillars. Considering a review of the results of a 2006 IRS study of tax-exempt hospitals, the authors propose a model of hospital community benefit behaviors that distinguishes community benefits between cost-quantifiable activities appropriate for justifying tax exemption and unquantifiable activities that only contribute to hospitals' legitimacy.