The "Common Sense" of the Nonprofit Hospital Tax Exemption: A Policy Analysis

Abstract

Although rarely discussed prior to the 1985 Utah Supreme Court ruling against Intermountain Health Care Inc., the question of whether to grant tax exemptions to nonprofit hospitals is currently being debated by federal, state, and local legislators, and by the courts. Changes to current policy seem likely. This policy analysis: (1) presents the historical and legal background; (2) examines the economic, political, and organizational implications of current tax-exemption policy; and (3) offers three alternatives to this current policy. The analysis indicates that the current policy provides little incentive for nonprofit hospitals to make contributions of charity care. Of the alternatives, eliminating the exemption is not politically feasible at this time; regulating hospital operations and outputs portends an implementation nightmare; and tying tax subsidy levels to output levels of charity care--perhaps the strongest and most efficient incentive--would require an unlikely political consensus on what constitute valid and reliable measures of charity care. If there is a movement toward subsidies, then linking subsidy amounts to levels of charity care will depend on whether policy analysts can design satisfactory empirical measures. With the advent of universal health coverage, the demand for charity care will decrease. The problem for tax-exempt hospitals will then become justifying the exemption by demonstrating the extent to which they generate community benefits at no or reduced cost to society.