Why Are Hospitals Tax Exempt?

May 11, 2012

TaxProf points us to a very interesting article which makes the case that the origins of our current debate over "Obamacare" and particularly the health care individual mandate stem from 1960s era IRS rulings on the charitable nature of hospitals:

"In fact, under ruling 69-545 a tax-exempt hospital did not have to provide any free care to the poor so long as it maintained an emergency room open to all regardless of ability to pay, accepted Medicare and Medicaid patients, and had an independent governing body comprised of community leaders. The IRS had decided that the "promotion of health" was an inherently charitable purpose even if the cost is borne by patients and third party payors. It is important to note, that the change from a relief of poverty standard to a promotion of health/community benefit standard was not the result of a change in the law-rather it resulted solely from a change by the IRS in the regulations interpreting the law. The validity of this change has, however, withstood repeated court challenges. It appears that part of the reason for the approach taken by Revenue Ruling 69-545 was the passage of Medicare and Medicaid four years before in 1965. The IRS evidently believed that this new legislation would provide adequate access to medical care for the poor and indigent."

Accordingly, most hospitals now operate as tax-exempt entities and in return provide free or low cost care.  The removal of market pricing from health care has led to the same sort of problems we might expect if shoes were provided free of charge: over-consumption, out of control costs, poor quality service, and rationing.  The health care individual mandate is meant to address this market distortion by penalizing those who do not buy health insurance.  In this sense the circle is complete: both providers and consumers are subject to government pricing and terms.

See this for more on tax law and the individual mandate.

See this, this, and this for more on tax-exempt organizations.

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