Tax-Exempt Hospitals and the Community Benefit Standard: A Flawed Standard and a Way Forward

Abstract

Each year, section 501(c) (3) tax-exempt hospitals receive billions ofdollars in taxpayer subsidies. Although the Service traditionally required that hospitals provide free or below-cost care to indigent persons as a condition of exemption, in 1969 it eliminated this charity care requirement and replaced it with a broadly permissive "community benefit" standard. As a result, nonprofit hospitals have since enjoyed virtual per se exemption. This Article examines the community benefit standard as a matter of tax policy and determines it is flawed for three reasons. First, it is an indefinite criterion for exemption that has caused confusion in the courts. Second, because empirical studies show little difference in the behavior offor-profit and nonprofit hospitals, including the provision of charity care, the community benefit standard is inequitable. Third, it fails to comport with any compelling theory for the charitable exemption. Thus, this Article ultimately calls for the repeal of the community benefit standard. Instead, this Article argues that exemption should be determined by a test based on Professor John Colombo's access theory. This test would grant tax-exempt status to nonprofit hospitals that either expanded access to care for previously underserved populations, or provided access to medical services not otherwise available in the market. In addition to promoting sound tax policy, such a test would complement ongoing federal health reform efforts under the Affordable Care Act.