This is what I intend to be the first in a series of postings on the various intertwined issues of health care reform, the impact of the increasing costs of medical care on the ability to provide universal access, and the appropriateness of continuing exemptions from taxation for hospitals.
Let's start with the latter. The focus in recent reports has been upon whether the tax exemption for hospitals is merited when they do not provide a significantly important differential amount of charity care--i.e., care for the indigent or those who are unable to pay, at no profit or even at less than the cost to the hospital. See e.g., Tax Exempt Hospitals--the American Hospital Association Response to the IRS Study, Feb. 24, 2009, and Tax Exempt Hospitals--do most exempt hospitals merit the exemption?, Feb. 17, 2009. It appears that much of the taxpayer subsidy of the exemption for hospitals has flowed through for the benefit of (as profits for) hospital managers and employee physicians rather than for patients. The tax exemption is accordingly a tax expenditure that, like most such tax subsidies, has been hidden in the tax code and perhaps not assessed fully by those most expert in health care and the relative merits of different incentives in that area. It may be that the tax exemption should be eliminated in our current system, since it appears to provide an irrationally inconsistent advantage for some hospitals over others that may have had a rational origin but whose parameters have changed so much over time that it is no longer justifiable.
Note that the tax exemption for not-for-profit hospitals is not the only element of the tax expenditure in the Internal Revenue Code. Individuals can make tax-deductible charitable contributions to such hospitals, receiving a tax benefit for their own tax returns. Hospitals may be beneficiaries of tax-exempt financing as well.
This is a matter that requires new consideration if there are actual steps towards reform of our current health care system so that there is universal coverage. For example, we may ultimately move to a single-payer, single-provider system, which would resemble the health care systems of most developed nations like the EU countries and Canada. Such a change is increasingly supported by Americans, as demonstrated by two recent surveys summarized on Sustainable Middle Class Blog. Polls Show Strong Support for Single Payer Health Program. In that case, hospitals would no longer be expected to provide charity care to the uninsured, since all would be covered. The tax exemption would appear to be an anachronism in such a universal coverage system--perhaps all hospitals should be considered public and nontaxable entities that are part of a single-provider system, or none should be eligible for special status as a tax-exempt organization.
Senator Grassley has already put this issue on the radar screen for the Senate Finance Committee. BNA quotes his comment today that "tax exempt hospitals appear more likely to provide services for those with insurance than [for] the poor and indigent. If as a result of health care reform everyone has health insurance, presumably hospitals should see a steep decline or the elimination of their uncompensated care." BNT Daily Tax RealTime, 051209 at 7:22pm. Grassley intends to release a revised standard for tax-exempt hospitals within the next two or three weeks.