The tax-exemption system for American hospitals was created both to optimize care for those who cannot afford it and to encourage good deeds by hospitals. But despite well-intentioned attempts by the IRS to implement these lofty policy goals, for-profit hospitals today pay taxes despite at times providing more public benefit than their nonprofit brethren while nonprofit hospitals are incentivized to seek profit rather than provide free care. This rise of this state of affairs coincides with changes by the IRS to the standards required to obtain the exemption. Originally, the nonprofit system operated on a quid pro quo model, where hospitals were thought to relieve a burden on the government and receive tax exemption in return. But in 1969, the IRS migrated to the ambiguous “promotion of health” model introduced in Revenue Ruling 69-545. With its enactment, the IRS effectively freed nonprofit hospitals from accountability to the original policy goals behind nonprofit status and introduced the problems above. To fix the imbalance faced by hospitals today, this Article proposes a modification to federal policy that returns to the quid pro quo model but keeps the flexible attitude of Revenue Ruling 69-545 towards community benefit. Under this suggested approach, all hospitals must provide a threshold amount of community benefit to receive tax exemption, but they will have sufficient flexibility in the means to reach that goal. This places all hospitals on a level playing field and will hopefully increase charitable services provided to the needy.
Nicholas Archibald, Restoring Balance to the Federal Tax-Exemption Regime’s Treatment of Hospitals: Let Their Actions Speak Louder Than Their Charters, 45 Campbell L. Rev. 237 (2023).