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Non- Profit Charitable Tax Exempt Hospitals- Wolves In Sheep's Clothing:To Increase Fairness and Enhance Compition All Hospitals Should Be For Profit and Taxable

george A. Nation III, Lehigh University

Abstract

Most hospitals in the United States are not-for-profit tax exempt institutions. Legally these hospitals are deemed to be charities and are exempt from federal, state and local taxes, raise money through tax exempt bond offerings and receive charitable contributions that are tax deductible to the donors. Today it is estimated that 47 million Americans lack access to healthcare.5A Moreover, even when the new Patient Protection and Affordable Care Act5B is fully operational, which is estimated to be around 2019, there will still be millions of Americans without health insurance and thus without reliable access to healthcare.5C Notwithstanding the millions of uninsured Americans charitable hospitals are not required, and nothing in the new Health Care Reform Law will require that they provide any charitable (that is, free) medical care in exchange for their tax benefits, and many in fact provide very little or no charitable care. In addition, some charitable hospitals charge uninsured patients exorbitant amounts that are much higher than the amounts insured patients are required to pay. Many also use harsh and even draconian collection tactics to collect these exorbitant charges from uninsured and/or indigent patients; the very people a charitable institution should be helping. Moreover, some “charitable” hospitals demand large cash payments upfront before they will even admit or schedule appointments for un/under-insured patients.

Under the traditional definition of charity, helping the poor and needy, most charitable hospitals fail miserably in accomplishing a charitable mission. Even under the modern amorphous “public benefit” definition of charity, most charitable hospitals do not provide benefits equal to the value of the tax exemptions they receive. As noted, most charitable hospitals do very little to provide health care for the un- and under-insured. Thus, many commentators have called for changes in the law applicable to charitable hospitals. Unfortunately, most of the proposed changes aim to make charitable hospitals more charitable (to “earn” their tax benefits) when what is needed is just the opposite.

That is, no hospitals should be tax exempt. Hospitals are not really charities, notwithstanding the current legal definition of charity, because they derive their income by charging and receiving payment from most if not all of their patients. Moreover, a hospitals ability to produce negative (to society) internalities such as excessive executive and doctor salaries or premium working conditions, or positive externalities, such as biomedical research, health education, free indigent care or other “community benefits” is the direct result of secretly overcharging paying patients. These “contributions” from paying patients, which have been estimated to exceed 30 percent of the hospital charges paid by patients, are in no sense voluntary. Today, non-profit hospitals are more akin to mini-governments imposing a tax on all of their patients who pay for the services they receive. Moreover, paying patients have no right to “vote” for these mini governments or even to have access to information regarding the amount of “tax” imposed or how the “taxes” are spent. In fact, it is this very lack of transparency or this camouflage, along with a lack of discipline imposed by financially interested investors/directors, and the increased (though often misplaced) trust the public places in non-profits, as well as the tax exemption, that encourages hospitals to adopt the non-profit business model.

In addition, to the extent that the tax exemption given to non-profit hospitals is characterized, at least in part, as a purchase by of the government of the positive externalities mentioned supra, it is dramatically inefficient and a startlingly bad deal for taxpayers, paying patients and the poor. Direct purchase by the government of the positive externalities it seeks with the taxes that are forgone due to the exemption would be much more efficient. Achieving healthcare access for the poor by hidden cost transfers structured by non-profit hospital administrators and/or required by the government through below cost Medicare/Medicaid reimbursements, or requiring tax exempt hospitals to provide a set level of free care to the poor, is an inefficient, deceitful, non-democratic approach that undermines the basic foundations of our democracy. This discredited, disingenuous, and elitist approach springs from a basic distrust of the American people and/or a willful determination to thwart the democratic process on the part of those who support such a system. Moreover, such an approach does a disservice to the poor by ultimately making their access to healthcare haphazard at best and dramatically inefficient. This Machiavellian mess is enabled by the ill-conceived combining of health care creation and delivery (the business of health care) with the political/social goal of addressing the needs of the poor. A central theme of this article is that we must separate these two issues; the business of healthcare, and providing services for the poor, and keep them separate, in order to achieve our health care goals.

The primary issue related to health care is how to insure that America continues to develop the best healthcare possible – where best is defined as the ability to cure, treat, and manage the greatest number of diseases or other maladies while preserving patient autonomy. The only way to achieve this goal is to harness the most effective tool we have to achieve it which is free market competition. Another problem with allowing a tax exemption for non-profit hospitals is that it gives the government more influence over tax exempt hospitals and as a result, contributes to the already great influence government has over the business aspects of health care which in turn interferes with the operation of free market competition. Government influence results in part from the dependence of charitable hospitals on their tax exemption. Moreover this dependency results in another problem; charitable hospitals focus too much of their attention on retaining their tax-exempt status at the expense of an exclusive focus on providing the highest quality healthcare at the lowest cost. Government influence over the business of healthcare also results in a different and somewhat less obvious but just as serious problem. The problem is that the government is subject to a strong temptation to limit access to (i.e., ration) healthcare, to eliminate patient autonomy, and to discourage the development of new medical technologies including new drugs and procedures in order to control the overall cost of health care. This results from, among other reasons, the high cost to the government of the Medicare and Medicaid programs, the political difficulty of cutting benefits, the popular (though erroneous) belief that the increasing cost of health care is a threat to the U.S. economy, and a desire of some in government to provide access to healthcare for all Americans by adopting a single payer government run health insurance system. The recent passage of Obama Care has made these problems even worse because it insures more government involvement in health care than ever before. The result of too much government influence over the business of healthcare is that the free market will be constrained and the development of the highest quality, lowest cost health care will be overwhelmed by a myopic focus on cost containment, which will lead to less individual patient autonomy, lower quality healthcare, and less available health care.

Finally, this article argues that the business of healthcare development and delivery is too important to be conducted under the not-for-profit tax exempt business model or to be run by the government. Moreover, the primary reason that the non-profit model has dominated the hospital industry is that it provides camouflage for the real profit seeking motives and/or elitist wealth transfer motives of those in defacto control, and it affords a tax deduction that enhances profits. The most effective tool that exists for allocating scarce resources to produce the most abundant supply of the goods and services society wants at the lowest cost is the free market, for-profit business model. The for-profit free market model will produce the high quality health care that Americans want at the lowest cost and preserve the individual autonomy that Americans value. This article argues that for-profit taxable hospitals play a very important role in ensuring a freely competitive health care market, and provide a critical counter balance to the increase government involvement in the business of healthcare that will occur in the near future as Obama Care becomes operational.38A Thus, hospitals should be encouraged, by amending the legal definition of charity, to adopt the for-profit model. Federal and state tax codes should be amended to provide that a healthcare provider must provide service free to all patients with no expectation of or request for payment in order to be considered charitable and thus tax exempt. As a result of this change only free clinics will qualify as tax exempt.

This article begins with a historical overview of the non-profit tax exempt hospital. Next the development of the current state of law regarding charitable hospitals is reviewed. The problems associated with the current law are then discussed. Part V proposes a solution that will help to address these problems and Part VI concludes.

Suggested Citation

george A. Nation III. 2010. "Non- Profit Charitable Tax Exempt Hospitals- Wolves In Sheep's Clothing:To Increase Fairness and Enhance Compition All Hospitals Should Be For Profit and Taxable" ExpressO
Available at: http://works.bepress.com/george_nation/1

Hospitals-2.doc (286 kB)
This is the current draft of the article, it will be published by The Rutgers Law Journal in 2011.

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