The Role of Tax Exemption in a Competitive Health Care Market

Abstract

The Federal Trade Commission and Department of Justice 2004 report on competition in health care raises the issue of nonprofit versus for-profit form in several contexts, including their relative financial performance, pricing behavior, and role in caring for the uninsured poor. The report, however, does not discuss in detail the connection between tax exemption and the nonprofit/for-profit debate. Is tax exemption, for example, "buying" charity care for the poor, and would withdrawal of exemption negatively impact health care for the uninsured poor? Or is tax exemption justified on the grounds of other nonprofit behavior outside the financial realm and thus not considered by the report? If nonprofit status does not result in differential financial behavior (as the report concludes) and if competition will end the ability of hospitals to cross subsidize free care for the poor (as the report speculates), is there any reason to retain tax exemption for nonprofit hospitals? This article summarizes the debate on these issues and offers some alternatives to the current structure of tax exemption for nonprofit health care providers.

Charitable (Anti)Trust: The Role of Antitrust Regulation in the Nonprofit Sector

“…This paper does not directly address many of the questions which will require attention before policy interventions, such as appropriate levels of profit in the nonprofit sector and the role of taxation exemptions in competitive mixed markets (such as in Colombo (2006)). Further, several simplifying assumptions were made for the sake of exposition that the typology needs empirical verification that the specific combinations of traits described above are found in the market.…”

Tax Exemptions for Nonprofit Hospitals: Toward Transparency and Accountability

“…Furthermore, the disciplining effect that results may be preferable to explicit requirements for minimum charity care provision. Colombo (2006) discusses the merits and disadvantages of such strict standards, and Kennedy et al (2010) find empirical evidence that these standards can result in hospitals, that were previously exceeding the threshold, reducing the levels of charity care provided. These additional disclosures may be a particularly attractive solution in light of the Act which will change, once again, the landscape of the number of individuals needing charitable care.…”

“…The study finds evidence of reclassification of bad debts to charity care, suggesting incentives for the management of charity care as a percentage of revenue (Eldenburg and Vines 2004). These incentives should be considered in a broader stream of literature which tends to suggest that there is little difference between charity care provided by nonprofit and for-profit hospitals (Colombo 2006;Sloan 2000;Duggan 2000). Collectively, we know that there are incentives to manipulate reported charity care amounts, and we know that there may be little difference in nonprofit and for-profit hospital approaches to charity care.…”

Community benefit laws, hospital ownership, community orientation activities, and health promotion services

“…Because the tax exemptions for not-for-profit hospitals represent a significant amount of foregone tax revenues, some have expressed concerns over whether these notfor-profit hospitals provide enough community benefit to justify their continued tax-exempt status (Colombo, 2006;Morrisey, Wedig, & Hassan, 1996;Nicholson, Pauly, Burns, Baumritter, & Asch, 2000). Gamm (1996) categorizes both of the above as concerns over the accountability of hospitals.…”

“…For example, in an effort to determine whether a hospital has a community orientation, the American Hospital Association (AHA;1994, 2006 annual survey asks whether the hospital had implemented certain community orientation activities. The AHA survey contained the answers to nine questions that measured whether or not the study hospitals had implemented the following activities: (a) had a mission statement that includes a focus on community benefit, (b) had a long-term plan for improving the health of the community, (c) committed resources for community benefit activities, (d) worked with others to conduct a community health assessment, (e) used health service indicators to design and modify services, (f) worked with others to develop a written assessment of capacity, (g) used assessment to identify unmet needs, (h) worked with others to collect and track health information, and (i) worked alone or with others to disseminate reports on quality and costs.…”