Tax Exemptions as Health Policy

By Gray, Bradford H. | Frontiers of Health Services Management, Spring 1996 | Go to article overview

Tax Exemptions as Health Policy


Gray, Bradford H., Frontiers of Health Services Management


Mark Pauly offers a fresh and interesting way to consider the confusing and increasingly contentious matter of tax-exemption policy for nonprofit health care organizations. He makes several important points including: (a) that governmental policies on matters seeming unrelated to health care-criteria for tax exemptions in this case-can have important consequences for the health care system, (b) that changes in tax policy may require reallocations of hospitals' resources in unanticipated ways that bear careful advance consideration, and (c) that the future of nonprofits in health care will be affected by political processes and their own behavior, an argument that I myself made in these same pages a few years ago (Gray 1992). Along the way, Pauly illustrates some policy paradoxes and dilemmas that face the nonprofit sector in health care today.

In the current political and competitive health care environment, it is difficult to dispute the advice with which Pauly concludes: nonprofit institutions would indeed be wise to define and document their "community benefit" activities to satisfy their critics. These critics, it should be noted, have diverse motivations. Some are seeking only to develop consistent and responsive tax policy in a field that is undergoing rapid change. Some, as Pauly notes, seek to use tax policy to achieve ends that policymakers have been unable to achieve more directly. Some are trying to improve their competitive position: the investor-owned health care companies who have entered the field and then contend that nonprofits' tax benefits create an uneven playing field may be similar to people who purchase homes near airports and then complain about the noise, but the health care companies have more political influence.

Because of this mix of motives and the magnitude of the stakes, the tax-exemption policy debate in health care has taken on some characteristics that are worthy of note and careful consideration. I will concentrate on these in this commentary.

Health-Centric Tax Policy

Health care has become a distinct field of public policy, with its own institutions, focal governmental programs, interest groups and professional societies, academic and scholarly activities, and modes of discourse. The field has a kind of insularity that enables analysts and policy advocates to view the tax-exemption question for health care organizations as though it can be answered completely within a health care frame of reference.

I have some culpability here, because an example of this health-centric approach to tax exemption policy can be seen in the report of the Institute of Medicine's Committee on ForProfit Enterprise in Health Care, to which Pauly refers several times. As director of the IOM study, I participated in the Committee's discussions and drafted much of the report. In discussing the "indigent care problem," the report suggested that "more consideration should be given to ensuring that hospitals and other notfor-profit institutions that receive charitable contributions and that benefit from a tax exemption provide public goods in the form of uncompensated care, unprofitable standby capacity, unsponsored research, or institutionally subsidized educational activities" (Institute of Medicine 1986, page 196).(1)

In 1989, after having become thoroughly steeped in health policy in a decade at the IOM, I became the director of Yale University's Program on Nonprofit Organizations, a research center concerned with nonprofits generally. My awareness grew about the enormous variety of nonprofit organizations in the United States, about the disputed rationale for nonprofits' tax exemptions (Simon 1987), and the long tradition of thought that held that the existence of a third sector, distinct from (though hardly independent of) government and business was an important distinguishing characteristic of American society. It is from that perspective that my commentary is written. …

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