A large number of the United States's indigent citizens are facing a health care crisis.1 It is difficult for indigents to access nonprofit hospitals across the nation because of the current standard required for a hospital to be tax-exempt.2 The federal government has increasingly relaxed the standards requiring charity care in order for hospitals to be tax exempt under section 501 of the Internal Revenue Code (IRC).3 Furthermore, economic pressure encourages nonprofit hospitals to become more financially efficient.4 This new efficiency makes it difficult to distinguish a nonprofit hospital from a for-profit hospital. Nonprofit hospitals are now providing less charity care and closely resemble for-profit hospitals. A large movement is developing which questions nonprofit hospitals' taxexempt status.5
This Note addresses the current crisis facing indigents trying to find medical care.
Part 11. A provides an overview of the nonprofit hospital and its evolution through time. Part ILB addresses nonprofit hospitals' federal and state tax-exempt status. Part ILC discusses the questioning of nonprofit hospitals' tax status. Part III analyzes the problems behind granting nonprofit hospitals tax-exempt status, and also discusses the status of these problems and how they are currently viewed. Part IV suggests how state and local governments can depart from the current federal tax-exempt standard. Part IV also proposes that bad debt should not be counted toward nonprofit hospitals' charity care. Part V concludes that state and local governments should evaluate for themselves whether nonprofit hospitals should be exempt from property taxes. When doing so, these governments should strongly consider hospitals' characterization of bad debt as charity care.
A. History of Hospitals
In the nineteenth and early twentieth centuries, the practice of medicine focused on those who could afford a physician's services and took place outside of hospitals.6 Those who could not afford to pay a physician to come to their home had to visit a hospital.7 Funded by charitable donations, hospitals provided comfort, as opposed to medical care, for the indigent.8 This charity care, services rendered without expectation of payment from the patient, is why the tax code incorporates hospitals as charitable organizations.9 The function of hospitals began to change in the twentieth century.10 The evolution of medical technology necessitated the need for collective resources.11 Hospitals became the "primary [center] for Healthcare;" doctors coalesced in order to afford and access new technology.12
The convergence of hospitals, physicians and technology created many different types of hospitals. In addition, "governments] own and maintain public hospitals."13 These hospitals "serve as teaching institutions" and provide medical care for the indigent.14 Private hospitals also exist. Private hospitals can be subdivided into for-profit and nonprofit hospitals.15 For-profit hospitals benefit their "investors and [rely] on earnings and securities as their main sources of capital."16 Traditionally, nonprofit, private hospitals "depended on charitable donations and governmental grants" for capital.17 The nonprofit, private hospital provided charity care, that is, below-cost or free health care to the indigent.18
B. The Tax-Exempt Hospital
Charitable organizations are exempt from federal income taxation.19 Since the initial grant of this exemption, nonprofit hospitals qualify as charitable organizations under the Internal Revenue Code.20 This is despite the fact that section 501(c)(3) of the IRC does not expressly name nonprofit hospitals. The nonprofit hospital is continuing to change; consequently, governments increasingly question nonprofit hospitals' tax-exempt status.21
The IRS has used two standards to determine when a charitable organization deserves to be tax-exempt under section 501. …