When everyone has insurance what will happen to hospitals’ not-for-profit status?

Undeniably, the most important advantage of a hospital’s not-for-profit standing is the tax-free status that it grants.  Save for very few exceptions: no taxes on income.  None on property.  Most significantly no tax on bond-issued debt.

The reason hospitals are granted not-for-profit status by the IRS is because they are considered charitable organizations.  A charitable organization needs to provide charity; in hospitals charity usually consists of free care provided to patients who can’t pay.  Community benefit also exists, but few agree on how exactly to measure the financial commitment of such considerations and that makes its charitable contributions murky.

As we move closer to health care reform and decide upon what that reform will look like, one reality is rising to the top: we need to insure everyone (even the insurers are game on this point).  Charity care will no longer be necessary when all Americans have insurance.  So what then will happen to hospitals’ not-for-profit status?  More realistically, what will become taxable?

It’s unclear what exactly a new taxable status would hold except that hospitals would not be required to provide charity care.  What would become taxable?  What happens to charitable donations?  Would it prompt hospitals to privatize?  Access to capital is a big consideration and would it require organizations to become publicly traded in order to raise funds (research concludes capital is cheaper in the not-for-profit setting)?  Widespread hospital IPOs don’t seem like such a palatable reality to those currently leading health reform legislation.

The most probable answer is the creation of a hybrid status where taxes will be levied on profits and property but access to tax-free debt will remain.  Charitable hospitals have become an American institution; some (many?) may have real concerns with all hospitals becoming privatized.

If hospitals want to run their operations like business, complete business, taxable status may be the consequence.  And since 501(c)(3) status prevents these organizations from doing any kind of lobbying activities…they won’t have much say (that may be naive).

Aside: The Congressional Budget Office released its extensive thinking on health reform possibilities recently.  Discussion of taxable status may be amongst the 400 pages but I haven’t had a chance to comb through.  Here’s a quicker rundown from Health Care Policy and Marketplace Review.

(ht: Scott Snyder and our daily back-and-forths)

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