Vanderbilt Law Review

First Page



The provision of health care has traditionally been deemed a charitable function.' Therefore, hospitals and other health care institutions have been afforded the benefits of tax exemption. As a standard for determining which entities merit the tax exemption and which do not, the Internal Revenue Service ("IRS" or "Service") developed what has come to be known as the community benefit test. At the federal level, this test has been the basis for awarding tax- exempt status to hospitals and other health care entities State legislatures have traditionally followed the federal government's standards for tax exemption and have thus allowed health care organizations to be exempt from state taxes as well.

In recent years, the United States health care system has changed dramatically. These changes have altered the ways in which health care services are provided. In seeking to find new and innovative organizational models for health care delivery, the health care industry has been confronted with a major question-namely, whether these new models of health care delivery should be tax-exempt. Critics of the tax exemption afforded health care organizations argue that health care has become more of a business and that non- profit health care entities are no different than their for-profit counterparts.

The debate over non-profit health care organizations has reached a critical point, as evidenced by the challenges to the tax- exempt status of hospitals in many states. It is further evidenced by the IRS's recent challenge to the tax-exempt status of a health maintenance organization ("HMO") in Geisinger Health Plan v. Commissioner.

This Note will demonstrate that these challenges to tax exemption have essentially involved the issue of what the community benefit standard should require and what we should expect from our non-profit health care institutions. This Note will argue that the community benefit test is premised on two important aspects of non- profit health care entities, which the courts and the IRS have already implicitly recognized. First, non-profit health care entities must organize and govern themselves in a way that allows them to be responsive to the needs of their communities. Second, these organizations must produce socially desirable outcomes by providing benefits to their communities that the government might otherwise have to provide."

Part II of this Note will analyze the legal framework for tax exemption that courts have applied to hospitals, discussing the major inroads on the tax-exempt status of hospitals, particularly at the state level. Part III will discuss the evolution of the health care industry into new organizational models and will analyze the tax-exempt treatment that these entities have received. Finally, Part IV will suggest that a refined version of the community benefit test provides the best means for preserving the beneficial characteristics of non- profit health care entities while not interfering with the taxing purposes of the IRS. This refined community benefit test should be premised explicitly on both the organizational advantages and the beneficial outcomes provided by non-profit health care entities.