Andrew C. Papa


Healthcare organizations abuse the 501(c)(3) tax-exempt status—reaping tax benefits but failing to give back to their local communities in return. Congress created the 501(c)(3) tax-exempt status to benefit the poor and impoverished. Yet, not-for-profit hospitals and managed care organizations are neither required to offer services to the poor nor required to offer emergency care services to their local communities. Instead, they charge higher prices in their increasingly concentrated markets. Therefore, consumers subsidize the same not-for-profit healthcare systems that charge them higher prices.

This Article analyzes government-placed incentives under the 501(c)(3) tax-exempt status, demonstrating how not-for-profit hospitals unfairly compete with for-profit hospitals. Studies show that not-for-profit hospitals have larger profit spreads than their for-profit counterparts. This Article will also demonstrate how the government encourages not-for-profit healthcare entities to increase their market power and extract rents from consumers. Today, the out-patient care business model fractionalizes the healthcare industry. Subsequently, not-for-profit healthcare entities can now acquire assets or firms in a piecemeal fashion, resulting in highly concentrated markets.

The third-party payor system and the Affordable Care Act exacerbate the issue, destroying traditional market forces. The third-party payor system creates a disconnect between the true provider and true consumer of healthcare treatment. The Affordable Care Act imposed additional requirements on not-for-profit hospitals—intending to incentivize charitable giving. Instead, the Affordable Care Act’s additional requirements incentivize profit-maximizing behavior at the expense of charitable giving. Because the healthcare industry suffers from a misalignment of pecuniary incentives and public health needs, creating clout on who the actual winners and losers are, the tax-exempt status should be revisited.