Introduction
The long-simmering debate about the continued propriety of hospital tax-exemption lingers with no clear end in sight.Footnote 1 Recently Professor Edward A. Zelinsky asserted that “there is no room left to reasonably debate the tax status of nonprofit hospitals.”Footnote 2 Many other scholars, policy makers and the media have embraced similar perspectives due to commonalities in business structure, operations and provision of charity care between taxable and tax-exempt hospitals.Footnote 3 According to this perspective, rather than operating in furtherance of charitable purposes and providing a quid pro quo of free or reduced-cost health care to the needy in exchange for exemption from federal income tax, tax-exempt hospitals operate in a commercial manner while taking advantage of unearned tax subsidies. And yet, the enduring, pervasive unmet health needs of so many communities and individuals suggest the discussion needs to include what alternatives might follow voluntary or involuntary relinquishment of hospital federal income tax-exempt status. In looking for what is next, it is time to recognize the role of women-led philanthropic hospital auxiliaries in the founding of nonprofit hospitals and to build solutions to the hospital tax-exemption conundrum in the model of community driven investment and direction.Footnote 4
While acknowledging the chorus of those who for decades have questioned whether nonprofit hospitals can meaningfully be differentiated from their for-profit counterparts,Footnote 5 the purpose of this article is to propose a different path.Footnote 6 The path most focused on has been broadly revoking nonprofit hospital tax exemption and forsaking efforts to meet individual and community health needs through charitable structures.Footnote 7 This article suggests an alternative, framed in the long history of the truly charitable purposes undergirding and still present in hospital auxiliaries, that would allow for hospital-related charitable activities to be provided through tax-exempt auxiliaries regardless of the tax status of their related hospitals. This approach has the potential to simultaneously further efforts to address pervasive health disparities and to encourage the relinquishment of federal income tax-exemption by certain exempt hospitals that no longer appear to operate in furtherance of charitable purposes. A previously tax-exempt hospital, together with the assurance of a collaborative exempt auxiliary, could leverage private capital, operate in a more certain, profit-focused manner and separately preserve genuine efforts to promote health across the community. For these hospitals, alleviation from the requirements of tax-exemption could facilitate a more targeted focus on the provision of hospital medical care and profit maximization that might align more closely with organizational priorities.Footnote 8 Importantly, encouraging hospitals to relinquish their exemption could ease concerns about and the need for Internal Revenue Service (the “Service”) oversight of executive compensation and hospital-provided community benefits.Footnote 9 At the same time, the strengthening of exempt auxiliaries exclusively attentive to charitable needs could more effectively empower communities to act in prioritizing caring for the poor, addressing systematic health disparities, and furthering scientific research to promote community health.Footnote 10
This proposal does not intend to suggest that (nor delve into the debate about whether) all of the approximately 3,000 nonprofit, exempt hospitals should lose their federal income tax exemption, nor the related benefits of state income and property tax-exemption.Footnote 11 Rather, it recognizes that exempt hospitals that are truly organized and operated to pursue charitable purposes and that function squarely within the existing regulatory scheme should retain their exempt status.Footnote 12 Such hospitals, which might include, among others, rural and urban safety net hospitals and academic medical center hospitals, could even potentially satisfy more stringent community benefit requirements without substantial burden.Footnote 13 While others have recognized the risk of throwing the baby (i.e., the segment of exempt hospitals operating in earnest for charitable purposes) out with the bath water (i.e., those exempt hospitals that cannot be meaningful differentiated from their for-profit counterparts),Footnote 14 the scholarship identifies few clear paths to meeting residual charitable needs if the exemption of some hospitals were to be revoked or relinquished.
Part I highlights the significant body of scholarly work describing the evolution of institutionalized health care in the United States from colonial almshouses to today’s modern, complex health systems. Intertwined in this history, the roles of women in advocacy, organizing, and philanthropy illuminate the oft-hidden threads of charity that built so many hospitals and have the capacity to bind those hospitals to their communities today. Part II describes the history of and current standards for hospital and auxiliary tax-exemption. With a review of legislative, regulatory, and litigation-based efforts to define what it means to be charitable, this Part also briefly explains of the benefits of federal income tax exemption that are at stake in the hospital exemption debate and identifies contemporary critiques of such exemption. Part III proposes a new (or perhaps old) approach to protecting the genuinely charitable activities undertaken by nonprofit hospitals by centering the role of auxiliaries in holding and directing the use of charitable assets to address community health needs. This part concludes with recommendations about approaches future auxiliaries might embrace to leverage their charitable legacies while addressing some of the common critiques raised against hospital tax-exemption and the problematic social stratifications reinforced by auxiliaries of the past.
Part I: Evolution of Institutionalized Health Care & The Women Who Led the Way
The story of the evolution of health care and hospitals in the United States has been told from many vantage points. Detailed records of the efforts taken to establish individual hospitals,Footnote 15 together with complex analyses of the values at work and power struggles across communities, tell a uniquely American story.Footnote 16 Often referenced in passing is the role of women philanthropists and volunteers in establishing and supporting nonprofit charitable hospitals. From providing initial funding, to pushing for expansion, to providing vital services, the role of women’s voluntary hospital auxiliaries in the evolution of nonprofit hospitals is a story that helps to explain the bigger narrative and suggests a way forward.Footnote 17 This Part I begins with a brief summary of key turning points in the history of nonprofit hospitals. Against this background, Part I then tells the story of women’s charitable hospital auxiliaries and how these groups have consistently maintained a connection to the original charitable purposes of their nonprofit hospitals.
A. From Almshouses to Hospitals for the Poor to Hospitals for All
Modern U.S. hospitals, with highly trained physicians and cutting-edge technology, had their start centuries ago as places for society to care for and lodge “the indigent, the pilgrims, the wayfarers, the sick orphans, the homeless, the incurably ill, and the insane.”Footnote 18 Providing minimal health care to their destitute inhabitants was a necessary function of almshouses, but was not the primary focus.Footnote 19 By the mid-eighteenth century, there was a gradual shift in focus to caring for the physical ailments of those in need of charity and the establishment of early hospitals.Footnote 20 Over the next century, more private or voluntary hospitals were established “for the better class of our poor, when sick or wounded” and to serve as alternatives to public almshouses.Footnote 21 Many of these hospitals were founded by physicians seeking to create programs of medical education and to establish themselves within society.Footnote 22 Some were established by religious or ethnic organizations to care for poorer members of their own communities.Footnote 23 Others were funded by wealthy and prominent citizens.Footnote 24 Though these voluntary hospitals distinguished themselves from public almshouses, they similarly relied primarily on voluntary charitable donations and served populations in need.Footnote 25 There remained, however, a strong association between recurring or chronic illness and moral destitution.Footnote 26 Due to the stigma and the risks of crowded and unclean facilities, those with the means to receive medical care at home strongly preferred that option.Footnote 27
Through the late nineteenth century, the focus of hospitals was primarily on caring for those without means to obtain care at home on a fee-for-service model.Footnote 28 As a consequence of the Civil War and the need to care for injured soldiers, the number of hospitals ballooned despite only minor progress in the tools available for treating illness.Footnote 29 In the decades that followed the Civil War, in addition to a growth in the number of hospitals,Footnote 30 the organization and staffing of hospitals changed.Footnote 31 One key change was the advent of trained nurses who cared for patients; a change resisted by physicians and championed by wealthy women who sought change.Footnote 32 While most hospital funding in this period came from philanthropists driven by a sense of “pious activism,”Footnote 33 minimal patient charges were assessed by some hospitals to ensure the “dignity of being treated as a paying patient” and allow patients to avoid the shame of receiving charity.Footnote 34
In the early twentieth century, advances in science and the professionalization of medicine led to an increase in hospital revenue from patients paying directly for services.Footnote 35 Nonprofit charitable hospitals, including those affiliated with religious organizations, constituted at least half of all hospitals, with a growing number of for-profit hospitals opening.Footnote 36 Historian Paul Starr described that, during this period, “[h]ospitals [went] from treating the poor for the sake of charity to treating the rich for the sake of revenue and only belatedly gave thought to the people in between.”Footnote 37 With these changes the stigma attached to hospital care was replaced with a social acceptance of hospitals as “the best providers of some medical procedures because of the superior equipment, postoperative nursing, and medical care available.”Footnote 38 So too came an increase in the cost of providing care and the amounts billed to paying patients.Footnote 39 And while the importance of philanthropy in funding hospital operations waned,Footnote 40 access to care for the poorest also declined with hospitals “discourag[ing] charity care where they could.”Footnote 41
This rise in fee-for-service hospital care and the amounts charged, together with evolution in the ways physicians related to hospitals, paved the way for debates about providing insurance through the states or individual employers.Footnote 42 The formation of workers’ compensation insurance and group hospital-insurance schemes, in the model of Blue Cross (providing insurance for physician bills) and Blue Shield (providing insurance of hospital costs), was an effective strategy for warding off calls for compulsory government run insurance.Footnote 43 It also foreshadowed a future where access to health insurance would equate to access to hospital and other healthcare.Footnote 44
In the period after World War II, a dramatic increase in hospital building and a growing confidence in the importance of “specialized, high-technology medicine” emerged.Footnote 45 The Hill-Burton Act increased access, particularly in rural areas, to hospital care by providing grants for the construction and modernization of nonprofit and government hospitals.Footnote 46 This legislation was intended to provide access to those who could not afford or access existing facilities, provide employment opportunities, and address the lack of investment in hospital facilities during the Great Depression and World War II.Footnote 47 Later legislation added mortgage insurance for commercial and direct loans and a requirement that hospitals receiving support provide care to those receiving government-funded health insurance.Footnote 48 Grants under Hill-Burton were conditioned on hospitals providing “a reasonable volume of [medical] services to persons unable to pay” for a period of twenty years following the end of construction.Footnote 49 This general expectation was not defined with specificity until decades later.Footnote 50 The Act also required states to engage in regional planning with the goal of a “nationally defined, regionally organized network for hospital provision.”Footnote 51 Though the Act was successful in driving rapid construction in rural areas, aspirations for serving those with the greatest need and creating a coordinated, efficient system of hospitals serving local communities to ensure access for the underserved were not as clearly satisfied.Footnote 52 Due to the requirement that federal money be matched with local funding, the Act most benefitted middle- or higher-income communities which could leverage their own resources to obtain additional federal funds.Footnote 53
As hospitals were built across the country, significant changes in both organizational structure and types of care provided arose.Footnote 54 A dramatic growth in employer-based health insurance, emboldened by the recognition of health insurance as a “condition of employment” over which unions could bargain, increased the number of people covered by health insurance.Footnote 55 With the promise of more paying patients, hospitals spent more on staffing and facilities which in turn increased overall costs.Footnote 56 As described by Historian Rosemary Stevens, “[t]he pot of gold” of secure payment from third-party payors “unleashed an unprecedented demand for hospital services” and “encouraged hospitals to respond to the market incentives of increased demand by providing more, more expensive, and better care, in areas that were most likely to be reimbursed.”Footnote 57 Despite, or perhaps as a result of, this increased demand and confidence regarding payment, the provision of charity care became less central to the operations of nonprofit hospitals.Footnote 58 Where charity care was provided, it was generally funded through income earned on other patient care rather than through endowment income or philanthropy.Footnote 59 At the same time, the growth in demand and the increasing number of hospitals created a need for more physicians and led to the growing dominance of medical schools and the hospitals affiliated with them.Footnote 60
As more workers and their families gained access to hospital care through employer-based insurance, debates about how to care for the elderly and the poor continued. An unsuccessful 1958 proposal to provide government-funded hospital insurance for those receiving Social Security was followed in 1960 by the passage of the Kerr-Mills legislation, which provided federal funds for states to support health care for the elderly poor.Footnote 61 This legislation paved the way for the creation of Medicare and Medicaid which, though explicitly not intending to foster federal interference in the provision of health care,Footnote 62 has impacted nearly every aspect of care, the ways in which physicians are paid, and the structures through which they operate.Footnote 63
Medicare, which provides payment from the federal government through fiscal intermediaries to hospitals and other providers caring for the elderly, and Medicaid, which provides federal funds to the states for the provision of care to the poor, initially paid hospitals based on their actual reasonable costs.Footnote 64 As the number of people seeking care increased, so too did the type of services provided, the size of hospital staffs, per patient costs, and the financial strength of hospitals.Footnote 65 In addition to including traditional operating expenses such as staff labor costs, reimbursable costs under Medicare were permitted to include depreciation of capital assets on an accelerated basisFootnote 66 as well as capital- and debt-related expenses.Footnote 67 These generous allowances encouraged hospitals to expand programs and prioritize borrowing funds for capital projects over relying on philanthropic contributions.Footnote 68 Like with Hill-Burton’s push for construction, hospitals in the early Medicare era felt “a public mandate—even a social duty—to expand, rebuild, and reequip.”Footnote 69 In 1965, the year Medicare was adopted, philanthropy provided just over forty percent of funding for nonprofit hospital construction projects.Footnote 70 A dramatic decrease was seen between 1968 and 1981 when the percentage of hospital construction funds from philanthropy dropped from twenty-one percent to four percent, while the percentage funded by debt financing rose from thirty-eight percent to sixty-nine percent.Footnote 71 This shift in funding represented a disconnection from the community and a loss of local independence.Footnote 72 At the same time, many states devoted their health care budgets to funding Medicaid which reduced their capacity to support charity care to those excluded from the new program.Footnote 73
Government expenditures for Medicare and Medicaid that far exceeded early estimates, together with overall increasing hospital costs, led to calls in the 1970s for cost containment and a reconsideration of the role of nonprofit hospitals.Footnote 74 Proposals for expansion of the health maintenance organization (HMO) model and state efforts to regulate capital expenditures and hospital rates reflected an understanding that rising costs were unsustainable.Footnote 75 States adopted certificate-of-need laws that required hospitals to obtain state permission for certain construction projects to limit growth that did not match state or local needs.Footnote 76 Nonprofit hospitals were simultaneously critiqued for “managerial inefficiency” due to their rising costs and “blamed for expert exploitation of the new market conditions” because of the ways in which they had expanded.Footnote 77 Embracing the competitive nature of this new market and managing new demands on hospitals, nonprofit hospitals began establishing and joining hospital systems.Footnote 78 At the same time, driven by the lucrative promise of an untapped market, for-profit hospital chains proliferated.Footnote 79 These collective trends meant that, less than twenty years after the adoption of Medicare and Medicaid, more than one-third of hospital beds were in a multi-hospital systems.Footnote 80 This shift towards hospital systems eroded the historical community connections between hospitals and their local communities and further reduced the reliance on local philanthropy.Footnote 81 At the same time, the increasing prevalence of third-party payment for health care services diminished many of the overt distinctions in operations between nonprofit and for-profit hospitals.Footnote 82 Overall, the view of hospitals as “institutions of last resort” had been nearly replaced with a new understanding that they were the “setting[] of first choice for treating too many minor ailments, especially when the insurance coverage was good.”Footnote 83
The growth of nonprofit and for-profit hospital systems continued in the decades following the passage of Medicare with the establishment of outpatient satellite clinics, horizontal and vertical integration, and corporate restructuring that led one scholar to warn of the development of a “new medical-industrial complex.”Footnote 84 The federal government, states, and private insurers continued to scrutinize rising costs, leading in 1983 to the restructuring of Medicare payments to set inpatient payment levels based on a patient’s diagnosis rather than the costs incurred by the hospital.Footnote 85 The reduction of government reimbursements to hospitals, along with the growth of insurance structures that reduced hospital care, placed a heavy burden on those hospitals serving communities with the greatest need.Footnote 86 Shortly thereafter, recognizing the need to assure a minimal level of care for the uninsured and ease the disproportionate burden being placed on certain safety net hospitals, Congress passed the Emergency Medical Treatment and Active Labor Act (EMTALA), which requires that all hospitals participating in Medicare screen and stabilize any patient, regardless of insurance status, who seeks care for an emergency condition.Footnote 87
Beginning in the 1980s and continuing into the 1990s, HMOs and other managed care structures largely replaced direct fee-for-service insurance plans.Footnote 88 Based on the apparent success of managed care plans in driving down costs, many states ceased efforts to regulate hospital charges.Footnote 89 The rise of managed care and lower government payments were correlated with (and perhaps caused) lower rates of inpatient care and the closure or merger of many hospitals.Footnote 90 Mergers of nonprofit hospitals into local systems and across regions increased as regulatory efforts to protect competition were stifled.Footnote 91 These mergers ultimately gave large hospital systems increased bargaining power to demand higher rates from third-party insurance payors.Footnote 92 By the early 2000s, efforts to limit costs through managed care were augmented with a shifting of costs to workers through high-deductible health plans and continued reductions in the provision of employment-based insurance.Footnote 93 These shifts made hospital-based and other medical care increasingly inaccessible to those with lower incomes.Footnote 94
By 2010, over fifty million people in the United States were uninsured and therefore had limited access to non-emergency hospital care.Footnote 95 Many of these people were low-wage workers and those with pre-existing conditions.Footnote 96 Perhaps due to the direness of this situation and the financial stress it put on hospitals,Footnote 97 the American Hospital Association (AHA) joined other stakeholders in the healthcare industry in the discussions over what would become the 2010 Patient Protection and Affordable Care Act (the “ACA”).Footnote 98 In addition to facilitating a significant decrease in the number of uninsured and underinsured individuals,Footnote 99 the ACA has encouraged hospitals to participate in coordinating care and focusing on quality outcomes through financial incentives for establishing accountable care organizations and achieving certain quality outcomes.Footnote 100 As described in Part II.A, below, the ACA for the first time set statutory requirements for hospital exemption. As hospitals and other providers have adapted to lower payment increases from the federal government,Footnote 101 there has been a surge in mergers, consolidations and for-profit conversions which have had unclear impacts on cost and quality.Footnote 102 Given the ongoing flux in the nation’s health care system, it is fair to say that the state of nonprofit hospitals today, as described by Historian Rosemary Stevens 35 years ago, remains “opportunistic and unsettled; ebullient and nervous; politically attuned and market-oriented.”Footnote 103
B. Role of women in building hospitals, tending to sick
In the debate about hospital tax-exemption, the role of women philanthropists and volunteers, and the auxiliary organizations through which they have worked for over 150 years is often overlooked or mentioned in passing. Yet, the development of many of our nation’s first charitable hospitals was made possible, in large part, through the efforts of women philanthropists and women’s organizations that raised building funds.Footnote 104 The first general hospital in the United States, which today is known as the University of Pennsylvania Hospital, was built in 1752 with funds donated in part by wealthy widows and single women.Footnote 105 In addition to aiding in the construction of the building, these benefactors contributed funds to facilitate the purchase of medicines from Europe.Footnote 106
By the mid-nineteenth century, formal women’s auxiliary organizations started forming to support the provision of care for the poor.Footnote 107 According to the AHA, the first official women’s auxiliary was formed in 1863.Footnote 108 Across the country, groups of women worked to meet the needs of the needy in their communities by founding and supporting new hospitals.Footnote 109 These groups emerged as women found themselves relieved of agrarian work and largely excluded from emerging commercial and industrial work.Footnote 110 White middle-class and upper-class women, charged with being the “moral guardian[s] of home and family” and shunned from paid work, sought public lives through volunteering with social service, cultural and moral reform organizations.Footnote 111 These women, motivated by their religious beliefs and commitment to “social action and autonomy,” were generally welcomed by male physicians to “help in fundraising, sponsoring charity beds, or furnishing wards and private rooms.”Footnote 112 Consistent with the perception of hospitals as treating a “socially marginalized constituency,” the women who raised funds to build hospitals (like other supporters) were supporting institutions “that they themselves were never likely to use.”Footnote 113
In the decades that followed, progressive women became involved with the establishment and management of hospitals for women and children “as one link in their web of institutions that they hoped would protect children and their families from the vagaries of the mature industrial society.”Footnote 114 Children’s hospitals demonstrated an ethos of “uplift and social control” when they separated young patients from their families, with benefactors hoping this separation and the influence of the hospital would better the families and in turn “commence the education of the poorer classes.”Footnote 115 Supporters of new hospitals believed that hospitals created “social stability” and demonstrated the commitment of the affluent to care for the needy.Footnote 116 While women were “active boosters,” they also took on other roles including providing oversight through formal boards and in some cases directing regular operations.Footnote 117 Many auxiliaries delivered in-kind support and services; including visiting patients,Footnote 118 providing and mending linens, canning foods, transporting patients to the hospital, and establishing patient libraries.Footnote 119 These voluntary services made the provision of hospital care for needy patients feasible, despite the majority of scarce fees going to physicians in their individual capacity.Footnote 120 The deep engagement of women volunteers eroded as the professionalization (or read otherwise, the taking over by male physicians) of these specialty hospitals reduced the influence of women and shifted the focus of these institutions from community support and moral reform to medical care.Footnote 121
In the early twentieth century, the focus of women’s auxiliaries included making investments in modern buildings and equipment and subsidizing general hospital operating expenses.Footnote 122 “Money for new buildings or renovations, room furnishings, and medical equipment now claimed priority in fund-raising programs,”Footnote 123 leaving hospitals and an emerging third-party insurance structure to pay for the provision of care. At the same time, auxiliaries supported the growing field of nursing through helping to establish and support nursing schools.Footnote 124 Fundraising and philanthropy were key to building new institutions, as well as to developing communal allegiances that built upon religious and ethnic affiliations and to setting “social structures in the community.”Footnote 125 Historian Rosemary Stevens described the motivation of women involved in this work as reflecting “their commitment to ideals of Judeo-Christian obligation, to class and group solidarity, and to civic duty[.]”Footnote 126
The focus of auxiliaries pivoted during World War II when members again undertook direct patient care to fill personnel shortages created by war demands.Footnote 127 Through this embedded work, auxiliaries and their members became more empowered and took on a key role in serving as “a link between their institutions and the community at large.”Footnote 128 One example of this mission expansion is described in a 1949 article in The American Journal of Nursing about the Emory University Hospital Women’s Auxiliary’s efforts to support the growth of a nursing school. The auxiliary’s efforts included advocacy, recruiting students, raising funds to support faculty and students, and communicating with the community.Footnote 129
In the years after World War II, the role of auxiliaries continued to evolve. The expertise of women who had entered the work force during the war and resumed volunteer work afterwards appears to have allowed auxiliaries to provide direct support to patients and to act as emissaries between their communities and local hospitals.Footnote 130 In 1961, approximately 1.2 million adults and teenagers were hospital auxiliary members.Footnote 131 Nearly three quarters of nonprofit hospitals were supported by auxiliaries.Footnote 132 The role of auxiliaries in an increasingly complex health care system was recognized and formalized through state hospital associations and a newly established council within the AHA.Footnote 133 Despite the significant presence of auxiliaries in communities and their strong membership, the need for auxiliaries to provide hospitals with substantial operating expense subsidies diminished and most basic expenses were paid for increasingly by revenue from third-party payors.Footnote 134 Instead, an auxiliary could, as described by the AHA in 1951, “through its very existence, as well as through a well-organized public relations program, bring greater community interest and understanding to the hospital.”Footnote 135 Auxiliary activities were focused on “cooperat[ing] with … and render[ing] assistance and service to” hospitals and undertaking “activities which [would] be of benefit to the hospital and the community.”Footnote 136 These activities continued to include supplying equipment, recruiting and training unpaid volunteers, sponsoring community programs, running gift shops, and holding rummage sales and bazaars.Footnote 137
At the same time, increased investment by the federal government in health care infrastructure, including through the Hill-Burton Act’s investment in hospital construction, reduced the need for philanthropic support for capital projects.Footnote 138 The advent in the 1950s of federal payment to hospitals for the care of indigent patients (a precursor to Medicaid), combined with increased rates of employer-based health insurance, significantly increased the patient care revenue received by hospitals.Footnote 139 In response to these changes, the AHA, in the mid-1970s, explained in a report to auxiliaries that, “[m]onies that once were expended for medical care of the indigent, or for building funds and equipment purchases, may no longer be specifically required for these purposes.”Footnote 140
Accordingly, the AHA encouraged auxiliaries to “consider regearing their programming so that fund raising [would be] represented by a diversity of community-oriented activities.”Footnote 141 According to the AHA, auxiliaries needed to “become fully cognizant of the health care needs of [their] communit[ies]” and then could “develop some well-conceived and clearly defined suggestions for redirecting [their] funds in ways that [would] fulfill these needs [and] … be [the] catalyst[s] for a whole new way of viewing the auxiliary’s role by the institution and, eventually, the community.”Footnote 142 Suggested new programs and funding priorities might include many of the community focused activities now expected to be undertaken by nonprofit hospitals including workforce development, the compilation of health care resources, supporting community-based outpatient and home care, arranging for patient access to food and other essential resources, blood donation programs and supporting community-based health programs.Footnote 143 The AHA also contemplated auxiliaries taking on a role in facilitating communication between communities and hospitals.Footnote 144
In the midst of these changing priorities, a debate about the potential harm of women’s volunteer work grew out of the feminist movement.Footnote 145 According to a resolution from the National Organization for Women, social services volunteering of the type undertaken by hospital auxiliaries, harmed women because it prevented them from “earn[ing] and control[ling] their own money in order to control their own lives” and it harmed those who were being served because it prevented adequate funding for social services that could be obtained for free from volunteers.Footnote 146
By the mid-1980s lower patient censuses, reduced reimbursement rates, and shrinking government grants created financial pressures on hospitals that again made auxiliary fundraising and support more imperative. Footnote 147 At the same time, auxiliary growth was haltedFootnote 148 and record numbers of women entered the paid workforce and became unable to volunteer their time in ways previously expected. Footnote 149 Today, the aging of many auxiliary leaders, changes in volunteering trends, and shifts away from individual hospitals and toward large systems all present challenges to the future of auxiliary organizations.Footnote 150 Hospital mergers and affiliations today raise questions for their auxiliaries about whether community-based auxiliaries should merge as well.Footnote 151
Part II: Tax-Exemption for Hospitals and Auxiliaries
While the debate about the tax status of nonprofit hospitals centers on whether charitable tax-exemption is reconcilable with the current structures and practices of modern hospitals, the history of tax-exemption tracks the evolution of almshouses into today’s advanced health care institutions described in Part I, above. Early predecessors of today’s hospitals were exempted from tax on account of their activities being charitable in the oldest sense of the word.Footnote 152 Accelerating shifts away from caring for the poor and aged and toward the provision of professionalized medical care raised questions about the appropriate role of nonprofit, tax-exempt hospitals and ultimately about the propriety of hospital tax-exemption altogether. The story of hospital auxiliary exemption is less entangled in, though not entirely divorced from, the evolution of the provision of hospital care. Both the structure and exempt status of auxiliaries has depended largely on their relationship to their hospitals and the power dynamics inherent to volunteer organizations largely led by unpaid women operating in connection with increasingly profit-focused institutions. So too have dynamics fully outside of healthcare impacted the relationship between hospitals and their auxiliaries as Congress and the Service repeatedly have considered the necessary connection between hospitals and the related organizations that support the charitable needs of their patients and communities.
Part II begins with a concise history of hospital federal income tax-exemption, a summary of the current requirements for a nonprofit hospital to qualify as exempt under Internal Revenue Code (I.R.C.) Section 501(c)(3), and a brief discussion of some of the major critiques of the status quo.Footnote 153 Next, this Part II describes the benefits enjoyed by a hospital that is determined to be exempt from federal income tax. Finally, this Part II explains the various means by which hospital auxiliaries obtain and maintain their status as charitable tax-exempt entities, highlighting the Service’s limited guidance on exempt auxiliaries of non-exempt hospitals.
A. Hospital Tax Exemption
i. History
The practice of distinguishing hospitals that care for the poor and rely on philanthropic support is older than the government which today struggles to define or exercise oversight over this practice.Footnote 154 And yet, centuries later, a clear articulation of what a hospital must do to earn exemption from taxation remains elusive.Footnote 155 Tracing their roots back to fourteenth century England, entities caring for the poor and sick in the British colonies were typically formed as charitable trusts.Footnote 156 In the wake of the Revolutionary War, the formation of charitable corporations, including through “the incorporation of private associations engaged in essential public services,” increased and persisted throughout the nineteenth century.Footnote 157
In enacting the first post-Civil War federal income taxes, Congress excluded the income of charitable organizations organized for “charitable, religious, or educational purposes.”Footnote 158 Though this first federal income tax was declared unconstitutional, the precedent of exemption for charitable organizations was set.Footnote 159 The adoption of the Sixteenth Amendment to the Constitution in 1913 allowed for the imposition by Congress of income taxes without apportionment to the states, and the passage of the Revenue Act of 1913, which is the foundation of our current federal income tax code.Footnote 160 This Act exempted from taxation any “corporation or association organized and operated exclusively for religious, charitable, scientific, or educational purposes, no part of the net income of which inures to the benefit of any private stockholder or individual.”Footnote 161 Under these early income tax statutes, certain hospitals were exempted from the obligation to pay federal income tax on account of their charitable work in caring for the sick and providing relief from suffering for the poor.Footnote 162
Although not statutorily defined, “charitable” was construed in its traditional and common understanding “to mean ‘relief of the poor.’”Footnote 163 At the turn of the twentieth century, a large portion of hospital services were provided without charge or at minimal cost to patients.Footnote 164 As such, the majority of activities engaged in by such hospitals was unquestionably charitable, as that term was understood. As described above in Part I, in the early twentieth century progress in medicine expanded the type of care provided in hospitals and the type and affluence of patients receiving care in those institutions.Footnote 165 At the same time, the expansion of insurance to pay hospital and physician charges changed how charitable hospitals structured and financed their operations with increased reliance on receiving payment for services.Footnote 166 With increasing commercialization, exempt hospitals and their advocates worked to differentiate themselves from both government-run and for-profit hospitals by drawing attention to their “flexibility in role and administration,” as well as the role they played in the community as “public utilities” and providers of “social services.”Footnote 167 By the early 1940s, the U.S. Department of Treasury indicated skepticism about the bona fide charitable nature of some exempt hospitals when it began to seek financial information from hospitals to distinguish between truly charitable institutions and those “‘masquerading under the cloak of charity.’”Footnote 168
In response to an apparently diminishing need for institutions dedicated exclusively to providing relief to the sick and poor and the expansion of the health care market, the Service, in 1956, first articulated a standard for hospitals to qualify for tax-exemption under I.R.C. Section 501(c)(3) in Revenue Ruling 56-185.Footnote 169 The Service explained that hospitals typically qualified for exemption from federal income tax on the basis of being “organized and operated for public charitable purposes” and that “charitable,” as used in and liberally interpreted from the statute, “contemplate[d] an implied public trust constituted for some public benefit.”Footnote 170 More specifically, the Service described that to qualify for exemption a hospital would need to be organized “for the purpose of operating a hospital for the care of the sick,”Footnote 171 and be “operated to the extent of its financial ability for those not able to pay for the services rendered and not exclusively for those who are able and expected to pay.”Footnote 172 The Service explained that operating for those not able to pay could include providing care for free or at “below” cost rates (often referred to as “charity care”) and did not preclude the possibility of using earnings “for improvements and additions to hospital facilities.”Footnote 173 In addition, charitable hospitals were required to maintain open medical staffs for all qualified physicians and were prohibited from paying excessive salaries or rents or otherwise allowing net earnings to inure to the benefit of private individuals.Footnote 174
The application of this Ruling was clear in Sonora Community Hospital v. Commissioner, where the Service succeeded in denying exemption to a nonprofit hospital that provided free care of “less than 1 percent of paid care,” an amount the Tax Court referred to as “de minimis” in the context of the fee sharing arrangements with the hospital’s founding physicians.Footnote 175 The Tax Court foreshadowed a position to which the Service would later return that, “[w]hile the diagnosis and cure of disease are indeed purposes that may furnish the foundation for characterizing an activity as ‘charitable,’ something more is required.”Footnote 176
In 1969, acting on the (now, clearly mistaken) belief that the newly created Medicare and Medicaid programs would eliminate the need for hospitals to provide charity care,Footnote 177 the Service, in Revenue Ruling 69-545, modified its earlier guidance on the criteria for deciding if a hospital qualified for exemption under Section 510(c)(3).Footnote 178 Reasoning that the “promotion of health” is a charitable purpose under charitable trust law, the Service explained that a hospital could be “beneficial to the community as a whole” even though some groups (e.g., indigent patients) were not included within the “class of beneficiaries eligible to receive a direct benefit.”Footnote 179 Accordingly, the Service explained, the provision of hospital care to all those able to pay, either directly or through private or government insurance, and the operation of an emergency room open to all constituted community benefits that could satisfy the requirement that an exempt hospital be operated for a charitable purpose.Footnote 180 In coming to this conclusion, the Service explicitly rejected the notion that charity care was a necessary activity for exempt hospitals.Footnote 181 This evolution of charitable hospital purposes from caring for the sick and poor to promoting health for the community at large reflected a fundamental (though seemingly unrecognized at the time) shift in understanding and tax policy.Footnote 182
Echoing Revenue Ruling 56-185, the Service’s 1969 ruling confirmed that a charitable, tax-exempt hospital needs to maintain an open medical staff and acknowledged that the use of earnings by a hospital to “improve the quality of patient care, expand its facilities, and advance its medical training, education and research programs” is consistent with furthering its charitable purpose of promoting health.Footnote 183 In addition to these expectations, the Service indicated that an exempt hospital should maintain a governing board “composed of independent civic leaders.”Footnote 184 Collectively, the criteria described in Revenue Ruling 69-545 came to be known as the “community benefit standard.”Footnote 185
Significantly higher than expected Medicare and Medicaid costs and the resulting decisions of the federal and state governments to narrowly define eligibility and coverage to constraint costs,Footnote 186 combined with the loss of employer-based coverage in some industries, meant that the expected disappearance of the need for charity care never came to fruition. The need remained significant throughout the 1980s and into this century.Footnote 187 Almost immediately recognizing the continuing unmet need and within a decade of articulating the community benefit standard, the Service started walking back the expansive factors it had laid out for determining the exempt status of hospitals and insisting that “simply providing health care to all paying patients was insufficient to warrant exemption.”Footnote 188 Through challenges to the exemption of health care organizations and by providing additional guidance the Service for decades has undercut its own (voluntarily binding on the ServiceFootnote 189) stated interpretation of the law.Footnote 190 In 1983, the Service recognized that certain hospitals without emergency facilities could satisfy the community benefit standard based on their unique nature or the lack of need for such services in their geographic area.Footnote 191 Though the courts initially held the Service to its position regarding the sufficiency of caring for all paying patients, by the late 1980s and early 1990s the Service succeeded in convincing the appellate courtsFootnote 192 and eventually the Tax CourtFootnote 193 that the community benefit standard articulated in Revenue Ruling 69-545 required something more than operating primarily for the promotion of health—“promotion of health plus.”Footnote 194 That “plus,” in almost every case, would be the “free or below-cost services”Footnote 195 that Revenue Ruling 69-545 had explicitly attempted to dispense with as a requirement. Notwithstanding the Service’s consistent emphasis on the centrality of charity care,Footnote 196 the courts have kept open the acknowledgement that “research, education, and medical training” might also constitute the type of “plus” required to preserve exemption.Footnote 197
Beginning in the early 1990s, public attention and proposals for specific modifications to the statutory requirements for charitable exempt hospitals began to emerge.Footnote 198 The GAO reported to Congress that the burden of caring for indigent patients was falling disproportionately on government hospitals and a sub-set of teaching hospitals in urban areas.Footnote 199 With its description of the then existing standards, the GAO advised that if Congress intended for exemption to relate to the provision of charity care that legislative changes were necessary.Footnote 200 Various proposals in the early 1990s would have required a fixed percentage of spending on each of charity care and other community benefits that was tied to the value of a hospital’s tax exemption,Footnote 201 a fixed percentage of spending on charity care tied to annual gross revenue, or that a hospital serve as the sole hospital in its community or that it serve a disproportionate number of Medicare and Medicaid patients.Footnote 202
By the early 2000s, news of scandal and abuse within the nonprofit sector,Footnote 203 and particularly among tax-exempt health care entities, sparked significant Congressional attention on hospitals and a new wave of proposals to establish a definitive and quantifiable measure of a hospital’s community benefit.Footnote 204 A key catalyst in drawing attention to the alleged abuses of tax-exempt hospitals was a 2004 series in The Wall Street Journal that criticized hospital billing and debt collection practices.Footnote 205 In response, the Senate Committee on Ways and Means held a hearing in 2005 for the stated purpose of assuring “the American taxpayer that the tax-exempt hospital sector is living up to its community responsibilities.” The hearing aimed to “examin[e] the legal history of the tax-exemption for hospitals; IRS oversight of tax-exempt hospitals; the need for congressional oversight of the standards for hospital tax-exemption; and Federal policies that subsidize treatment of the indigent by hospitals.”Footnote 206 The following year, the Senate Finance Committee, led by Senator Charles Grassley, held further hearings to assess whether hospital tax exemptions were justified, focusing specifically on the measurement of community benefits and the provision of charity care by exempt hospitals.Footnote 207
In 2007, the Service undertook its first serious effort to collect specific data on the benefits provided by tax-exempt hospitals by requiring a new Schedule H on IRS Form 990, the annual tax information return filed by charitable exempt organizations.Footnote 208 In connection with these efforts, the Service conducted a survey of over 500 exempt hospitals to better understand their provision of charity care and other community benefits and executive compensation practices.Footnote 209 The Service anticipated that the new Schedule H for tax year 2009 would “promote uniform and accurate reporting of quantitative and qualitative community benefit information” by exempt hospitals.Footnote 210 As policy makers considered possible system-wide health reform, the difficulty of applying the community benefit standard’s “imprecise legal standards to complex and evolving fact patterns” loomed heavily.Footnote 211
ii. Current State of Hospital Tax-Exemption Law
While the 2010 ACA focused primarily on reshaping how health care is paid for in the United States, it included seemingly modest additions to the standards for hospital tax-exemption.Footnote 212 Influential advocacy by the AHA and other industry leaders persuaded lawmakers against pursuing more substantial or quantitative changes to hospital exemption standards.Footnote 213 Instead, the ACA only imposed additional administrative and procedural requirements on hospitals claiming exemption.Footnote 214 These new requirements did not supersede or negate the community benefit standard articulated in Revenue Ruling 69-545, nor the general requirements that an organization described under I.R.C. Section 501(c)(3) be organized and operated for charitable purposes.Footnote 215 Instead, they were intended to direct how hospitals structure, publicize, and account for community benefits, while giving the IRS and the public “additional tools and information to ensure charitable hospitals act charitably.”Footnote 216 Through the addition of I.R.C. Section 501(r), the ACA requires that tax-exempt hospitals:
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1. Maintain and publicize a written financial assistance policy that identifies the criteria and process by which a hospital determines if a patient is eligible for financial assistance;Footnote 217
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2. May not charge patients who are eligible for financial assistance more than the amounts generally billed to other payors (e.g., the average amount actually paid by private insurance, Medicare, etc.);Footnote 218
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3. May not engage in extraordinary collection activities (e.g., placing a lien on a patient’s home or initiating litigation) without first making reasonable efforts to determine if the patient is eligible for financial assistance;Footnote 219 and
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4. Undertake an assessment every three years of the health needs of their communities and identify which needs the hospital intends to address and how such work will be undertaken.Footnote 220
The first three requirements reasserted the original expectation that charitable hospitals provide relief to the poor, echoing the mandate in Revenue Ruling 56-185 (later retracted) that hospitals should provide care to those unable to pay to the extent of their ability.Footnote 221 These requirements reflected an understanding that neither the creation of Medicare and Medicaid nor expanded coverage under the ACA would entirely eliminate the need for financial assistance among patients without adequate insurance.Footnote 222 Ultimately though, these requirements impose no actual, specific demand that a hospital provide a certain amount of charity care or simplify the process for applying for assistanceFootnote 223 and include little in the way of enforcement mechanisms.Footnote 224 In arguing that Section 501(r)’s financial assistance requirements make no meaningful difference in the justification of hospital exemption, Professor Zelinksy has suggested that, “[a] hospital can fully comply with Section 501(r) without materially modifying its commercial practices.”Footnote 225 For this reason, questions persist about whether hospitals should enjoy the benefits of tax-exemption unless they can demonstrate how they are supporting needy patients in a meaningfully different way than their for-profit counterparts.Footnote 226
The fourth requirement, the mandate to perform a community health needs assessment (CHNA), can be understood as adding necessary process and detail to how hospitals determine the most impactful use of their required community benefit efforts, as first outlined in Revenue Ruling 69-545. However, this reading risks ignoring today’s dramatically different health care landscape, how the growing emphasis on addressing the social determinants of health is shaping the expectations of tax-exempt hospitals, and the ACA’s focus on prevention and population-level health promotion.Footnote 227 Instead of broadly encouraging hospitals to look inward to reinvest in their own facilities, pursue medical research, provide subsidized patient care, and support patient education, the CHNA requirement reflects a different expectation that hospitals affirmatively reach outward.Footnote 228 Hospitals are asked to act as “hub” institutions in their communities,Footnote 229 to harness the power and knowledge of government entities and community groups, and to invest funds in programs and activities that improve the long-term health of their communities.Footnote 230 They are asked to focus their efforts by taking on an apparent burden of government in ensuring the health of broad communities.Footnote 231 Given the substantial consensus on the impact of social determinants of health and the efficacy of intersectional work between health professionals and community leaders to drive change, it would be foolhardy to question the potential benefit of this work.Footnote 232 And yet, in essence, this requirement asks institutions established and operated for the purpose of providing hospital medical care to undertake a fundamentally different role in order to maintain federal tax-exemptionFootnote 233 and offers few of the tools necessary for achievement of these lofty goals.Footnote 234 This expanded role may require hospitals to shift their areas of expertise and modify the composition of their staffs, all the while their success in these endeavors may lead (by design) to diminishing revenue as overall community health improves.Footnote 235 In addition, the CHNA requirement may “impose[] what are arguably greater burdens on hospitals in needier communities than on their counterparts in resource-rich communities.”Footnote 236
B. Benefits of Hospital Federal Income Tax-Exemption
In the context of considering whether auxiliaries rather than their hospitals should pursue charitable goals, it is important to briefly outline the key benefits of tax-exempt status.Footnote 237 The complexity of the requirements for hospitals to qualify as exempt from federal income tax, not to mention the copious ink spilled analyzing the effectiveness of this system and its alternatives, demonstrates how much is at stake in the hospital exemption debate.Footnote 238 Otherwise, many nonprofit hospitals would likely forego tax-exemption to avoid the related administrative and operational burdens. Just exactly how much is at stake, and how that compares to the benefits provided by nonprofit hospitals, is subject to almost as much debate as the issue of exemption itself.Footnote 239 Recent estimates of the value of tax-exemption to nonprofit hospitals have ranged from a low of $12.4 billion to four times that amount.Footnote 240 According to a Kaiser Family Foundation analysis in the spring 2023, the total estimated value of tax exemption for nonprofit hospitals in 2020 was approximately $28 billion.Footnote 241 This amount included $10.3 billion in foregone federal corporate income tax, $1.6 billion in interest savings on tax-exempt bonds, and $13.7 billion in forgone state and local taxes.Footnote 242 Also included in the total amount was $2.5 billion in additional charitable contributions that might have not have been given had those contributions not been deductible by their donors.Footnote 243 A year earlier, EY, working on behalf of the AHA, estimated the total foregone federal revenue from nonprofit hospital tax exemption at $12.4 billion, factoring in $7.2 billion in federal corporate income tax, $5 billion in interest savings on tax-exempt bonds and $200 million in foregone federal unemployment tax.Footnote 244 The disparities in these estimates are the result, in large part, of the lens through which each survey is conducted. Regardless of the focus or narrative, exemption from federal income tax by virtue of being described under I.R.C. Section 501(c)(3) is of tremendous financial (and some argue, non-tangible) value to nonprofit hospitals.Footnote 245
i. Exemption from Federal Income Tax
Under I.R.C. Section 501(a), an organization described under Section 501(c)(3) is exempt from federal income tax.Footnote 246 Accordingly, a nonprofit hospital that is organized and primarily operated for charitable purposes (i.e., “the promotion of health plus”) and which satisfies the other criteria for exemption is not subject to the federal income tax that would otherwise be applicable.Footnote 247 Accordingly, an exempt hospital is not required to pay corporate income tax on its annual income from activities related to its charitable purposes.Footnote 248 For modern nonprofit hospitals, this related business income derives primarily from patient care revenue, with additional related revenue coming from government subsidies, grants and charitable contributions.Footnote 249 Additional income may come from related business operations including cafeterias,Footnote 250 parking lots,Footnote 251 and the leasing of office space to physician practices.Footnote 252 Exempt hospitals also earn income from investment assets, including, in some cases, significant endowments.Footnote 253 As such, hospitals receive dividends, interest and capital gains free of taxation.Footnote 254 The exemption of related income, including investment income, from taxable income is understood as a direct subsidy allowing for the development of long-term capital savings.Footnote 255
With the current corporate income tax at a base rate of twenty-one percent,Footnote 256 an exempt hospital is exempted from paying approximately one-fifthFootnote 257 of its net income to the federal government. KFF estimated that the total value of federal income tax exemption for all nonprofit, exempt hospitals in 2020 was approximately $10.3 billion.Footnote 258 Exemption of this significant income from taxation is generally justified with the argument that income tax exemption effectively creates a capital subsidy from the federal government to exempt organizations that allows for reinvestment of income back into organizational programs, facilities, and staff.Footnote 259
ii. Ability to Accept Tax-Deductible Charitable Contributions
In addition to federal income tax exemption, charitable hospitals are entitled to receive contributions that donors may deduct in part or whole from their own taxable income.Footnote 260 Donations are exempt from federal trust, gift and estate taxesFootnote 261 and generally, and from state income tax.Footnote 262 Though not a direct benefit to the hospital, the ability to accept deductible contributions encourages philanthropic donations. KFF estimated that in 2020 the value to exempt-hospitals of increased charitable contributions based on deductibility was approximately $2.5 billion.Footnote 263 While donations from taxpayers not claiming a charitable contribution deduction are not accounted for within these significant values, these non-deducted contributions can be a substantial source of funding for hospitals, and they represent a significant portion of donors.Footnote 264
iii. Bond Financing
By virtue of being described under Section 501(c)(3), tax-exempt hospitals can borrow money at lower interest rates because bond holders can exclude the interest they receive on account of such bonds from their taxable income.Footnote 265 Through such bonds, tax-exempt, nonprofit hospitals that cannot generate capital through investors are able to access significant funds for capital investments like buildings and state-of-the-art medical equipment.Footnote 266 By relieving bond holders of federal income tax on the income they receive and thereby inducing bond holders to accept lower interest rates, the federal government provides another indirect support to exempt hospitals.
Tax-exempt bonds are subject to strict requirements relating to the operation of the exempt organization’s operations and the use of space and assets funded with bond proceeds. To assure bond holders of the certainty of the tax-exemption of bonds, a borrowing organization must establish to the satisfaction of counsel that it then meets and will continue to meet the applicable exemption standards.Footnote 267 Once exempt bonds are issued, the organization is expected to carefully monitor the use of bond-funded space to ensure that no more than five percent of the bond proceeds are used for private business uses (e.g., leasing of bond-funded space to another organization for trade or business purposes and sponsored research agreements focused on specific commercial objectives).Footnote 268
iv. Additional Benefits
Beyond federal income tax exemption, the ability to accept deductible charitable contributions, and access to tax-exempt bond financing, exempt hospitals have access to a variety of other federal and state advantages. Likely the most lucrative benefit afforded to many, but not all, exempt hospitals is exemption from local property tax.Footnote 269 At the federal level, certain exempt hospitals including critical access, sole community and disproportionate share hospitals have been eligible to purchase discounted drugs from pharmaceutical companies that they can dispense at a profit.Footnote 270 Exempt academic medical centers and other hospitals may also, by virtue of their tax status, qualify for certain federal research grants.Footnote 271 In addition, organizations described under Section 501(c)(3) are not required to pay the unemployment excise tax on wages paid to their employees.Footnote 272 Such organizations are also permitted to send bulk mailings at reduced postage rates.Footnote 273 Finally, beyond these pecuniary advantages, exempt hospitals benefit from the public perception that being a “501(c)(3)” denotes validation of an organization’s charitable purposes and work in the community.Footnote 274
C. Exemption of Hospital Auxiliaries
With an understanding of how hospitals qualify for charitable tax exemption and the benefits accrued from that status, we turn now to the ways in which hospital auxiliaries qualify for tax exemption. The basis for an auxiliary’s exemption may depend on its historical relationship with the hospital, its organizational structure, and its specific activities. An auxiliary qualifies as exempt from federal income tax if it is (1) a division within an exempt hospital, (2) a separate charitable entity that meets the requirements to be a supporting organization of a hospital that is itself recognized as exempt under I.R.C. Section 501(c)(3), or (3) a separate charitable entity that independently qualifies as tax-exempt on the basis of its own structure, operations and source of funds. Historically, the AHA recommended that hospital auxiliaries be closely tied to their hospitals and that they operate under the control of the hospital’s board and management.Footnote 275
i. Auxiliaries as Divisions Within Hospitals
Hospital auxiliaries that are not separately organized entities operate as a division or department within a hospital.Footnote 276 The income of an auxiliary of this type is treated as the income of the hospital,Footnote 277 meaning that if the hospital is described as tax-exempt under Section 501(c)(3), the auxiliary’s income is exempted from federal income taxation and charitable donations to the auxiliary are deductible. If the hospital is instead taxable, any income of the auxiliary will be taxed and contributions to the auxiliary are not deductible. In this structure, the auxiliary is necessarily controlled by and dependent on the hospital for its existence and tax status.
ii. Auxiliaries as Separate Charitable Organizations
The tax status of a hospital auxiliary organized as a separate legal entity depends on its structure, activities, and relationship to the hospital. An independently organized auxiliary can qualify for exemption either based on its own charitable activities or as a supporting organization of a tax-exempt hospital. Additionally, despite the historic connection between auxiliaries and exempt hospitals, a charitable auxiliary may qualify for tax-exemption by supporting the community health needs and patients of a taxable hospital.Footnote 278
a. Auxiliaries as Supporting Organizations of Exempt Hospitals
While most fundraising and volunteer-focused auxiliaries would independently qualify for tax exemption based on their history, organizational structure, and funding sources, many are instead recognized as exempt public charities because they are supporting organizations of exempt hospitals.Footnote 279 A supporting organization is organized and operated for exempt purposes under Section 501(c)(3), and avoids classification as a private foundation by virtue of its organizational and operational relationship to a publicly supported charity.Footnote 280 Supporting organizations fall into three categories: they may be (1) “operated, supervised or controlled” by a supported organization, (2) “supervised or controlled in connection with” a supported organization, or (3) “operated in connection with” a supported organization.Footnote 281 An auxiliary is considered to be operated, supervised, or controlled by its supported hospital when a majority of its governing board members are appointed by the hospital.Footnote 282 This type of relationship presupposes that the hospital exercises a “substantial degree of direction over the policies, programs, and activities” of the auxiliary.Footnote 283 Though rare in practice, an auxiliary would be considered “supervised and controlled in connection with” its supported hospital if there were common control of each entity’s governing board.Footnote 284 Alternatively, an auxiliary is “operated in connection with” a supported hospital when it maintains “significant involvement in the operations of the” hospital and provides “support on which” the hospital “is dependent” and the auxiliary is “responsive to the needs and demands of” the hospital.Footnote 285
b. Auxiliaries as Separately Exempt Organizations
Based on their traditionally charitable activities and broad base of public support, hospital auxiliaries may independently be described under Section 501(c)(3) as tax-exempt public charities. In both a corporate organizational and tax sense, such auxiliaries may be related to or entirely independent from an affiliated taxable or tax-exempt hospital. To be exempt and accept deductible contributions, an independent auxiliary needs to meet the criteria under I.R.C. Section 501(c)(3).Footnote 286
c. Exempt Auxiliaries of For-Profit Hospitals
The traditional model of an exempt hospital working in tandem with an exempt auxiliary has morphed over time as exempt hospitals have converted to taxable entities.Footnote 287 When an independently exempt auxiliary operates in tandem with a for-profit hospital, no substantial portion of the auxiliary’s activities may further the hospital’s for-profit purposes.Footnote 288 In effect, the auxiliary must operate for and dedicate its assets and staff toward its own charitable purposes, rather than the for-profit entity’s profit-making objectives. As described in more detail below, such auxiliaries may collaborate with, but may not subsidize, a for-profit hospital’s business operations. In a non-binding 2002 Advisory Letter, the Service advised the hospital auxiliary of a previously tax-exempt hospital on activities involving the hospital in which the auxiliary might appropriately engage and identified certain auxiliary functions that would not unduly benefit the hospital nor jeopardize the auxiliary’s tax-exemption.Footnote 289 These functions included making grants to the hospital for educational and research purposes, engaging in activities directly supporting hospital patients and providing services to patients and the public.Footnote 290 Earlier Service guidance about the relationship between tax-exempt organizations and their non-exempt partners echoes through the 2002 Advisory Letter.Footnote 291
1. Grant Making for Hospital Activities
Since at least 1968, the Service has recognized that a 501(c)(3) tax-exempt organization may, without jeopardizing its exemption, make distributions to non-exempt organizations for charitable purposes.Footnote 292 An organization making such distributions protects its tax status by limiting the use of its funds to specified exempt purposes consistent with its own purposes, retaining control and discretion as to the use of distributed funds, and maintaining records of the use of such funds.Footnote 293 In a 2002 Advisory Letter, the Service advised that grant making from an auxiliary to a taxable hospital in furtherance of the auxiliary’s specific exempt purposes was permissible.Footnote 294 For example, providing financial support to a hospital to fund free health education programs would be permitted so long as the auxiliary retained discretion and control over the use of funds and maintained records of the use of such grant funds.Footnote 295 Similarly, the Service advised that an auxiliary could make grants to a taxable hospital to fund “scientific research on health related matters such as finding a treatment or cure for a disease.”Footnote 296 Such grants, the Service explained, would not provide a substantial private benefit to the hospital or its individual researchers.Footnote 297 Retaining discretion and control over the use of funds, along with maintaining documentation, is critical to an auxiliary that makes grants to a for-profit entity. Recently in a non-binding Private Letter Ruling revoking the exemption of an organization making grants to a for-profit entity, the Service explained that the organization’s failure to provide evidence that it reviewed and approved of projects before they were conducted by the for-profit entity undercut the organization’s argument that it was operating for exempt purposes.Footnote 298
2. Activities Benefitting Hospital Patients
The 2002 Advisory Letter goes on to describe how earlier guidance supported the possibility that the provision of funding or direct services to hospital patients by an auxiliary might constitute charitable activities regardless of the for-profit nature of the hospital.Footnote 299 Direct assistance to patients must be made on a “true charitable basis.”Footnote 300 As with grants made to a for-profit entity, auxiliaries should maintain documentation of the process used for determining a patient’s need and those individuals who received assistance.Footnote 301 Under Revenue Ruling 68-73, the Service affirmed the exempt status of an independent nonprofit organization formed to provide non-medical support to patients of a for-profit, taxable hospital.Footnote 302 The organization was not controlled by or related to the hospital in which it operated.Footnote 303 The Service reasoned that the activities of the organization benefited the patients, an acceptable class of charitable beneficiaries, rather than the hospital.Footnote 304 Any benefit to the hospital resulting from the organization’s activities was “merely incidental.”Footnote 305
Similarly, in Revenue Ruling 79-358, the Service acknowledged that a charitable organization organized for the purpose of ensuring that patients without financial means could be treated in private hospital rooms could accept patient recommendations from hospital staff and make direct payments to the hospital to cover those patients’ excess costs.Footnote 306 Even in Revenue Ruling 69-267, where the direct benefit to patients was less evident, the Service acknowledged that the operation of a hospital gift shop promoted the well-being of patients and that such a benefit outweighed the private benefit to the hospital and its employees.Footnote 307 Interestingly, in the 2002 Advisory Letter, the Service indicated that the operation of parking garages and cafeterias were not appropriate auxiliary activities because they did not directly benefit patients since inpatients do not need those services while staying overnight at the hospital.Footnote 308 The significant increase in outpatient hospital care (together with ambulatory care centers) puts this reasoning into question.Footnote 309
3. Limits on Purchasing of Hospital Goods and Equipment
In the 2002 Advisory Letter, the Service cautioned that “purchasing goods, services, or facilities for a for-profit hospital would also be problematic because of the direct and substantial private benefit to the proprietary hospital.”Footnote 310 In this warning, the Service identifies a meaningful limit to the ways in which auxiliaries can be integrated into and supportive of the primary operations of a taxable hospital. This limit, without additional clarifying guidance from the Service, could hinder an auxiliary’s ability to support programs aimed at underserved populations and intended to meet unmet health needs. Despite this constraint, in the 2002 Advisory Letter the Service outlines a road map for auxiliaries of previously exempt hospitals seeking to continue their efforts to promote community health and address individual health needs.Footnote 311
Part III: A Proposal to Center the Auxiliary
Regardless of the next swing in the debate over hospital tax exemption, the need to address unmet individual and community health needs will remain. If sufficient legislative momentum builds to tighten the exemption requirements,Footnote 312 many hospitals might elect to forego their tax-exempt status.Footnote 313 In such a scenario, the essential community benefits currently provided by exempt hospitals would still be needed.Footnote 314 Often, proceeds from the sale or conversion of an exempt hospital are transferred to a private foundation, which may focus its efforts on general community needs or broader health needs beyond the hospital.Footnote 315 An alternative, that prioritizes local communities is centering a hospital’s auxiliary in the work ahead. Historically, auxiliaries have played a crucial role in building hospitals, serving patients and meeting community health needs. Looking ahead, they could once again serve an essential role in charitable health care efforts. Centering auxiliaries in future planning could ensure the due application of charitable assets while preserving philanthropic and societal support of efforts to address unmet health needs.
Part III describes a possible role for auxiliaries if the federal hospital tax exemption requirements were tightened and explains how centering auxiliaries might mitigate some of the challenges to nonprofit hospitals’ tax-exempt status. Part III begins with a discussion of the charitable activities that exempt auxiliaries of taxable hospitals might undertake. Consideration of how auxiliaries could fund these efforts, through sale proceeds and seeking and accepting charitable contributions, is framed within the limitations on public charities. Next, Part III identifies certain constraints on the ability of auxiliaries to leverage the benefits of tax-exemption currently enjoyed by tax-exempt hospitals. Finally, Part III describes organizational approaches that could lessen the ways in which auxiliaries historically have reinforced social and gender stratifications.
A. Auxiliaries & Health-Related Charitable Activities
Consistent with existing guidance and in furtherance of the health policy goals of I.R.C. Section 501(r), exempt auxiliaries can directly undertake or fund programs to care for individual patients in need, provide preventative health education, support programs that address social determinants of health, fund research, and support workforce development and training programs.
i. Direct Community Benefit
Newly independent auxiliaries could continue to lead programs and activities that promote community health and address social determinants of health. Shifting this responsibility from hospitals to auxiliaries may allow for greater flexibility and adaptability, particularly in communities prioritizing broader “efforts to address upstream causes of poor health.”Footnote 316 In addition, auxiliaries could expand their role to encompass community benefit and development programs currently managed by exempt hospitals. In states where hospitals are required to conduct CHNA-like assessments, auxiliaries could partner with hospitals and other stakeholders to identify and address community health needs.Footnote 317 Where such a state-level requirement is not applicable, auxiliaries could sponsor similar assessments of community health needs and provide the community coordination and anchoring that is being asked of hospitals.Footnote 318
While Section 501’s CHNA requirement may be perceived as layering on an additional burden unrelated to the original health care purpose of nonprofit hospitals, this same work is inherently consistent with the purposes of auxiliaries formed to address unmet community health needs. With an eye toward social determinants of health, auxiliaries could extend their efforts beyond traditional hospital programs to include food security, affordable housing, and health prevention initiatives.Footnote 319 Auxiliaries, more so than hospitals, may be well situated to undertake community-based work that looks beyond individual patients to broader community health. As organizations historically led by community members, auxiliaries by their nature are connected to their communities and may more readily collaborate with public health officials and other community organizations.Footnote 320 It will be essential, however, for auxiliaries to leverage the expertise of health care professionals (both in and outside of their related hospital) in identifying, understanding and implementing interventions to address health disparities and their underlying causes. Shifting this responsibility to auxiliaries may also alleviate hospital concerns (and the real possibility) that regional coordination efforts will be perceived as running afoul of anti-trust rules.Footnote 321
ii. Grant Making for Patient Care & Hospital Programs
Auxiliaries could also collaborate with their affiliated hospitals to meet the charity care needs of eligible patients and support hospital educational and research programs. As described in Revenue Ruling 79-358, once a hospital identifies patients with financial need, the exempt auxiliary could make direct payments to the hospital on behalf of such patients.Footnote 322 Alternatively, auxiliaries could partner with the hospital to administer a financial assistance program, including by taking many of the steps now required under Section 501(r) to inform patients about the availability of financial assistance.Footnote 323 While Section 501(r)’s limitation on collection activities was intended to protect patients from unfair business practices, separating a hospital’s collection activities from the processes by which a patient requests and receives financial assistance may provide patients with greater protections. An auxiliary, which has no financial stake in the hospital’s billing operations, and its staff may be better positioned to advocate on behalf of and support patients through the process of seeking financial assistance.
The Service could encourage auxiliaries to engage in this type of grant-making to needy individuals by addressing the apparent incongruence between the 1996 EO CPE text that warns against a successor charity focusing its efforts and program support on its previously exempt hospital and the 2002 Advisory Letter which appears to bless the continued exemption of a narrowly, one-hospital focused auxiliary.Footnote 324 Additionally, to encourage charitable contributions from taxable hospitals to their affiliated exempt auxiliaries, the Centers for Medicare and Medicaid Services should issue guidance reinforcing that such contributions made to facilitate the provision of care to those with financial need would not violate fraud and abuse laws.Footnote 325
Some charitable expenditures and activities could be directly undertaken by an exempt auxiliary, while others could be funded by the auxiliary and carried out by the hospital. In addition to the non-binding guidance already provided in the 2002 Advisory Letter which requires auxiliaries to maintain control over the use of their funds, the Service could provide additional guidance speaking to the “expenditure responsibility”-like reporting expected when a taxable hospital accepts grants to carry out the charitable purposes of an exempt auxiliary.Footnote 326 In addition to receiving reports of the use of their funds, auxiliaries could also be held to higher disclosure standards. Such standards might include a Form 990 schedule akin to Schedule H that would detail the type, form, and value of specific benefits a hospital auxiliary provides to its community.Footnote 327 Further guidance could also clarify under what circumstances an auxiliary may purchase goods or services that are needed to address community health or underserved patient population needs without creating a “direct and substantial private benefit to the proprietary hospital.”Footnote 328
B. Funding for Auxiliary Efforts
As described in Part II.C, exempt auxiliaries may qualify independently for tax-exemption and the benefits that flow from it. As organizations described under I.R.C. Sections 501(c)(3) and 170(c)(2), auxiliaries have the capacity to accept deductible charitable contributions, including the proceeds of a hospital conversion sale, a previously exempt hospital’s charitable endowment, and future charitable gifts from community members and the formerly exempt hospital.Footnote 329 This capacity to accept charitable contributions can allow an auxiliary to build and maintain capital to fund significant investments in programs that address the health of communities and individuals with the greatest need.Footnote 330 In this way, the capital subsidy justification for hospital exemption can be more narrowly deployed to focus on subsidizing purely charitable activities.Footnote 331
i. Building a Solid Footing with Conversion Proceeds
The possibility of establishing (or maintaining) a charitable affiliate for a newly for-profit, taxable hospital is not particularly innovative. During periods of significant hospital and other health care entity conversions, foundations have been formed to receive charitable assets previously held by tax-exempt, nonprofit hospitals.Footnote 332 Such foundations may adopt broader charitable purposes than the health care focus of the original hospitalFootnote 333 and are frequently controlled by a governing board that mirrors or draws from the exempt hospital’s previous board.Footnote 334 Most of these foundations primarily engage in grantmaking.Footnote 335 The Service and state regulators are highly skeptical of foundations that retain too close of a relationship with a for-profit, taxable entity that acquired the previously exempt hospital.Footnote 336 The risk, as perceived by these regulators, is the possibility of impermissible private inurement if a foundation’s grants benefit the for-profit business, or if previous hospital executives or board members hired by the foundation receive excessive compensation.Footnote 337 A foundation formed and funded with the proceeds of a converted hospital that does not receive significant broad public support will be classified as a private foundation rather than a public charity.Footnote 338 As a private foundation, a successor entity classified in this way is subject to strict distribution and other requirements.Footnote 339
Transferring hospital sale proceeds to an exempt, operating auxiliary (or to a supporting organization operated, supervised, and controlled by the auxiliary), could facilitate the localized, community benefit work currently performed by tax-exempt hospitals.Footnote 340 Unlike a grantmaking private foundation, an exempt, operating auxiliary would be engaged in direct charitable activities, community engagement, and fundraising. Auxiliaries have a longstanding history of addressing the service and financial needs of their communities, serving as a bridge between hospitals and the communities they serve, and working in tandem with their affiliated hospitals.Footnote 341 This history and engagement has the potential to mitigate skepticism toward hospitals and the health care system more broadly and to foster philanthropic giving.
ii. Seeking Broad Community Support
To preserve public charity status, successor auxiliaries would need broad sources of funding over time.Footnote 342 Where a hospital holds and plans to transfer an endowment to an auxiliary, to the extent that the hospital when exempt was a publicly supported charity, the auxiliary should be able to accept a gift of the endowment as public support.Footnote 343 Lawmakers could further support auxiliaries in maintaining public charity status by extending the period during which an auxiliary must establish its public support following its acceptance of a large endowment gift.Footnote 344
Through broad-based appeals, an auxiliary can serve as both a conduit and voice for donors who choose to support community health initiatives and assistance for individuals in need. Some donors, who may have been hesitant to support its nonprofit hospitals that appeared undistinguishable from their for-profit counterparts, may be more inclined to support an auxiliary whose sole purpose is providing assistance to those in need and addressing unmet community health needs.Footnote 345 By virtue of their smaller size and likely lower executive salaries, auxiliaries may avoid some of the skepticism that hospitals and their complex systems often face.Footnote 346 At the same time, auxiliaries, like other nonprofit organizations, would need to address gaps in confidence many have in the trustworthiness and transparency of their sectorFootnote 347 and the potential for donors to question the real separation of their charitable efforts from a newly for-profit hospital. To reduce and redress the paternalism and harm of past auxiliary fundraising that cemented social stratifications, auxiliaries could adopt Community-Centric Fundraising practices rooted in racial and economic justice.Footnote 348 At the same time, auxiliaries would need to grapple with the ways in which today’s nonprofit hospitals have blurred boundaries between health care and philanthropy through wealth screening and the differentiation of donor patients from others.Footnote 349 With broad-based financial and in-kind community support, auxiliaries could help realize the democratic and pluralistic justifications for tax exemption – values that may no longer resonate in today’s hospital systems – through initiatives that are important to and valued by the community.Footnote 350
In addition to continuing and expanding public fundraising efforts previously undertaken by a hospital, an auxiliary might also accept charitable contributions from the newly taxable hospital. Taxable hospitals could be encouraged to increase their charitable contributions, and reduce their taxable income, if the percentage of adjusted gross income that can be deducted by a taxable hospital were increased to 100% with respect to contributions restricted for charity care and other specified community benefits.Footnote 351 Consideration would also need to be given to whether a hospital’s donations, and how they are factored into the public support test, would prevent the auxiliary from qualifying as a publicly supported charity.Footnote 352
C. Possible Challenges to the Capacity of Auxiliaries
While recognizing the significant impact exempt auxiliaries could have in their communities and the ways in which centering charitable activities outside of hospitals might address many of the critiques of exempt hospitals, there are significant limitations on the ability of auxiliaries to leverage some of the benefits of tax-exemption currently enjoyed by tax-exempt hospitals. These limitations include the possible loss of access to tax-exempt bond financing and the likely loss of state and local property tax exemption.
i. Capital to Meet the Health Needs of the Underserved
As noted in Part II.B, one of the major benefits of federal tax-exemption for hospitals is access to tax-exempt bond financing. The ability to borrow funds at lower interest rates enables exempt hospitals to invest in their facilities and the technology to provide cutting-edge hospital care without looking to investors for capital.Footnote 353 With the conversion of exempt, nonprofit hospitals to taxable, for-profit hospitals, capital for many projects will be available through investors. It is likely, however, that investors and their for-profit hospitals will focus on projects that generate the greatest profit margins.Footnote 354 This has the potential to leave projects and facilities focused on underserved communities or less-profitable service lines unfunded. When funding is needed for an entirely charitable program or facility (e.g., an outpatient clinic for the uninsured), an auxiliary might step into the shoes of its previously exempt hospital and serve as the borrower. However, strict limitations on private use would significantly limit how a for-profit hospital could use or operate of such facilities, except for narrowly specified charitable purposes. Alternately, policymakers could consider other ways to make capital available for projects focused on underserved communities and less-profitable service lines. One option might include a new structure for reduced-tax bonds available to all health care entities regardless of tax status for certain specified purposes or on the condition of providing access and care to Medicaid or uninsured patients. Alternately, funding for such projects might come from a government-funded or guaranteed construction program structured in the spirit of the Hill-Burton Act.Footnote 355
ii. State and Local Benefits that May Not be Available to Auxiliaries
While exempt auxiliaries could undertake many of the charitable activities and enjoy many of the benefits of exemption currently held by tax-exempt hospitals, certain related benefits would likely be lost. The most substantial is likely the state and local property tax exemption that is available under state law to charitable organizations.Footnote 356 Previously exempt hospitals would likely retain ownership of their facilities and would therefore not qualify for property tax exemption.Footnote 357 Similarly, previously exempt hospitals would likely lose their state income and sales tax exemptions. At the same time, such hospitals would forfeit the ability to obtain certain types of federal research funding and access to lower cost drugs.
D. Centering the Community in Auxiliary Governance and Structures
If auxiliaries are to be centered in the future of charitable work to address health disparities and unmet community needs, the communities served by hospitals need to be centered in the leadership and priorities of those auxiliaries. As described above in Part I, the philanthropists and women’s auxiliaries that founded and supported many early hospitals did so with a sense of religious obligation and because they believed hospitals could provide “uplift and social control” in a rapidly changing time.Footnote 358 We now see the condescension reflected in separating hospitalized children from their families to protect those children from the vagaries of their communities.Footnote 359 We see how auxiliary members and other philanthropists (together with an emerging physician class) secured for themselves a stratified social position by creating institutions where they themselves would not seek care.Footnote 360 This social stratification survived into the twentieth century with middle and upper-class women continuing to lead auxiliaries and serve as representatives of their communities.Footnote 361
A new generation of auxiliaries, potentially encouraged by the statutory changes and regulatory guidance suggested above, should strive to avoid replicating these harmful structures and impact. Instead, auxiliaries should aspire to truly reflect the communities they serve and to promote both stability and opportunity for all.Footnote 362 Inspired by Revenue Ruling 69-545’s suggestion that exempt hospitals need boards made up of “citizens in the community,” auxiliary governing boards should ensure broad representation across a hospital’s full community.Footnote 363 An auxiliary could achieve this by adopting a board structure whereby a certain percentage of board seats are reserved for those representing the communities facing health disparities and unmet needs while also limiting the number of directors with ties to the hospital.Footnote 364 Such guardrails could address the concerns about the risk of impermissible private benefits being provided to or at the direction of hospital insiders.Footnote 365 Board members should also represent the racial, ethnic, socio-economic, national origin, ability/disability status, gender and sexuality diversity of their communities. A more representative board is likely to encourage participation in auxiliary activities by a more diverse group of community members and to facilitate the building of vital trust both within the auxiliary and, by extension, in the hospital.Footnote 366
The possibility of more broadly representative auxiliary boards and membership raises the question of whether auxiliaries – historically lead for decades by volunteer women – will or should remain primarily led by female volunteers. Evolving understandings of gender and gender-roles suggest that if hospital auxiliaries are to thrive, promote community advancement, and have the capacity to address unmet health needs, this model must adjust. The history outlined above demonstrates that women, due to the social and professional restrictions of their times, played central roles in the formation and leadership of hospital philanthropic auxiliaries.Footnote 367 Though women in the United States continue to do a disproportionate share of unpaid family and child-related labor and have not yet reached parity with respect to compensation in paid labor, the vast majority of women between the ages of twenty-five and fifty-four are engaged in paid work.Footnote 368 Accordingly, while anchoring themselves in the community focused work of their predecessors, future auxiliaries will need to rely less on the volunteer efforts of women and more on the collaborative involvement of all community members and professional staff. Carrying out the wide-ranging charitable activities described will require that auxiliaries employ staff with professional expertise in public health, community organizing and fundraising. While many of these professionals are currently employed by hospitals in community outreach and development roles, centering their work in an auxiliary solely dedicated to charitable purposes may further community trust and engagement. At the same time, while nonprofit hospitals have benefitted from the robust administrative structures and expertise of their institutions, new and reimagined auxiliaries may find challenges in building independent and efficient organizations.
As effective auxiliary staffing structures emerge, they may indirectly address one of the most prominent objections to hospital tax-exemption: excess executive compensation. Though beyond the scope of this Article, concerns about nonprofit executive compensation, and specifically about hospital CEO compensation, are longstanding.Footnote 369 Concerns about whether tax-exemption creates a subsidy for the compensation of physician and hospital administrators would likely be resolved when the only compensation paid by exempt auxiliaries is to staff engaged in explicitly charitable work.
Conclusion
As the debate over the propriety of nonprofit hospital tax-exemption continues to simmer, it is essential to explore alternative ways to preserve and strengthen community-based efforts for addressing unmet health needs. The long history of women’s hospital auxiliaries, along with existing guidance on how exempt entities can work alongside newly-taxable hospitals, presents a path forward. By centering the legacy of women’s auxiliaries and integrating new approaches to centering the entirety of communities being served, we see a potential alternative that could facilitate charitable efforts to meet community and individual health needs.
