The Methodist Hospital System: Tax Exemption and Charitable Responsibilities of Not-for-Profit Hospitals

Abstract

In November 1990, the Texas Attorney General filed a lawsuit against The Methodist Hospital System, alleging that it had failed in its duty to provide enough charity care to poor people. The state claimed that the hospital provided significantly less charity care than the hospital reported; it then filed the suit in an effort to require specific performance—that is, to compel the hospital to provide greater amounts of charity care in the future. The case focuses on the amount of charity care provided before the suit, the economic value of the tax exemption provided to the hospital because it is a not-for-profit (NFP) hospital, and the responsibilities of the hospital given the expectations of society. The case also brings into sharp relief the value of having tax-exempt status and the social and political expectations that accompany the exemption. In addition, the case raises ethical questions concerning these issues, as well as issues involving the financial reporting of the entity and management perquisites.

The Sentinel Effect and Financial Reporting Aggressiveness in the Healthcare Industry

“…The differences between not-for-profit and for-profit hospitals manifests in a variety of ways; for example, receiving donations (Krishnan and Schauer 2000;Leone and Van Horn 2005), and stakeholders being more concerned about resources going towards the organization's mission (and thus not-for-profit hospitals are required to disclose program expenses (Quosigk and Forgione 2018)). Further, only not-for-profit hospitals are subject to the scrutiny of providing sufficient charity care to maintain tax-exempt status (Bain et al 2001), particularly when reporting high profits (Jervis Wilkicki 2001; Leone and Van Horn 2005). For-profit healthcare provider's executives can be paid bonuses based solely on financial performance, while not-for-profit executives cannot (Brickley and Van Horn 2002).…”

Do non-profit hospitals provide more charity care when faced with a mandatory minimum standard? Evidence from Texas

“…This concern is evidenced by actions of the IRS, which has begun to aggressively examine NFP healthcare organizations (Bain et al, 2001;Smith and Crabtree, 2006). As a result, in 1985, the Utah Supreme Court revoked Intermountain Health Care's tax-exempt status because of failure to provide an adequate level of community benefits (Maiure et al, 2004).…”