¹ Unrelated Business Income Tax: Hearings Before the Subcomm. on Oversight of the House Comm. on Ways and Means, 100th Cong., 1st Sess. 12 (1987) [hereinafter Unrelated Business Income Tax Hearings] (there are currently 1.2 million exempt organizations, including churches; nonchurch exempt organizations have doubled in last twenty years from 400,000 to 800,000). See also W. WELLFORD & J. GALLAGHER, UNFAIR COMPETITION: THE CHALLENGE TO CHARITABLE TAX EXEMPTION 49-74 (National Assembly 1988).

² E.g., I.R.C. § 1014 (1986); W. WELLFORD & J. GALLAGHER, supra note 1, at 122.

³ See infra notes 74-145 and accompanying text; see also Baldwin, , Legislatures, Agencies Debating Whether Not-For-Profit Hospitals Deserve Their Tax Exempt Status, MOD. HEALTHCARE, May 22, 1987, at 34Google Scholar; Charity Care: Tell the Public, Save Tax Status, HOSPITALS, June 5, 1988, at 42; Financial Success May Invite Local Tax Scrutiny, HOSPITALS, Oct. 5, 1988, at 30; Hyman, & McCarthy, , Property Tax Exemptions: Headed for Extinction?, HEALTH PROGRESS, Dec, 1988, at 32Google Scholar; Iglehart, & White, , Tax Status of Not-For-Profits is Under Increased Scrutiny, HEALTH PROGRESS, July-Aug., 1988, at 14Google Scholar; Palm, , Lawmaker Says Congress Will Review Tax Breaks, MOD. HEALTHCARE, May 27, 1988, at 6Google Scholar; Taylor, , Property Taxation of a Not-For-Profit Hospital: A Case Study, 33 HOSP. & HEALTH SERV. ADMIN. 111 (1988)Google Scholar.

⁴ See, e.g., Beebe, & Harrison, , A Law in Search of a Policy: A History of New York's Real Property Tax Exemption for Nonprofit Organizations, 9 FORDIIAM URB. L.J. 533 (1981)Google Scholar; Bittker, & Rahdert, , The Exemption of Nonprofit Organizations from Federal Income Taxation, 85 YALE L.J. 299 (1976)Google Scholar; Clark, , Does the Nonprofit Form Fit the Hospital Industry? 93 HARV. L. REV. 1416 (1980)Google Scholar; Copeland, & Rudney, , Federal Tax Subsidies for Not-For-Profit Hospitals, 46 TAX NOTES 1559 (1990)Google Scholar; Falcone, & Warren, , The Shadow Price of Pluralism: The Use of Tax Expenditures to Subsidize Hospital Care in the United States, 13 J. HEALTH POL., POL'Y & L. 735 (1988)Google Scholar; Gershon, , Tax Exempt Entities: Achieving and Maintaining Special Status Under the Watchful Eye of the Internal Revenue Service, 16 CUMB. L. REV. 301 (1986)Google Scholar; Herlzinger, & Krasker, , Who Profits from Nonprofits﹜ HARV. BUS. REV., Jan.-Feb. 1987, at 93Google Scholar; Hopkins, & Beckwith, , The Federal Tax Law of Hospitals: Basic Principles and Current Developments, 24 Duo.. L. REV. 691 (1985)Google Scholar; Mancino, , Income Tax Exemption of the Contemporary Nonprofit Hospital, 32 ST. Louis U.L.J. 1015 (1988)Google Scholar; O'Donnell, & Taylor, , The Bounds of Charity: The Current Status of the Hospital Property Tax Exemption, 322 NEW ENG.J. MED. 65 (1990)Google Scholar; Pfister, , A Reevaluation of the Justifications for Property Tax Exemption, 4 PUB. FIN. Q. 431 (1976)Google Scholar; Quigley, & Schmenner, , Property Tax Exemption and Public Policy, 3 PUB. POL'Y 259 (1975)Google Scholar; Schwarz, , Recent Developments in Tax-Exempt Organizations, 19 U.S.F. L. REV. 299 (1985)Google Scholar; Shaller, , Tax Exemption of Charitable Organizations and the Deductibility of Charitable Donations: Dangerous New Tests, 8 BRIDGEPORT L. REV. 77 (1987)Google Scholar; Zelenak, , Serving Two Masters: Commercial Hues and Tax Exempt Organizations, 8 U. PUGET SOUND L. REV. 1 (1984)Google Scholar; Note, The Charitable Exemption from Ad Valorem Taxation — A Proposal for Change, IOTEX. TECH L. REV. 121 (1978); Note, The “Public Purpose” and “Charitable” Tax Exemption in Florida: A Judicial Morass, 19 U. FLA. L. REV. 330 (1966).

⁵ Shaviro, , From Big Mama Rag to National Geographic: The Controversy Regarding Exemptions for Educational Publications, 41 TAX L. REV. 693, 718 (1986)Google Scholar.

⁶ Prior to the 1986 Act, a deduction for interest payments on commercial loans was allowed. This subsidy encouraged citizens to finance purchases through debt and carry a balance on their credit cards. The 1986 Act eliminated this preference, except when the loan was exagainst a private residence. I.R.C. § 163(h)(2)(D) (1986). Thus, home ownership receives a double subsidy — deductibility of interest on the original mortgage and also deductibility of interest on any subsequent home equity loan. Renters receive no such benefit. Another embedded subsidy relates to the allocation of passive losses, pursuant to the 1986 Act. The statute specifically allocates deductions from explorations for oil and gas to the active category, despite its similarity to all other activities in the passive category. I.R.C. § 469(c)(3)(A) (1986).

⁷ For example, allowing a deduction for interest on debt gives companies an incentive to raise money through debt rather than equity. Similarly, consumers may be more willing to carry balances on their credit cards if they can deduct the interest attributable to such conduct. Deductions for home ownership may make it look more attractive than renting. See supra note 6.

⁸ See, e.g., THE ECONOMICS OF NONPROFIT INSTITUTIONS: STUDIES IN STRUCTURE AND ECONOMICS (S. Rose-Ackerman, ed. 1986); IN SICKNESS AND IN HEALTH: THIS MISSION OF VOLUNTARY HEALTH CARE INSTITUTIONS (J. Seay & B. Vladeck, eds. 1988) [hereinafter IN SICKNESS AND IN HEALTH].

⁹ Jimmy Swaggert Ministries v. Board of Equalization, 110 S. Ct. 688 (1990); Texas Monthly v. Bullock, 109 S. Ct. 890 (1989); Bob Jones U. v. United States, 461 U.S. 547 (1983); Walz v. Tax Comm'n, 397 U.S. 664 (1970); Big Mama Rag, Inc. v. United States, 631 F.2d 1030 (D.C. Cir. 1980).

¹⁰ Simon v. Eastern Ky. Welfare Rts. Org., 426 U.S. 26 (1976), was decided on standing grounds. Thus, the boundaries of extending tax exemption to hospitals has yet to be addressed by the Supreme Court.

¹¹ CCH, 1990 U.S. MASTER TAX GUIDE 33.

¹² Contributions to charitable organizations are deductible for several tax purposes: federal income, I.R.C. §§ 170(a), 501(a) (1988); estate, I.R.C. §§ 642(c), 2055(a), 2106 (1988); and gift, I.R.C. § 2522 (1988). Funding in the nonprofit sector has changed in recent years. In 1946, tax-exempts obtained approximately 59% of their support from business receipts, interest, dividends, rents, and the like. Unrelated Business Income Tax Hearings, supra note 1, at 12. By 1983, that figure had grown to 78%. Id.

Hospitals rarely solicit or receive contributions to cover operating costs or provide indigent care, in part because of the changes in their character. IN SICKNESS AND IN HEALTH, supra note 8, at 184, 191-92. For the period 1962-1966, philanthropy accounted for only 2.3% of total hospital revenues. Hansmann, , The Role of Nonprofit Enterprise, 89 Yale LJ. 835, 866 (1980)Google Scholar.

¹³ I.R.C. § 4253(h) (1988).

¹⁴ I.R.C. §§ 3301, 3306(c)(8) (1988).

¹⁵ 15 U.S.C. § 13 (1982). See also infra note 187.

¹⁶ I.R.C. §§ 103(a), 145 (1988).

¹⁷ The exemptions from property tax and income tax did not always go together, even for charitable organizations. I.R.C. § 501(c) actually contains multiple subsections, involving different types of organizations which receive varying levels of exemption from taxation. One may of course have exemption from federal taxation without receiving a state or local exemption and vice-versa. For one attempt to institute such an arrangement, see Utah County v. Intermountain Health Care, Inc., 709 P.2d 265 (Ut. 1985), described infra at text accompanying notes 79-115.

¹⁸ W. WELLFORD & J. GALLAGHER, supra note 1, at 122. See also Gallagher, , The Nonprofit Tax Climate in the 50 States, Assoc. MGMT., Feb., 1988, at 29Google Scholar.

¹⁹ W. WELLFORD & J. GALLAGHER, supra note 1, at 122.

²⁰ Falcone & Warren, supra note 4, at 735.

²¹ Baldwin, supra note 3, at 34.

²² See supra note 4.

²³ Hyman & McCarthy, supra note 3, at 32.

²⁴ See infra notes 50-53, 303-18 and accompanying text; see also Gershon, supra note 4, at 301; Hopkins & Beckwith, supra note 4, at 691; Mancino, supra note 4, at 1045.

²⁵ AMERICAN HOSP. ASS'N, 1987 HOSPITAL STATISTICS (Table 10A); Chang, & Tuckman, , The Profits of Not-For-Profit Hospitals, 13 J. HEALTH POL., POL'Y & L. 547 (1988)Google Scholar (1985 data).

²⁶ See AMERICAN HOSP. ASS'N, supra note 25; Chang & Tuckman, supra note 25.

²⁷ Herlzinger & Krasker, supra note 3, at 93.

²⁸ See infra text accompanying notes 46-64.

²⁹ See infra text accompanying notes 74-145, 173-96.

³⁰ See infra text accompanying notes 206-322.

³¹ This is a restatement of one of the basic principles of economics: if people are willing to voluntarily exchange, each must think himself the better off for doing so, barring the usual caveats such as fraud, incompetence and duress.

³² “Dumping” means the transfer of a patient to another institution or refusal to care for a patient for economic reasons. See infra note 274.

³³ The hospital is obligated to provide at least emergency care in order to maintain its tax exemption as a charitable organization. Rev. Rul. 69-545, 1969-2 C.B. 117. Physicians are under less of a legal constraint, but most physicians believe the nature of the profession obligates them to treat those who are in need. See Emanuel, , Do Physicians Have an Obligation to Treat Patients with AIDS? 318 NEW ENG.J. MED. 1686 (1988)Google Scholar; Pellegrino, , Altruism, Self-interest and Medical Ethics, 258 J. A.M.A. 1939 (1987)Google Scholar.

³⁴ See infra note 217 and accompanying text.

³⁵ More specifically, market failure tends to result in the adoption of the nonprofit form. Arrow, , Uncertainty and the Welfare Economics of Medical Care, 53 AM. ECON. REV. 941, 947 (1963)Google Scholar; Hansmann, supra note 12, at 845. Encouragement of the nonprofit form typically takes place through exemption.

³⁶ Arrow, supra note 35, at 947.

³⁷ H. LUFT, POVERTY AND HEALTH: ECONOMIC CAUSES AND CONSEQUENCES OF HEALTH PROBLEMS (1978); BROOKINGS INST., HEALTH AND THE WAR ON POVERTY: A TEN-YEAR APPRAISAL (K. David & C. Schoen eds., 1978); Mundinger, , Health Service Funding Cuts and the Declining Health of the Poor, 313 NEW ENG.J. MED. 44 (1985)Google Scholar. This, of course, follows from the basic supply and demand curves. If the demand is high, one may command a higher price. Practical examples include gas and water, which command a higher price in the middle of the desert, because there are no adequate substitutes. Thus, one can extract a much higher price, if so inclined, from someone who is bleeding to death and needs an operation than from an elective surgery patient who can substitute easily if physician overreaching takes place.

³⁸ Arrow, supra note 35, at 941. Hansmann similarly suggested that clients turn to nonprofits when confronted with market failure, such as inability to accurately evaluate the goods or services they are seeking. Hansmann, supra note 12, at 862. These asymmetries include uncertainty about the quality of service, lack of ability to judge the service that is actually rendered and high costs associated with uninformed choice. Id. at 862-63.

Curiously, however, physicians who play a far greater role in such matters are not generally organized as nonprofit providers. Indeed, the corporate practice of medicine doctrine (although less viable than previously) restrains this choice of organizational form. Perhaps the reliance here is on notions of professionalism, rather than organizational form. For examples of professionalism in action, see supra note 33.

³⁹ Brock, & Buchanan, , The Profit Motive in Medicine, 12 J. MED. PHIL. 18 (1987)Google Scholar.

⁴⁰ Nonprofit hospitals are close enough to their for-profit brethren that: 1) The Utah Supreme Court refused an exemption for two Intermountain Health Care hospitals. Utah County v. Intermountain Health Care, Inc., 709 P.2d 265 (Ut. 1985). 2) Many local taxing bodies decided to try and tax their hospitals. See infra text accompanying notes 116-44. 3) There is a booming industry in academic publications about the character of the hospital industry. See supra note 4.

⁴¹ Approximately 81 hospitals closed in 1988. News at Deadline, HOSPITALS, Feb. 5, 1989, at 14. However, only 41 of these were nonprofit hospitals. Id. The tax exemption probably provides a cushion which keeps marginal institutions open longer than they otherwise would be. The notion of a perpetual charitable trust is an important one for nonprofit hospitals — they are in the market for the duration. Hyman & McCarthy, supra note 3, at 36. For-profits on the other hand, are always calculating whether or not it is worth staying in the market — that is, whether they can get a higher return elsewhere. Id. See also W. WELLFORD & J. GALLAGHER, supra note 1, at 17-18.

On the other hand, no one can long provide a money-losing service, regardless of intentions. The subsidy must come from somewhere or the service will close. See infra text accompanying notes 253-56.

⁴² See supra note 40, infra note 61.

⁴³ See infra notes 234-318 and accompanying text.

⁴⁴ Ezra 7:24. See also Genesis 47:26 “Joseph made it a law over the land of Egypt unto this day, that Pharoah should have the fifth part; except the land of the priests only, which became not Pharoah's.“

⁴⁵ Commissioners of Income Tax v. Pemsel, App. Cas. 531, 583 (1891). Almost three hundred years earlier, the statute of charitable uses recognized the following as charitable purposes:

43 Eliz., ch. 4 (1601).

⁴⁶ w. WELLFORD & J. GALLAGHER, supra note 1, at 120.

⁴⁷ Id.

⁴⁸ Id.

⁴⁹ Id. Some analysts have divided the requirements for exemption into categories known as organizational (how the entity is set up) and operational (what it does). Others have divided the requirements into the categories of structure (how the entity is set up), process (how it decides what to do) and outcome (what it provides). Each of these factors may be significant in considering the differences between for-profits and nonprofit entities. See AMERICAN HOSP. ASS'N, COMMUNITY BENEFIT AND TAX-EXEMPT STATUS: A SELF-ASSESSMENT GUIDE FOR HOSPITALS (1988).

⁵⁰ Treas. Reg. § 1.501(c)(3)-l(a)(l) (1990).

⁵¹ See infra notes 52, 172.

⁵² Gershon, supra note 4, at 302; Hopkins & Beckwith, supra note 4, at 701-04; Mancino, supra note 4, at 1045.

⁵³ See infra notes 299-301.

⁵⁴ W. WELLFORD & J. GALLAGHER, supra note 1, at 117-51. See also Gallagher, supra note 18, at 29.

⁵⁵ \v. WELLFORD & J. GALLAGHER, supra note 1, at 117-51.

⁵⁶ A charitable purpose is “almost any thing that tends to promote the well-doing and well-being of social man.” Ould v. Washington Hosp. for Foundlings, 95 U.S. 303, 311 (1877). That such charitable purposes are not necessarily fixed was noted by the D.C. Circuit Court of Appeals:

Eastern Ky. Welfare Rts. Org. v. Simon, 506 F.2d 1278, 1287-88 (D.C. Cir. 1974), vacated, 426 U.S. 26 (1976).

Another fairly typical example is Todd v. Citizens’ Gas Co. of Indianapolis, 46 F.2d 855 (7th Cir. 1931), where Judge Wilkerson wrote:

Id. at 865. The case held that the establishment and operation of a gas plant for providing light, heat and power to a municipality and its inhabitants was a proper object of a public charitable trust. Few people would go so far today — there are public utilities, but they still pay taxes.

Just as the tide advances, it also recedes. Things that once were charitable can become no longer so. See infra note 92.

⁵⁷ Eastern Ky. Welfare Rts. Org. v. Schultz, 370 F. Supp. 325 (D.D.C. 1973), rev'd, Eastern Ky. Welfare Rights Org. v. Simon, 506 F.2d 1278 (D.C. Cir. 1974), vacated, 426 U.S. 26 (1976).

⁵⁸ See infra notes 65-145 and accompanying text.

⁵⁹ See infra notes 146-96 and accompanying text.

⁶⁰ See infra notes 197-203 and accompanying text.

⁶¹ Hansmann, supra note 12. Hansmann organized nonprofits into four classes, depending on the source of their income and the manner in which control was exercised. Id. at 842. A donative nonprofit receives most of its income as grants or donations, while a commercial nonprofit receives income by charging for its services. Id. at 840-41. A mutual nonprofit is controlled by patrons, while an entrepreneurial nonprofit is usually controlled by a self-perpetuating board of directors. Id. at 841. Concrete examples are: donative/mutual = Audobon Society; donative/entrepreneurial = an art museum; commercial/mutual = American Automobile Association; commercial/entrepreneurial = hospitals, Educational Testing Service. Id. at 842. Hansmann cautioned that these divisions were not absolute and that there was often a middle ground. However, hospitals are clearly commercial/entrepreneurial, the closest class to a for-profit provider. Id. at 866. Charging fees has never been held to destroy an exemption, but it certainly takes an organization farther from its charitable roots than it would otherwise be. W. WELLFORD & J. GALLAGHER, supra note 1, at 99, 100, 103. Exemption challenges have not been limited to hospitals. The Boston Symphony Orchestra once lost its exemption because a restrictive ticket policy resulted in an insufficient number of people benefitting from its performances. Boston Symphony Orchestra v. Board of Assessors, 294 Mass. 248, 1 N.E.2d 6 (1936).

⁶² Hansmann, supra note 12, at 868.

⁶³ The introduction of the prospective payment system in 1983 effectively shifted the incentives that hospitals faced, so that the more efficient they were, the greater their return would be (and the less efficient they were, the greater their losses would be). Social Security Amendments, Pub. L. No. 98-21 § 601, 97 Stat. 149 (codified as amended at 42 U.S.C. § 1395 (1983)).

For an overview of articles about the effects of the prospective payment system, see Hyman, & Williamson, , Fraud and Abuse: Regulatory Alternatives in a “Competitive” Health Care Era, 19 Loy. U. Chi. LJ. 1133, 1136-43 (1988)Google Scholar. Rhetoric about competition and cost-containment through entrepreneurial behavior was frequent and lively when the prospective payment system was introduced. Id. See also infra note 308.

⁶⁴ The Justice Department recently attempted to stop two mergers, in Rockford, Illinois and Roanoke, Virginia, of nonprofit hospitals, using the Sherman Act and the Clayton Act. Do NonProfit Hospital Mergers Violate Antitrust Laws? Round 2, 6 HEALTHSPAN 24 (1989). Successful in the former and unsuccessful in the latter (at least at trial), the government has placed the hospital industry on notice that it intends to enforce the antitrust rules against hospitals like any other industry. Id. Both the Justice Department and the federal district court judge in Rockford maintain that non-profit status does not operate as a restraint on anticompetitive behavior. Id. See also Kopit, & McCann, , Toward a Definitive Antitrust Standard for NonProfit Hospital Mergers, 13 J. HEALTH POL., POL'Y & L. 635 (1988)Google Scholar.

⁶⁵ For $20, the Universal Life Church will ordain you as a minister through the mail. You might remember that the Church became famous during the Viet Nam [sic] War when ordination provided a divinity exemption from the draft. Now that the war is over, the Church has found a new market by ordaining taxpayers who can then claim that they are holding their homes as church property. For a modest $20 investment, you earn the right to argue with the assessor over whether your home is indeed a church. Prof. R. Pomp, Testimony Before the State Finance Comm. Subcomm. on Tax-Exempt Property (Nov. 21, 1977), reprinted in CONN. GREATER HARTFORD CHAMBER OF COMMERCE, PROPERTY TAX EXEMPTIONS FOR NON-PROFIT INSTITUTIONS: PROBLEMS AND PROPOSALS I (1979).

⁶⁶ Texas Monthly v. Bullock, 109 S. Ct. 890 (1989) (Free Exercise, Speech and Establishment Clauses); Bob Jones U. v. United States, 461 U.S. 574 (1983) (Free Exercise Clause); Walz v. Tax Comm'n, 397 U.S. 664 (1970) (Establishment Clause); Big Mama Rag, Inc. v. United States, 631 F.2d 1030 (D.C. Cir. 1980) (Free Speech Clause).

Texas Monthly is particularly interesting because it sets the Free Exercise Clause in opposition to the Establishment Clause of the first amendment in the context of a tax exemption statute. Texas law provided that “periodicals … that consist wholly of writing promulgating the teachings of (a religious faith) … are exempted from the state sales tax. TEX. CODE ANN. § 151.312 (Vernon 1986). The Supreme Court mustered six votes (with three opinions) to strike the law as violating the Establishment Clause because the subsidy was limited to publications advancing the tenets of a religious faith.

Justice Scalia, in a dissent joined by Justices Kennedy and Rehnquist, noted that the majority opinion authored by Justice Brennan would “completely block off the already narrow ‘channel between the Scylla [of what the Free Exercise Clause demands] and the Charybdis [of what the Establishment Clause forbids] through which any state or federal action must pass in order to survive constitutional scrutiny.’ “ Texas Monthly, 109 S. Ct. at 914 (Scalia, J., dissenting) (quoting Thomas v. Review Bd. of the Ind. Employment Sec. Div., 450 U.S. 707, 721 (1980) (Rehnquist, J., dissenting). Navigating this narrow channel will only get more difficult. See generally McConnell, , Making Peace Between the Religion Clauses, 33 U. CHI. L. SCH. REC. 6 (1987)Google Scholar. But see Jimmy Swaggert Ministries v. Board of Equalization, 110 S. Ct. 688 (1990), where a unanimous Court concluded that a flat tax on the sale of all personal property, including religious items, was consistent with both the Free Exercise and Establishment Clauses.

⁶⁷ Bob Jones U., 461 U.S. at 574.

⁶⁸ Id. at 611 (Powell, J., concurring) (quoting Kurtz, Difficult Definitional Problems in Tax Administration: Religion and Race, 23 CATH. LAW. 601 (1978)).

⁶⁹ Bob Jones U., 461 U.S. at 591-92 (footnote omitted).

⁷⁰ Id. at 592.

⁷¹ Id. at 608-09 (Powell, J., concurring).

⁷² Id. at 609-10 (Powell, J., concurring). The last sentence of this quote is footnoted, and the footnote contains a long list of organizations with clearly incompatible purposes. Justice Powell insightfully notes:

Id. What one means by “undeserving” takes on a new meaning when faced with these difficulties.

⁷³ Commissioner of Internal Revenue v. Duberstein, 363 U.S. 278 (1960).

⁷⁴ Harvard Community Health Plan, Inc. v. Board of Assessors of Cambridge, 384 Mass. 536, 427 N.E.2d 1159 (1981) (non-profit HMO's exempt status upheld); Children's Hosp. Med. Center v. Board of Assessors of Boston, 353 Mass. 35, 227 N.E.2d 908 (1967) (laundry operated by five local hospitals for their own use held to be an exempt use although preexisting commercial laundries were available).

⁷⁵ In re Northeast Wash. County Community Health Center, 148 Vt. 113, 530 A.2d 558 (1987) (status strictly construed). See also Bromberg, , The Charitable Hospital, 20 CATH. U.L. REV. 237, 254-56 (1970)Google Scholar (provides an extensive list of physician-controlled hospitals where inurement was an issue and exempt status was questioned).

⁷⁶ “It is well settled that the promotion of health is a charitable purpose.” A. SCOTT, THE LAW OF TRUSTS 368, 372 (4th ed. 1989). See also G. BOGERT, THE LAWS OF TRUSTS AND TRUSTEES § 374 (2d ed. 1977).

⁷⁷ The harshest critics of medicine argue that not only has it not improved people's lives, it has actually recklessly endangered them. See generally I. ILICH, MEDICAL NEMESIS: THE EXPROPRIATION OF HEALTH (1976).

⁷⁸ C. Eliot, The Exemption from Taxation, 1874 (paper delivered to the Commissioners of the Commonwealth of Massachusetts), reprinted in ELIOT, CHARLES W., THE MAN AND HIS BELIEFS 667, 675Google Scholar (W. Nielson ed. 1926), reprinted in part in Bittker & Rahdert, supra note 4, at 332.

⁷⁹ 709 P.2d 265 (Ut. 1985).

⁸⁰ Id. at 267.

⁸¹ Id.

⁸² Id.

⁸³ Id. at 266.

⁸⁴ Id.

⁸⁵ Id. at 278-79. However, the court ordered that the ruling be applied prospectively to “avoid the otherwise unreasonable burden” that might be placed on Intermountain Health Care. Id. at 279.

⁸⁶ Id. at 267.

⁸⁷ Id. at 270-72.

⁸⁸ Id. at 270.

⁸⁹ The opinion quotes extensively from P. STARR, THE SOCIAL TRANSFORMATION OF AMERICAN MEDICINE (1982). See also R. STEVENS, IN SICKNESS AND IN WEALTH: AMERICAN HOSPITALS IN THE TWENTIETH CENTURY (1989); D. ROSNER, A ONCE CHARITABLE ENTERPRISE: HOSPITALS AND HEALTH CARE IN BROOKLYN AND NEW YORK, 1885-1915 (1986).

⁹⁰ P. STARR, supra note 89.

⁹² Changes in the environment do not necessarily mean that an exemption is required, even if the organization continues to do “good work.” All proponents of the modern hospital's exemption seem to miss this point. Fixing up the roads used to be a charitable enterprise, but few people would advocate giving a paving contractor a tax exemption. See supra note 45 (repair of highways a charitable purpose at one time).

⁹³ Intermountain, 709 P.2d at 274, 276, 277.

⁹⁴ Id. at 274.

⁹⁵ Id.

⁹⁶ Id. at 276.

⁹⁷ See infra notes 293-97 and accompanying text.

⁹⁸ Intermountain, 709 P.2d at 276, 277.

⁹⁹ Id.

¹⁰⁰ See infra notes 293-97 and accompanying text.

¹⁰¹ Intermountain, 709 P.2d at 269. The “hedging” comes when the court notes that all such decisions are fact-sensitive and that the six articulated factors are “not all of equal significance, nor must an institution always qualify under all six before it will be eligible for an exemption.” Id. at 270. The court provides no further guidance, causing the chaos described infra at the text accompanying notes 131-34.

¹⁰² Intermountain, 709 P.2d at 278.

¹⁰³ Id.

¹⁰⁴ Id. at 273-74.

¹⁰⁵ Id. at 277.

¹⁰⁶ Id. at 279-303.

¹⁰⁷ Id. at 279.

¹⁰⁸ Id. at 294.

¹⁰⁹ Yorgason v. County Bd. of Equalization, 714 P.2d 653 (Ut. 1986). In fact, Justice Stewart (who dissented in Intermountain) dissented in Yorgason because he could not reconcile the result with that reached in Intermountain, and felt bound by the precedent.

¹¹⁰ Id. at 655.

¹¹¹ Id.

¹¹² Id. at 656.

¹¹³ See infra text accompanying notes 131-34.

¹¹⁴ Hyman & McCarthy, supra note 3, at 33.

¹¹⁵ Id.

¹¹⁶ See Hyman & McCarthy, supra note 3. 5^ also supra note 109.

¹¹⁷ Hyman & McCarthy, supra note 3, at 33; Taylor, supra note 3, at 111.

¹¹⁸ Hyman & McCarthy, supra note 3, at 33.

¹¹⁹ Id.

¹²⁰ Id.

¹²¹ Id.

¹²² id.

¹²³ Greene, Pittsburgh Hospital Wins Key Tax Ruling, MOD. HEALTHCARE, Apr. 14, 1989, at 4.

¹²⁴ Id. See also Greene, Three Pennsylvania Hospitals Lose Their Tax Exemptions, MOD. HEALTHCARE, Dec. 16, 1988, at 6; Swasy, Challenge to Erie Hospital's Tax Status Gains Attention of Cash-Poor U.S. Cities, Wall St. J., Feb. 16, 1990, § A, at 5A.

¹²⁵ 71 Op. Atty. Gen. Cal. 106 (1988).

¹²⁶ Callaway Community Hosp. Ass'n v. Craighead, 759 S.W.2d 253 (Mo. Ct. App. 1988).

¹²⁷ Id. at 256.

¹²⁸ Hyman & McCarthy, supra note 3, at 33.

¹²⁹ Id.

¹³⁰ Id.

¹³¹ Id. at 34.

¹³² Id.

¹³³ Id.

¹³⁴ Id.

¹³⁵ Id. at 35. See also infra note 145 and text accompanying note 217.

¹³⁶ Unrelated Business Income Tax Hearings, supra note 1.

¹³⁷ See infra notes 179-82.

¹³⁸ Palm, supra note 3, at 6. See also supra note 3.

¹³⁹ Hyman & McCarthy, supra note 3, at 33.

¹⁴⁰ Id.

¹⁴¹ Id.

¹⁴² Id.

¹⁴³ Id.

¹⁴⁴ Id.

¹⁴⁵ Id. However, we should keep in mind that if charity is going to be our test for charitability, there are very few institutions that will qualify — and determining which ones do qualify will require frequent auditing and substantial monitoring costs.

¹⁴⁶ Id.

¹⁴⁷ Commissioner v. Brown, 380 U.S. 563, 565 (1965) (quoting H.R. REP. NO. 2319, 81st Cong., 2d Sess. 38-39). See also Moore, and Dohan, , Sales, Churches and Monkeyshines, 11 TAX L. REV. 87 (1956)Google Scholar.

¹⁴⁸ W. WELLFORD & J. GALLAGHER, supra note 1, at 119-20. For an account of the federal tax treatment of charitable institutions see infra text accompanying notes 149-82.

¹⁴⁹ D. BOUTWELL, A MANUAL OF THE DIRECT AND EXCISE TAX SYSTEM OF THE UNITED STATES 275 (1863) (Decision 110) (“The income of literary, scientific, or other charitable institution, in the hands of the trustees or others, is not subject to income tax.“).

¹⁵⁰ Revenue Act of 1894, ch. 349, § 32, 28 Stat. 556 (imposed the tax); Pollock v. Farmers’ Loan & Trust Co., 158 U.S. 601 (1895) (declared the tax unconstitutional). Subsequent tax statutes continued an uninterrupted tradition of exemption for charitable organizations. Act of Oct. 3, 1913, Ch. 16 § II (G)(a), 38 Stat. 114, 172-77; Internal Revenue Code of 1939, Ch. 1 § 101, 53 Stat. 33; Internal Revenue Code of 1954, Ch. 1, § 501 (c)(3), Pub. L. No. 379, 68A Stat. 163.

¹⁵¹ Corporation Excise Tax of 1909, ch. 6, § 38, 36 Stat. 112.

¹⁵² 44 CONG. REC. 4,151 (1909).

¹⁵³ Id.

¹⁵⁴ Corporation Excise Tax of 1909, ch. 6, § 38, 36 Stat. 112, 113.

¹⁵⁵ 44 CONG. REC. 4,154-55 (1909).

¹⁵⁶ The provision requires that an entity provide that “no part of the net income of [the entity will inure] to the benefit of any private stockholder or individual.” Corporation Excise Tax of 1909, ch. 6, § 38, 36 Stat. 112-13.

¹⁵⁷ Revenue Act of 1916, ch. 463, § 11(a) Twelfth, 39 Stat. 767.

¹⁵⁸ W. WELLFORD & J. GALLAGHER, supra note 1, at 79.

¹⁵⁹ Treas. Reg. § 45, art. 517 (1918), O.D. 953, 4 C.B. 261 (1921).

¹⁶⁰ Trinidad v. Orden de Predicadores, 263 U.S. 578 (1924). The clause “recognizes that a corporation may be organized and operated exclusively for religious, charitable, scientific or educational purposes, and yet have a net income. Next, it says nothing about the source of the income but makes the destination the ultimate test of exemption.” Id. at 581.

¹⁶¹ Roche's Beach v. Comm'r of Internal Revenue, 96 F.2d 776, 778 (2d Cir. 1938).

¹⁶² Gen. Couns. Mem. 20,853, 1938-2 C.B. 166.

¹⁶³ Gen. Couns. Mem. 23,063, 1942-1 C.B. 103.

¹⁶⁴ Hearings Before the House Ways and Means Coram, on Revenue Revision of 1942, 77th Cong., 2d Sess. 89 (1942).

¹⁶⁵ Revenue Act of 1943, Pub. L. No. 235 § 117, 58 Stat. 2 1 , 36-37 (codified at I.R.C. § 54(f) (1939)).

¹⁶⁶ Hearings Before the House Ways and Means Comm. on Proposed Revisions of the Internal Revenue Code, 80th Cong., 1st Sess. 1,894-95 (part 4), 3,396-542 (part 5) (1947) [hereinafter 1947 Hearings].

¹⁶⁷ Id. at 3,525 (part 5) (testimony of John Gerdes).

¹⁶⁸ C.F. Mueller Co. v. Comm'r of Internal Revenue, 190 F.2d 120 (3d Cir. 1951).

¹⁶⁹ Hearings Before the House Ways and Means Comm. on Revenue Revision of 1950, 81st Cong., 2nd Sess. 579-80 (statement of Rep. John D. Dingell, Sr.). Interestingly, at the 1947 Hearings, even the representative of New York University conceded that there was a problem with unfair competition. 7947 Hearings, supra note 166, at 3527 (part 5) (testimony of John Gerdes).

¹⁷⁰ I.R.C. § 513(a) (1986).

¹⁷¹ The present Unrelated Business Income Tax provisions are found at I.R.C. §§ 510- 14. (1986).

¹⁷² The definition of relatedness was an issue when the Unrelated Business Income Tax provisions were originally added to the tax code. “It is not possible to define in the bill exactly every case that is going to be covered. We have drawn it so that there is a certain amount of discretion for the determination of questions of fact as to whether or not a certain matter comes within the purview of the bill.” 96 Cong. Rec. 9,368 (1950) (statement of Rep. Lynch). The Treasury validated this approach most recently in 1987. Unrelated Business Income Tax Hearings, supra note 1, at 38 (statement of O. Donald Chapton, Deputy Ass't Sec'y (Tax Policy), Treasury Dept).

¹⁷³ See infra notes 178, 180.

¹⁷⁴ See infra notes 177-78, 180.

¹⁷⁵ Captive referrals are a frequent complaint by competitors of nonprofit hospitals. See Unrelated Business Income Tax Hearings, supra note 1, at 273, 280 (Nat'l Fed'n of Independent Bus.).

¹⁷⁶ Key Enters, of Del., Inc. v. Venice Hosp., 703 F. Supp. 1513 (M.D. Fla. 1989). In Venice Hospital, the plaintiff purchased a one-half interest in a durable medical equipment (DME) supplier. The hospital encouraged their own patients and home health nurses to use their DME supplier, but honored requests for other suppliers. A competing DME supplier sued under Sherman Act sections 1 and 2 and for tortious interference with a business relationship. The plaintiff won a verdict which when tripled came to approximately $2.3 million. The verdict was eventually set aside by the judge, who granted judgment notwithstanding the verdict.

¹⁷⁷ Unrelated Business Income Tax Hearings, supra note 1, at 919-26 (Am. Hosp. Ass'n); Unrelated Business Income Tax Hearings, supra note 1, at 951-53 (United Hosp. Fund).

¹⁷⁸ The hostility is apparent in t h e many submissions from small for-profit providers. See, e.g., Unrelated Business Income Tax Hearings, supra note 1, at 809 (Health Indus. Distributors Ass'n); Unrelated Business Income Tax Hearings, supra note 1, at 276 (Nat'l Fed'n of Independent Bus.); Unrelated Business Income Tax Hearings, supra note 1, at 793 (Nat'l Hearing Aid Soc'y); Unrelated Business Income Tax Hearings, supra note 1, at 864-71 (Small Bus. Against Hosp. Unfair Competition).

¹⁷⁹ W. WELLFORD & J. GALLAGHER, supra note 1; Copeland & Rudney, , Business Income of Nonprofits and Competitive Advantage, 33 TAX NOTES 747 (1986)Google Scholar; Rose-Ackerman, , Unfair Competition and Corporate Income Taxation, 34 STAN. L. REV. 1017 (1982)Google Scholar. See supra note 178.

¹⁸⁰ Unrelated Business Income Tax Hearings, supra note 1, at 217, 231 (Bus. Coalition for Fair Competition); Unrelated Business Income Tax Hearings, supra note 1, at 346-47 (U.S. Chamber of Commerce); Unrelated Business Income Tax Hearings, supra note 1, at 276 (Nat'l Fed'n of Independent Bus.); Unrelated Business Income Tax Hearings, supra note 1, at 98 (Small Bus. Ass'n).

¹⁸¹ Unrelated Business Income Tax Hearings, supra note 1, at 270 (Nat'l Fed'n of Independent Bus.).

¹⁸² Unrelated Business Income Tax Hearings, supra note 1, at 216, 231 (Bus. Coalition for Fair Competition). See also Copeland & Rudney, supra note 179, at 747; Unrelated Business Income Tax Hearings, supra note 1, at 271, 278 (Nat'l Fed'n of Independent Bus.); Unrelated Business Income Tax Hearings, supra note 1, at 89, 96 (testimony of Frank S. Swain, Chief Counsel for Advocacy, U.S. Small Bus. Admin.).

¹⁸³ Unrelated Business Income Tax Hearings, supra note 1, at 214 (Bus. Coalition for Fair Competition); Unrelated Business Income Tax Hearings, supra note 1, at 864-71 (Nat'l Ass'n of Small Bus. Against Hosp. Unfair Competition); Unrelated Business Income Tax Hearings, supra note 1, at 270 (Nat'l Fed'n of Independent Bus.); Unrelated Business Income Tax Hearings, supra note 1, at 327 (U.S. Chamber of Commerce); Bromley, & Clark, , Congress Looks at Overhaul of Unrelated Business Income Tax, 20 HOSP. L. 169, 171-72 (1987)Google Scholar.

¹⁸⁴ OFFICE OF THE CHIEF COUNSEL FOR ADVOCACY, U.S. SMALL BUS. ADMIN., UNFAIR COMPETITION BY NONPROFIT ORGANIZATIONS WITH SMALL BUSINESS; AN ISSUE FOR THE 1980's (3d ed. 1984). See also Unrelated Business Income Tax Hearings, supra note 1, at 89, 96 (testimony of Frank S. Swain, Chief Counsel for Advocacy, U.S. Small Bus. Admin.).

¹⁸⁵ For example, for-profits can deduct reasonable business expenses such as salary. I.R.C. § 162(a)(1) (1986). Such deductions can virtually eliminate the corporate level income tax for a closely held corporation if artfully done. Amortization of the capital assets is another benefit. I.R.C. § 167(a)(1) (1986). The non-profit has no need of such things because it does not pay taxes, but if properly planned, a for-profit business can minimize its tax burden as well.

¹⁸⁶ Reich, , Of Markets and Myths, 83 COMMENTARY 38 (1987).Google Scholar

¹⁸⁷ Some have argued that there is no such thing as unfair competition. See Bittker & Rahdert, supra note 4, at 299. Others have been less persuaded. See Copeland & Rudney, supra note 179, at 747; Rose-Ackerman, supra note 179, at 1024.

If the literature on predatory pricing is any guide, such things happen far less frequently than they are complained of. See L. AREEDA, ANTITRUST ANALYSIS: PROBLEMS, TEXTS, CASES 528-98 (4th ed. 1988). The incentive for a hospital to price below its marginal cost is minimal, unless it hopes to close the market after the departure of the present competitors. If the marginal cost is lower because of the tax subsidy, there is a genuine problem, but if not, the issue is more mixed.

However, it is clear that hospitals can sometimes obtain things at a cost lower than “wholesale” and thus are able to sell such things below “retail.” This advantage is the result of price discriminatory sales to non-profit enterprises by their suppliers. These sales do not run afoul of the Robinson-Patman Act, 15 U.S.C. § 13(a) (amending § 2 of the Clayton Act). The Nonprofit Institutions Act, 15 U.S.C. § 13(c) (1988), exempts from the application of Robinson-Patman the “purchase of their supplies for their own use by hospitals and charitable institutions not operated for profit.”

What counts as “for their own use” is important in deciding if “unfair competition” has taken place. One example of such conduct was Abbott Laboratories v. Portland Retail Druggists Ass'n., Inc., 425 U.S. 1 (1976). This case was what would now be called an “unfair competition” case, although it came to court in another guise. The case involved the sale of drugs obtained at discount to a variety of classes of users. The Supreme Court determined that not all of the sales were to individuals who fell within the description of the hospital's “own use.” Id. For complaints about this conduct, even limited to “own use,” see Unrelated Business Income Tax Hearings, supra note 1, at 809 (Health Indus. Distributor's Ass'n).

¹⁸⁸ If any business can lower the price of its product while still increasing its profit, it will do so. The feasibility of lowering a price depends on the slope of the demand curve. The underlying point, however, is unchanged — no one knowingly prices at other than the income-maximizing position, which is generally the market rate. If the prevailing rate is the equilibrium market rate, the hospital has no incentive to go lower, because to do so would decrease net revenues. This analysis is most applicable to things that are not substantially related to the mission of the charitable enterprise.

New York University did not propose to lower the price of Mueller Spaghetti because to do so would decrease the return, without hope of future benefit. If, however, their mission was providing spaghetti to a pasta crazed populace, providing it at the lowest possible cost would of course maximize their sales (although not necessarily their profits) and thus further their charitable purpose. The problem occurs when there is an overlap between a charitable mission and a for-profit enterprise on terrain that was formerly the exclusive province of forprofit providers.

¹⁸⁹ See infra notes 190-96 for a discussion of market failure. In this view, one cannot compete unfairly in a market that is providing an insufficient quantity of the required product. The nonprofit, by increasing the quantity of the product that is actually provided, makes the market “fairer.“

¹⁹⁰ See supra notes 35-36.

¹⁹¹ “Have tax-exempt organizations intruded into the for-profit business market? Or, have businesses found a profit in traditional tax-exempt organization activities?” Unrelated Business Income Tax Hearings, supra note 1, at 10. (1987) (opening statement of Rep. J.J. Pickle, Chairman).

Actually, Representative Pickle's formulation obscures the problem slightly — there is no reason for the second question to be controversial unless the for-profit provider turns around and complains about “unfair competition.” The first question is another matter — especially if the for-profit providers think an area should be for-profit while the charitable providers view it as part of their mission. That is precisely the present case, with hospitals encroaching on previously for-profit industries, while claiming it is their charitable duty to do so.

¹⁹² See supra notes 35-36, 188-89. An additional problem arises when tax exemptions outlive their usefulness for the organization receiving them (although not necessarily for the entire class receiving the exemption). Educational publications receive a tax exemption, but does Ms. or HARPER's deserve one? Each has had a subsidy in the past. Shaviro, supra note 5, at 693. If they still had the subsidies, could a competing magazine rightly complain about unfair competition? The analogy is quite close to the current debate between hospitals and their for-profit competitors.

¹⁹³ This is the question of predatory pricing, discussed supra in note 187. The analysis also has implications for measuring the quantity of “charity care” that is actually provided — does one look to average cost or variable cost? See infra text accompanying note 225.

¹⁹⁴ Speech by Robert S. Bromberg, National Health Lawyers Association Health Law Update on Unrelated Business Income (June 4, 1988).

¹⁹⁵ DuVal, Jones & Lesparre, , Competition or Conscience? Mixed Mission Dilemmas of the Voluntary Hospital 24 INQUIRY 110 (1987)Google Scholar; Vladeck, , The Dilemma Between Competition and Community Service, 22 INQUIRY 115 (1985)Google Scholar. Both of these articles view the two claims as utterly polar, but perhaps one can attempt to serve two masters by being charitable but efficient.

¹⁹⁶ Hyman & McCarthy, supra note 3, at 34-35.

¹⁹⁷ A. BALK, THE FREE LIST: PROPERTY WITHOUT TAXES (1971).

¹⁹⁸ See supra note 4, infra note 200.

¹⁹⁹ Prof. R. Pomp, supra note 65.

²⁰⁰ Hyman & McCarthy, supra note 3, at 34.

²⁰¹ Id.

²⁰² Id.

²⁰³ University v. The People, 99 U.S. 309 (1878); Northwestern U. v. Hanberg, 237 Ill. 185, 86 N.E. 734 (1908) (upheld the grant of a charter exemption from property taxes for all property owned by Northwestern University). The constitutional cases usually involve intergovernmental immunity, because as we all know, “the power to tax involves the power to destroy.” McCuUough v. Maryland, 17 U.S. (4 Wheat.) 316, 431 (1819). One cannot have the supreme law of the land destroyed by local attempts to “retard, impede, burden, or in any manner control” it, through taxation or otherwise. Id. at 436. On intergovernmental immunity generally, see G. STONE, L. SEIDMAN, C. SUNSTEIN & M. TUSHNET, CONSTITUTIONAL LAW 210-12 (1986).

²⁰⁴ AMERICAN HOSP. ASS'N, supra note 49.

²⁰⁵ Id.

²⁰⁶ Although these are the specific arguments that form the foundation for exemption, enforcement has turned on one of three tests, commonly described as the liberal, conservative, and community benefit tests. See infra text accompanying notes 303-18.

²⁰⁷ This was the standard adopted in Utah County v. Intermountain Health Care, Inc., 709 P.2d 265, 276-78 (Ut. 1985).

²⁰⁸ Id. at 278.

²⁰⁹ Walz v. Tax Comm., 397 U.S. 664 (1969).

²¹⁰ Because a subsidy from exemption amounts to the same thing as a direct contribution, it is difficult to fully accept the line of non-taxation that the government has followed in dealing with religious organizations. See Walz, 397 U.S. at 700 (Douglas, J., dissenting); see also supra note 66 (discussing Texas Monthly v. Bullock, 109 S. Ct. 890 (1989)).

Taxing churches may interfere with the free exercise of their religion, while not taxing them encourages religion (as opposed to non-religion). Such favoritism may constitute an establishment of religion, explicitly forbidden by the first amendment. The Supreme Court has attempted to find a middle course between the Free Exercise and the Establishment Clauses of the first amendment. The effort was poetically described as steering between “the Scylla [of what the Free Exercise Clause demands] and the Charybdis [of what the Establishment Clause forbids].” Texas Monthly, 109 S. Ct. at 914 (Scalia, J., dissenting). See supra note 66.

²¹¹ See supra note 72 and accompanying text for Justice Powell's concurring answer. In his analysis, there is no easy way to determine what constitutes a burden without imposing a heavy dose of conformity into a republic that prides itself on pluralism and diversity. Bob Jones U. v. United States, 461 U.S. 574 (1983) (Powell.J., concurring). Like Banquo's ghost, this problem can never be put under.

²¹² Guggenheimer, Making the Case for Voluntary Health Care Institutions: Policy Theories and Legal Approaches in IN SICKNESS AND IN HEALTH, supra note 8, at 37-38.

²¹³ See supra notes 148-50 and accompanying text. Although the federal government did not become significantly involved in financing health care until recently, involvement at the state and local level is a different story. Stevens, , A Poor Sort of Memory: Voluntary Hospitals and Government Before the Depression, 60 HEALTH & SOCIETY 551 (1982)Google Scholar. Federal involvement in financing health care is described in BROOKINGS INST., supra note 37. See also supra note 89.

²¹⁴ Herlzinger, , Letter to the Editor, 319 NEW ENG. J. MED. 1485-86 (1988)Google Scholar; Herlzinger & Krasker, supra note 4, at 93; Hyman, , Letter to the Editor, 319 NEW ENG. J. MED. 1486Google Scholar; Iglehart & White, IOM Study: Meaning for Not-For-Profits﹜ HEALTH PROGRESS, Oct., 1986, at 14; Levinsky, , Letter to the Editor, 319 NEW ENG. J. MED. 1486Google Scholar; Lewin, Eckels, & Miller, , Setting the Record Straight: The Provision of Uncompensated Care by Not-For-Profit Hospitals, 318 NEW ENG. J. MED. 1212 (1988)Google Scholar; Relman, , Are Voluntary Hospitals Caring for the Poor? 318 NEW ENG. J. MED. 1198 (1988)Google Scholar.

²¹⁵ Unrelated Business Income Tax Hearings, supra note 1, at 768 (statement of Rep. Stark) (citing Simpson & Lee, Nonprofit Community Hospital Tax Exemptions: Issues for Review in WESTERN CENTER FOR HEALTH PLANNING, WESTERN CONSORTIUM FOR THE HEALTH PROFESSIONS (1987)).

²¹⁶ Hyman & McCarthy, supra note 3, at 35.

²¹⁷ The similarity of the words “charity” and “charitable” makes it easy to see why that suggestion is persuasive to many people who have not bothered to acquaint themselves with the law of charitable trusts. “Charitable” means serving a charitable purpose, of which the promotion of health is one of many. See supra note 76.

²¹⁸ See infra notes 235-302 and accompanying text.

²¹⁹ See supra note 214. A point not noticed is that even the Lewin, Eckels & Miller report, supra note 214, which was the most thorough examination of charity care, counted Hill-Burton obligations as part of uncompensated care. This is incorrect — services that one is contractually obligated to provide are by no stretch of the imagination “charity.” See infra note 233. Likewise, contracts to provide services at low cost do not constitute “charity.” No one forced the hospital to sign the contract, and comparisons between the contract price and the hospital's average cost are often little more than evidence of creative accounting. The correct figure for comparison is the marginal cost. See infra text accompanying note 225.

There is also reason to be worried about the health effects of depending on uncompensated care to provide for the medically indigent. Blendon, Aiken, Freeman, Kirkman-LifF & Murphy, , Uncompensated Care by Hospitals or Public Insurance for the Poor: Does it Make a Difference? 314 NEW ENG. J. MED. 1160 (1986)Google Scholar (uncompensated care is not an adequate or effective substitute for public insurance and may adversely affect the health care received by the poor). See also Iglehart, , Medical Care of the Poor: A Growing Problem, 313 NEW ENG. J. MED. 59 (1985)Google Scholar; infra notes 220-225 and accompanying text.

²²⁰ Hyman, Letter to the Editor, supra note 214, at 1486. The ways in which hospitals further classify uncompensated care as bad debt or charity care varies considerably, and seems more a matter of accounting convention than any accepted standard. Mulstein, , The Uninsured and the Financing of Uncompensated Care: Scope, Costs and Policy Options, 21 INQUIRY 214, 219-20 (1984)Google Scholar.

²²¹ Mulstein, supra note 220, at 219-20.

²²² Id. See also Hyman & McCarthy, supra note 3, at 35.

²²³ Finkler, , The Distinction Between Cost and Charges, 96 ANNALS INTERNAL MED. 102 (1982)Google Scholar (charges often bear little relation to economic cost).

²²⁴ Two of the key studies used average costs to determine the quantity of charity care provided. Herlzinger & Krasker, supra note 4, at 93; Lewin, Eckels & Miller, supra note 214, at 12.

²²⁵ Hyman, supra note 214, at 1486.

²²⁶ This is of course just a restatement of the definition of a burden. The Lewin, Eckels & Miller study, supra note 214, was especially interesting because it demonstrated free-riding by some nonprofit hospitals. These hospitals provided even less uncompensated care than the average of care among the for-profit hospitals. Id. at 1212.

²²⁷ The most concise statement of this position appears in a certificate of need application filed by West Hernando Medical Center in Florida, a Humana (for profit) hospital: “Public policy in the United States has determined that providing hospital care to indigent patients is a government responsibility. In order to meet this responsibility, various levels of government collect taxes and make funds available to certain hospitals for this purpose. As a taxpayer, Humana contributes to the provision of this care through payment of property taxes, sales taxes, income taxes, franchise taxes, and other taxes. As a result of public policy and their status as taxpayers, Humana hospitals do not have the responsibility to provide hospital care for the indigent except in emergencies or in those situations where reimbursement for indigent patients is provided.” FOR-PROFIT ENTERPRISE IN HEALTH CARE 203 (B. Gray, ed., 1986). See also Brock & Buchanan, supra note 39, at 6-7. Strictly speaking, even nonprofit hospitals do not have to provide charity care in order to receive a tax exemption. See supra text accompanying notes 48-49.

²²⁸ Hyman, supra note 214, at 1486.

²²⁹ This follows from the reasoning just above — the full value of the subsidy is measured by the foregone taxes and the amounts that the nonprofit would have to pay to equity shareholders if it were a for-profit.

²³⁰ Levinsky, supra note 214, at 1486.

²³¹ Charities often do a better job than the government because they have greater freedom, are more open to innovation and have greater incentive to do a good job. STAFF OF SENATE COMM. ON FINANCE, 89TH CONG., 1ST SESS., TREASURY DEPT. REPORT ON PRIVATE FOUNDATIONS 12-13 (Comm. Print 1965).

²³² Justice Powell was sensitive to this problem. His concurrence in Bob Jones University notes that tax exemptions are an “indispensible means of limiting the influence of governmental orthodoxy on important areas of community life.” Bob Jones U. v. United States, 461 U.S. 574, 609 (1983) (Powell, J., concurring).

²³³ Hyman, supra note 214, at 1486 (undifferentiated subsidy led to free-riding; some hospitals are not bearing the burden of providing charity care).

²³⁴ Hill-Burton provided funds for capital improvements in exchange for an obligation to provide charity care. Blumstein, , Court Action, Agency Reaction: The Hill-Burton Act as a Case Study, 69 Iowa L. Rev. 1227 (1984)Google Scholar; Dowell, , Hill-Burton: The Unfulfilled Promise, 12 J. HEALTH POL., POL'Y & L., 153 (1987)Google Scholar (widespread facility non-compliance).

Of course, stricter enforcement would be required. Hospitals could compete for contracts giving them the opportunity to provide compensated charity care. The defect in Hill- Burton was that it led to excess capacity as well as non-compliance.

²³⁵ TOCQUEVILLE, A. DE, DEMOCRACY IN AMERICA 513 (1969)Google Scholar.

²³⁶ See generally Wilder, The Virtuous Hospital: Do Nonprofit Institutions Have a Distinctive Moral Mission? in IN SICKNESS AND IN HEALTH, supra note 8. All the writing about the mission of nonprofit hospitals presupposes a shared set of attitudes and beliefs about what is being attempted. See Jones, DuVal & Lesparre, supra note 195, at 110; Vladeck, supra note 195, at 115.

²³⁷ For example, the Catholic religious tradition has resulted in a series of policy decisions about providing health care. See CONGREGATION FOR THE DOCTRINE OF THE FAITH, U.S. CATH. CONF., DECLARATION ON EUTHANASIA, (Washington, D.C. 1980); U.S. CATH. CONF., ETHICAL AND RELIGIOUS DIRECTIVES FOR CATHOLIC HOSPITAL FACILITIES, 1975. Ethical arguments from religious perspective are also common. See Caspar, Food and Water: Symbol and Reality, HEALTH PROGRESS, May, 1988, at 54; Devine, Catholic Healthcare's New Crisis: Values Versus Bottom Line, HEALTH PROGRESS, Oct., 1988, at 71; O'Rourke, Two Ethical Approaches to Research on Human Beings, HEALTH PROGRESS, Apr., 1988, at 48. Other faiths also have specific traditions about medical care. See, e.g., JEWISH BIOETHICS (F. Rosner & J. Bleich eds. 1979).

²³⁸ Congregation for the Doctrine of the Faith, Instruction on Respect for Human Life in Its Origin and on the Dignity of Procreation 16 ORIGINS 698 (1987), was the Vatican pronouncement on in vitro fertilization. Multiple documents have demonstrated the Vatican's opposition to abortion.

²³⁹ William Francis Bartling v. Superior Court of Los Angeles County, 163 Cal. App. 3d 186, 192, 209 Cal. Rptr. 220, 226 (1985).

²⁴⁰ Epstein, , Voluntary Euthanasia, 35 U. Cm. L. SCH. REC. 8, 13 (1988)Google Scholar. This approach would produce peculiar results. Jehovah's witnesses refuse to accept blood or blood products. Application of the President and Directors of Georgetown College, 331 F.2d 1005 (D.C. Cir. 1964). What would a hospital run by Jehovah's witnesses look like? Would it meet the standard of care? Is the standard set by religious hospitals or regular hospitals?

²⁴¹ Epstein, supra note 240, at 13.

²⁴² Guggenheimer, supra note 212, at 37; Seay & Vladeck, Mission Matter in IN SICKNESS AND IN HEALTH, supra note 8, at 9.

²⁴³ See supra text accompanying notes 231-32.

²⁴⁴ On the costs of our present system see Enthoven, & Kronick, , A Consumer Choice Health Plan for the 1990's: Universal Health Insurance in a System Designed to Promote Quality and Economy, 320 NEW ENG. J. MED. 29 (Part 1), 94 (Part 2) (1989)CrossRefGoogle Scholar; Falcone & Warren, supra note 4, at 735; Himmelstein, Woolhandler, & Writing Committee of the Working Group on Program Design, A National Health Program for the United States: A Physicians’ Proposal, 320 NEW ENG.J. MED. 102 (1989).

At a minimum, the administrative costs of the American system (compared with a national/provincial system like Canada's) are about $22 billion yearly. Falcone & Warren, supra note 4, at 740. Adding in the deductible expenditures for employer sponsored health insurance would triple that figure. Id.

²⁴⁵ Hyman & McCarthy, supra note 3, at 35 (contains the total cost figure).

²⁴⁶ This is simple division of the amounts in the text. $720,000/$ 1,400,000 = 51% of the total charity care provided that actually went to Burlington citizens. $720,000/$2,800,000 = 26% of the value of the exemption that was returned as charity care to Burlington citizens.

²⁴⁷ Prof. R. Pomp, supra note 65, at 1-2.

²⁴⁸ See generally IN SICKNESS AND IN HEALTH supra note 8, at 26; W. WELLFORD & J. GALLAGHER, supra note 1.

²⁴⁹ IN SICKNESS AND IN HEALTH, supra note 8, at 26.

²⁵⁰ Hyman & McCarthy, supra note 3, at 32. See also IN SICKNESS AND IN HEALTH, supra note 8, at 17.

²⁵¹ Hyman & McCarthy, supra note 3, at 32.

²⁵² Compare this with nonprofit providers who are significantly less responsive to incentives. Gray, Hospital Systems and the For-Profit/Nonprofit Debate, HEALTH AFFAIRS, Summer, 1987, at 172.

²⁵³ See supra note 41, infra note 256.

²⁵⁴ See infra notes 256, 274.

²⁵⁵ See infra note 256.

²⁵⁶ Engelhardt, & Rie, , Morality for the Medical-Industrial Complex: A Code of Ethics for the Mass Marketing of Health Care, 319 NEW ENG. J. MED. 1086, 1087-88 (1988)Google Scholar. The Letters to the Editor that followed the publication of Engelhardt and Rie's article are found at 320 NEW ENG. J. MED. 1082 (1989). See supra note 41.

²⁵⁷ Hyman & McCarthy, supra note 3, at 36. Commercial businesses also may be trustworthy providers of services. However, it is the business of for-profit businesses to respond to market demand. They do not serve the interest of their shareholders if they persist in an unprofitable activity. If an activity becomes unprofitable, a business must cease to provide it or go bankrupt. Even marginal profits may not be enough to lead a business to continue providing a service.

W. WELLFORD & J. GALLAGHER, supra note 1, at 18.

Some law and economics theorists have even suggested that a for-profit business should violate the law if the likely gains from violation exceed the likely penalties. Fischel, The Corporate Governance Movement, 35 VAND. L. REV. 1259, 1268-71 (1982). A nonprofit institution has a markedly smaller incentive to engage in such conduct.

²⁵⁸ Put another way, a good economist believes that a sick poor person does not really need health care — and he certainly does not deserve it, because he cannot pay for it. For economists, there are only wants (rather then needs) and purchasing power. If you do not have money, by definition you cannot want (or need) anything. This logic is based on the equivalence of utility and wealth, a relationship that underlies much of the scholarship in law and economics. Health care, however, operates in a realm where there is a gap between the two. Interview with Prof. R. Epstein, University of Chicago Law School, (June, 1989).

²⁵⁹ Menzel, , Economic Competition in Health Care: A Moral Assessment 12 J. MED. & PHIL. 63 (1987)Google Scholar. See also FOR PROFIT ENTERPRISE IN HEALTH CARE supra note 227; THE NEW HEALTH CARE FOR PROFIT: DOCTORS AND HOSPITALS IN A COMPETITIVE ENVIRONMENT (B. Gray ed. 1983) [hereinafter THE NEW HEALTH CARE FOR PROFIT]. It is unclear what the ultimate role of for-profit providers will be in the health care industry. See generally Ginzberg, , For-Profit Medicine: A Reassessment, 319 NEW ENG. J. MED. 757 (1988); Light, Corporate Medicine For Profit, 255 Sci. AM. 38 (1986)Google Scholar; Pauly, Advent and Implications of For-Profit Delivery, in THE CHANGING HEALTH CARE MARKET (F. McArdle ed. 1985); Schles, inger, Marmor, & Smithey, , Nonprofit and For-Profit Medical Care: Shifting Roles and Implications for Health Policy, 12 J. HEALTH POL., POL'Y & L. 427 (1987)Google Scholar.

²⁶⁰ See supra note 257.

²⁶¹ Chang & Tuckman, supra note 25, at 547; Herlzinger & Krasker, supra note 4, at 93; (hospitals divert their surplus into activities that benefit physicians and not patients); Young, Nonprofits Need Surplus Too, HARV. BUS. REV., Jan.-Feb., 1982, at 124.

²⁶² FOR PROFIT ENTERPRISE IN HEALTH CARE, supra note 227; THE NEW HEALTH CARE FOR PROFIT, supra note 259; Herlzinger & Krasker, supra note 4, at 93; Jones, DuVal & Lesparre, supra note 195, at 110; Mancino, supra note 4, at 1015; Vladeck, supra note 236, at 115.

²⁶³ Vladeck, supra note 236, at 115.

²⁶⁴ DE TOCQUEVILLE, supra note 235, at 514.

²⁶⁵ W. WELLFORD & J. GALLAGHER, supra note 1, at 60-62. See also Seay & Vladeck, supra note 242, at 20-21.

²⁶⁶ Seay & Vladeck, supra note 242, at 20-21.

²⁶⁷ Id.

²⁶⁸ Id.

²⁶⁹ The on]y data I have been able to obtain indicates that for-profits do not rely to a significant extent on volunteers. Interview with Paul Hattis, Office of Legal and Regulatory Affairs, American Hosp. Ass'n, (June, 1989). However, in the hospitals that have converted from nonprofit to for-profit status, there has been no decrease in the number of volunteers. Id. Nonprofit hospitals also do not rely on volunteers to anywhere near the extent they used to. IN SICKNESS AND IN HEALTH, supra note 8, at 206. These mixed results make any generalization problematic.

²⁷⁰ The exploitation fears are nicely illustrated in the following quote: Corporate for-profit medicine is growing rapidly and giving many observers moral shivers. Will community hospitals be able to survive? Will for-profit parties provide the necessary unreimbursed care for patients unable to pay? Will physicians and nurses become so business minded that they lose their predominant loyalty to patients?

Menzel, supra note 259, at 63. See also FOR PROFIT ENTERPRISE IN HEALTH CARE, supra note 227; THE NEW HEALTH CARE FOR PROFIT, supra note 258; Hansmann, supra note 12, at 881.

²⁷¹ On informational asymmetry and market failure, see supra notes 35, 38. The problem was concisely stated as follows:

consumers might find themselves considerably better off if they deal with nonprofit producers rather than with for-profit producers. While the nonprofit producer, like its for-profit counterpart, may have the capacity to raise prices and cut quality in such cases without fear of consumer reprisal, it has nowhere near the same incentive since those in charge are barred from taking home the profit.

Hansmann, supra note 12, at 843. See also Hansmann, , The Rationale for Exempting Nonprofit Organizations from Corporate Income Taxation, 91 YALE L.J. 54 (1981)Google Scholar;

Hansmann, , Reforming Nonprofit Corporation Law, 129 U. PA. L. REV. 497 (1981)Google Scholar.

In norma! language, the non-exploitation rationale is equivalent to the “halo” that surrounds every activity of a non-profit hospital. See supra note 182 and accompanying text. Forprofit providers have complained bitterly about the halo. See supra note 167. Because it is implicit in the non-profit form, there is little that can be done about it.

²⁷² Hansmann, supra note 12, at 843. The belief in the trustworthiness of nonprofit providers is not limited to the health care industry. I.R.C. § 501(c)(3) (1989) provides an exemption for organizations that perform “testing for public safety.” Underwriters Laboratory (UL) is a beneficiary of this exemption, and consequently receives an imprimatur of respectability that does not attach to for-profit testing laboratories. The for-profit competition, not unsurprisingly is unhappy with this state of affairs and has complained about its inability to counter the tax subsidized reputation of UL. See Unrelated Business Income Tax Hearings, supra note 1, at 533-605.

For-profit providers have also “traded” on the respectability of nonprofits. An ad I came across describes a cologne that can only be described as a love potion. The heading of the ad reads “Drive Women Wild with New Scientific Discovery.” Under the heading “Absolute Proof” (in bold letters) the ad reads, “[a]n experiment was conducted at a non-profit research institute in 1986 on the effects of the odor of androgen steroids on women. Their conclusions, which were published in a highly respectable medical journal, was [sic] that this substance had a definite effect on the female endocrine system.” INVESTMENT OPPORTUNITY, July- Aug., 1989, at 89.

²⁷³ Exploitation here simply means acting as a for-profit actor would in the same marketplace. More sinister connotations are possible, but hardly necessary for purposes of this analysis.

²⁷⁴ “Wallet biopsy - noun, slang, a speedy but close examination of a patient's financial status and insurance coverage before admittance to a hospital.” Soukhanov, Word Watch, ATL. MONTHLY, June, 1989, at 102. The consequences of failing the “wallet biopsy” are that one is “dumped” (i.e. transferred, often without adequate medical attention) to a public institution, which must take all comers. Himmelstein, , Patient Transfers: Medical Practice as Social Triage, 74 AM. J. PUB. HEALTH 494 (1984)Google Scholar; Schiff, , Transfers to a Public Hospital, 314 NEW ENG. J. MED. 552 (1986)Google Scholar; Wrenn, , No Insurance, No Admission, 312 NEW ENG. J. MED. 373 (1985)Google Scholar; Note, Preventing Patient Dumping: Sharpening the Cobra's Fangs, 61 N.Y.U. L. REV. 1186 (1986); Hospitals in Cost Squeeze “Dump” More Patients Who Can't Afford to Pay Bills, WALL ST. J. Mar. 8, 1985, at 1.

²⁷⁵ Clark, supra note 4, at 1468 (“taxation” of this form violates principles of horizontal and vertical equity).

²⁷⁶ Brock & Buchanan, supra note 39, at 16.

²⁷⁷ Id. at 15-16.

²⁷⁸ Id. at 16.

²⁷⁹ Articles I, II, and III of the Constitution vest the legislative, executive, and judicial power in the three branches of the federal government, and certainly do not give hospitals the power to create or implement rights.

²⁸⁰ Youngberg v. Romeo, 457 U.S. 302 (1982); Harris v. McRae, 448 U.S. 297 (1980); Maher v. Roe, 432 U.S. 464 (1977); Wideman v. Shallowford Community Hosp., Inc., 826 F.2d 1030 (11th Cir. 1987).

²⁸¹ If the cross-subsidy went for indigent care, people might be willing to allow such conduct if they were given the opportunity to consent. Yet, there is no guarantee that the subsidy will go for indigent care. Bad debt includes both deadbeats and the poor, and most patients, who after all are paying their bills, would like to see the hospital having some incentive to collect its bills, rather than simply passing on the cost of its inadequacies to the paying customers.

Even if the subsidy is applied to medical care, there is no guarantee it will be spent wisely. Organ transplantation programs are expensive and benefit relatively few people. Their income almost never covers their expenses, especially with new or innovative approaches or clinical trials. However, they are good ways to get publicity. Assuming you are willing to pay a cross-subsidy, do you care if it is spent on prenatal care or liver transplants? Not all moneylosing medical services deserve to be supported from the standpoint of community health.

²⁸² Pauly, , Is Medical Care Different? Old Questions, New Answers, 13 J. HEALTH POL., POL'Y & L. 227 (1988)Google Scholar.

²⁸³ Engelhardt & Rie, supra note 256, at 1088.

²⁸⁴ Crile, , Surgery in the Days of Controversy, 262 J. A.M.A. 256 (1988)Google Scholar. More recently, ambulatory surgery is a classic case of cheating on quality — few people thought such surgery was safe (and efforts were made at stamping it out “on quality grounds“), although it is now virtually the standard for certain operations. For another example of (now accepted - once frowned upon) cheating on quality, see Conti, , Outpatient Cardiac Catheterization, 319 NEW ENG. J. MED. 1282 (1988)Google Scholar.

Self-interest may also be a factor in the level at which quality is set. For example, a decision that only specialists in cardiology can give the official interpretation of electrocardiograms may marginally increase quality (and not necessarily so), but at the cost of excluding all potential competitors, such as internists and family practitioners. Such turf battles have become more frequent in recent years. J. MCPHEE, HEIRS OF GENERAL PRACTICE 72-74 (1986).

There is also tremendous regional variation in the use of medical services. Hyman & Wiliamson, supra note 63, at 1136-37. Almost none of the variation seems to result in a significant effect on the public health. Id. Cheating on quality might thus mean pushing the incidence of use of certain interventions to a very low level. So long as this does not markedly affect the public health, it is actually commendable conduct.

²⁸⁵ This was the reason that hospitals identified physicians as their customers for so long, and physicians decided where to refer patients. Physicians presently control 70% of admission decisions, a drop from the 88% observed in the early 1980's. Hyman & Williamson, supra note 63, at 1146.

Physicians can choose to admit to one hospital over another for important reasons (quality of care/better specialists or facilities), trivial reasons (location of physician's parking/color of carpeting), or fraudulent reasons (receives a bounty for every patient admitted). To the extent a hospital is successful in offering incentives, the physician's ability to act free of a marked conflict of interest is compromised. This problem is currently being addressed by federal regulations. Id. at 1275.

²⁸⁶ Hansmann, supra note 12, at 866 (physician acts as a very sophisticated purchasing agent for the patient).

²⁸⁷ FOR PROFIT ENTERPRISE IN HEALTH CARE, supra note 227; Herlzinger & Krasker, supra note 4, at 93.

²⁸⁸ Hansmann, supra note 12, at 874-75. The means of enrichment that have been used include:

excessive salaries, low-interest loans from the organization, personal services and amenities paid for out of the organization's funds, excessively generous contracts for services provided to the organization by businesses owned by the managers, or the purchase or lease of real estate by the organization from its managers at inflated prices, mortgage interest, or rents.

Id.

²⁸⁹ Clark, supra note 4, at 1416; Herlzinger & Krasker, supra note 4, at 93; Pauly, & Redisch, , The Not-For-Profit Hospital as a Physicians’ Cooperative, 63 AM. ECON. REV. 87 (1973)Google Scholar. See also supra note 271 (discusses some of the benefits of the nonprofit form). But see Newhouse, Toward a Theory of Nonprofit Institutions: An Economic Model of a Hospital, 60 AM. ECON. REV. 64 (1970) (nonprofits maximize satisfaction and purpose of trustees rather than profits).

²⁹⁰ Clark, supra note 4, at 1416.

²⁹¹ Id.

²⁹² Id.

²⁹³ AMERICAN HOSP. ASS'N, supra note 49; FRIEDMAN, HATTIS, BOGUE & HELLMAN, TAX EXEMPTION, UNCOMPENSATED CARE AND COMMUNITY BENEFITS OF NON-PROFIT HOSPITALS, (American Hosp. Ass'n Working Paper, 1988).

²⁹⁴ Hyman & McCarthy, supra note 3, at 36.

²⁹⁵ Id. The carrying-on of research is exempted from unrelated business income tax. I.R.C. § 512(b) (1986).

²⁹⁶ Twenty-four percent of nonprofit hospitals have residency training programs, while only two percent of for-profit institutions have similar programs. AMERICAN HOSP. ASS'N, HOSPITAL STATISTICS 202 (1987).

²⁹⁷ See supra note 41.

²⁹⁸ AMERICAN HOSP. ASS'N, supra note 49.

²⁹⁹ Rev. Rul. 69-545, 1969-2 C.B. 117. See abo Bromberg, supra note 75, at 237.

³⁰⁰ Rev. Rul. 69-545, 1969-2 C.B. 117.

³⁰¹ Rev. Rul. 83-157, 1983-2 C.B. 94.

³⁰² AMERICAN HOSP. ASS'N, supra note 49. This sort of “support” for hospitals suggests that the claimed community benefit is either non-existent, or is simply not recognized. Some communities allow a vote every so often on whether the currently tax-exempt organizations should continue to enjoy that exemption. Interview with Paul Hattis, supra note 269. Despite some public choice, collective action and constitutional issues, this seems an excellent way of polling “community benefit.“

³⁰³ Bromberg, supra note 75, at 241.

³⁰⁴ Id. at 241-44.

³⁰⁵ Rev. Rul. 56-185, 1956-1 C.B. 202.

³⁰⁶ Since the IRS issued Revenue Ruling 69-545, 1969-2 C.B. 117, virtually everyone has concluded that the 1956 standard is no longer applicable, although it still provides an alternative basis for achieving exempt status. Bromberg, supra note 75, at 239; Hopkins & Beckwith, supra note 4, at 691; Mancino, supra note 4, at 1015. For a discussion of the problem raised by trying to provide charity care in the context of a Medicare and Medicaid program, see Lewin, Eckels & Miller, supra note 214, at 212; White, The Charity Care Debate is Nothing New, HEALTH PROGRESS, May, 1989, at 16, 18 (“I don't see how hospitals can give away a lot of care given today's budget restraints.“).

³⁰⁷ See P. STARR, supra note 89; R. STEVENS, supra note 89; Bromberg, supra note 75, at 238-39; Mancino, supra note 4, at 1021-26. Hospitals are not almshouses anymore, and few people would wish for a return to the “good old days” where hospitals deserved their exemption on the conservative test. In fact, in some ways the modern hospital deserves a tax subsidy far more than the old one did; people now generally expect to survive their encounter with a hospital. Wealthy individuals used to shun hospitals - now they are patrons and VIP guests.

³⁰⁸ The reforms in the Medicare system (discussed supra in note 63) were intended to “change the economic incentives that influence a hospital's decisions in the use of resource inputs for each case. The profit potential inherent in this system alone should encourage hospitals to begin changing their behavior to decrease their operating costs.” 48 Fed. Reg. 39,752, 39,805 (1983). Similarly, “the new system [is] … intended to provide incentives to hospitals to manage their operations in a more cost-effective manner.” Id. at 39,752.

³⁰⁹ Bromberg, supra note 75, at 243.

³¹⁰ Id. at 244-48.

³¹¹ Id. at 248.

³¹² In fact, this was the position taken by the Medical Center Hospital of Vermont in its argument before the Vermont Supreme Court over its tax exemption battle with Burlington. The court did not accept this argument. The court held that a not-for-profit institution with a recognized charitable purpose was entitled to exemption from taxes because it offered services regardless of ability to pay. Medical Center Hosp. of Vt. v. Burlington, 566 A.2d 1352, 1357 (Vt. 1989).

³¹³ Either our current rules are based on something our intuition is incapable of discerning, or the rules have simply remained unchanged, despite the lack of logical coherence in their present form. See supra note 92.

³¹⁴ A. SCOTT, THE LAW OF TRUSTS § 372.2 (3d ed. 1967) (“A trust is not charitable if the persons who are to benefit are not of a sufficiently large or indefinite class so that the community is interested in the enforcement of the trust. This is true even though the purpose of the trust is to promote health.“); Bromberg, supra note 75, at 248.

³¹⁵ Bromberg, supra note 75, at 248-49; Burlington, 566 A.2d at 1355.

³¹⁶ Bromberg, supra note 75, at 250.

³¹⁷ See supra note 274.

³¹⁸ See supra text accompanying notes 33-34.

³¹⁹ See supra text accompanying note 306. Compare with supra note 92.

³²⁰ A GAO report found that Blue Cross and commercial insurers provided virtually identical coverage, and had similar enrollment and pricing policies. GAO/HRD, BLUE CROSS AND COMMERCIAL INSURERS 86-110 (1988). As a result, the 1986 Act removed the exemption for such insurers. See I.R.C. § 501 (m) (1986). The effect has been minimal. Richman, Loss of Tax Exemption Prompts Blues to Review Policy Prices, MOD. HEALTHCARE, Jan. 16, 1987, at 46.

³²¹ The figures vary somewhat depending on the source. See PRESIDENTS COMM'N FOR THE STUDY OF ETHICAL PROBLEMS IN MEDICINE AND BIOMEDICAL AND BEHAVIORAL RESEARCH, SECURING ACCESS TO HEALTH CARE, (1983); Hyman & Williamson, supra note 63, at 1143; Larkin, Will the Public Support Health Care Rationing?, Hospitals, May 5, 1988, at 79.

³²² For example, a report by the Institute of Medicine noted that further research was necessary before a definitive conclusion on for-profit medicine could be reached. However, certain conclusions and recommendations were nonetheless made. FOR PROFIT ENTERPRISE IN HEALTH CARE, supra note 227, at 201.

A supplementary statement was filed by a minority of the working group of the Institute of Medicine. The statement reads: “in our opinion, the major finding of this report is that investor-owned hospital chains have so far demonstrated no advantages for the public interest over their not-for-profit competitors …. We would have little to gain and possibly much to lose, if for-profit corporations came to dominate our health care system.” Id. at 205.

It is clear from this statement that the baseline is the virtuous nonprofit hospital, and there is a heavy presumption for maintaining the present system, or at least favoring the existing players.