THE DIVERGENCE OF FEDERAL AND STATE POLICIES ON THE CHARITABLE TAX-EXEMPTION OF NONPROFIT HOSPITALS

Nonprofit hospitals have traditionally enjoyed charitable exemption fr om real estate taxes because they provide specific social benefits. Ho wever, in the past three decades, major health policy changes at the f ederal level-most significantly, implementation of the Medicare and Me dicaid programs-have weakened this rationale. Federal tax regulations during this period have changed in ways that complement these federal health programs and the accompanying federal interests in encouraging efficiency and performance uniformity among hospitals. States and loca l governments, however, have different interests, and these may favor a strict set of tax exemption standards that disregard efficiency and elevate the importance of a measurable level of charitable service. Th eir divergent policies rest on a fundamental value judgment about whet her nonprofit hospital care is intrinsically charitable or not. Increa singly, this judgment may be forced upon state courts and legislation by local governments seeking new tax revenues through the elimination of hospitals' exemption from real estate taxes.