Part I of our nonprofit hospital series is here.
Hospitals, even nonprofits, are not excluded from federal taxes by default. Rather, each hospital has to qualify individually for its own slice of billions in federal tax exemptions doled out each year. The criteria for qualification are laid out in §501(c)(3) of the Internal Revenue Code -- the same section that lays out qualifications for other exempt organizations like churches, nonprofit charities, educational institutions, etc.
The IRS states that the nonprofit must be operated “exclusively for exempt purposes” in order to qualify. Those purposes include work for “charitable, religious, educational, scientific,” purposes. The charity subset includes “relief of the poor, the distressed, or the underprivileged," and "lessening the burden of government.” The last function, “lessening the burden of government,” is particularly important to this issue. It suggests that nonprofits should be providing services that the government might also provide, and so the tax exemption should provide more benefit to the community through the charity than it would if the government simply collected the tax and provided the service itself.