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Taxing Hospitals Is a Lousy Way to Fix Health Care

But if that’s the case, then the best solution is probably to stop subsidizing it, not to make the subsidy more complex. A lot of the current mess in the American health-care system can be traced back to the thicket of hidden subsidies and fiddling regulations we’ve enacted over the years, trying to fine-tune the system into some platonic ideal where nothing ever goes wrong and no one ever makes an unseemly amount of money. But fine tuning has not delivered us the platonic ideal of anything, except perhaps the word “dysfunction.” It might be time to step back and rethink our approach.

We might start by asking ourselves, “Why are hospitals tax exempt in the first place?” When the income tax was first levied, giving hospitals nonprofit status made sense, because these organizations did largely act as charities. Over the succeeding decades, however, the government decided that it didn’t want to rely on charities for charity care, and enacted a series of programs that financed such care with government dollars.

In an ideal world, perhaps hospitals would have gratefully accepted those dollars, and redirected the money they’d been spending on treating patients to cover gaps in the system, like dental care (woefully underprovided either by charity or government fiat). But we do not live in the ideal world. The difference between a charity hospital and its for-profit brethren has shrunk smaller and smaller, and by now, seems too small to justify treating them as charities.
     — Megan McArdle

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