Revenue Ruling 69-545

In the first half of the twentieth century, hospitals generally used free treatment of indigent patients to justify claims of tax-exempt status. The enactment of Medicare and Medicaid in the 1960s drastically expanded funding for hospital treatment for indigent people. In light of this change, hospitals sought guidance about what types of hospital operations would satisfy the requirements for tax exemption. The Internal Revenue Service analyzed two hypothetical hospitals. Hospital A had large facilities that were open to all qualified area physicians and an active emergency room from which no patient was turned away. If a patient who was unable to pay Hospital A was in need of nonemergency treatment, Hospital A would arrange for transfer to an area hospital that served indigent patients. Hospital A generally funneled budgetary surpluses into expanding its facilities or paying down debts. Hospital B was controlled by a committee of five doctors who had previously owned the hospital. Hospital B limited access to its facilities to those five doctors, with rare exceptions, and denied applications to other qualified area doctors. Hospital B treated almost exclusively patients of the five doctors. Moreover, although Hospital B had an emergency room, it was generally inactive; ambulances seeking to deliver emergency cases were frequently redirected to other hospitals.