The Methodist Hospital System: Tax Exemption and Charitable Responsibilities of Not‐for‐Profit Hospitals

In November 1990, the Texas Attorney General filed a lawsuit against The Methodist Hospital System, alleging that it had failed in its duty to provide enough charity care to poor people. The state claimed that the hospital provided significantly less charity care than the hospital reported; it then filed the suit in an effort to require specific performance—that is, to compel the hospital to provide greater amounts of charity care in the future. The case focuses on the amount of charity care provided before the suit, the economic value of the tax exemption provided to the hospital because it is a not‐for‐profit (NFP) hospital, and the responsibilities of the hospital given the expectations of society. The case also brings into sharp relief the value of having tax‐exempt status and the social and political expectations that accompany the exemption. In addition, the case raises ethical questions concerning these issues, as well as issues involving the financial reporting of the entity and management perquisites.