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Supremes shoot down property tax exemption for hospital

Thursday, Mar 18, 2010

* A new opinion by the Illinois Supreme Court is very bad news for not-for-profit hospitals in Illinois who want to qualify for local tax exemptions.

Background

The decision will be watched closely by hospitals and policymakers nationally, following years of debate over how best to quantify the charity care that non-profit medical providers dole out in exchange for tax exemptions.

It’s the most notable case nationally in the past two decades of a hospital losing its tax-exempt status over questions of its charitable commitment, says Elizabeth Mills, an attorney at Proskauer Rose LLP in Chicago who specializes in tax exemptions for health care organizations.

“Everywhere I go in the country, people ask me about the Provena case,” she says.

The case goes back to 2003, when Champaign County tax officials stripped the hospital of its exemption. Officials cited the 210-bed hospital’s $831,724 spent on “charitable activities” a year earlier, saying it fell short of the medical center’s $1.1 million in property taxes. The state’s Department of Revenue upheld that decision.

* The court ruled that Provena could not apply for a not-for-profit exemption from property taxes for a few reasons. Here’s one

[The hospital’s income is] not derived mainly from private and public charity and held in trust for the purposes expressed in the charter. They are generated, overwhelmingly, by providing medicalservices for a fee.

The hospital failed additional tests

Provena Hospitals likewise failed to show by clear and
convincing evidence that it satisfied factors three or five, namely, that it dispensed charity to all who needed it and applied for it and did not appear to place any obstacles in the way of those who needed and would have availed themselves of the charitable benefits it dispenses. […]

When the law says that property must be “exclusively used” for charitable or beneficent purposes, it means that charitable or beneficent purposes are the primary ones for which the property is utilized. […]

Further undermining Provena Hospitals’ claims of charity is that
even where it did offer discounted charges, the charity was often
illusory. As described earlier in this opinion, uninsured patients were charged PCMC’s “established” rates, which were more than double the actual costs of care. When patients were granted discounts at the 25% and 50% levels, the hospital was therefore still able to generate a surplus.

Provena also asked for a religious exemption. That, too, was denied

To qualify for an exemption under that statute, the property in question must be used exclusively for religious purposes. There is no all-inclusive definition of religious purpose for tax cases. […]

If Provena Hospitals’ argument were valid, it would mean that the church rather than the judiciary is the ultimate arbiter of when and under what circumstances church property is exempt from taxation under the constitution and statutes of the State of Illinois.

The Illinois Hospital Association responds…

The Illinois Hospital Association is extremely disappointed by the court’s decision, which could do great harm to a hospital and its ability to serve its patients and community. Imposing new tax burdens on a hospital could force it to reduce services and increase health care costs – jeopardizing access to quality hospital services as well as the hospital’s financial viability.

- Posted by Rich Miller        

25 Comments
  1. - 47th Ward - Thursday, Mar 18, 10 @ 10:35 am:

    This is a textbook example of a real world problem that the federal health care bill can and will address. Once we get 95% of Americans insured, hospitals like Provena won’t be in the position they are in today deciding whether and how much to pay for “charity” care.

    Everybody wins with this health care legislation, patients, doctors, hospitals and communities like Champaign.


  2. - Jake from Elwood - Thursday, Mar 18, 10 @ 10:38 am:

    From the opinion:
    ==Under Illinois law, taxation is the rule. Tax exemption is the exception. All property is subject to taxation, unless exempt by
    statute, in conformity with the constitutional provisions relating thereto. Statutes granting tax exemptions must be strictly construed
    in favor of taxation==

    The hospital devoted so little of its resources to charitable issues in 2002, the year in question. That Provena spent $38 Million in charitable works in 2008 is only relevant as to the 2008 taxes.
    Each year should be a case by case basis. If they are not charitable enough to meet the test, then they ought to pay their fair share to the local governments that serve them.


  3. - Robert Zimmerman - Thursday, Mar 18, 10 @ 10:40 am:

    so now we can expect free YMCA memberships and tix to the opera right?


  4. - Anonymous - Thursday, Mar 18, 10 @ 10:44 am:

    The big question is what happens next. If Provena can’t pass muster its unlikely any of the big hospitals can. Do all of their exemptions get yanked? Do local officals just ignore the ruling and continue with business as usuall until someone challenges an exemption?


  5. - Cal Skinner - Thursday, Mar 18, 10 @ 10:52 am:

    Looks like hospital costs will be going up.


  6. - Amalia - Thursday, Mar 18, 10 @ 10:55 am:

    it is absolutely not true that big hospitals will be unable to pass muster, and that they will fail like Provena. there just seem to be a group of hospitals which do not provide the care they must by law to get the exemption. this decision emboldens all those protesting against other hospitals, and makes it clear that it
    is way past time to anty up.


  7. - PFK - Thursday, Mar 18, 10 @ 10:58 am:

    While I agree “charitable activities” are an important part of a hospital’s mission, it’s not the only community benefit that a hospital provides.

    How do you calculate the benefit of having a hospital in your community, as opposed to 30 or even 45 minutes from your house?

    People need to remember that a hospital just being there is a community benefit in itself.

    As for billing practices, hospitals were never aggressive about collecting bills until really the last 10 or so years. When you have payers like Blue Cross basically skimping on reimbursements and using their market share to threaten to put hospitals out of business (see Condell in Libertyville). The state is behind on payments. Medicare is about to be cut. You can see why hospitals have had to step up their collections.

    Single payer is, to my mind, the only way out that will keep hospitals open, nonprofit and independent.


  8. Pingback McHenry County Blog | Looks Like Hospital Costs Could Be Going Up - Thursday, Mar 18, 10 @ 11:10 am:

    […] A decision by the Illinois Supreme Court striping Champaign’s Provena Hospital’s not-for-profit real estate tax exemption will reverberate across the state. Thanks to Capital Fax Blog for alerting me to the case. […]


  9. - Angry Chicagoan - Thursday, Mar 18, 10 @ 11:19 am:

    Decisions like this will force more hospitals towards a for-profit model, driving up consolidation in the industry and driving up costs to patients and insurers. If a hospital has no realistic way of avoiding being taxed like a commercial business, then it has to operate like one.


  10. - Yellow Dog Democrat - Thursday, Mar 18, 10 @ 11:30 am:

    Just for kicks, I checked the Illinois AG’s charity database.

    Despite having been around since 1998, it doesn’t appear that Provena Hospitals has EVER filed the required financial documents with the state.

    Things could get even worse for Provena, BTW. If they accepted “charitable” contributions which donors then claimed as a tax deduction, they’re going to have some explaining to do.


  11. - Ann - Thursday, Mar 18, 10 @ 11:44 am:

    I don’t think the Supreme Court’s ruling will have any effect on Provena’s 501(c)3 status–they’re quite different standards. But this is an excellent decision. The community is supposed to be gaining something of significance in exchange for the lost property taxes. When poor people end up paying more than insured people (”Further undermining Provena Hospitals’ claims of charity is that even where it did offer discounted charges, the charity was often
    illusory. As described earlier in this opinion, uninsured patients were charged PCMC’s “established” rates, which were more than double the actual costs of care. When patients were granted discounts at the 25% and 50% levels, the hospital was therefore still able to generate a surplus”) they’re not being helped.
    Ultimately, however, commenter 47th Ward says it best. We need to have health care reform so Provena, and other hospitals, are not always having to struggle to balance their mission to serve the community against their need to continue to operate.


  12. - ChampaignGuy - Thursday, Mar 18, 10 @ 12:08 pm:

    Yellow Dog:

    That’s funny because I managed to find it:

    PROVENA HOSPITALS
    Reg. Number: 01033595
    EIN: 364195126
    Address: 9223 WEST ST. FRANCIS ROAD
    FRANKFORT, IL 60423


  13. - D.P. Gumby - Thursday, Mar 18, 10 @ 1:10 pm:

    Angry Chicagoan misses the boat saying this will run up the costs blah blah blah…The opinion notes that the revenue after costs and expenses etc. for the year in question was $10.5 million…they can easily absorb the $1 million property tax and providing services. For a not-for-profit, that’s a hell of a profit!


  14. - Downstate weed chewing hick - Thursday, Mar 18, 10 @ 1:40 pm:

    YDD, there is no issue with charitable donations. This is a property tax case, not a rejection of its 501(c)3 status.


  15. - Mike - Thursday, Mar 18, 10 @ 2:38 pm:

    Not for profit hospitals have a two tier set up in Illinois. Provena, like most Catholic systems, has very little endowment, compared to Northwestern, Rush, Advocate, etc. The lower tier systems tend also to serve poorer communities, and be more dependent on Medicare and Medicaid. Not surprisingly, their facilities tend to be more rundown as well. Health care reform as currently planned will not “help” the lower tier systems, but probably will hurt them less than the higher-tier systems, who over a few years, will look more like Provena Mercy in Aurora and less like Central DuPage.


  16. - 47th Ward - Thursday, Mar 18, 10 @ 2:46 pm:

    ===Health care reform as currently planned will not “help” the lower tier systems, but probably will hurt them less than the higher-tier systems===

    Mike, how exactly will providing health insurance to 95% of Americans hurt hospitals? The problem in the Provena case was that they weren’t providing sufficient “charity” care to merit their property tax deduction.

    As soon as most of the 31 million Americans who lack insurance get covered, there will be far fewer cases of patients who cannot pay their bills. If 95% of Provena’s patients can pay their bills, how is that not a good thing for Provena and every hospital?

    Your argument has no merit.


  17. - Mike - Thursday, Mar 18, 10 @ 3:12 pm:

    Hospitals will not have more revenues if 95 percent of the population now have insurance unless true, non-inflationary, funding is found to pay for their care. The current plan cuts Medicare provider payments by 400 billion dollars; since about 40 percent of provider revenue is supplied by Medicare, this will result in lower revenue. Many of these 30 million new insured will be covered by Medicare and Medicaid. Hospitals will have to cost shift even more to private insurers,who will pass the cost on to their employer groups. Cadillac taxes seek to limit private insurance advantages in this regard. At best, it is probably all revenue neutral, if you believe that Congress will actually cut Medicare, adding 30million more insured, keeping the same total funding. More likely, Congress won’t and society will have to find more money somewhere to pay for the additional costs. Good luck with that. In order to believe what you believe, hospitals in the UK and Canada must be nicer, and offer more services than those in the US. This is self-evidently untrue, if you have been in any UK or Canadian hospital.


  18. - 47th Ward - Thursday, Mar 18, 10 @ 3:44 pm:

    ===In order to believe what you believe, hospitals in the UK and Canada must be nicer, and offer more services than those in the US. This is self-evidently untrue, if you have been in any UK or Canadian hospital.===

    Playing the Canadian/UK health care card? Really?

    *sigh*


  19. - wordslinger - Thursday, Mar 18, 10 @ 5:10 pm:

    That’s a real big deal for some inner ring suburubs (Oak Park, Oak Lawn, Evanston, Berwyn) that have some pretty big hospitals with associated doctors’ office buildings, also tax-exempt up to now. Local governments have had their eye on those properties forever.


  20. - Peggy SO-IL - Thursday, Mar 18, 10 @ 6:07 pm:

    This is poetic justice today for the habit-less nuns and their “Catholic” hospitals.


  21. - RJW - Thursday, Mar 18, 10 @ 6:16 pm:

    I applaud the ruling. I think hospitals should be MANDATED to provide a certain amount of charity care. Of course I’m also opposed to for-profit healthcare of any kind.


  22. - Bookworm - Thursday, Mar 18, 10 @ 8:44 pm:

    I find it very ironic that this decision came on the heels of the Catholic Health Association deciding to endorse the Obama healthcare plan, despite very serious concerns about its provisions regarding abortion and lack of conscience protection.

    In fact the CHA (which intervened in this court case) has publicly gone against the clear warnings of the U.S. bishops and other groups regarding the moral dangers of the healthcare bill.

    With that in mind, one could view this decision in two ways: 1) as yet another attempt to drive Catholic hospitals out of business and force everyone to be dependent on the government for health care, or 2) a sort of poetic justice.

    If Catholic hospital execs (as a group, not necessarily as individuals) think government funded healthcare is so wonderful, to the point of selling out their moral principles to endorse it, then maybe it’s only fair they should have to help pay for it? If they want to be just like any other business (complete with a trade association CEO/nun that makes in excess of $800,000 a year), then one could ask… why shouldn’t they be taxed like any other business?

    What the government gives, the government can just as easily take away.


  23. - 47th Ward - Thursday, Mar 18, 10 @ 9:04 pm:

    ===With that in mind, one could view this decision in two ways: 1) as yet another attempt to drive Catholic hospitals out of business and force everyone to be dependent on the government for health care, or 2) a sort of poetic justice.===

    Bookworm,

    First of all I’m Catholic and as big a supporter of religious hospitals (of all stripes) as you’ll ever come across, whether it’s Lutheran General, St. Joseph’s (my port of entry), Rush, or Mt. Sinai.

    Are you really suggesting the Illinois Dept. of Revenue made the decision to revoke the property tax exemption of Provena back in 2002, and that Provena’s suit worked its way through the entire Illinois judicial system and the Illinois Supreme Court waited until yesterday to decide simply to send a message to the Catholic Health Association to back off support for Obama’s health care bill (which is 100% consistent with the Hyde Amendment), and that this is part of a plot to do away with nonprofit hospitals?

    Which moral principles have been sold out? The Democrats’ bill is pro-life, and it addresses one of the top, long-time goals of the U.S. Conference of Bishops. The nuns are for it, alongside the Catholic Health Association and many other Catholics.

    Can you please clarify your post?


  24. - 47th Ward - Thursday, Mar 18, 10 @ 9:17 pm:

    It’s late, so I’ll add this when it won’t completely derail the thread:

    What I find ironic is that Obama’s legislation, which the House is going to pass this weekend is pro-life, doesn’t include single payer or even a modest public option, and its centerpiece is tax credits for businesses.

    And the Republicans still won’t support. And moreover, they insist they had no input! That’s rich.

    If this was truly an Obama-Democratic only bill, how come abortions aren’t mandatory under a single payer system that outlawed private interests in health care? Listening to how my party is described before every election, that’s the bill I should expect as a partisan, flaming Democrat. Instead, I got a watered-down bill.

    This is bipartisanship in 2010. A sweeping, historic piece of legislation that should be titled the Bauchus-Snowe Health Care Reform Act of 2010 is instead ridiculed as Obamacare.

    In 30 years, will the GOP still call it Obamacare? I hope so, and I know I will just to stick it to my GOP friends.


  25. Pingback That vibration you feel this morning is due to the administrators at Peoria’s big three hospitals quaking in their boots in fear | Peoria Pundit - Friday, Mar 19, 10 @ 7:35 am:

    […] Via Rich Miller: A new opinion by the Illinois Supreme Court is very bad news for not-for-profit hospitals in Illinois who want to qualify for local tax exemptions. […]


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