The Illinois Supreme Court ruled today that Provena Hospital did not provide sufficient charity care to qualify for a property tax exemption. This widely watched case is likely to send shock waves through nonprofit hospitals through out the country. Cash strapped state and local governments are likely to be...
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inspired by it, resulting in aggressive challenges to property tax exemptions claimed by other nonprofit hospitals and health care providers. Hospital executives are undoubtedly huddling with their lawyers as this is written, asking how their own property tax exemptions might be vulnerable.
The Provena decision comes at a time when the nation's legislators are embroiled in a bitter battle over health care reform. While the decision is likely to have little impact on the vote that is expected later this week in Washington, it should serve as a warning--health care finance is not easy and health care reform, if enacted, will not solve the question of who pays for health care.
The decision is relatively straightforward. The court begins its analysis by noting that the standards for federal income tax exemption differ from those for Illinois property tax exemption. This is hardly a surprising conclusion. The decision then works its way through a five-factor test that the court had previously employed as the test for defining whether charitable institution is engaged in charitable activity for purposes of Illinois property tax exemption. The following are the five factors: (i) the organization has no capital, capital stock, or shareholders; (ii) the organization earns no profits or dividends but rather derives its funds mainly from private and public charity and holds them in trust for the purposes expressed in the charter; (iii) the organization dispenses charity to all who need it and apply for it; (iv) the organization does not provide gain or profit in a private sense to any person connected with it; and (v) the organization does not appear to place any obstacles in the way of those who need and would avail themselves of the charitable benefits it dispenses.
At the end of the day, the court applied these factors in such a way that a hospital will need to put itself in bankruptcy to qualify for property tax-exemption in Illinois. As we read the facts, Provena is using cross subsidies and Medicare and Medicaid volume to keep its door opens. This is not enough. If the Illinois Supreme Court had its way, Provena would have to advertise that it is offering free services to all people below a certain income level, encouraging them to come in not only for emergency services, but also for routine medical exams and preventive care. That's a nice sentiment, but a hospital that operates that way is not economically viable in the context of the existing health care system. Like the national debate currently taking place in Washington, the Illinois Supreme court's decision is simply unrealistic.
Provena's lawyers must have known they were in trouble when they read the discussion of the first factor, with the court stating:
Provena Hospitals clearly satisfies the first of the factors
identified by this court in Methodist Old Peoples Home v. Korzen for
determining whether an organization can be considered a charitable
institution: it has no capital, capital stock, or shareholders.
The court quickly continued that Provena met the fourth factor: Provena provides no gain or profit in a private sense to any person connected with it. In federal tax lingo, there is no private inurement, which is different from paying people fair value for their services.
Then, as should have been expected, the court dropped the other shoe. It begins by noting that Provena failed the second factor. It did not derive its funds primarily from public and private charity. In the court's words, Provena's revenue comes "overwhelmingly, by providing medical services for a fee." Later in the opinion, the court noted that fees charged to patients who can afford to pay are set higher so that a portion of those fees can be used to fund care provided to patients who are unable to pay the full rate. The court conveniently fails to recognize that this in substance is a charitable contribution, albeit a forced one.
The court then addressed the third and fifth factors. It concluded that Provena did not dispense charity care to all who needed it and that there were obstacles to obtaining it. The court discussed in depth the procedure for applying for charity care, concluding that the process was collection focused, with charity care being given only when there no possibility of payment. Given the bottomless pit that would open if a hospital made its services widely available for no cost, we view efforts to determine whether the patient can pay prudent financial management.
The dispute in Provena comes down to a difficult definitional one: What constitutes charity? The court relied on court decisions from 1867 and 1893 to help it define charity. This is regrettable. Within the last 100 years, the definition of charity has evolved. Charity now is considered to encompass far more activities than just giving money away to the needy. The Illinois Supreme Court could have brought Illinois case law forward by enunciating a definition of charity that encompassed existing norms, but is chose not to do so.
Fortunately, the Illinois Supreme Court tipped its hand, giving us a glimpse of what really motivated this decision. It wrote:
The case before us is concerned solely with Provena Hospitals’ eligibility for a property tax exemption for the 43 parcels of real estate in the PCMC complex. If permitted, that exemption would result in the loss of tax revenue by the following taxing districts: Champaign County, Champaign County Forest Preserve District, Community College District 505, Unit School District 116, Urbana Corporation, Cunningham Township, Urbana-Champaign Sanitary District, Urbana Park District, Champaign-Urbana Mass Transit District, and Champaign- Urbana Public Health District.
For our out-of-state readers, Illinois is facing a $12 billion budget deficit on a $25 billion budget. The state legislature is gridlocked. Services are being cut. Against that backdrop, we are not at all surprised that the requirements for property tax exemptions were strictly construed. What the court failed to take into account was the finances of many nonprofit hospitals in Illinois. We did a sample several years ago. We found that many of the sampled nonprofit hospitals are operating at breakeven at best. The Illinois Supreme Court's decision will only exacerbate the problems these hospitals face if they now lose their property tax exemptions. If a few of these hospitals are forced to close, expect to see the burdens of government increase.
Several other points about the opinion are worth noting:
Threaded throughout the opinion is a discussion of which entities provided services and which entities held title to the real estate. While we would hope the substance would control, it appears that who holds legal title may make a difference. To be sure on the point, we would need to better understand Provena's corporate structure. We are willing to bet that Illinois health care lawyers who represent hospitals are busy talking to their counterparts in real estate law about restructuring which entities hold title to property.
The Illinois Supreme Court followed a lower court decision holding that discounted Medicare and Medicaid services are not charity care for purposes of the property tax exemption. The court's language almost suggests that the court felt bound by lower court precedent. Hmm.
The court refused to treat other benefits provided to the community by Provena as charitable--distinguishing charity care from community benefit. The court apparently believes that the only way a hospital can be charitable is to give its services away for free or at substantial discount. That may be the definition for charity care, but it is not the definition of charity. Here again, the court became bogged down in what are now archaic notions of what constitutes charity.
The court rejected Provena's argument that if Provena did not qualify for exemption because of its charitable activities, it should qualify for its religious activities.
And so there you have it. The Illinois Supreme Court has spoken.
If we were a social services agency receiving government funding pursuant to contracts for services, we would be nervous. If we were a museum that is now charging $15 for admission (and only offering free admission in February, the shortest month of the year, and one day of the week in other months), we would be nervous.
They're coming to get you. Let the fun begin.
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