State Challenges Hospitals on Charity Care

August 18, 2011

New rulings by the Illinois Department of Revenue have reignited a debate over whether the State’s non-profit hospitals provide adequate charity care to patients in exchange for their property-tax exemptions.

On August 16, 2011 the Department of Revenue denied property tax exemptions to three hospitals and said it was reviewing applications from 15 others seeking exemptions . As is customary for the Revenue Department, the rulings state that the ownership and use of the properties do not qualify for tax exemptions but do not give reasons for the decisions.

However, Revenue Department officials said that the rulings were based on guidelines established by an Illinois Supreme Court opinion in March 2010. In that case, the Supreme Court upheld a determination by the Department of Revenue that Provena Covenant Medical Center in Urbana was not entitled to an exemption partly because it provided a minimal amount of charity care. The hospital delivered charity care costing $831,724, or 0.72% of its revenues, in 2002, when the exemption was sought. The tax bill for the property was estimated at $1.1 million.

The three hospitals affected by the August 16 rulings—Northwestern Memorial’s Prentice Women’s Hospital, Edward Hospital and Decatur Memorial Hospital—plan to appeal. They have 60 days to request a hearing before an administrative law judge.

If non-profit hospitals end up paying property taxes in Illinois, the revenues would go to local governments or to other taxpayers in the form of lower property tax rates. Cook County Board President Toni Preckwinkle applauded the Department of Revenue’s actions at an unrelated press conference on August 16 and said that many hospitals deliver a “paltry” amount of care to uninsured patients. Cook County’s public health system, which is facing severe financial problems, provides more charity care than any other institution in the State.

The Illinois Hospital Association issued a statement expressing deep concern about the rulings and said requiring non-profit hospitals to pay property taxes could lead struggling hospitals to reduce services. The hospital association is working on a legislative solution to the issue.

A legislative solution will likely be needed because existing Illinois law is vague on the taxation of property owned by non-profit hospitals. The Illinois Constitution (Article IX, Section 6) allows the General Assembly to exempt from taxation property that is publicly owned and property that is “used exclusively for agricultural and horticultural societies, and for school, religious, cemetery and charitable purposes.” The General Assembly has required (35 ILCS 200/15-65) that the property in question be “actually and exclusively used for charitable or beneficent purposes, and not leased or otherwise used with a view to profit.” The legislature has also required that the property be owned by an institution of public charity or certain other organizations, including “old people’s homes,” qualifying not-for-profit health maintenance organizations, free public libraries and historical societies.

The courts have defined charitable use and, for institutions like hospitals for which the law does not provide blanket exemptions, established standards for charitable ownership. A widely cited case decided by the Illinois Supreme Court in 1968 (Methodist Old Peoples Home v. Korzen) identified five characteristics of a charitable institution:

  • It has no capital, capital stock or shareholders;
  • It earns no profits but derives its funds mainly from charity and holds them in trust;
  • It delivers charity to all who need and apply for charity;
  • It does not provide private gain to any affiliated person; and
  • It does not appear to place any obstacle in the way of those who need and want its charitable benefits.

In the Provena case, the Supreme Court found that the hospital did not use the property actually and exclusively for charitable purposes because it received compensation for the overwhelming majority of its services. The Court also found that Provena’s parent company, the actual owner of the property, had not provided evidence that it was a charitable institution.

The Provena decision did not appear to bring clarity to the debate because only three of the seven Supreme Court justices agreed that a monetary threshold for charity care was appropriate. Two justices did not participate in the opinion. Two others disagreed with quantifying the charity care requirement but went along with the conclusion concerning charitable ownership.

Instead of charity care, many hospitals prefer a broader measure of benefits they provide to the community. The Community Benefits Act (210 ILCS 76) requires that hospitals file annual reports with the Illinois Attorney General’s Office showing the cost of charity care and all other unreimbursed community benefits provided, including services under the Medicaid and Medicare programs, uncollected debt, public education and research. Charity care is defined as “care provided by a health care provider for which the provider does not expect to receive payment from the patient or a third party payer.”

In 2010 the Northwestern Memorial system, which includes Northwestern Memorial Hospital, Northwestern Lake Forest Hospital and Northwestern Memorial Foundation, reported that it provided total community benefits of $267.7 million, including $44.0 million of charity care. The largest benefit provided was the unreimbursed cost of Medicaid and Medicare ($117.2 million), followed by training ($49.9 million) and uncollected payments ($29.8 million). Total community benefits represented 18.8% of net patient revenues of $1.5 billion, while charity care constituted 3.0%. In 2007, the year it applied for property tax exemption for its newly constructed women’s hospital, Northwestern provided $21.8 million of charity care, or 1.9% of patient revenues.

For more information on property tax exemptions, please see the Civic Federation’s April 2010 report, The Cook County Property Assessment Process: A Primer on Assessment, Classification, Equalization and Property Tax Exemptions in Cook County.