Hospital groups join legal battle for tax exemption

National and local hospital groups are going to bat for an Illinois hospital that is fighting to reclaim its tax-exempt status, arguing that the outcome of the case could affect health care access nationwide.

Five hospital groups, including the American Hospital Assn. and the Catholic Health Assn. of the United States, filed a court brief supporting the hospital in its legal battle and saying the case could be a template for others nationwide.

"Denying Provena Covenant [Medical Center] its property tax exemption potentially brings into question the exempt status of nearly every Illinois nonprofit hospital. The resulting financial drain on those hospitals if their tax exemptions, too, subsequently were revoked would seriously jeopardize access to quality hospital services for every Illinois resident," the brief said. "The rationale applied in this case will likely influence the views of local and state taxing authorities throughout the nation."

The groups announced their involvement Feb. 15, nearly two months after the case was tried before an administrative law judge. Provena, a nonprofit, 270-bed acute care hospital serving the Champaign-Urbana area, had gone to court to appeal a February 2004 decision by the state Dept. of Revenue to yank its charitable property tax exemption. A ruling is expected after April 1.

Observers say it could be a bellwether case as scrutiny of nonprofit hospitals heats up. In the past year, numerous lawsuits have accused nonprofit hospitals of overcharging the uninsured, spotlighting the question of how these facilities live up to their charitable missions.

"This is an unprecedented case," said Patrick Coffey, attorney for Provena and partner with Gardner, Carton & Douglas LLP in Chicago. "I think it is clearly related to the controversy that exists in this country when it comes to nonprofit health care and its role in helping patients who are uninsured or otherwise in need."

Coffey said Provena has served the community as a charitable hospital for 80 years. "There is no question that the hospital serves a critical community need and relieves the government of millions of dollars worth of care and other community benefits that are charitable in nature," he said.

But the state reached a different conclusion, which meant Provena owed more than $1 million in taxes. At the trial in December 2004, the revenue department's lawyer argued that Provena had not sufficiently proven that it deserves tax exemption.

Cynthia Reaves, a Detroit health attorney who focuses on tax-exempt organizations, said the case was important in part because "it is widely thought that the local regulators narrowly read the local ordinances about whether this property should be classified as being used for charitable exempt purposes."

Reaves said local authorities focused on the fact that Provena subleased space at the hospital to for-profit organizations, including physician groups. But she said the Internal Revenue Service previously had ruled that making space available to physicians on the campus of an exempt hospital wouldn't threaten the exemption if those physician services were available to patients at the hospital.

"It's difficult to reconcile the guidance that we have from the federal regulations in the form of the IRS, with the local regulations in Illinois," she said.