Hospital loses latest fight over tax-exempt status

An Illinois medical center did not provide enough charity care to qualify for a property tax exemption in 2002, an appellate court ruling states.

By — Posted Sept. 22, 2008

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An Illinois appeals court decision affirming that one nonprofit hospital must pay property taxes could call into question hundreds of millions of dollars in exemptions claimed by hospitals throughout the state.

The Illinois Fourth District Court of Appeals on Aug. 26 found that Provena Covenant Medical Center in Urbana, Ill., did not provide enough charity care in 2002 to merit its $1.1 million property tax exemption. The hospital will petition the Illinois Supreme Court to hear the case. Provena Health, a Catholic health system, owns five other hospitals in Illinois.

An attorney with the Illinois Hospital Assn. said the ruling ignores a century of case law and too strictly interprets what types of hospital services should be considered charitable.

The case began when a citizens group in Champaign County, Ill., challenged Provena Covenant's property tax exemption, said Mark Deaton, general counsel for the hospital association, which filed briefs in support of the medical center. The Champaign County Board of Review revoked the hospital's 2002 exemption, saying the hospital did not provide enough charity care. An administrative judge for the Illinois Dept. of Revenue and a circuit court disagreed with the Board of Review, but the Illinois Dept. of Revenue upheld the board's original decision and appealed the circuit court's ruling.

"In a way, it's been a little bit of a pingpong match," Deaton said.

The state's constitution does not provide much room for interpretation when it comes to property tax exemptions, said Mike Klemens, a spokesman for the Illinois Dept. of Revenue. "The rule is taxation and the exemption is the exception."

The constitution says only property used "exclusively for charitable purposes" qualifies, which has been interpreted instead to mean property used "primarily" for charitable purposes, Klemens said. The Dept. of Revenue concluded that Provena Covenant provided charity care equal to only 0.7% of its total revenues in 2002. That year the hospital gave free care to 196 patients and discounted care to 106 patients out of 110,000 admissions.

But the standard for meriting a property tax exemption is more complex than simply calculating a percentage, Deaton said. Property owned by hospitals, art galleries and volunteer fire departments historically has been exempted from taxes because the organizations themselves have been considered to have "charitable purposes," he said.

Instead, the Illinois Dept. of Revenue has interpreted the standard as requiring "free care to poor people," Deaton said. "There's a huge difference between charitable purposes and charitable care."

The department's interpretation doesn't account for hospitals' losses from caring for people on Medicaid and Medicare, which don't always cover hospitals' care costs, Deaton said. The standard also doesn't account for other uncompensated care.

Deaton estimated that Illinois nonprofit hospitals might owe hundreds of millions of dollars in property taxes if the Provena case standards were applied to all of them.

The appeals court decision could encourage other local governments to follow in the footsteps of Champaign County by challenging the tax exemption of nonprofit hospitals, said an aide to U.S. Sen. Charles Grassley (R, Iowa). Grassley, the Senate Finance Committee's ranking Republican, has been investigating hospitals' property tax exemptions since 2005 and is considering legislation that would set national standards for hospitals to qualify for such exemptions.

New hospital charity care reporting requirements from the Internal Revenue Service should shed more light on the issue and help determine the next move, the Grassley aide said.

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External links

Provena Covenant Medical Center and Provena Hospitals v. the Dept. of Revenue of the State of Illinois, Appellate Court of Illinois, Fourth District, Aug. 26, in pdf (link)

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