Illinois hospital not charitable enough to merit tax exemption

The state high court ruling could make it difficult for other facilities to maintain a property tax exemption.

By Amy Lynn Sorrel — Posted April 19, 2010

Print  |   Email  |   Respond  |   Reprints  |   Like Facebook  |   Share Twitter  |   Tweet Linkedin

A recent Illinois Supreme Court decision could set in motion new standards for hospital charity care requirements.

In a case that caught national attention, the high court upheld the revocation of Provena Covenant Medical Center's property tax exemption status after finding that the nonprofit facility did not provide enough charity care in 2002 to qualify for its $1.1 million tax break.

"Both the number of uninsured patients receiving free or discounted care and the dollar value of the care they received were [minimal]," the court said. Rather than charity care being its primary purpose, "with very little exception, the property was devoted to the care and treatment of patients in exchange for compensation through private insurance, Medicare and Medicaid," or other fee-based sources.

The March 18 ruling affirmed a 2003 decision by a local tax review board to deny Provena's tax exemption status after learning that the Catholic hospital's charity services amounted to less than 1% of its 2002 total revenues.

Hospital charity care practices have become the subject of increased scrutiny at the state and federal levels. But legal experts and hospital executives said the ruling sets the bar high at a time when hospitals can least afford it.

While Illinois law requires hospitals to show that they are being used for charitable purposes, it does not spell out specific levels of charity care, said Elizabeth M. Mills, a health care attorney with Proskauer Rose LLP in Chicago.

According to the opinion, hospitals likely would have to show that a majority of their care was charity care, "and that's a fairly drastic approach," she said. "There are very few hospitals that can meet that standard or raise enough contributions to be supported that way, because most are supported by payments from other payers so they can provide charity care to those who can't pay."

Provena insists it is a charitable organization, noting that the hospital provided more than $38 million in free care and other benefits in 2008.

"We can only hope this troubling ruling prompts a dialogue among hospitals and elected officials ... about not only how we define charity care, but also how we better ensure that the people who need financial assistance get it," Provena President and CEO David Bertauski said.

But Illinois Attorney General Lisa Madigan, who represented the state Dept. of Revenue in the case, said the decision helps ensure hospital accountability, calling it good news for the nearly 2 million uninsured in the state.

Justices did not dispute that Provena offered treatment to all who requested it, regardless of their ability to pay. But in addition to deriving its revenues mainly from fee-for-service payments, the court took issue with certain obstacles the hospital created for indigent patients, rather than making charity care freely available. For example:

  • Provena did not advertise the availability of charity care.
  • Patients were routinely billed, and unpaid bills automatically were referred to collection agencies.
  • Hospital charges were discounted only after patients proved that they qualified for charitable programs.

"As a practical matter, there was little to distinguish the way in which [Provena] dispensed its 'charity' from the way in which a for-profit institution would write off bad debt," the court said.

But dissenting justices objected to the use of certain quantitative factors -- such as the number of uninsured patients treated and value of such uncompensated care -- in evaluating hospitals' charitable status. State law did not set out such thresholds, and nor should the courts, the dissenting opinion states.

Because levels of uncompensated care constantly change, "it's an impractical standard, because the same organization's tax status could change year to year," said Chicago health care regulatory lawyer Daniel J. Lawler, a partner with K&L Gates.

While such cases are fact-specific, the court ruling could lead to more challenges, Lawler added.

U.S. Sen. Charles Grassley (R, Iowa), the ranking Republican on the Senate Finance Committee, pledged to continue his efforts to investigate hospitals' charity care practices and develop uniform tax reporting standards.

"This ruling underscores what the Government Accountability Office and others, including the former IRS commissioner, have said for a long time. There is often no discernible difference between the operations of taxable and tax-exempt hospitals," Grassley said. "Tax-exempt hospitals should give more attention to their charitable activities."

The federal health reform law includes new income tax exemption requirements for hospitals that could guide the process, health care attorney Mills said. Hospitals are required, for example, to have a charity care policy in place, avoid extreme collection actions and provide a community needs assessment.

While the rules do not include specific charity care requirements, such measures are a likely next step, Mills said. "The problem with setting minimum standards is, the minimum becomes the maximum."

Back to top


Case at a glance

Did an Illinois hospital provide enough charity care to merit a property tax exemption?

The Illinois Supreme Court said no.

Impact: Legal experts and hospital executives say the ruling couldmake it more difficult for hospitals to maintain tax-exempt status if they cannot balance charity care with fee-based services. Some state officials and federal lawmakers say the decision holds hospitals accountable for their charity care practices.

Provena Covenant Medical Center v. Dept. of Revenue, Illinois Supreme Court

Back to top



Read story

Confronting bias against obese patients

Medical educators are starting to raise awareness about how weight-related stigma can impair patient-physician communication and the treatment of obesity. Read story

Read story


American Medical News is ceasing publication after 55 years of serving physicians by keeping them informed of their rapidly changing profession. Read story

Read story

Policing medical practice employees after work

Doctors can try to regulate staff actions outside the office, but they must watch what they try to stamp out and how they do it. Read story

Read story

Diabetes prevention: Set on a course for lifestyle change

The YMCA's evidence-based program is helping prediabetic patients eat right, get active and lose weight. Read story

Read story

Medicaid's muddled preventive care picture

The health system reform law promises no-cost coverage of a lengthy list of screenings and other prevention services, but some beneficiaries still might miss out. Read story

Read story

How to get tax breaks for your medical practice

Federal, state and local governments offer doctors incentives because practices are recognized as economic engines. But physicians must know how and where to find them. Read story

Read story

Advance pay ACOs: A down payment on Medicare's future

Accountable care organizations that pay doctors up-front bring practice improvements, but it's unclear yet if program actuaries will see a return on investment. Read story

Read story

Physician liability: Your team, your legal risk

When health care team members drop the ball, it's often doctors who end up in court. How can physicians improve such care and avoid risks? Read story

  • Stay informed
  • Twitter
  • Facebook
  • RSS
  • LinkedIn