Illinois Department Of Revenue Upholds Revocation Of Hospital’s State Property Tax Exemption
by Stephen E. Weyl , Hinckley, Allen & Snyder LLP, Boston, MA
In a long-awaited ruling in a highly contested case, the Illinois Department of Revenue (Department) upheld the decision of the Champaign County Board of Review (Board) that Provena Covenant Medical Center (Provena) was not entitled to a real estate tax exemption on certain of its properties for the 2002 tax year. The taxes in question amount to $1.1 million before interest. In reaching his decision, the Director of the Department overruled the recommendation of an administrative law judge that the Board's decision be reversed. Although Provena has indicated that it will appeal the ruling, the Department's decision has far-ranging implications for hospitals and healthcare systems not only in Illinois, but throughout the United States.
Over the past several years Congress has held hearings and the Internal Revenue Service has made inquiries relating to the tax-exempt status of hospitals under the Internal Revenue Code (Code). These federal investigations have been complemented at the state level by an increased scrutiny of the state law status of not-for-profit institutions, with the Provena case garnering the most attention.
In reviewing the law applicable to Provena's request for exemption, the Director recognized that Illinois law has consistently required "exclusive" use of charitable facilities (which has been construed to mean primary, rather than secondary or merely incidental, use under Illinois case law ). He also noted the familiar strictures in these cases: exemptions are a matter of specific constitutional and statutory provisions; statutory exemptions are construed narrowly, and in favor of taxation; applicants bear the burden of showing entitlement to exemption by clear and convincing evidence; and contested factual issues are resolved in favor of taxation. Finally, the Director reiterated the principle that a hospital's 501(c)(3) status under the Code does not, in and of itself, establish charitable status under state law.
The Director's decision focused on several factual issues, which underlay his conclusion that the Board's determination should be upheld. These included:
Provena's Charity Care Policy. Provena's charity care policy (Policy) stated that it would offer "'to the extent that it is financially able, admission for care or treatment...regardless of ability to pay....'" Payments by those meeting certain percentages of the federal poverty level were reduced by a sliding scale, a common practice among hospitals. The fact that the reduction was based on usual and customary charges – as opposed to charges to third party payors such as Medicare, Medicaid and third party insurers – appears to have troubled the Director, as did the fact that there was no relationship between the gross amount of the bill and the patient's actual ability to pay. The Director found that the widespread use of collection agencies by Provena to collect unpaid portions of these bills was "inconsistent with charitable activities."
To bolster its argument that it provided care to all those needing it, Provena pointed to the fact that its emergency room was open to all, regardless of ability to pay. The Director noted that under EMTALA, 42 U.S.C.A. §1395dd, "emergency facilities operators are required...to provide appropriate screening, and in many instances, treatment to every person who enters an emergency facility and requests examination or treatment for a medical condition."
Provena's Provision of Charity Care in 2002. Provena's cost of providing charity care in 2002 was $831,724, about 0.7% of its total net patient revenues of $113,494,000. The Director compared this cost to the amount of taxes in question – $1.1 million – and implied that an exemption request in excess of the cost of care actually provided was inappropriate and inconsistent with the both Illinois law and the Policy's stated objective of providing such care to the extent Provena was financially able to do so.
Provena argued that the amount of charity care it provided in 2002 also included in excess of $10 million for unreimbursed costs from Medicare and Medicaid patients. As permitted under these programs, Provena attempted to collect certain of these costs from these patients. The Director noted that this claim previously had been rejected by the Illinois courts in Riverside Medical Ctr. v. Dept. of Revenue, 342 Ill.App.3d, 795 N.E.2d 361 (3 rd. Dist 2003). The Director also rejected the concept that certain community activities and contributions constituted charity care, noting that such activities and contributions were common to both for-profit and not-for-profit hospitals.
Use of Provena's Facilities. As is often the case, many of Provena's services were provided by for-profit providers. These included the emergency department, pharmacy, clinical laboratory, MRI/CT, rehabilitation, cardiovascular surgery, laundry and neo-natal. The Director found no evidence to support the proposition that these providers adhered to the Policy, concluding "there is no evidence quantifying any charitable care provided to [Provena's] patients by the third parties with whom [Provena] contracted even though these third parties provide very substantial quantities of care to [Provena's] patients."
Provena's Charitable Contributions and Revenue Sources. A final factor in the decision was the small amount of charitable contributions received by Provena in 2002 compared to its overall revenues. Citing Korzen, supra, the Director asserted that Provena's receipt of "virtually no funds from public and private donations" – some $6,938 of unrestricted donations – was inconsistent with charitable status under Illinois law. Some 97.7% of Provena's revenues were comprised of patient service revenues, a fact which the Director likened to the case of Riverside Medical Ctr., supra. The Director found that
the primary use of the subject property in 2002 was for the exchange of services for payment. This is not a use of property that has ever been recognized by Illinois courts as "charitable". The fact that 97.7% of [Provena's] revenue in 2002 was generated from the exchange of services for payment supports the conclusion that the subject property was not 'exclusively' used for charitable purposes in 2002, as is required by the statute. Clearly...the primary use of the subject property here was to provide care to patients who were able to pay, either individually, or through Medicare, Medicaid or private insurance.
The Director also reviewed the charity care costs and revenues of Provena's parent, concluding that its activities were similar to those of Provena. He further rejected a claim that, because of its religious affiliation, Provena was entitled to exemption on that basis.
The Decision already has generated substantial discussion, comment and criticism, and, as indicated above, Provena intends to appeal. Regardless of the outcome of the appeal process, it should be noted that state administrative and judicial bodies are already taking a much closer look at hospitals' clams that they are entitled to property tax exemptions. Because the definition of what constitutes a "charity" for state law purposes is an issue of state law, in light of the fact that many taxing authorities are seeking to expand their revenue bases, and given the increasing scrutiny of the similarities and differences between for-profit and not-for-profit hospitals, it may well be that the Provena case has far greater implications than the specific decision itself.
Consequently, hospitals and their counsel may wish to review the Decision with care to determine whether proactive measures can and should be taken to maximize the likelihood of retaining state tax exemptions.