The Circuit Court of Sangamon County today reversed the Illinois Department of Revenue's (Department) revocation of Provena Covenant Medical Center's (Provena) property tax exemption for the tax year 2002. This highly publicized case has been watched closely by hospitals and other tax exempt entities since the Department issued a decision last year revoking Provena's exemption for hospital property in Urbana, Illinois. The Department reasoned that Provena was not a charitable organization because its primary purpose was not the provision of charity, emphasizing the fact that the cost of providing charitable care amounted to 0.7 percent of Provena’s total revenues. Today's ruling was made from the bench following argument of counsel. As a consequence, no written opinion or decision has been issued providing insight into the judge's decision. The decision is subject to appeal by the Department.

Illinois law grants property tax exemptions to certain organizations, including charities, whose property is actually and exclusively used for charitable purposes. An institution is charitable if providing charity is its primary purpose and not merely a secondary purpose or incidental effect. The factors that determine whether an organization is charitable are: (1) the benefits it creates -- whether educational, religious or otherwise -- go to an indefinite number of people; (2) it has no capital, capital stock or shareholders, and earns no profits or dividends, but rather derives its funds mainly from public charity; (3) it dispenses charity to all who need and apply for it; (4) it does not provide gain or profit in a private sense to any person connected with it; and (5) it does not appear to place obstacles of any character in the way of those who need and apply for the charitable benefits it dispenses.

In denying the property tax exemption, the Department emphasized the fact that Provena’s 2002 revenues were over $113 million, while the cost of providing charity care was about $830,000. Thus, charity care amounted to less than one percent of total revenues, which the Department found “seriously insufficient” to justify a property tax exemption. The fact that Provena provided many vital services, including emergency room services, under contract with for-profit organizations was also highly significant, especially in light of the lack of any evidence that these for-profit contractors followed Provena’s charity care policy. The Department was not persuaded that an indicator of charity care was compliance with federal law that requires screening and treatment of all people who request treatment in emergency rooms.

The Department criticized Provena’s charity care policy, which it said did not dispense charity to all who needed it. The policy was based on a sliding scale according to income level, providing a greater degree of relief to more impoverished patients. But patients at the same poverty level were offered the same percent reduction, leaving some with thousands of dollars in medical debt even after the reduction in charges. Moreover, patients with unpaid charges, even those who received reductions in their bills due to poverty, were referred to collection agencies. Provena also did not adequately publicize its charity care policy. The Department called these and other practices the “illusion of charity.”

The Department considered other issues, including the fact that well under one percent of Provena’s total revenue came from public and private donations. Also, it rejected the argument that unreimbursed costs by Medicare and Medicaid constituted charity care. It decided that the primary use of Provena’s property was for the exchange of services for payment, which the Department did not recognize as “charitable.” These facts, along with an inadequate charity care policy and the low cost of providing charity care compared to total revenues led to the conclusion that Provena was not a charitable organization, and therefore the Department rejected Provena’s application for a property tax exemption.

Earlier this year the Department recently denied applications for property tax exemption by two Illinois hospitals, Carle Foundation Hospital and Richland Memorial Hospital. These rulings represent a continuation of a policy of denying property tax exemption to hospitals that, in the Department’s view, are not organized and operated “exclusively for charitable purposes.” The Department appeared to focus on the amount of free care the hospitals provided, rather than the sum of all benefits that the hospitals conferred on their communities. In denying property tax exemption to Carle Foundation Hospital, the Department accepted the findings of the Champaign Board of Review, which previously had denied the hospital’s application. But the Department rejected the findings of local taxing officials who originally had granted property tax exemption to Richland Memorial Hospital when it denied that hospital’s application. The Department denied a property tax exemption to Provena Covenant Medical Center of Urbana, Illinois in September 2006, when it overruled an administrative law judge’s decision to grant the hospital a property tax exemption. The Department then concluded that the hospital’s provision of free care was insufficient under state law. Both Carle Foundation Hospital and Richland Memorial Hospital have indicated that they will appeal the denials of their applications for property tax exemption.

The Champaign Board of Review, in recommending a denial of Carle Foundation Hospital’s application for exemption, expressed its concern about the relationship between the hospital and a physician group that, in the Board’s view, used the hospital as a venue to pursue its own for-profit enterprises. The Board concluded that the hospital and physician group were “separate entities only on paper” because the “long-standing pattern of intimate business connections” allowed the physician group to exert control over the hospital and its medical staff. In treating this relationship as a “central issue,” the Board employed the concept of “private inurement,” a factor in federal charitable exemption law that local boards have historically not considered in reviewing property tax exemption applications. The Board found the hospital’s arrangement with the for-profit physician group “particularly troubling” in light of the “relatively small amount of true charity care that is actually provided and the Hospital's practice of overpricing and then suing their uninsured patients.” The Board indicated that no hospital that permits this fundamental unfairness to exist can be considered charitable or tax-exempt. The Department of Revenue accepted the Champaign Board of Review’s findings and recommendation of denial of the Carle Foundation Hospital application for property tax exemption. 

While Illinois not-for-profit healthcare providers should be encouraged by today's news, this decision has no precedential value and is subject to appeal. Those seeking to obtain or maintain exemptions from property tax or sales tax should continue to monitor these cases and take steps appropriate to justify their exemptions.

For further information, please contact Stephen T. Moore or your regular Hinshaw attorney.

This alert has been prepared by Hinshaw & Culbertson LLP to provide information on recent legal developments of interest to our readers. It is not intended to provide legal advice for a specific situation or to create an attorney-client relationship.