On September 29, 2006, the Director of the Illinois Department of Revenue ("Department") issued a decision that, if allowed to stand, could significantly impact real property tax exemption for all nonprofit hospitals in the state of Illinois. The Director ignored the recommendation of the Department's Administrative Law Judge and denied Illinois real property tax exemption to Provena Covenant Medical Center ("PCMC"), a nonprofit hospital in Urbana, Illinois. The decision resulted from an appeal by PCMC of an adverse determination by the Champaign County Board of Review recommending denial of PCMC's request for real property tax exemption for the 2002 tax year. The implications of this decision are important for all nonprofit healthcare entities.

Although the Director noted in his decision that "[n]either Illinois cases concerned with charitable exemptions nor the General Assembly has specifically identified a minimum level of charity care necessary to qualify for a charitable exemption," he nevertheless ultimately concluded that PCMC's charity care practices and policies, the actual charity care provided by PCMC, and other aspects of the manner in which PCMC provided its services to the community it serves were all evidence showing that, in his view, the property did not qualify for exemption. His "nutshell" conclusion was expressed as follows:

The primary basis of my conclusion is simple: Covenant admitted that its 2002 revenues exceeded $113,000,000 and that its charitable activities cost it only $831,724, or about .7% of total revenue. The property tax exemption it requested was worth over $1,100,000. As noted below, to obtain the exemption Covenant was required to prove that its primary purpose was charitable care. These financial figures fall far short of meeting the primary purpose standard.

The Director's decision first identified the narrow issues as being (1) whether the subject property was owned by a charitable institution (i.e., whether PCMC was an "institution of public charity") and (2) whether the subject property was "actually and exclusively used for charitable purposes." It is not entirely clear whether the Director based his decision on the resolution of only one or both of these issues.

After briefly discussing the standards for exemption, the Director summarized five factors he distilled from two Illinois Supreme Court decisions as the keys for determining whether an entity is an institution of public charity:

  1. Whether the benefits derived are for an indefinite number of people ... for their general welfare or in some way reducing the burdens of government;
  2. Whether the organization has no capital, capital stock or shareholders, earns no profits or dividends, but rather derives its funds mainly from public and private charity and holds them in trust [for its charitable purposes];
  3. Whether the organization dispenses charity to all who need and apply for it;
  4. Whether [the organization] does not provide gain or profit in a private sense to any person connected with it; and
  5. Whether [the organization] does not appear to place obstacles of any character in the way of those who need and would avail themselves of the charitable benefits it dispenses.

He ascribed no particular weight to any factor, nor did he indicate how many must be satisfied to qualify for exemption. The Director did identify certain of his specific findings that he considered to be inconsistent with granting real property tax exemption to the PCMC property, including the following:

  • PCMC's revenues amounted to $113,494,000, and it waived only $1,758,940 in billings under its charity care policy - while its cost of providing the services generating the waived revenue was only $831,724, or approximately .723% of its total revenues (the expressed primary basis for his decision). Here, the Director, incorrectly applying a "constitutional" analysis, declared that this amount of charity care "is so seriously insufficient that it simply cannot withstand the constitutional scrutiny required to justify a property tax exemption" (with no citation of authority or other indication of how much charity care would be sufficient "to withstand the constitutional scrutiny required to justify a property tax exemption").
  • PCMC's assertion that all persons seeking emergency care at PCMC actually receive that care should be dismissed/discounted in significance because of the need to comply with EMTALA under federal law (which, in fact, establishes a quite different standard in that it generally requires only stabilization of persons presenting themselves for emergency care, not hospital admission and treatment).
  • PCMC's emergency facilities were operated by a for-profit corporation under contract with PCMC, and that corporation performed its own billing and collection activities; moreover, PCMC's assertion that this for-profit corporation was required (under the contract) to comply with PCMC's ER policies and procedures requiring the provision of care to all without discrimination and regardless of ability to pay was not supported by "competent evidence of record," nor was there any indication of the amount of ER charity care provided (presumably meaning that the claimed charity care was not sufficiently broken down for proper allocation among the ER and other PCMC activities).
  • PCMC contracted with unrelated for-profit providers for pharmacy services, clinical laboratory services, MRI/CT services, neo-natal staff, medical residency program, laundry services, and the management, administration and staffing of a rehabilitation program and cardiovascular surgery program - and there similarly was no "evidence of record" that these "for-profit" entities complied with PCMC's charity care policy to provide care for all who needed it.
  • The Director noted that PCMC's parent, also a nonprofit (and tax-exempt) entity, Provena Health, had an exclusive arrangement for the provision of laboratory services to PCMC, and he concluded that this arrangement "raises the distinct possibility that there is a private inurement flowing back to Provena Health. It is not clear whether Provena Health in fact profited from this arrangement, but if it did then that single fact might disqualify [PCMC] from receiving the exemption" (emphasis added). This appears to be the first written suggestion that the payment by a nonprofit corporation to its parent nonprofit corporation in consideration for services rendered by the parent might somehow constitute private inurement (a concept heretofore believed to be possible only in circumstances in which a private person having a special relationship with a nonprofit entity receives excessive (greater than fair market value) consideration or compensation from the nonprofit organization for services rendered or property sold).

As part of his decision the Director also criticized PCMC's charity care policy and wrote a three-page arithmetic analysis which he stated showed the shortcoming of the application of PCMC's "sliding scale" discount procedure for the reduction from billed charges available to patients based on PCMC's poverty income guidelines.

The Director acknowledged but refused to take into account as charity care any portion of the more than $10 million of unreimbursed costs for Medicare and Medicaid that PCMC claimed to have incurred. The Director noted that PCMC had received only $6,938 in donations, or .00067% of collected revenue, and based his decision in significant part on the fact that most of PCMC's revenue came from payment for services rendered rather than from public and private charitable donation support (even referring to a case decided in 1907 as setting forth a kind of model for a truly charitable hospital). This is a standard that few, if any, modern hospitals can satisfy.

The final point in the Director's analysis dismisses PCMC's claim that it made other important contributions to its community. These were completely discounted by the Director, with absolutely no analysis of the nature or extent of those contributions, or how they might compare to the contributions of other hospitals, based upon the Director's feeling or observation that the proposition that hospitals improve the general well-being of the communities within which they operate "holds true for for-profit hospitals as well as for not-for-profit ones," and his conclusion that "[p]roperty tax exemptions do not turn on these general propositions."

This PCMC decision is certain to be appealed. It is also important to note that other county assessors and boards of review in Illinois are not legally bound to follow the Director's PCMC decision. As other taxing authorities look for additional sources of revenue, hospitals as well as other nonprofit healthcare entities should be prepared to defend their charitable status, to the extent legally possible, in light of the standards the Director applied in the PCMC decision. All nonprofit hospitals should analyze their charity care policies and identify and record carefully all of the charity care they provide. Although it is doubtful that any nonprofit hospital can satisfy the unrealistic standards set by the Director, nonprofit healthcare entities nevertheless should be prepared to defend their exempt status before a county assessor or in litigation.

If you have any questions about this Alert, please contact Neville M. Bilimoria, Patricia S. Hofstra, David M. Flynn, any of the other attorneys of the Health Law Practice Group or the partner in the firm with whom you are regularly in contact.

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