Regional News

Illinois Court Upholds Decision to Strip Provena Hospital of Tax Exemption

CHICAGO — The Illinois Supreme Court yesterday upheld an appellate court decision supporting the state’s decision to strip Provena Covenant Medical Center in Urbana of its property tax exemption because it failed to provide sufficient charity care in a case that has garnered national attention.

The court — which heard oral arguments in the case last September — rejected most of the hospital’s arguments and sided with the appellate court ruling that upheld the Illinois Department of Revenue’s position that Provena spent too little — less than 1% of its revenue according to the state — on charity care.

“In this decision, the Supreme Court upheld the denial of property tax exemption for the tax year in question, agreeing with the appellate court that the record was inadequate to demonstrate that Provena was a charitable institution. The department’s denial of a religious exemption was also upheld,” read a summary of the ruling online at http://www.state.il.us/court/Opinions/SupremeCourt/2010/March/107328.pdf.

The hospital — one of six operated by the Catholic-sponsored Provena Hospitals system — called the ruling troubling.

“We can only hope this troubling ruling prompts a dialogue among hospitals and elected officials to dialogue about not only how we define charity care but also how we better ensure that the people who need financial assistance get it,” David Bertauski, president of Provena Covenant, said in a statement.

Nonprofit health care sector participants have tracked the case closely because of its potential to set a precedent and to fuel similar challenges in other jurisdictions as hospitals’ charity care practices face heightened local, state, and national scrutiny.

Nonprofit hospitals enjoy exemptions from various property, sales and use taxes, and federal income taxes and enjoy access to the tax-exempt bond market to raise capital. The federal statute requires hospitals meet a “community benefit” while state standards vary.

Illinois Attorney General Lisa Madigan in 2006 attempted to require hospitals to provide at least 8% of their revenue for charity care, but that legislation stalled. Fiscally struggling governments could use the ruling to support efforts to raise revenue and hospitals fear the imposition of charity-care standards could erode their already strained balance sheets.

“I believe this is significant because it sets a precedent. It’s the first ruling of a Supreme Court of a sovereign state regarding a hospital that has had its property tax revoked, and it’s coming at a time when local municipalities and counties are strapped for cash,” said Jim Unland, president of Health Capital Group and editor of the Journal of Health Care Finance. “This could have the effect of galvanizing others to look at the issue

The Illinois Hospital Association said it was disappointed with the decision and warned of its potential impact.

“Imposing new tax burdens on a hospital could force it to reduce services and increase health care costs — jeopardizing access to quality hospital services as well as the hospital’s financial viability,” said Mary Jane Wurth, the association’s president.

The IHA claimed the court ignored legal precedent and public policy which holds that a hospital that treats patients regardless of their ability pay and is not a for-profit institution qualifies as charitable and merits a property-tax exemption regardless of the specific amount of free care provided. 

The case began seven years ago when the Champaign County tax review board stripped the Provena hospital of its 2002 property tax exemption due to its allegedly inadequate charity-care levels. The case went to the Illinois Department of Revenue, which in 2006 sided with the local review board, contending the hospital failed to meet state standards that govern charitable and religious organizations.

A Sangamon County Circuit Court judge disagreed and restored the tax-exemption and ruled that the state should return the $5 million in property taxes Provena had paid.

A Fourth District Appellate panel in August 2008 reversed the lower court decision and Provena petitioned the state Supreme Court to review the case. In oral presentations last year, state lawyers stressed their position that spending less than 1% of revenue to aid just 300 patients fails the test that requires a property be used for charitable purposes because so much of the hospital’s revenue came from paying customers. The state also argued that community benefits have never been considered as charity care under Illinois law.

The hospital countered that it provided free care to all in need and without limit and that its community benefits, including unlimited free care to the poor and underserved as well as other, non-reimbursed Medicaid costs and community services should be counted toward charity care. The hospital also argued that as a religious-based institution it warranted the tax-exemption.

The high court rejected Provena’s argument that its properties qualified for a tax-exemption based on its religious affiliation. Provena Hospitals’ mission is to pursue religious, charitable, educational, and scientific purposes and to offer high-quality and cost-effective care at all time.

“While there is plainly a religious component to this mission, advancing religion is not identified as the corporation’s dominant purpose,” the decision read.

Charitable ownership also is not sufficient to warrant an exemption, the hospital must meet a standard showing that its properties had a charitable use. The justices agreed with the appellate court that services such as free health screenings and wellness classes might provide community benefits but they refused to classify them as charitable as for-profit facilities also provide such services.

In a further blow, the court did not agree with Provena that uncompensated Medicaid and Medicare costs also be should counted as charity care, and it dismissed Provena’s arguments that no additional demand for charity care existed in its service area.

National attention aside, the Provena parent has seen its finances stabilize. Moody’s Investors Service and Standard & Poor’s affirmed the system’s Baa1 and BBB-plus ratings, respectively, last month and revised the hospital’s outlook to stable from negative.

“We believe Provena still faces operating challenges ... However, the revision of the outlook to stable reflects the implementation of significant savings initiatives and benefits from multiple restructurings of the debt structure, both of which have provided some relief and stability at the current rating level,” Moody’s wrote.



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