CHICAGO – The fate of a five-year-old Illinois law that safeguards not-for-profit hospitals' local tax exemptions in exchange for meeting minimum charity and community care standards is before the Illinois Supreme Court.
The 2012 law was a compromise between the industry and the state that ended a state crackdown seeking to strip some hospitals of their exemptions for failing to provide sufficient free or discounted charity care. Hospitals' access to the bond market through the Illinois Finance Authority was also at stake.
Rating agencies had warned that the crackdown threatened ratings, while investors were demanding a trading penalty on some credits due in part to the fiscal threat.
The 2012 legislation governs how much charity care and other community benefits not-for-profit hospitals must provide to keep their property tax and sales tax exemptions. At the time, Moody's Investors Service called the development a credit positive.
Under the legislation, all not-for-profit hospitals were required to show that they provide sufficient qualified services at a level equal to or greater than their assessed property tax liability. The state for a long time had limited the charity care definition to free or discounted care rendered to a patient at the time of service.
As part of the legislation, hospital representatives won an expansive widening of the definition of charity care activities to cover community outreach and educational services, in-kind services, subsidized services, and the shortfall between the cost of providing a service and the amount compensated under Medicaid. The state challenge had no impact on hospitals' federal tax-exemption benefits, including the exemption on bond interest.
The new rules, however, did not remove the threat from local taxing bodies or resolve the city of Urbana's attempt to collect taxes from Carle Foundation, a nonprofit organization anchored by the 393-bed Carle Foundation Hospital in Urbana.
Struggling local governments like Urbana's have argued that some hospital properties are operated like corporations generating profits for the hospital and should be subject to taxes.
The hospital went to court to seek the exemption on tax years prior to passage of the legislation and prevailed at the Champaign County Circuit Court level.
The taxing districts appealed and prevailed before the appellate court in arguing that the statute violated state constitutional language.
The Illinois 4th District Appellate Court found in its January 2016 ruling that the law is "unconstitutional on its face because it purports to grant a charitable exemption on the basis of an unconstitutional criterion, i.e., providing services or subsidies equal in value to the estimated property tax liability … without requiring that the subject property be 'used exclusively' for charitable purposes."
The state constitution says exemptions are permitted only if a property is used exclusively for charity while the law puts a value on the level of charitable care/community benefits to meet charitable standards.
The case grew much bigger after the state appellate court voided the state law that lays out various requirements for meeting care standards. The high court heard oral arguments late last week.
Carle's lawyers asked the Supreme Court justices to reverse the appellate court decision that found the statute unconstitutional, affirm the circuit court's finding that that the existing law applies to Carle and asked that the case be remanded back to the lower court to "determine whether the Carle Foundation is entitled to exemptions under the statutory criteria and by and demonstrating that is makes charity available to all without ability to pay," said Steven Pflaum, who represents Carle.
Carle paid about $20 million in property taxes from 2004 to 2011 while providing what it said was $30.6 million in charity care for 2015. The issue may have a sweeping impact in Illinois because hospitals that undergo a major change or change hands must reapply for their tax exemptions.
The Illinois Health and Hospital Association and American Hospital Association filed briefs in support of the state law. The local association warned of the potential negative impact tossing the law could have on its members.
"Taxing local hospitals hurts the communities they serve and diverts dollars that could be used to care for patients and to upgrade equipment, modernize facilities and hire needed staff. It is important to note that more than 40% of Illinois hospitals are currently operating on slim margins," the group wrote. Hospitals provide about $5.3 billion in benefits to their communities annually with charity care measured at about $800 million in 2015, the group said.
The uncertainty about property tax exemptions comes as hospitals grapple with uncertainty over President-elect Donald Trump and congressional Republicans' moves to repeal federal healthcare reforms.
