CHICAGO – Illinois' not-for-profit hospitals are facing new uncertainty over their local tax exemptions and charity care obligations after an appellate court voided the 2012 law governing their community benefit requirements.

The Illinois 4th District Appellate Court in a Jan. 5 ruling found the law unconstitutional. It's seen a blow to hospitals even though it won't have an immediate impact. The ruling does not impact the federal tax exemption on hospital bonds' interest.

"The Illinois Health and Hospital Association is disappointed with the Appellate Court ruling. The bipartisan legislation enacted by the Illinois General Assembly in 2012 had ended a decade of uncertainty regarding the test for hospital property tax exemption," the association said in a statement. "The law is clear, fair and reasonable. Illinois hospitals provide $5.5 billion in benefits to their communities annually, including more than $1 billion in charity care alone."

The hospital involved in the litigation that resulted in the ruling has 30 days to decide whether to appeal. Because the matter involves a state statute, the Illinois Supreme Court would be required to hear the case if an appeal is filed.

The case began with Carle Foundation Hospital suing Urbana and other local tax districts over its exemption from local property taxes on four properties on the grounds that they were for chartable use.

The hospital, which sought the exemption on tax years prior to passage of the legislation, prevailed at the Champaign County Circuit Court level but the taxing districts appealed. Carle officials said they are reviewing the opinion and not decided yet how to proceed.

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 ruling says.

When hospitals undergo a major change or change hands they must reapply for their tax exemptions.

Pending applications are before the state Revenue Department for Methodist Services Inc., NorthShore University Health System, Mercy Hospital and Medical Center, and Swedish Covenant Hospital.

The 2012 legislation which governs how much charity care and other community benefits not-for-profit hospitals must provide to keep their property tax and sales tax exemptions was part of a Medicaid restructuring. At the time, Moody's Investors Service called the development a credit positive.

It ended an ongoing state crackdown seeking to strip some hospitals of their exemptions for failing to provide sufficient free or discounted charity care. Rating agencies had warned that the crackdown threatened ratings, while investors were demanding a trading penalty on some credits due in part to the looming fiscal threat.

Under the new rules, 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, and its stance was reinforced by a 2010 state Supreme Court ruling.

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.

Struggling local governments like Urbana have argued that some hospital properties are operated like corporations and should be subject to taxes.

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