CHICAGO — A trio of nonprofit hospitals in the Chicago area, including the prominent Northwestern Memorial’s Prentice Women’s Hospital, are expected to appeal the Illinois Department of Revenue’s decision earlier this week to deny them their property-tax exemptions for failing to provide sufficient charity care.
It’s the state’s first set of rulings on hospitals’ tax-exempt status for property tax purposes since the Illinois Supreme Court last year ruled that a hospital operated by Provena Health does not provide enough charity care to warrant the exemption.
While property tax bills don’t represent a significant piece of a nonprofit hospital’s balance sheet, the state’s crackdown comes as medical facilities face growing fiscal challenges from federal health care reform. And they rely on the perks that come with their exempt status, including issuing tax-exempt bonds, although that’s not being threatened in this case.
“This is a major escalation in the aggressiveness of the Department of Revenue based on their interpretation of the results of the Provena case,” said James Unland, president of the Health Capital Group, a consulting firm.
The Provena case, which attracted national attention, was considered a big win for Illinois and the local governments that will be in line to receive property tax revenue from the entities.
The Department of Revenue relied on the court’s ruling to make its decisions this week, according to communications manager Sue Hofer. It will continue to use the ruling as its guide in its scrutiny of up to 30 more properties operated by systems across the state, she said.
Last week’s decision denied property tax exemptions for Prentice, located in Chicago’s wealthy Gold Coast neighborhood. Also affected were Edward Hospital, located in suburban Naperville, and Decatur Memorial Hospital in Decatur.
Like Provena, all three providers contributed 1% or 2% of their net revenues to charity care during the tax years examined. Many Illinois hospitals contribute less than 3%, and could be open to the same loss of tax-exempt status, a market expert said.
The DOR typically informs a hospital of its decisions privately, Hofer said. But it opted to publicize the announcement this time because it was the first round of decisions since the Provena ruling.
“We’re not saying that hospitals are not good entities, and Illinois has some of the best hospitals in the world,” the spokesman said. “But the courts have very clearly said that only charities are entitled to a property tax exemption.”
The Department of Revenue’s decision to publicize the case signals its determination to take on the industry, according to Unland. “The DOR is saying, 'We’ll go after Northwestern, it doesn’t matter how famous or big you are or your political clout,’ ” he said.
Edward and Decatur hospitals said they plan to appeal, while Northwestern has not yet formally said it would do so. The providers have 60 days to seek a hearing with an administrative law judge at the DOR. The law judge will review the case and make a recommendation to the department director. After that, the hospitals could appeal to a county circuit court.
Northwestern, which reported $1.17 billion of net patient revenue in 2007 — of which 1.85% was devoted to charity care — has deep enough pockets to cover legal fees for years. But with Provena as a precedent, the cases are unlikely to be dragged out, Unland predicted.
“The lower courts will say this was decided already,” he said. “I’d be very surprised if the Supreme Court hears this again. They’ve pretty much put their foot down and said one or two percent [of charity care] doesn’t cut it.”
All three providers issued statements saying they believe they provide adequate charity care to qualify as tax-exempt under current state law. Other states are reviewing property tax exemptions and the federal government continues its scrutiny of nonprofit organizations’ exemption from income taxes. In Ohio, the prestigious Cleveland Clinic faces a similar lawsuit that could make its way to that state’s highest court.
