Charity Care: Health Care & Public Officials Look to the State Supreme Court to Clarify
While Illinois’ highest court could try to avoid making policy, one case on its docket this fall has potential to start a domino effect that would have policy implications at all levels of government.
Specifically, state and federal lawmakers would have to reconsider the tax liabilities of nonprofit hospitals, as well as the payment for public health care programs that they often bill.
Heightening the importance of the court’s decision, the case is six years old.
In that time, the cost of health care has increased, the number of uninsured patients has climbed and the government’s mechanism for reimbursing hospitals for treating public aid patients has fallen further behind.
The plaintiff in the case is Provena Covenant Medical Center in central Illinois’ Champaign County. The defendant is the Illinois Department of Revenue.
“It’s been a long six years,” says Meghan Kieffer, an in-house lawyer and senior vice president for Provena Health System, the hospital’s parent company. “We have a hospital to run and patients to care for, and it’s a distraction.”
In 2002, the nonprofit hospital applied to the Champaign County Board of Review to receive a local property tax exemption based on its status as a charitable organization. It’s recognized by the federal Internal Revenue Service tax code as a 501(c)(3) and, therefore, does not pay federal income taxes. The hospital also contends that its religious mission as a Catholic health care ministry, serving all patients regardless of ability to pay, also meets the standard for a local property tax exemption.
Since then, the back-and-forth about whether Provena Covenant has to pay property taxes has forced the hospital to pay about $6.1 million in taxes, but a judge later ruled the money should be returned while the case works its way through the court system.
Existing case law is just as inconsistent.
“The law on charitable property tax exemptions in Illinois is hopelessly fractured,” Provena Covenant lawyers wrote in a petition to the Illinois Supreme Court. “Covenant and the 150-plus other Illinois hospitals that have consistently qualified for charitable property tax exemptions and whose exemptions are now in jeopardy have no direction on how to proceed.”
In essence, Provena Covenant’s case, regardless of how the justices decide, could set a new standard that would affect roughly 160 hospitals in Illinois. But the Supreme Court may not provide as much clarity as is sought by both sides of the debate. It could rule very narrowly, which could toss the issue of what hospitals need to do to earn a tax-exempt status back to state policymakers.
The debate is clouded by the fact that different levels of government use different standards for various tax breaks. Another layer of policy questions involves the nationwide trend that hospitals care for patients enrolled in the government-run Medicare and Medicaid programs but receive late and relatively low reimbursements for providing that care. Hospital officials, including Provena’s legal team, believe caring for patients in public aid programs ought to count toward their level of charity care when considering their tax exemptions.
Others strongly disagree that Medicaid or unpaid patient bills count as charitable acts.
Robert Rich, director of the Institute of Government and Public Affairs at the University of Illinois, says the case, therefore, has potential to set a new precedent.
“The case has far-reaching implications for how we deal with fair levels of reimbursement on the one hand, the growing number of uninsured on the other and cost containment on the third.”
He adds that from consumers’ perspective, “we’re not really getting the charitable care that we should be getting, and, moreover, the hospitals are going after us aggressively with bill collection in ways that don’t show any compassion.”
Conversely, the hospital industry’s perspective is that hospitals provide numerous forms of charitable care, not just free care.
“And so there is a real debate over what constitutes charitable care,” Rich says.
Provena Covenant’s case deals only with state standards for what the hospital needs to do to earn local property tax breaks, not what it needs to do to earn federal income tax exemptions.
Since the Champaign County board denied the hospital’s property tax exemption in 2002, the hospital’s first legal step was to seek an administrative review by the Illinois Department of Revenue. Its director, Brian Hamer, agreed with the board’s decision and ruled that Provena did not qualify for a tax exemption because its level of charity care accounted for only 0.7 percent of its total revenue that year. And Covenant had 110,000 admissions but gave free care only to 196 patients and discounted care to 106 patients.
Provena then took the case to circuit court and argued that the Supreme Court did not define charities based on percentages. It also has provided community services, including a 24/7 child abuse prevention and support service called Crisis Nursery. The hospital’s Supreme Court filing states that in 2002, the tax year in question, the hospital spent more than $13.5 million on such “community benefits.”
In addition to offering free medical care when needed, the hospital also offers discounted care on a sliding scale for families who meet federal poverty guidelines. For instance, families of four that make $132,300, or 600 percent of the federal poverty level, can get some financial assistance.
A family of four that only makes $44,100 a year, or that is 200 percent of the federal poverty level, could get 100 percent free care.
Patrick Coffey, a partner with the Locke, Lord, Bissell & Liddell law firm in Chicago, represents Provena Covenant. He says the Illinois Department of Revenue’s decision to deny the hospital’s property tax exemption “completely missed the boat” on other forms of charitable care.
“The state has argued that the only thing that matters, the only thing that should be evaluated for purposes of charitable exemption, is the amount of charity care given by a hospital in a given year,” he says. “That is, of course, contrary to what the Supreme Court has said.”
In a 1968 lawsuit, Methodist Old Peoples Home v. Korzen, the Illinois Supreme Court established a six-point test. Charitable care programs for “all who need and apply for it” without any obstacles is only one of those criteria.
In other words, nonprofit hospitals do more than provide free care to poor people, says Mark Deaton, general counsel for the Illinois Hospital Association.
Therefore, the industry strongly opposes the idea of creating a uniform standard for the amount of charity care needed to qualify for tax exemptions.
In fact, the Hospital Association fought Illinois Attorney General Lisa Madigan’s attempt in 2006 to define the level of charity care needed. She backed legislation that would require nonprofit hospitals to dedicate 8 percent of their annual income to charity care.
The association deemed the standard percentage as a one-size-fits-all approach that would take away hospitals’ ability to marshal their resources to meet the unique needs of their communities, says Deaton.
“Hospitals in the state are incredibly diverse. They range from the several hundred-bed medical center in Chicago to the 25-bed critical access hospital in Metropolis, Ill., which has a population of 6,000 people — and everything in between.”
Madigan’s office says since she became attorney general in 2003, she has been “concerned about and focused on health care accessibility, especially for the uninsured and low-income individual.”
Part of that effort was to call attention to and debate the level of charity care needed to earn property tax breaks. She also pressed for legislation to curb hospitals’ aggressive billing practices and to ensure affordable pricing for low-income or uninsured patients.
At the same time Provena Covenant’s case began, hospitals throughout the country came under intense scrutiny for aggressively trying to collect unpaid bills from patients, particularly the needy.
Illinois has since enacted a law against such aggressive billing practices.
Madigan’s office would not say whether she would try again to push legislation to set a standard percentage of charity care needed for tax exemptions.
“The future lies ahead,” says Paul Gaynor, Madigan’s chief of the Public Interest Division. “It’s very hard to say at this time what’s going to happen.”
Provena Covenant contends that a standard percentage of income in any given year would penalize hospitals if too few people sought or received free care.
“The broader policy implication is that if hospitals were required to pay property taxes, essentially that diverts scarce resources away from health care into other activity,” Deaton says.
Provena’s lawyers added in their Supreme Court filing: “Hospitals will also seek other ways to meet their tax liabilities. They might initially seek to pass on the tax burdens, but ultimately, there will be [an] impact on community services. Thus, the charitable-exemption issue affects all citizens of Illinois.”
Hospitals also argue that caring for Medicaid patients should count as a form of charity. The federal-state Medicaid program reimburses medical providers at about 50 percent of the cost to provide that care.
Deaton says the reimbursement rate is one indication that nonprofit hospitals help relieve the burden on government.
According to the Illinois Hospital Association’s 2008 report, the most recent available, 109 hospitals that filed information with the Illinois attorney general’s office provided a combined $2.2 billion in care that was not reimbursed by Medicaid and other government-sponsored programs.
The level of charity care provided throughout the past four reporting years has increased by 68 percent, and the value of total community benefits has increased by 27 percent, according to the association’s report.
The numbers could be even higher, says Danny Chun, assistant vice president of communications for the Illinois Hospital Association, if all 210 hospitals in this state reported and if the number of unemployed and uninsured workers continues to rise during the recession.
According to Lisa Lagger, vice president of public relations and marketing for Provena Health network, in the last year alone, the shortfall between the amount Provena Covenant provided in care to Medicaid patients and the amount that the state reimbursed the hospital reached nearly $71 million. She says Provena “clearly” provides that relief for the government.
The Center for Tax and Budget Accountability disagrees that uncompensated care of Medicaid patients should count. The bipartisan and nonprofit think tank based in Chicago advocates for progressive tax structures.
“The biggest question is what are nonprofit hospitals doing that distinguish them from hospitals that pay taxes?” asks Heather O’Donnell, the center’s policy director.
She adds that she doesn’t intend to minimize the benefits hospitals provide to their communities, but the level of those benefits depends on the definition. “What is a community benefit? And what community benefits are nonprofit hospitals providing that are different from for-profit hospitals? That’s the million-dollar question.”
The center issued its own report this past spring that shows for-profit hospitals also operate money-losing trauma centers, conduct research and lose money from patients who never pay their bills. Yet, unlike nonprofit hospitals, for-profit institutions also pay state and local taxes.
Furthermore, O’Donnell says property tax exemptions are a local benefit with local dollars. On the other hand, Medicaid shortfalls come from the state and federal governments.
“Medicaid funding problems — and there are many — should be addressed at the federal and state level, not through a local property tax exemption.”
Part of the problem, Rich says, is that it’s difficult to decipher the actual costs to hospitals versus what they bill and what they collect from patients and the government.
Hospitals also are working at more narrow margins of their revenues to costs. In addition to stricter federal regulations, they have a harder time shifting costs from patients who can’t afford medical care to those who have health insurance coverage, he says.
“From the hospital perspective, there’s a real dilemma here: I can’t aggressively bill; I am operating at this narrow margin; I have a lesser ability to cost shift. And now I have the attorney general telling me I can’t count uncompensated care as charitable care.”
The reason the case is so important in the context of the national health care debate is that while more than 45 million people in the United States are estimated to lack health insurance coverage, Rich says that measure excludes the number of Medicaid patients who get care that’s not fully reimbursed by the government.
“So if you’re a Medicaid patient, you’re insured. And if your care is uncompensated, that doesn’t make you uninsured,” Rich says.
O’Donnell says she agrees that the scope of the Illinois Supreme Court decision is unlikely to solve the nation’s health care problems nationwide. “Our health care safety net is sort of an ad hoc approach, and this is one of the small piece.”
But, she adds, the Supreme Court case could expose the need for further legislative action, especially when government resources are stretched thin during an economic recession.
“Every dollar, including tax breaks, ought to be tracked and made sure that the entity that has them is using them as intended, as lawmakers intended,” she says.
State Sen. Jeff Schoenberg, an Evanston Democrat, says the Supreme Court case may provide greater clarity for everyone in the short term, “but I would not expect the issue to go away.”
He says he looks to President Barack Obama’s administration to decide whether charity care fits within the national health care reform debate.
“All of that may set the terms of the debate more than any court case,” Schoenberg says.
Kieffer of Provena Health says either way the Illinois Supreme Court rules, neither it nor new laws would affect Provena Covenant patients because treating the uninsured and underinsured has been within the hospital’s mission for more than 70 years.
“If the need is there, we grant it. So legislation isn’t going to change that,” she says.
Whichever way the Supreme Court decides, the domino game likely will have just begun.
Provena Covenant’s case timeline
2002 Provena applies to the Champaign County Board of Review for a property tax exemption on the grounds of its nonprofit status and primary use as a charitable organization. The board recommends denying that request.
2004 Illinois Department of Revenue Director Brian Hamer rules against the hospital and agrees with the Champaign County Board of Review. Provena pays $1.1 million in property taxes and requests an administrative hearing before the department. During the hearing, Provena says it also qualified for a property tax exemption because it is a charitable organization primarily for religious purposes, given that it is a health care ministry of the Roman Catholic Church. Hamer says the level of charity care totals 0.7 percent of its revenue. And he denies the church’s nonprofit status based on its religious mission.
July 2007 The Circuit Court rules in favor of the hospital and says that the Champaign County Board of Review and Illinois Department of Revenue were wrong to deny the exemption. The hospital recovers $6.1 million in property taxes paid since losing its status as a charitable and religious organization in 2002. The Department of Revenue appeals to the 4th District Court of Appeals.
August 2008 Illinois 4th District Court of Appeals Judge Thomas Appleton rules in favor of the Department of Revenue and reverses the lower court decision. In a 55-page report, he writes, “It is unclear to what extent Provena exercises general benevolence as opposed to doing what a for-profit hospital does: selling medical services.”
September 2008 Provena appeals the decision that reversed the hospital’s property tax exemption.
December 2008 The Illinois Supreme Court decides to hear the appeal.
Criteria for nonprofit institutions
The U.S. Government Accountability Office said in a September 2008 report that Illinois is one of 10 states with detailed requirements for what “community benefit” activities hospitals must provide to qualify for tax exemptions.
A 1968 Illinois Supreme Court case, Methodist Old Peoples Home v. Korzen, established a six-point test for whether nonprofit hospitals qualify as charitable organizations that get property tax exemptions. In that decision, the courts ruled that the concept of property used exclusively for charitable purposes “does not lend itself to easy definition.”
It’s a case-by-case basis. “However,” the court said, “though past decisions of this court provide no precise formula for resolving questions of purported charitable use, they do furnish guidelines and criteria which should be generally applied.”
Here are the six criteria for nonprofit institutions:
1. The institution bestows benefits on all people for their general welfare, or the benefits in some way reduce the burden on the government.
2. The charitable institution has no capital, capital stock or shareholders and earns no profit from the enterprise.
3. Most of its funds are derived mainly from private and public charity and are held in trust for the purposes expressed in the charter.
4. The institution dispenses charity to all who need and apply for it.
5. It does not put any obstacles in the way of those who need charitable services.
6. The primary use of the property is for charitable purposes.
Source: Methodist Old Peoples Home v. Bernard Korzen, county treasurer, et al., the City of Evanston, Illinois?Supreme Court, 1968
Another layer of policy questions involves the nationwide trend that hospitals care for patients enrolled in the government-run Medicare and Medicaid programs but receive late and relatively low reimbursements for providing that care.
“Medicaid funding problems — and there are many — should be addressed at the federal and state level, not through a local property tax exemption.”
— Heather O’Donnell, Center for Tax and Budget Accountability
Statehouse Bureau Chief
Bethany Jaeger is Statehouse bureau chief of Illinois Issues magazine. She is responsible for reporting and writing news and analysis on state government and politics. She edits the People section of the magazine. She's news editor of the Web Site and writes the magazine's Statehouse Blog. She has been a health reporter for The Herald & Review in Decatur and was managing editor of The Chronicle of Hoopeston. She has a bachelor's degree in journalism from the University of Illinois at Urbana-Champaign and a master's degree in public affairs reporting at the University of Illinois at Springfield. She joined the staff January 2006.
Illinois Issues, September 2009