Illinois law defines qualifications for hospital tax-exemption

August 1, 2012

Ministry members educated lawmakers on value of community benefit contributions


Illinois has passed legislation that defines how hospitals qualify for property and sales tax-exempt status. Ministry leaders representing Illinois facilities said the new law clears up years of uncertainty around tax exemption; and they said they are pleased that the formula for determining tax exemption takes into account both charity care costs and the value of community benefit activity.

"The government has recognized that exempt status is about more than just the free charitable care we provide — that it really is about charitable activity, and that is a much broader definition," said Lindsey Artola, chief external affairs officer for Presence Health of Chicago and Mokena, Ill.

She said the passage of the new law reveals that now there's a "much greater understanding of what community benefit is and what activities hospitals provide for their communities that improve the lives of everybody in the communities. It's a much truer picture of the work that hospitals do in the community."

The General Assembly passed Illinois Senate Bill 2194 in late May, and Governor Pat Quinn signed it in mid-June. It defines the criteria for property and sales tax exemption for not-for-profit hospitals in Illinois. It also establishes what counts as charitable activities, including free and discounted care for indigent patients, support of health care programs and services for those patients, the subsidization of physicians treating low-income patients and preventive health programs for those patients. The law says the value of these charitable activities must be equal to or greater than the estimated value of that hospital's property tax exemption.

Hospitals deemed exempt from property taxes also are exempt from sales tax, as it relates to their charitable work.

Ambiguity, confusion
Not-for-profit facilities in Illinois long have sought this level of clarity. The Illinois Constitution says that tax exemption only can be granted for hospital property used exclusively for charitable purposes. But, there has been a lack of agreement among taxing agencies, courts, review boards and other entities about how to define these "charitable purposes."

The case of Provena Covenant Medical Center of Urbana, Ill., was among those that prompted the recent legislation. (The hospital became part of Presence Health with the 2011 merger between Provena Health and Resurrection Health Care.) A county review board had recommended about a decade ago that the hospital's tax exemption be denied based on the board's finding that the medical center provided a low level of charity care to patients; and the director of the Illinois Department of Revenue agreed with that decision.

Provena Covenant challenged the state regulator's decision, saying the state used inexact and arbitrary standards to determine whether hospitals qualify for tax-exempt status. The case then worked its way through the court system, ultimately reaching the Illinois Supreme Court. That court in 2010 upheld the property tax denial. Critics said that the standards for tax exemption remained unclear after the 2010 high court ruling. The Department of Revenue denied additional tax exemption applications from hospitals.

"There was a lot of confusion around the definition of charity care," said Patrick Cacchione, executive director of the Illinois Catholic Health Association. "We couldn't live in this ambiguous world."

Kelley Clancy, vice president of external affairs for Alexian Brothers Health System of Arlington Heights, Ill., noted that "lenders don't like confusion. They don't like lending people money when they really aren't sure if the hospital's financial status is going to be anything close to what they think it's going to be.

"Tax exemption is worth millions of dollars," she added, and loss of that status "could be a huge drain on hospitals, and could ultimately cause some hospitals to close."

On the heels of the Illinois Supreme Court ruling, the state's General Assembly began crafting the legislation to clarify charity care standards. Ministry members including Alexian Brothers; Presence Health; Hospital Sisters Health System of Springfield, Ill.; and Trinity Health of Novi, Mich., were among the many not-for-profit health care providers that worked through the Illinois Hospital Association to influence the legislation.

"We did a lot of educational work with our state lawmakers, demonstrating the work we do, describing the drawbacks and impact on the community if we were to lose our tax exemption, (and explaining) the importance of developing a solution that would sustain our tax exemption and create clarity," said Tim Eckels, vice president, community benefit, public policy and advocacy for Hospital Sisters Health System.

The advocacy efforts paid off, agreed ministry representatives, in that the law now spells out that not only charity care but also subsidized services, Medicaid shortfalls and some Medicare shortfalls and certain wellness services for the poor are counted as charitable activity. The same legislation allows nonexempt hospitals to claim a tax credit towards state income taxes that accounts for their charity care costs and services. At the same time, the state legislature also passed a bill clarifying the guidelines hospitals are to use to determine who is eligible to receive charity care, and at what level.

"This resolves an area of extreme uncertainty in the state of Illinois," said Dan Hale, executive vice president for Trinity Health. "What the state basically said to hospitals is 'We understand the discussion about what qualifies as charity care and community benefit, but we want to make sure you also have a legitimate charity care approach.'"

Added Artola: "It creates a level playing field that all hospitals will follow and that the Department of Revenue will follow; and, it provides some clarity and transparency for taxpayers."

Room for improvement
Eckels cautioned, though, that while the ministry is generally pleased with the outcome, "It was very much our second choice, only because our preference would be to not have a numerical threshold of any kind. … Using any kind of numerical test for tax exemption is a counterproductive and misleading way to demonstrate eligibility for tax exemption."

Eckels explained that a "one-size-fits-all" formula does not take into account the peculiarities of each hospital and its community. Also, that approach risks creating a "ceiling rather than a floor," with organizations potentially trying to just "hit a target number." Additionally, he said, the approach can create a reverse incentive in which organizations could hurt themselves financially by improving low-income patients' health — healthier people mean less charity care dollars being contributed and less chance of meeting the threshold for tax exemption.

"It distorts the fundamental basis for tax exemption, which is that our purpose is to serve the community," not to work around a formula, he said. He noted that ministry organizations will aim to improve the health of their communities, regardless of "reverse incentives."

All ministry representatives who spoke to Catholic Health World said this legislation is unique to Illinois, and some said they would hope other states would not try to emulate the ledger-based approach.

Telling the story
Ministry members in Illinois said throughout the past several years they have been making the case for not-for-profit hospitals' tax exemption. Their advocacy teams and communications teams have been communicating with state lawmakers, writing letters to the editor, engaging with media, and educating hospital board members and employees, to build awareness of hospitals' value to their communities.

Alexian Brothers' Clancy concluded, "It did everybody concerned a lot of good to understand what it is their hospitals do for the community, and I think that's reflected in the legislation."

Key events around hospital tax exemption in Illinois

  • 2002: Provena Covenant Medical Center of Urbana, Ill., applies to the Champaign County Board of Review for a property tax exemption. The board recommends denial.
  • 2004: The director of the Illinois Department of Revenue agrees with review board.

Provena pays $1.1 million in property taxes and requests a hearing before an administrative law judge in the department.

  • 2005: An administrative law judge rules in favor of Provena.
  • 2006: The Illinois Department of Revenue director overrules that judge.

Provena appeals to the court system.

  • 2007: A circuit court rules in favor of the hospital, saying that the county review board and state revenue department were wrong to deny exemption. Provena recovers $6 million in property taxes paid since 2002.

The Illinois Department of Revenue appeals to the District Court of Appeals.

  • 2008: The appeals court rules in favor of the Department of Revenue and reverses the lower court decision.

Provena appeals the decision to Illinois Supreme Court.

  • 2010: The Illinois Supreme Court upholds the department of revenue decision, in a non-majority, nonbinding ruling, split 3-2-2. The standards for tax-exemption still were not clear, according to the Illinois Hospital Association.
  • 2011: Department of revenue issues preliminary denials to three more hospitals.

This information is based on a resource from the Illinois Hospital Association.


Copyright © 2012 by the Catholic Health Association of the United States
For reprint permission, contact Betty Crosby or call (314) 253-3477.

Copyright © 2012 by the Catholic Health Association of the United States

For reprint permission, contact Betty Crosby or call (314) 253-3490.