Should Hospitals Continue To Be Tax Exempt?

Story first appeared in Bloomberg News.

More than a dozen hospitals in Illinois face the prospect of paying millions of dollars in property taxes or, in some cases, shutting down as a result of a state ruling denying exemptions for three nonprofit healthcare providers, according to a ESOP Lawyer.

The uncertainty has prompted at least one hospital to postpone a $23 million construction bond sale while several others that built facilities say they won’t be able to pay the bill if they lose the break.

Tracy Bauer, chief executive officer of Midwest Medical Center in Galena, a 25-bed hospital that is on the hook for a $2.3 million property tax bill if its nonprofit exemption is revoked said they will go out of business without it.

The challenge to such exemptions comes as Illinois confronts two financial stresses -- the state’s $8 billion in unpaid bills and hospitals struggling with cuts in Medicare and Medicaid payments.

While other states have battled for decades in court over the obligation to treat the poor in exchange for tax breaks, Illinois intensified the fight on Aug. 16 when its Revenue Department denied exemptions for facilities in Chicago, Naperville and Decatur, saying they provided too little charity care.

Windfall for Schools

A reversal of the exemptions would represent a windfall for school districts, which collect the lion’s share of property taxes and have watched state aid shrink and revenue fall during the economic and housing slide.

Pat Schou, executive director of the Illinois Critical Access Hospital Network said there are school districts that are so hungry for this money that there’s a tug and pull in these communities.

The lobbying group for the state’s towns and cities supports the decision to collect the money.

Larry Frang, executive director of the Illinois Municipal League said in a perfect world, everybody ought to pay property taxes.

This is a fight with roots that go back centuries, when the fear of God persuaded governments not to tax churches because they worried about getting struck down by a lightning bolt, Colombo said. Many hospitals gained exemptions because of their religious affiliation or care for the indigent.

‘Poorhouses’ No More

Colombo said hospitals aren’t poorhouses anymore, and that just because they were exempt in 1900 doesn’t mean they should be exempt in 2011.

The Illinois Revenue Department is to rule in the coming months on the tax-exemption status of 15 hospital groups involving hundreds of parcels of property, said spokeswoman Susan Hofer. The Illinois Hospital Association, the industry’s lobbying arm, has asked for a moratorium on decisions until a legislative solution can be worked out, said Danny Chun, a spokesman.

There are no clear statutory guidelines, though the Illinois constitution and a 2010 state Supreme Court ruling provide guidance.
The constitution states that exemptions can be granted when property is used exclusively for charitable purposes.

High Court Ruling

The state’s highest court used that standard in a case involving an Urbana hospital, Provena Covenant Medical Center, which challenged the state’s denial of tax-exempt status. In a March 18, 2010 ruling, the court noted that a mere 302 of the hospital’s 110,000 patients received free care in 2002. Provena failed to meet its burden that the hospital was used exclusively for charitable purposes, the court said.

Although the decision’s immediate impact was confined to Provena, it put other nonprofits on notice. About 75 percent of hospitals in Illinois are nonprofits, according to a 2009 report from the Chicago- based Center for Tax and Budget Accountability.

The center reported that in metropolitan Chicago nonprofit hospitals received $489.5 million in tax exemptions and delivered charity care valued at $175.7 million.

Ralph Martire, executive director of the center, said for the most part, hospitals are very good members of the community, but that doesn’t mean you evade the legal standard. He added that if you’re not doing that in an adequate amount, you lose your exemption.

Jobs Rebuttal

The rebuttal from hospitals is rooted in economics --namely jobs. The Illinois jobless rate in July was 9.5 percent, above the national average of 9.1 percent, and the hospital association said its members provide more to their communities than can be measured by charity care.

Some lawmakers are pushing for a more clearly defined standard. State Senator Iris Martinez, a Chicago Democrat, proposed that hospitals devote 3 1/2 percent of their patient load to charity care as a requirement to receive the tax break. She said the situation cries out for clarity.

Martinez said you have some hospitals that are making big revenues and not doing charity care with billions in revenues without charity.

The hospital association rejects a specific amount and opposes Martinez’s bill, which remains bottled up in a committee.

Hospitals Waiting

Other hospitals are awaiting a decision from the state on their tax- exempt status. Mark Rossi, chief operating officer of Hopedale Medical Complex in Bloomington, said the uncertainty forced the hospital to shelve a $23 million construction bond sale.

Rossi said they were in the process of designing a brand-new hospital, and then this thing happened.If the hospital doesn’t get a tax exemption on the land on which the facility would be built, the annual tax liability would be about $400,000 annually, Rossi said. He said that matches their profits.

At the Midwest Medical Center in Galena, a new $45.5 million replacement hospital would be hit with a $2.3 million total obligation if the facility lost its exemption. Construction for the addition began before the Provena decision.

With high unemployment and governments struggling to provide services, the pressure will build for Illinois lawmakers to broker a compromise that would preserve tax exemptions while boosting charity care, Colombo said.