Bloomberg News

Illinois Says Hospitals No Longer ‘Poorhouses’ Shielded From Tax

September 13, 2011

Sept. 13 (Bloomberg) -- 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.

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.

“We’ll go out of business without it,” said 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.

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.

“This really exposes the tip of a very big iceberg that has to deal with tax-exempt property in general and what tax breaks contribute to the community,” said John Colombo, a professor at the University of Illinois College of Law in Urbana-Champaign.

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.

“There are school districts that are so hungry for this money,” said Pat Schou, executive director of the Illinois Critical Access Hospital Network. “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.

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

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

“Hospitals aren’t poorhouses anymore,” Colombo said. “Just because they were exempt in 1900 doesn’t mean they should be exempt in 2011. The world is different.”

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.

“For the most part, hospitals are very good members of the community,” said Ralph Martire, executive director of the center. “That doesn’t mean you evade the legal standard. 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.

“Hospitals are the one sector still creating jobs,” Chun said. “Do you want to jeopardize that?”

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.

“You have some hospitals that are making big revenues and not doing charity care,” Martinez said. “Billions in revenues without charity. Let’s be real.”

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.

“We were in the process of designing a brand-new hospital, and then this thing happens,” Rossi said in a telephone interview.

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. “That matches our profits,” he said.

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.

“These small hospitals did not know this was going to be an issue,” said Schou, of the Illinois hospital network. “It’s quite a mess.”

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.

“I don’t think this is going to just blow over,” he said.

--Editors: Flynn McRoberts, Stephen Merelman.

To contact the reporter on this story: Tim Jones in Chicago at Tjones58@@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net


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