Illinois says non-profit does not mean tax-exempt

April 16, 2012

In a series of decisions that may affect healthcare nationally, Illinois is tightening the noose on hospitals that claim tax-exempt, non-profit status. What began as the denial of a property tax exemption by the Champaign County Board of Review for one hospital system in 2002 has become a state-wide analysis of how much actual “charity care” hospitals are providing.

The immediate implication is that hospitals’ property tax exemptions could be revoked and vital revenues could be collected. However, this raises a broader structural question around the use of tax-exempt municipal bonds for entities that may be passive vehicles for for-profit activity.

Becker’s Hospital Review has the specifics:

[T]he Illinois Department of Revenue’s crackdown on Illinois non-profit hospital tax-exempt statuses came on the heels of an Illinois Supreme Court ruling from last year. In 2010, the Illinois Supreme Court ruled that Provena Covenant Medical Center in Urbana, Ill., could not qualify for property tax-exempt status because it did not provide enough charity care to its community, although Provena argued that it provided millions of dollars in other free care and community benefits.

The microscope on Illinois non-profit hospitals does not end there. Chicago Mayor Rahm Emanuel also recently proposed cutting free water and sewage services for city non-profits in October, and Moody’s Investors Service recently released a report that said the revocation of Illinois hospitals’ property tax-exempt statuses could be debilitating to the sector’s finances. “This has implications beyond property taxes,” Mr. Dunn says. “A not-for-profit status is, by virtue, about the level of charity work they do, and this could jeopardize their 501(c)(3) statuses.”

Fitch Ratings had a report today that gave some color on the legal and legislative processes:

Although Illinois Department of Revenue’s decision is based on the grounds that these hospitals do not provide enough charity care to qualify for the exemption, the exact criteria or standards for the IDOR’s decision were not disclosed. Subsequent to the IDOR’s announcement, Illinois Governor Pat Quinn announced that the state would postpone its review of these exemptions until the state legislature had the opportunity to craft legislation that specifies qualifications for the exemption. In March, Governor Quinn ordered the IDOR to continue its reviews as the legislature was unable to resolve the issue.

As the legislative and executive branches thrash out the exact standard for how much charity care a hospital must provide, the deeper issue of for-profit entities using most of the physical space in a tax-exempt, non-profit building needs more attention. The original county review that sparked Illinois to look more closely at non-profit hospitals, that of the Provena Covenant Medical Center, detailed the extent of for-profit activity in the system:

Provena Covenant Medical Center allows outside, for-profit entities to use the facilities to generate personal and/or corporate profit. There are multiple outside physicians’ groups and service providers who use the hospital to serve patients. These physicians’ groups are for-profit entities that practice in the hospital and then bill patients for work done in what is claimed as a tax-exempt property. Some of those physicians’ groups that are using this property to derive a profit are as follows:

  • An outside firm provides emergency-room doctors
  • An outside group provides neonatology and pediatric doctors
  • Cardiac Surgery Associates
  • All internal pharmacy management is provided by Cardinal Health
  • MedCenter Labs provides lab testing and diagnostic imaging
  • RehabCare Group Inc
  • Sodexho Marriot
  • Neural-Surgeons and Cardiac Surgeons

Provena Covenant provided only minimum charity care; hired debt collection agencies to pursue patients with outstanding debts to the hospital; referred uninsured patients to a local bank to borrow at 12.9 percent to repay the hospital; and leased out the facility to for-profit vendors. Provena has reformed many of its practices, but as a consequence of the case, Illinois is conducting a thorough review of the non-profit hospital sector. Since Illinois has enormous fiscal issues, revenue is desperately needed. Turning over this stone may uncover a corner of the system that has inappropriately been bearing the non-profit mantle.


Guidestar: 2010 Form 990 for Provena Covenant Medical System

Chicago Tribune: Fitch warns Illinois hospitals on ratings

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