Thursday, August 28, 2008
Late yesterday I posted that the Illinois 4th District Court of Appeals had just released its opinion in Provena-Covenant v. Department of Revenue, a state-property tax exemption case that is being watched very closely nationally. For those who have not followed the case, I previously posted the background here. The court opinion is not yet available on-line; it usually takes several days before a released opinion is put up on the Illinois Courts web site. When the opinion is posted, however, you will be able to view it here.
The 4th District's opinion is the most thorough court examination of property tax exemption for health care providers in Illinois ever. The opinion is 55 pages long, and completely dismantles Provena's "community benefit" argument step by step. The court noted in its opinion that under Illinois law, charitable exemption for nonprofits is based on "the benefit conferred upon the public by them and a consequent relief, to some extent, of the burden upon the state to care for, and advance the interests of, its citizens." Quoting my colleague David Hyman here at Illinois, the court noted that simply being a nonprofit "in the hospital business" is not sufficient to establish charitable status under Illinois law.
It is far from obvious, however, that Provena is a gift to the public. As we will discuss at greater length below, it is unclear to what extent Provena exercises "general benevolence" as opposed to doing what a for-profit hospital does: selling medical services.
The court emphasized the lack of donative support for Provena as a negative factor in its assessment of charitable status: "Thus, having an operating income derived almost entirely from contractual charges goes against a charitable identity." It excoriated the Illinois Hospital Association's argument (adopted by Provena) that providing health care is itself a charitable purpose:
By holding medical care to be, in and of itself, charity, we effectively would excuse charitable hospitals from their ongoing mission of giving. We would hold that a hospital is being charitable, for instance, when it sends an impoverished patient a bill that the patient could never hope to pay. That holding not only would create a deafening cognitive dissonance, but it would ignore the [Illinois] supreme court's repeated rationale in cases involving charitable hospitals . . . There is nothing particularly kind or benevolent about selling somebody something . . . To be charitable, an institution must give liberally. Removing giving from charity would debase the meaning of charity and we resist such an assault upon language.
In short, the court adopted the stance that free care for the poor is the sine-qua-non of "charity" under Illinois law. And on this front, the court found Provena lacking for the same reasons as the Department of Revenue (.7% of revenues spent on charity care in the relevant year). It both rejected Provena's argument that other community benefits should "count" for charitable status, and adopted the view that charity care does not include bad debt - which means that a patient who is billed for service cannot be "counted" as a charity patient. It also specifically adopted a rule that "charity care" must be based on average costs, not charges, and that neither contractual discounts with 3d-party payers nor government program shortfalls (e.g., Medicare and Medicaid shortfalls) count as charity care. While I might nit-pick some of these conclusions (for example, I think it is reasonable to treat the difference between a Medicaid -- but not Medicare -- reimbursement and average cost of treatment as "charity care" given that the Medicaid program is specifically aimed at the uninsured poor), the court's overall dissection of Provena's wildly overstated "community benefit" claims was refreshing to see in print.
Finally, the court rejected Provena's argument that it should be exempt as a religious institution, noting that Provena's property was used primarily for the secular purpose of providing health care services, and not as a place of religious worship or instruction.
I doubt that anyone, including me, thought that Provena would lose this case in such an overwhelming fashion. I thought, based upon prior Illinois appellate opinions over the last decade that the hospital probably would lose the appeal, but not in such a devastating opinion. The 4th District's analysis was far more precise, detailed and analytical than any prior Illinois opinion on this front.
Of course, all of us watching the Provena case fully expect it to be appealed to the Illinois Supreme Court. Like the U.S. Supremes, the Illinois Supreme Court does not have to take this case if it doesn't want to and/or thinks the lower courts have adequately addressed the issues. My money, though, is on the Illinois Supreme Court weighing in on the matter, even though they declined to hear an earlier health care tax exemption case. Stay tuned, folks.