Thursday, March 18, 2010

Analysis of Provena Decision

Well, I now have the opinion (you can find it here), I have read it, and it is . . . complicated.  Here’s why.  The Illinois Supreme Court consists of 7 justices; two of the 7 justices recused themselves in this case, meaning that only 5 participated in the final opinion.  All 5 agreed that Provena should not get the tax exemption; however, two of the justices agreed only on a technical procedural basis: these two felt that Provena had failed to prove its case because the property that was exempt was owned by Provena Hospitals (Provena Covenant’s parent), but the evidence on charitable use all related to Provena Covenant (the subsidiary).  Accordingly, two of the justices concurred only because they believed the record contained no information regarding the charitable activities of the actual owner of the property.  Or put another way, they believed that the record all contained evidence of charitable use by the wrong party.

So, I can say definitively that Provena lost.  But that's all I can say.  Because only three of the five justices considering the case agreed on the substantive analysis of what constitutes “charitable use” (e.g., is charity care required, and if so, how much), the case does not actually resolve this issue for the future – as one of the concurring/dissenting justices pointed out (page 37 of the slip opinion), the plurality’s views on the substantive tests for charitable use are not entitled to stare decisis (e.g., are not entitled to be viewed as controlling precedent for future cases), because a majority of the court (e.g., four justices) did not agree on the substantive test. [I should note that all 5 justices agreed that Provena could not claim exemption as a religious organization, an argument I’m not going to discuss here].


So,  the case did not actually provide a definitive answer to what hospitals are required to do in order to get property tax exemption in Illinois.  But it is worth examining the conclusions of both the plurality and dissenters on the substantive issue, because their views are a microcosm of the national debate on tax exemption for nonprofit hospitals.

So first, let’s look at the plurality.  The plurality of the court soundly and completely rejected the “community benefit” test that has been the cornerstone of federal tax exemption for nonprofit hospitals since 1969.  The language of the plurality on page 26 of the opinion could not be clearer:

Provena Hospitals asserts that assessment of its charitable endeavors should also take into account subsidies it provides for ambulance service, its support of the crisis nursery, donations made to other not-for-profit entities, volunteer initiatives it undertakes, and support it provides for graduate medical education, behavioral health services, and emergency services training. This contention is problematic for several reasons. First, while all of these activities unquestionably benefit the community, community benefit is not the test. Under Illinois law, the issue is whether the property at issue is used exclusively for a charitable purpose.  (Slip opinion at 26, emphasis added).


Instead, the plurality adopted the approach of the 4th District Appellate opinion: in Illinois, charity is defined as a “gift.”  Treating patients for a fee is not a “gift”; only charity care is a “gift” in this context and the evidence showed that Provena’s true charity care was less than 1% of its revenues.  The plurality characterized this amount as “de minimis.”  Accordingly, Provena failed to prove appropriate charitable use of the property in question.  The plurality also clearly was not pleased with Provena’s handling of poor patients: it commented extensively on Provena’s failure to advertise its charity care programs, its practice of automatically billing all patients, turning accounts over for debt collection, and so forth.  While it is unclear how much this activity contributed to the plurality’s view that Provena was not engaging in charity, it was clearly a factor.

In reaching its conclusion, the plurality adopted some very interesting analysis.  First, the plurality adopted the “relief of government burden” theory as the basis for why tax exemption is appropriate.

Conditioning charitable status on whether an activity helps relieve the burdens on government is appropriate. After all, each tax dollar lost to a charitable exemption is one less dollar affected governmental bodies will have to meet their obligations directly. If a charitable institution wishes to avail itself of funds which would otherwise flow into a public treasury, it is only fitting that the institution provide some compensatory benefit in exchange. While Illinois law has never required that there be a direct, dollar-for-dollar correlation between the value of the tax exemption and the value of the goods or services provided by the charity, it is a sine qua non of charitable status that those seeking a charitable exemption be able to demonstrate that their activities will help alleviate some financial burden incurred by the affected taxing bodies in performing their governmental functions.  (Slip opinion at 20).


This view confirms a trend noted by Evelyn Brody at Chicago Kent of states moving toward this rationale as a basis for property tax exemption.  See, e.g., Evelyn Brody, The States’ Growing Use of a Quid-Pro-Quo Rationale for the Charity Property Tax Exemption, 56 Exempt Organization Tax Review 269 (2007).

Second, the plurality concluded that neither Medicaid nor Medicare “shortfalls” (e.g., the amount by which reimbursement falls short of costs – or, as some hospitals argue, customary charges) should count as charity, because these are essentially “pay for service” transactions and Provena voluntarily chose to take part in these programs.  The court observed that both provide stable sources of revenue and other benefits (such as eligibility for federal tax exemption), and therefore the decision to treat Medicare/Medicaid patients was not a “gift” but self-interested behavior.  I should note that the plurality actually got one thing completely wrong in this part of the opinion.  The plurality asserted that the Catholic Health Association’s (CHA) community benefit guidelines also take the position that Medicare and Medicaid shortfalls do not “count” as community benefit.  That is not correct.  The CHA guidelines do not count Medicare shortfalls, but do count Medicaid shortfalls.

Now let’s turn to the dissenters (on this issue).  Unlike the plurality, the dissent wholeheartedly embraced the “community benefit” test of tax exemption, quoting extensively from Medical Center Hospital of Vermont v. City of Burlington, 566 A.2d 1352 (Vt. 1989) and Wexford Medical Group v. City of Cadillac 713 N.W.2d 734 (Mich. 2006), both classic “community benefit” cases.  The dissenters rejected the notion that any minimum level of charity care was required, quoting directly from the Medical Center of Vermont and Wexford cases:

Similarly, in Medical Center Hospital of Vermont, Inc. v. City of Burlington, 152 Vt. 611, 566 A.2d 1352 (1989), the Vermont Supreme Court, in rejecting the taxing authority’s argument that the amount of free care dispensed must exceed revenues, concluded there was nothing in any Vermont case that required an institution to dispense any free care to qualify as charitable for purposes of the charitable property tax exemption. (Slip opinion at 35)

“[I]t does not follow that an institution must present evidence of a particular level of charitable care because there is no such threshold level contained in the statute. And we refuse to create one.” Wexford, 474 Mich. at 220, 713 S.W.2d at 748. (Slip opinion at 34).  


So, where are we on the issue of tax exemption for nonprofit hospitals?  Well, in Illinois we are essentially where we were before this opinion: because only a plurality of the court (rather than a majority) held that some substantial charity care was a requirement of exemption, technically that is not a definitive holding.  We don’t know how the other two justices would have voted, and until we have a case with a 4-person majority opinion, the best we can say is that not having a substantial charity care program is extremely dangerous, but having one is not clearly required.  Nevertheless, I suspect that any Illinois hospital that already hasn’t adopted clear charity care policies, including advertising them, and who hasn’t “throttled back” on debt collection cases will be doing so immediately.  It just wouldn’t be wise to tempt fate on this point, since it is clear that at least 3 justices believe that substantial charity care is a requirement of exemption under Illinois law.

Second, I suspect that one result of the Provena decision (or non-decision, as the case may be) will be to resurrect interest in a legislative solution to the nonprofit hospital exemption debate, which is where I think the solution should come from – see my article Hospital Property Tax Exemption in Illinois: Exploring the Policy Gaps, 37 Loyola L. Rev. 493 (2006).  Deciding questions such as whether charity care is a requirement of exemption, and if so, how much and how to count it, is simply not a task well-suited to the case-by-case judicial process.  These are intensely technical questions that should have clear answers, and on this point I agree with the dissenters: the legislature needs to answer them.  In Illinois, and in other states where this issue is boiling, the best approach would be to have the legislature step in.

Finally, I would note once again that I don’t agree with either approach – that is, I do not agree with either the “charity care is essential” approach of the plurality, nor the broad community benefit formulation of the dissenters.  In my view, the relevant question should be “what does a nonprofit hospital do that for-profit hospitals do not?” – or in other words, what services do nonprofits provide that are not otherwise provided by the private market.  These services might include free care for the poor, but might also include services (like a burn center) that for-profits shun because they are money losers.  Unfortunately, it seems that this test is not on anyone’s radar screen.

JDC

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