Monday, June 4, 2012

Illinois Enacts Hospital Property Tax Exemption Standards

Late last week, the Illinois Legislature enacted a new law setting specific standards for nonprofit hospitals seeking property tax (and sales tax) exemptions.   The new law, SB2194 (the tax exemption provisions begin on page 48 of the PDF file linked above), essentially requires nonprofit hospitals to provide unreimbursed services to the poor or government entities in an amount at least equal to the property tax that would have been assessed on the hospital's property in order to retain exempt status.  For-profit hospitals would get a property-tax credit for the value of such services.

The new law is a response to the Illinois Supreme Court's decision in the Provena Covenant hospital exemption case, which we have previously blogged about a number of times (key posts are here and here). In that case, a plurality of the court held that Provena Covenant hospital in Urbana, Il failed to provide sufficient charity care to qualify for property tax exemption, although the court declined to set a specific standard for how much charity care would be enough.  The resulting uncertainty created a mess, and this legislation was designed to end the uncertainty.

While I'm not going to attempt a detailed dissection of the legislation in this blog post, I do want to comment on a few items.  The first is that while the bill does retreat a bit from the classic community benefit formulation of tax exemption for nonprofit hospitals in that it focuses on the unreimbursed costs of services to the poor or underserved populations as the only things that "count" for tax exemption purposes, the breadth of the definition of those services is very wide indeed.   In addition to classic charity care (not charging charity patients at all or heavily discounting their services), Medicaid shortfalls count, as do Medicare shortfalls for so-called "dual eligible" patients (e.g., Medicare-eligible patients that also meet eligibility requirements for Medicaid).  Also counting in the calculation are

the portion of unreimbursed costs of the relevant hospital entity attributable to providing, paying for, or subsidizing goods, activities, or services that relieve the burden of government related to health care for low-income individuals. Such activities or services shall include, but are not limited to, providing emergency, trauma, burn, neonatal, psychiatric, rehabilitation, or other special services; providing medical education; and conducting medical research or training of health care professionals. 

While the hospital in question will have to make an allocation for the above costs attributable to low-income inividuals, you can see that the "community benefit" theme still runs strongly in this legislation. So strongly, in fact, that I seriously doubt the legislation will effect any change to nonprofit hospital behavior.  In fact, a hospital that "missed" its numerical target could simply cut a check to an appropriate entity (e.g., a clinic for the poor) and maintain exemption that way.  And the fact the legislation was supported heavily by the hospital industry causes me to think that my "serious doubt" will prove to be reality.

I also wonder if the result of having a specific mathematical target (the property tax that would otherwise have been due) will lead over time to fewer services for the poor than more.  While I certainly don't see any hospital CEO getting up in front of her Board and requesting changes in policies to reduce services for the poor (that would certainly get a headline in the Chicago Tribune, if not the New York Times!), one wonders if over time more subtle changes in policy (or lack of new policies) will result in a "remarkable accident" where hospitals all end up just meeting the statutory requirements in order to retain exemption.  As I told one reporter, call me in five years and let's see what has happened.

In addition, there is some question whether the legislation is in fact constitutional.   The Illinois Supreme Court had previously held in the Eden Retirement Center case that what constitutes a "charity" for property tax exemption purposes is in the first instance a constitutional matter, and therefore the legislature may not contradict the courts interpretations of charity for property tax exemption purposes. How this plays out with SB2194 is an interesting question.   On the one hand, the bill does stick to defining broad concepts laid out by the Illinois Supreme Court in Provena - the concept of charity care as a broad gift to the community and the overall concept of relief of government burden as a sine qua non of property tax exemption.  On the other hand, the bill curiously "overrules" some specifics of the Provena case - for example, the plurality in Provena quite clearly stated that Medicaid shortfalls do not count for tax exemption purposes, while this bill quite clearly says they do.

Finally, there is the question whether this legislation will become a model for other states.  (If I were in a snarky mood, I might ask why anyone in their right mind would copy something passed by the Illinois Legislature, but as the saying goes, even a stopped clock tells the right time twice a day).  The truth is that I doubt it.  The issue of nonprofit hospital tax exemption has been settled in many states either by statute (e.g., New York, Pennsylvania, Texas); or prior litigation (e.g., Vermont, in the Medical Center Hospital v. Burlington case).   While there are a few states where the issue may still be open, I didn't see any rush by state departments of revenue or local county assessment boards to copy the Provena analysis, and I similarly doubt there will be much interest in the Illinois solution to the Provena case.   




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Do you see any spill over from this to the non-hospital community. I know when Provena came out that some of the language was very worrying to non-hospital entities, such as theatres, that have lots of revenue from related activities but maybe not so much in the way of services to the impoverished. This seems like a uniquely hospital legislative solution - it leaves open some of that discussion in Provena, although as a practical matter, I've not seen or heard of any move to extend the application of Provena.

Posted by: Elaine Wilson | Jun 4, 2012 8:37:00 AM

Hi Elaine.

No, I don't see spillover. When the Provena debate began back in 2002, I thought there might be spillover, both to other states and to other kinds of entities. But that didn't happen, and I don't think it will. My take is that Provena was peculiar to Illinois, and in turn was peculiar to nonprofit hospitals in Illinois, and will remain so.

John C.

Posted by: John Colombo | Jun 5, 2012 6:02:32 AM

Thank you for this post. Regarding your comment if having a specific mathematical target will lead over time to fewer services for the poor than more, there is some empirical evidence from Texas on a related issue. In a study published in the Journal of Accounting and Public Policy in 2010, Kennedy et al. found that on average, NFP hospitals in Texas spending below the 4% minimum threshold (as implemented by the Texas legislature) increased their charity care spending to meet the required threshold while NFP hospitals spending above the threshold experienced a marginally significant decrease in spending (Kennedy et al., 2010. Do non-profit hospitals provide more charity care when faced with a mandatory minimum standard? Evidence from Texas. Journal of Accounting and Public Policy 29(3): 242-258). It will be interesting to see how spending by hospitals in Illinois will change as a result of the new law but any minimum spending requirement provides incentives for hospitals with spending levels above the threshold to reduce their spending.

Posted by: Simone R. Singh | Oct 4, 2012 1:03:56 PM

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