Tax ruling may affect hospitals’ charitable care

By Adam Terese

A landmark ruling about an Urbana hospital could set a precedent that would lead to more accountability in the amount of charity care non-profit hospitals must provide.

Provena Covenant Medical Center, 1400 W. Park St., in Urbana, does not deserve its property-tax exemption, ruled Brian Hamer, the director of the Illinois Department of Revenue in September. Back in January 2003, the Champaign County Board recommended the hospital’s status be revoked, citing aggressive attempts, such as lawsuits, to get money from poor and uninsured patients that could not pay.

In 2002, Provena provided $832,000, or 0.7 percent of its $113.5 million in revenues in charitable care, which was “insufficient” to receive the exemption, Hamer said in the ruling.

Property-tax exemptions are given to non-profit hospitals in exchange for their promise to provide charity care, said Danny Chun, vice president of communications for the Illinois Hospital Association.

However, tax review boards, prompted by controversy over aggressive billing practices and the amount of charity care hospitals provide, are now reconsidering that benefit. The Provena case may set a precedent for other non-profit hospitals in Illinois – and all over the U.S. – that may be the focus of similar challenges on their exemptions, said Stephen Weyl, a partner with the Boston-based law firm Hinckley, Allen & Snyder LLP.

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While Provena has stopped aggressive collection practices, it has evoked national discussion, especially considering the number of uninsured in the U.S. has risen past 45 million, said Weyl, who specializes in health-care law.

“What is amazing to us is that you’re still hearing about this,” Weyl said. “Even if Provena has stopped, the issue is on the radar screen. I think Pandora’s box is already open.”

If the decision were to hold and spread in Illinois, it would mean millions of dollars in additional taxes for non-profit hospitals, said Laura Sandefur, chair of the Champaign County Board of Review. Since Provena had lost its status in 2003, it paid nearly $5 million in property taxes up until September.

At worst, some smaller hospitals would be forced to close, which could impact smaller communities, Sandefur said. Yet, she said the scrutiny is necessary.

“You are in a sense supported by the community around you, and there is an expectation that charitable facilities will provide some benefit to the community or will be lessening the governmental burden,” said Sandefur, who was on the board when Provena lost its status.

Provena has appealed the decision, and the Illinois Hospital Association is standing behind the hospital.

“We’re confident that through our appeal that it will be overturned simply because of the implications it has for non-profit hospitals throughout the state and all types of non-profits,” said Stephanie Faraci, Provena’s hospital relations liaison.

Chun said Hamer’s definition of charity care is “much too narrow” and only looks at what hospitals provide for free.

Other services cause hospitals to lose money, but are not counted as charity care. If a patient comes in covered by Medicaid, the hospital gets 73 cents back from the government on every dollar it spends on services for that patient. That 27-cent shortfall, plus bad debt – or unpaid medical bills – should be counted as charity care, Chun said.

“Statewide in Illinois for 104 hospitals, the total net community benefit is more than $3.6 billion,” Chun said. “We think that needs to be taken into account.”

However, Weyl said the Illinois Department of Revenue is on firm ground. He said including the Medicaid shortfall as charity care undermines the system. As for the notion of bad debt, it has a built-in fallacy, he added.

“You could have someone with a million-dollar-a-year income that just ditches the hospital and doesn’t want to pay his charges,” Weyl said. “So you can’t say it’s charity care if it’s given to someone who shouldn’t be a recipient.”

Illinois Attorney General Lisa Madigan is working to create legislation that would require hospitals to give a certain percentage of charity care to receive tax exemption. Although no percentage has been set, the legislation would create a standard that the Hamer ruling does not define, Chun said.

But Provena’s appeal could result in even stricter charity care guidelines, said Jim Unland, president of the Chicago-based Health Capital Group, a health-care consulting firm.

In the meantime, Weyl tells his hospital clients to take precautions, such as adopting standards on charity care and providing extra services to their communities. Unland, too, warns his clients of the dangers of letting the controversy continue.

“I am not a community activist or an advocate for the uninsured,” Unland said. “But this is trouble; this could be really bad news. It’s a disturbing situation. It’s an unnecessary and exaggerated risk on the part of hospitals to let this go on and on.”