On March 18, 2010, the Illinois Supreme Court issued its opinion in Provena Covenant Medical Center v. The Department of Revenue. In its opinion, the Court reviewed the facts surrounding a property tax exemption valued at $1.1 million sought by Provena Covenant Medical Center ("Provena") for its real estate located in Urbana, Illinois. Ultimately, the Court affirmed the Illinois Court of Appeals' decision to deny Provena's property tax exemption.

Background

Provena Covenant Medical Center is an Illinois not-for-profit corporation that operates a full-service acute-care hospital located in Urbana, Illinois. Provena is exempt from federal income taxes under 501(c)(3) of the Internal Revenue Code and exempt from a variety of Illinois taxes as well. 

In 2002, Provena filed an application for property tax exemption for 43 parcels of real estate used for its Urbana hospital facility. The exemption was sought under 35 ILCS 200/15-65(a) for property owned by a "charitable institution" that is "actually and exclusively used for charitable or beneficient purposes, and not leased or otherwise used with a view to profit." The exemption application was denied by the Champaign County Board of Review, and the Illinois Department of Revenue agreed with its decision. After its exemption was denied, Provena sought administrative review in the Sangamon County Circuit Court. The Circuit Court disagreed with the Champaign County Board of Review. On appeal, the Illinois Court of Appeals reversed the Circuit Court's decision by denying the exemption. The Illinois Supreme Court agreed to review the Court of Appeals' decision.

The Court's Reasoning

In affirming the Court of Appeals' decision, a majority of the justices agreed that the exemption was not proper. This is based on the fact that Provena did not qualify as a "charitable institution" under 35 ILCS 200/15-65(a).  However, the justices were split on whether or not the real estate was "actually and exclusively used for charitable or beneficient purposes, and not leased or otherwise used with a view to profit" as required by 35 ILCS 200/15-65.

Charitable Institution - A Lack of Charitable Contributions

A majority of the justices agreed that being exempt from federal or state income taxes was not sufficient to meet the definition of a charitable institution. They stated that while Provena was a not-for-profit corporation without capital stock or shareholders during its 2002 fiscal year, Provena did not derive most of its funds from private or public charity. They focused on the fact that nearly all of its funding was received by treating patients in exchange for compensation through private insurance, Medicare and Medicaid, or direct payment from patients. Only $6,938 of Provena's income in 2002 came from charitable contributions.

Charitable Use - A Disagreement among the Justices

The more controversial issue that was not resolved by the Court was whether or not Provena's real estate was "actually and exclusively used for charitable or beneficient purposes, and not leased or otherwise used with a view to profit."

Three of the justices focused their attention on the fact that Provena did not provide charity care to all who needed it and applied for it, nor did Provena advertise the availability of free or discounted medical care. The application process for charity care was also a complicating factor. The justices were concerned that patients were required to submit an application for charity care and to provide evidence that their income and assets met Provena's eligibility requirements. If a patient failed to obtain an advance determination prior to being admitted for treatment, then normal collection practices were followed. Those practices involved using collection services, calling the patient, and in some cases, taking legal action.

The same justices stated that Provena provided charity care only after it determined the patient was unable to pay for the services and revenue sources from private payers or Medicare or Medicaid were exhausted. Under Provena's charity care policy, only 302 of 110,000 admissions received reductions in bills. As a result, in 2002, Provena provided charity care in the amount of $831,724.  The justices stated that Provena's charity care was $286,276 less than the $1.1 million in tax benefits that it would have received from the property tax exemption.  In light of the previously mentioned facts, the justices felt that Provena's charity care practices placed obstacles in the way of those who needed charitable benefits.

On the other hand, two dissenting justices were troubled by the fact that the Court attempted to establish a monetary threshold for evaluating charitable use under 35 ILCS 200/15-65. They stated that establishing such a threshold is a right reserved for the legislature, not the Court.

Practical Takeaways 

• In light of the fact that a majority of justices did not agree upon the reason for denying the exemption, the decision may have limited precedential value.
  
  
• Hospitals and health care centers attempting to qualify as a "charitable institution" should make sure that a portion of their funds for operating expenses are derived from charitable donations.
  
  
• Charity care policies and practices should be carefully reviewed to ensure that patients are aware of free or discounted medical care.
  
  
• Charity care policies and practices should not place obstacles in the way of those who need free or discounted medical care.

A copy of the opinion issued by the Illinois Supreme Court is available at: http://www.state.il.us/court/OPINIONS/SupremeCourt/2010/March/107328.pdf

If you have questions about this matter, please contact your regular Hall Render attorney or Andrew Dick at (317) 977-1491 or by email at adick@hallrender.com.