Showalter, Stuart. The Law of Healthcare Administration, Ninth Edition, Health Administration Press, 2020.

Chapters 12 - Taxation of Healthcare Institutions

Chapter 13 - Competition and Antitrust Law

Discussion question for answer below - please help! Thank you!

Read Chapter 12 and Provena Covenant Medical Center v. Department of Revenue (p. 479 in text). Answer the following questions and post your answer in Discussion Post. How should the term "charity" be defined? What are the arguments against and in favor of counting the provision of healthcare in and of itself as a charity?

Provena Covenant Medical Center v. Department of Revenue 236 Ill.2d 368, 925 N.E.2d 1131 (2010)

As described in this chapter, the issue in this case is whether a certain Catholic hospital system, Provena Hospitals, had proven that it qualifies for property tax exemption for its Urbana, Illinois, hospital. The director of revenue had determined that the system had not sufficiently made its case and denied the exemption. On review, the circuit court reversed the director's decision, but an appellate court reinstated the denial. The hospital system now appeals to the state's highest court. The system, which is the property owner, is itself exempt from federal income tax under IRC 501(c)(3) and from various Illinois occupation and use taxes. None of these exemptions is determinative of the property tax issue. The opinion begins with some further background.] Provena Hospitals owns and operates six hospitals, including Provena Covenant Medical Center (PCMC), a full-service hospital located in the City of Urbana. PCMC was created through the merger of Burnham City Hospital and Mercy Hospital. It is one of two general acute care hospitals in Champaign/Urbana and serves a 13-county area in east central Illinois. The services it provides include a 24-hour emergency department; a birthing center; intensive care, neonatal intensive care, and pediatrics units; surgical, cardiac care, cancer treatment, rehabilitation and behavioral health services; and home health care, including hospice. It offers case management services to assist older persons to remain in their homes and runs various support groups and health-related classes. It also provides smoking cessation clinics and screening programs for high cholesterol and blood pressure as well as pastoral care. PCMC maintains between 260 and 268 licensed beds. Each year it admits approximately "10,000 inpatients and 100,000 outpatients." Some 60% of its inpatient admissions originate through the hospital's emergency room, which treats some 27,000 visitors annually. PCMC provides an emergency department because it is required to do so by the [Illinois] Hospital Emergency Service Act. Where emergency room services are offered, a certain level of health care is required to be provided to every person who seeks treatment there. That is so as a matter of both state and federal law. [Citations omitted here and throughout.] Staffing PCMC are approximately 1,000 employees, 400 volunteers and 200 physicians. The physicians are not employed or paid by the hospital. . . . Provena Hospitals' employees do not work gratuitously. Everyone employed by the corporation, including those with religious affiliations, are paid for their services.* Compensation rates for senior executives are reviewed annually and compared against national surveys. Provena Health "has targeted the 75th percentile of the market for senior executive total cash compensation." * This assertion by the court is not literally true. Members of Catholic religious orders who have taken a vow of poverty are not themselves compensated for their services; instead, their religious orders (e.g., the Sisters of Mercy, Alexian Brothers) are paid directly. The earnings are considered to be the income of the religious order and are not taxable to the individual. See IRS Pub. 517. According to the record, PCMC's inpatient admissions encompass three broad categories of patients: those who have private health insurance, those who are on Medicare or Medicaid, and those who are "self-pay (uninsured)." PCMC has agreements with some private third-party payers which provide for payment at rates different from "its established rates." The payment amounts under these agreements cover the actual costs of care. The amounts PCMC receives from Medicare and Medicaid are not sufficient to cover the costs of care. Although PCMC has the right to collect a certain portion of the charges directly from Medicare and Medicaid patients and has exercised that right, there is still a gap between the amount of payments received and the costs of care for such patients. For 2002, PCMC calculated the difference to be $7,418,150 in the case of medicare patients and $3,105,217 for Medicaid patients. PCMC was not required to participate in the Medicare and Medicaid programs, but did so because it believed participation was "consistent with its mission." Participation was also necessary in order for Provena Hospitals to qualify for tax exemption under federal law. In addition, it provided the institution with a steady revenue stream. [The court next reviews various facts relating to the system's and the hospital's financial performance, including budget items; expenses; net revenues; and policies relating to billing, collections, and charity care. The opinion contains the following findings, among others.] In 2002 [the tax year in question], PCMC budgeted $813,694 for advertising. . . . The ads taken out by PCMC in 2002 covered a variety of matters, including employee want ads. None of its ads that year mentioned free or discounted medical care. While not mentioned in PCMC's advertisements, a charity care policy was in place at the hospital, and the parties stipulated that PCMC's staff made "outreach efforts to communicate the availability of charity care and other assistance to patients." The charity care policy, which was shared with at least one other hospital under Provena Hospitals' auspices, provided that the institution would "offer, to the extent that it is financially able, admission for care or treatment, and the use of the hospital facilities and services regardless of race, color, creed, sex, national origin, ancestry or ability to pay for these services." The charity policy was not self-executing. An application was required. Whether an application would be granted was determined by PCMC on a case-by-case basis using eligibility criteria based on federal poverty guidelines. . . . PCMC's policy specified that the hospital would give a charity care application to anyone who requested one, but it was the patient's responsibility to provide all the information necessary to verify income level and other requested information. To verify income, a patient was required to present documentation "such as check stubs, income tax returns, and bank statements." PCMC believed that its charity care program should be the payer of last resort. It encouraged patients to apply for charity care before receiving services, and if a patient failed to obtain an advance determination of eligibility under the program, normal collection practices were followed. PCMC would look first to private insurance, if there was any; then pursue any possible sources of reimbursement from the government. Failing that, the hospital would seek payment from the patient directly. . . . The fact that a patient's account had been referred to collection did not disqualify the patient from applying to the charity care pro gram. Applications would be considered "[a]t any time during the collection process." . . . During 2002, the amount of aid provided by Provena Hospitals to PCMC patients under the facility's charity care program was modest. The hospital waived $1,758,940 in charges, representing an actual cost to it of only $831,724. This was equivalent to only 0.723% of PCMC's revenues for that year and was $268,276 less than the $1.1 million in tax benefits which Provena stood to receive if its claim for a property tax exemption were granted. The number of patients benefitting from the charitable care program was similarly small. [The court next establishes the standard for review in cases such as this.] This standard is "significantly deferential." An administrative decision will be set aside as clearly erroneous only when the reviewing court is left with the definite and firm conviction that a mistake has been committed. . . . [T]his is not such a case. Under Illinois law, taxation is the rule. Tax exemption is the exception. All property is subject to taxation, unless exempt by statute, in conformity with the constitutional provisions relating thereto. Statutes granting tax exemptions must be strictly construed in favor of taxation and courts have no power to create exemption from taxation by judicial construction. nThe burden of establishing entitlement to a tax exemption rests upon the person seeking it. . . . If there is any doubt as to applicability of an exemption, it must be resolved in favor of requiring that tax be paid. [Citing Methodist Old Peoples Home v. Korzen, 39 Ill 2d 149, 233 N.E.2d 537 (1968), the court lists five "distinctive characteristics of a charitable organization." They are as follows:] (1) it has no capital, capital stock, or shareholders; (2) it earns no profits or dividends but rather derives its funds mainly from private and public charity and holds them in trust for the purposes expressed in the charter; (3) it dispenses charity to all who need it and apply for it; (4) it does not provide gain or profit in a private sense to any person connected with it; and (5) it does not appear to place any obstacles in the way of those who need and would avail themselves of the charitable benefits it dispenses. For purposes of applying these criteria, we defined charity as "a gift to be applied *** for the benefit of an indefinite number of persons, persuading them to an educational or religious conviction, for their general welfareor in some way reducing the burdens of government." . . . Provena Hospitals plainly fails to meet the second criterion: its funds are not derived mainly from private and public charity and held in trust for the purposes expressed in the charter. They are generated, overwhelmingly, by providing medical services for a fee. While the corporation's consolidated statement of operations for 2002 ascribes $25,282,000 of Provena Hospitals' $739,293,000 in total revenue to "other revenue," that sum represents a mere 3.4% of Provena's income, and no showing was made as to how much, if any, of it was derived from charitable contributions. The only charitable donations documented in this case were those made to PCMC, one of Provena Hospitals' subsidiary institutions, and they were so small, a mere $6,938, that they barely warrant mention. Provena Hospitals likewise failed to show by clear and convincing evidence that it satisfied factors three or five. . . . While the record is filled with details regarding PCMC's operations, PCMC is but one of numerous institutions owned and operated by Provena Hospitals. It [PCMC] does not hold title to any of the property for which an exemption is sought. The actual owner is Provena Hospitals. As the Director of Revenue expressly concluded, however, "the record contains no information as to Provena Hospitals' charitable expenditures in 2002." The Director reasoned that without such information, it is simply "not possible to conclude that the true owner of the property is a charitable institution as required by Illinois law." We fully agree. The appellate court was therefore correct when it concluded that this aspect of the Department's decision was not clearly erroneous. As detailed earlier in this opinion, eligibility for a charitable exemption under [Illinois law] requires not only charitable ownership, but charitable use. Specifically, an organization seeking an exemption . . . must establish that the subject property is "actually and exclusively used for charitable or beneficent purposes, and not leased or otherwise used with a view to profit." . . . In rejecting Provena Hospitals' claim for exemption, the Department determined that the corporation also failed to satisfy this charitable use requirement. As with the issue of charitable ownership, the appellate court concluded that this aspect of the Department's decision was not clearly erroneous. Again we agree. [The court here quotes other cases, including the 1867 Massachusetts case mentioned early in this chapter under What Is a Charity? The opinion continues as follows.] [W]e explained [in a 1936 decision] that "[t]he reason for exemptions in favor of charitable institutions is 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." See also [a 1927 case stating:] "The reason for exempting certain property from public taxes arises from the fact that such property, in its use for charitable purposes, tends to lessen the burdens of government and to affect the general welfare of the public." 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. . . . Even if Provena Hospitals were able to [show that it somehow reduced a burden on local government] there was ample support for the Department of Revenue's conclusion that Provena failed to [show] that it used the parcels in the PCMC complex actually and exclusively for charitable purposes. As our review of the undisputed evidence demonstrated, both the number of uninsured patients receiving free or discounted care and the dollar value of the care they received were de minimus. With very limited exception, the property was devoted to the care and treatment of patients in exchange for compensation through private insurance, Medicare and Medicaid, or direct payment from the patient or the patient's family. To be sure, Provena Hospitals did not condition the receipt of care on a patient's financial circumstances. Treatment was offered to all who requested it, and no one was turned away by PCMC based on their inability to demonstrate how the costs of their care would be covered. The record showed, however, that during the period in question here, Provena Hospitals did not advertise the availability of charitable care at PCMC. Patients were billed as a matter of course, and unpaid bills were automatically referred to collection agencies. Hospital charges were discounted or waived only after it was determined that a patient had no insurance coverage, was not eligible for Medicare or Medicaid, lacked the resources to pay the bill directly, and could document that he or she qualified for participation in the institution's charitable care program. As a practical matter, there was little to distinguish the way in which Provena Hospitals dispensed its "charity" from the way in which a for-profit institution would write off bad debt. [The opinion continues for another ten pages in which it dismisses the hospital's arguments that not a lot of charity is needed in this university town, that it provides other community benefits, and that it is entitled to a religious exemption because "it is, itself, a ministry of the Catholic Church." The penultimate substantive paragraph of the opinion reads:] [T]he record clearly established that the primary purpose for which the PCMC property was used was providing medical care to patients for a fee. Although the provision of such medical services may have provided an opportunity for various individuals affiliated with the hospital to express and to share their catholic principles and beliefs, medical care, while potentially miraculous, is not intrinsically, necessarily, or even normally religious in nature. We note, moreover, that no claim has been made that operation of a fee-based medical center is in any way essential to the practice or observance of the Catholic faith. [The majority opinion then concludes:] For the foregoing reasons, the Department of Revenue properly denied the charitable and religious property tax exemptions requested by Provena hospitals in this case. The judgment of the appellate court reversing the circuit court and upholding the Department's decision is therefore affirmed. . . . [The majority opinion was written by an associate justice and joined by the chief justice and another member. Two justices did not participate. Two others joined in affirming the director's decision that Provena failed to carry its burden of proof and that it is not entitled to a religious exemption, but they dissented from the majority's discussion of charitable use. The dissenting por-tion of the second opinion reads, in part, as follows:] [T]he plurality holds that Provena Hospital's use of the property in 2002 was not a "charitable use" because the charity care provided was de minimus. . . . I disagree with this rationale. By imposing a quantum of care requirement and monetary threshold, the plurality is injecting itself into matters best left to the legislature. The legislature did not set forth a monetary threshold for evaluating charitable use. We may not annex new provisions or add conditions to the language of a statute. . . .I do not believe this court can, under the plain language of section 15-65, impose a quantum of care or monetary requirement, nor should it invent legislative intent in this regard. Setting a monetary or quan- tum standard is a complex decision which should be left to our legislature, should it so choose. The plurality has set a quantum of care requirement and monetary requirement without any guidelines. This can only cause confusion, speculation, and uncertainty for everyone: institutions, taxing bodies, and the courts. Because the plurality imposes such a standard, without any authority to do so, I cannot agree with it. I also disagree with the plurality's conclusion that Provena Hospitals was "required to demonstrate that its use of the property helped alleviate the financial burdens faced by the county or at least one of the other entities supported by the county's taxpayers." Alleviating some burden on government is the reason underlying the tax exemption on properties, not the test for determining eligibility. Despite acknowledging this, the plurality converts this rationale into a condi- tion of charitable status. I neither agree with this, nor do I believe that Provena Hospitals failed to show it alleviated some burden ongovernment. . . .While "lessening the burden of government" is a component of the definition of charity, it is inextricably tied to the public policy justifying the exemption itself and is not a requirement for demonstrating entitlement to the exemption. The plurality here errs in requiring Provena Hospitals to specifically demonstrate some burden of government it relieved. There is no such requirement.

Discussion Questions 1. As this Provena excerpt (about one-fourth of the total) shows, the case decision is long and complicated. It reflects the public policy struggles inherent in these issues. From what you have read, which of the two opinions (majority or partial dissent) do you feel is better reasoned, and why? 2. The court relies onand quotes with approvalcases that are many decades (even more than a century) old. Why might those old cases not be relevant today? 3. Should the idea of charity be redefined to meet today's realities? Is it still a valid concept in the context of healthcare? If not, what would you recommend be changed? 4. Given what you know about other hospitals, to what extent do you think the Illinois court's rationale will serve as a blueprint for other states to revoke hospitals' tax exemptions? 5. How, if at all, can hospitals position themselves better to deal with property tax issues?