Hospitals fear loss of tax exemption in Illinois

SPRINGFIELD — Two new buildings created some badly-needed new space — and a dilemma — for Sarah Bush Lincoln Health Center.

A not-for-profit hospital and clinic system in Coles County, Sarah Bush Lincoln placed its new buildings on taxable land. Now the buildings, which are housing both hospital and doctors' offices, are being assessed for taxes, unless Sarah Bush Lincoln decides to file a protest, the systems's Vice President of Financial Services Craig Sheagren says.

That hasn't been decided yet, because daring to seek an exemption on any buildings could land the health center squarely where no Illinois hospital wants to be right now, under the microscope of the state Department of Revenue and possibly subject to losing the tax exemption on Sarah Bush Lincoln's hospital buildings, Sheagren said.

"That's my worst case scenario," he says, grimly.

Illinois hospitals got their first major warning about losing charitable tax exemptions when the state Department of Revenue first removed Provena Covenant Medical Center's exemption in 2006, then yanked Carle Foundation Hospital's exemption.

Last year, after the state Supreme Court ultimately found Provena Covenant was taxable, the Department of Revenue began looking at a stack of applications from other hospitals in Illinois seeking tax exemptions.

In August, the department preliminarily denied exemptions for three more hospitals, in Chicago, Naperville and Decatur.

Illinois Hospital Association President Maryjane Wurth says her organization has been trying to work out a solution with the Department of Revenue, Attorney General Lisa Madigan's office and others with a stake in the charity care issue.

The hospital organization has asked the department both to withdraw its latest three hospital exemption denials and to hold off on further decisions for now, but Department of Revenue spokeswoman Sue Hofer says more preliminary decisions may be forthcoming.

"Clearly it is time for a global solution for this issue," Wurth says.

What's enough

During the year deciding the Provena Covenant tax exemption case, tax year 2002, the Urbana Catholic hospital provided free care to needy patients that equaled less than 1 percent of its revenues.

In its most recent full fiscal year, Covenant provided free care worth 3.2 percent of its annual revenues, hospital officials said. The numbers reflect free care at what it cost the hospital to provide it, not the higher figures patients would have been charged had they been billed.

The latest three hospitals to lose their exemptions — all deemed by the Department of Revenue to have acted more like businesses than charities — gave away less than 2 percent of their revenues in free care, and one of them, Decatur Memorial Hospital, provided less than 1 percent.

In making its determinations, the Department of Revenue says it is following the guidance supplied by the state Supreme Court in the Provena case.

That includes applying the five characteristics of a charitable institution that the high court applied from a 1968 court case: A charitable institution has no capital, capital stock or shareholders; it derives its funds mostly from private and public charity, it dispenses charity to all who need it; it doesn't provide gain or profit in a private sense to anybody connected with it, and it doesn't throw obstacles in the way of anybody who needs charity.

A sixth standard is also being applied from the Provena case, the Department of Revenue said: Hospitals need to show their charitable activities are lessening the burdens of their taxing districts.

For hospital executives, this is a bit vague.

"I'd just like to know what the rules are," said Dr. James Leonard," CEO at Carle Foundation Hospital. "This is a question for society, so society needs to weigh in on this subject. Should we be taxed, not taxed, but we have to have the rules."

Brian Crawford, vice president of public affairs at Chicago-based Resurrection Health Care, objects to tax exemption standards that only consider charity care as a slice of revenue and nothing else hospitals provide for free.

This six-hospital Catholic system, poised to merge with Provena (if state regulators approve), absorbs bad debts exceeding $36 million and makes up the difference in cost for what the government doesn't pay for Medicare and Medicaid patients to the tune of $74.8 million a year, Crawford says.

"I don't see more traditional businesses, for-profit businesses, providing free services, really life-saving services to the community the way hospitals do," he said.

Together, 109 of the state's not-for-profit hospitals provided $561 million in charity care in the latest reporting year that ended Sept. 30, 2010 — 124 percent more than they gave the previous year, according to the state hospital association. Public, smaller and rural hospitals aren't included in that number, because they aren't required to file a report.

Wurth says one-third of the state's hospitals are losing money, many are operating on slim margins, and the general uncertainty of what qualifies as charity care and what might trigger the loss of a tax exemption is worrisome. Already, one hospital she is aware of has put off an improvement project and others may begin to do likewise, she said.

"One of the unintended consequences and a sorry commentary for our communities is that many hospitals are reassessing what projects they go forward with, and whether they can continue to meet the needs of their communities," she said.

The hospital association is pinning its hopes on a legislative solution that would spell out some clear directives on charity care for hospitals.

"We don't have a bill yet, but we are working toward that end and it would be our hope that we could get passage in the veto session," Wurth said.

Beyond numbers

The tax exemptions hospitals want are for property taxes paid to local governments to help cover the cost of such services as police and fire protection and the cost of public schools.

But the Patient Protection and Affordable Care Act that is overhauling the nation's health care system also includes several provisions that will affect how non-profit hospitals qualify for their federal income tax exemptions.

The new requirements include conducting a community needs assessment every three years, having a written financial assistance policy, charging patients eligible for financial assistance the same amounts they'd charge patients with insurance, and not turning patients over to collection agencies before they make a reasonable effort to find out if they qualify for help with their bills. Most Illinois non-profit hospitals should already meet these requirements under existing state laws, according to the state hospital association.

While the organization is seeking further legislation that would give hospitals clarity on charity care, it rejects the idea of an arbitrary figure requiring each hospital to give the same percentage of its revenues in charity care each year: Needs change each year depending on the economy and each community's needs are different, association leaders say.

Case in point: Provena doesn't "budget" a certain amount for charity care. Assistance is available to all who need it and qualify, and at each of Provena's hospitals in Urbana and Danville, the amount of charity care given out wound up being just over 3 percent of each hospital's revenues in the last fiscal year.

That level appears to fit the needs of those communities, said the hospitals' Regional Vice President of Finance Deborah Schimerowski.

"Right now, there's a lot of economic distress," she said. "There's a greater need. In times when there's not, the need might not be there,"

Sarah Bush Lincoln provided charity care adding up to 4.2 percent of its revenues in its last fiscal year, but Sheagren warns hospitals may not keep or lose their exemptions on their charity care numbers alone.

The Supreme Court also found Provena Covenant wasn't a charity because it doesn't derive most of its income from charitable sources, and if that's the new test, he says, "it's a new ball game."

"Every hospital in the state of Illinois ought to be scared they're going to lose their tax exemption for property taxes," he says.

Sarah Bush Lincoln already pays taxes on its clinics in nine communities, and is waiting to decide what to do about paying taxes on its two new buildings for the moment, he said.

"What we're really hoping is the state legislature acts. We wouldn't have to write a check until next summer," he added.

More to lose?

Leonard, at Carle, says he's seeing signs the Department of Revenue is out to remove more than property tax exemptions from hospitals. Sales tax exemptions are next, he warns, and then every other charitable organization had better watch out.

That will include the Y(MCA) and everybody else," he said. "Although they've played their cards close to the vest, their message has been consistent and clear."

Like Leonard, Crawford, at Resurrection Healthcare, says he just wants to know the rules.

"Absolutely there needs to be a bright line criteria," he said. "Otherwise, these decisions are very puzzling and leave us with a lot of uncertainty about what we're supposed to be doing."

Meanwhile, Resurrection is taking some cues from Provena on improving its charity care policies as the two systems prepare to merge, he says.

One of Resurrection's biggest charity care barriers is getting people to apply, Crawford said. Even when hospital staff members help fill out applications, patients can run into problems providing the right documentation and can wind up in the bad debt category, he said.

These days, Resurrection is following Provena's lead and presuming more patients who appear to qualify for charity care — for example, people who are homeless or on public assistance — do qualify, Crawford said.

He and Shimerowski say the two systems are taking the best and most generous of their two charity care policies and putting them together in a new policy they'll use under one merged system.

Charity care is all well and good, Crawford says, but it also carries a stigma.

"We need to get more people insured," he says.

Until then, Resurrection hospitals will provide charity without strings attached. Provena makes a similar promise.

"Our mission is to serve everybody who comes through our doors, regardless of their ability to pay, and I think if you're going to have a standard, it needs to start there," Crawford said.

Comments

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read the DI wrote on September 05, 2011 at 7:09 am

Whereas many not-for-profits and nonprofits have enriched themselves and their managers at the expense of the general public, going after the hospitals *in general* seems like a poor choice. The DOR should start with the so-called charitable foundations made up of single families as a means to avoid the inheritance tax. Then it should go after the trade associations -- as big a tax dodge racket as ever there was.

kenlyn wrote on September 06, 2011 at 3:09 pm

There are, however, some healthcare bill exemptions. First, the new law creates a religious conscience exemption for those who are members and faithful adherents of a recognized religious sect or division. The provision may exempt those individuals from the mandatory health insurance purchase requirement if they are members of religions that have established tenets or teachings that bar the “acceptance of the benefits of any private or public insurance.”

The religious conscience exemption is defined as:

RELIGIOUS CONSCIENCE EXEMPTION. – Such term shall not include any individual for any month if such individual has in effect an exemption under section 1311(d)(4)(H) of the Patient Protection and Affordable Care Act which certifies that such individual is a member of a recognized religious sect of division thereof described in section 1402(g)(l) and an adherent of established tenets or teachings of such sect or division as described in such section.

It must be made clear that personal religious objections do not exempt an individual from the mandate. Therefore, those who do not belong to a denomination with specific bans on insurance, for example, will not be considered exempt from the law. http://www.newsonhealthcare.com/healthcare-bill-exemption/

notmd wrote on September 13, 2011 at 3:09 pm
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follow this scenario..
hospital A does not invest in getting people covered into the medicaid program and uses software to make it easy to declare charity care..result high charity care writeoffs..less people with insurance..more use of the emergency room
hospital B invests in staff and aggressively pursues coverage for the patient so they can see doctors and get prescriptions filled and be assigned a PCP..less charity care write offs..higher conversions to state program..people receiving the right care in the right location..
which hospital is doing the right thing?
by pushing hospitals to have higher charity care ,you are actually hurting the majority of the patients in their long term care needs..charity care is not insurance and creates an incentive for patients not to be enrolled in a program..i thought we are trying to improve the quality of health care and reduce admissions?..

drselvidge wrote on October 02, 2011 at 10:10 pm

While an excellent hospital, Sarah Bush should pay property taxes as does every other business in Coles County. Just a few years ago all physicians owed ther own office and paid property tax. Since Sarah Bush has practically eliminated private practices, it has taken millions away from the county for support of schools and other needs. Through a loop hole in the law because they are a non-profit, the highest paid employees in the county (doctors) making $200,000 to 1,000,000 a year are subsidized by the tax paying public.