Hospital Charity Care Issue Threatens Jobs, Healthcare Costs and Healthcare Delivery

 Many hospitals in Illinois and, I suspect, nationally, are on edge because of an Illinois Supreme Court ruling nearly two years ago in the case Provena Covenant Medical Center v. The Illinois Department of Revenue. The case certainly brought immediate, severe financial implications for one hospital, and it laid the foundation for a legislative and regulatory battle that continues to this day.

The fight over what constitutes charity care and what constitutes tax exempt status for non-profit hospitals has played out in a rather public way in recent months. This has very deep implications for our state, the communities served by our hospitals, and the employers and individuals that reside in those communities. The implications of this case and the fate of property tax exemptions, however, run much deeper than just those immediate to the non-profit provider community.

If a common sense resolution eludes Illinois legislators and the Quinn administration – and property tax exemptions for non-profit hospitals are revoked – the current situation will destroy jobs, drive healthcare costs even higher, create more legal morass, and place even greater financial strain on a system that will be asked to provide care to an expanded population of patients in just a few short years.

The Issue

The Provena case dates back to 2003, when Champaign County officials revoked the hospital’s property tax exemption, citing its failure to provide “charitable activities” that met or exceeded the $1.1 million value of the hospital’s tax exemption for that year. Provena’s case went back and forth and finally ended up in the Illinois Supreme Court. The Supreme Court’s ruling revoked Provena’s tax exempt status for 2003, requiring the hospital to pay property taxes for that year. However, the decision was absent of any definitive ruling on what actually constitutes “charitable use” of property by a hospital.

Since that time, several legislative measures have emerged that have attempted to apply a strict charity care standard to all non-profit hospitals. These measures have been staunchly opposed by hospitals and the Illinois Chamber. The issue came to a head last summer when the Illinois Department of Revenue revoked property tax exemptions for three hospitals without identifying a bright-line test for those rulings. The lack of transparency surrounding the rulings created a firestorm. The governor responded appropriately by placing a moratorium on the Department of Revenue rulings and any future rulings, to allow stakeholders to come together and work towards a legislative solution.

Despite good faith negotiations, a legislative resolution still remains elusive, but not impossible. Nevertheless, the administration has recently lifted its moratorium placing dozens of non-profit hospitals and their applications for property tax exemptions in peril. This sends a very confusing message to hospitals, the vendors that do business with those hospitals, and the patients and employers that rely on those hospitals for care.

Hospitals Provide $80 Billion in Annual Economic Benefits to Illinois Communities   

The public debate over hospital property tax exemptions has been largely focused on defining the community benefit, as it relates to the amount of charity care a hospital provides in any given year. What has been largely overlooked in this debate, however, is the economic benefit hospitals provide to our state and the local economies they serve.

According to a recent report issued by the Illinois Hospital Association, hospitals generate nearly $80 billion a year for our state and local economies. They support nearly 200,000 jobs statewide through direct employment and an additional 223,000 jobs within those companies that provide goods and services to the hospitals. In addition to the immense workforce that hospitals support today, the healthcare sector overall is growing rapidly, creating thousands of new jobs each year. In fact, the healthcare industry outperformed all other sectors when it came to job growth between 2008 and the fall of 2011, when the economy faltered and job loss was at an all-time high.

Hospitals are not only a boon to state and local economies, they are pillars of their communities, providing important services to individuals and employers that extend well beyond emergency and traditional patient care. Employers, for example, are relying more and more on their relationships with community hospitals to help develop and improve worksite wellness programs. They are also vital training grounds for future healthcare professionals and those individuals working on the frontlines to provide care. Furthermore, hospitals do provide hundreds of millions of dollars in free care to the uninsured and underinsured, to say nothing of the costs they incur as a result of Medicaid’s underpayment for services provided to 2.7 million eligible Illinois residents.

None of this is to suggest hospital property tax exemptions should go without legislatively established boundaries. The administration should have been pushing for a clear and reasonable definition from day one. Unfortunately the state has recently chosen to reinstate the former procedures that could very well result in the revocation of a number of hospital property tax exemptions this year. If this occurs, it will most certainly result in additional litigation and higher healthcare costs as hospitals seek to recoup those additional costs.

The issue, however, also is detrimental to vendors who sell goods and services to hospitals. Hospital applications for sales tax exemptions are being held by the Department of Revenue, presumably, to see how the charity care issue plays out, which could result in a double whammy to hospitals.

In the meantime, hospitals presumed to be exempt from the sales tax continue to operate under the assumption the sales tax exemption still applies. Consequently, the vendors that sell to those hospitals have become extremely nervous because they could be financially liable for the sales tax if they make tax-free sales when the hospitals’ exemption is formally revoked.

The Solution

The Provena case, while failing to establish a clear definition of what constitutes “charitable use,” appeared to suggest the dollar threshold to which a hospital should be held for charity care should equal the amount their property tax bill would be if they did not have such an exemption. The Illinois Chamber, along with other organizations such as the Civic Federation of Chicago, believes this is a reasonable and quantitative threshold that can be applied on a per-hospital basis. To us, this makes more sense than a “one-size-fits-all” threshold.

A legislatively created bright-line test requires a clear definition of “charitable use,” a definition that must account for the state’s severe lack of underpayment for Medicaid recipients. It also must take into account the federal Affordable Care Act’s potential impact on the uninsured and Medicaid populations. If the Affordable Care Act survives a Supreme Court challenge this year, the number of uninsured in Illinois is expected to fall dramatically in 2014 while the state’s Medicaid population is expected to increase quite rapidly. The net affect will be to place greater pressure on hospitals to meet a charity care standard if that standard relies solely on unreimbursed care.

Conclusion

The consequences of failure to reach consensus on this issue are serious and far-reaching. As employers and consumers battle escalating healthcare costs and our state’s economy continues to struggle, the administration should be working feverishly to reach a reasonable and rational legislative solution.

The executive branch needs to approach this issue in a constructive manner that sends a positive message to the state’s job creators. Employers seek stable and predictable tax policy. Businesses also look to prompt and reasonable executive decision making as an indication that Illinois is a hospitable place for business.

Non-profit hospitals have a constitutional obligation to provide charitable services in return for their property tax exemption. But to have the state government to simply threaten to revoke a hospital’s exempt status without clear and transparent guidelines is not only counterproductive to the process, it is irresponsible. This matter must be resolved while the General Assembly is in session this spring.

The Illinois Chamber stands with the Illinois Hospital Association and the hundreds of Illinois hospitals that are working towards a solution that establishes clear legislative parameters. At a time when our state and national leaders should be laser focused on promoting jobs and supporting our nation’s job creators, we urge the administration to do the same.