On Thursday, March 18, 2010, the Illinois Supreme Court issued
what will be a controversial opinion in the long-running saga of
the Provena Covenant Medical Center real estate
tax-exemption case in Illinois (available at http://www.state.il.us/court/Opinions/recent_supreme.asp
). While all five justices agreed exemption was not proper for the
2002 tax year, the court failed to advance a unified rationale as
to why the exemption was not available. As discussed below, three
justices offered a very narrow view of what constitutes
"charity" and "charitable use." Because only
three of the seven justices adopted this narrow view, and because a
majority of the seven justices is required to hand down a binding,
precedential decision, the Provena plurality's
pronouncements do not constitute the law, even in Illinois. That
said, the plurality's views will no doubt prove to be very
controversial, and we can expect them to be discussed and debated
across the country.
Essential Facts
The owner of the properties in question was Provena Hospitals, a
501(c)(3) organization affiliated with Provena Health, a 501(c)(3)
Catholic health system. The properties in question consisted of 43
parcels of real estate located in Champaign County, Illinois. Tax
revenues were shared among the county and a number of smaller
governmental units. The plurality opinion considered each of these
separate governmental units to have "granted" the tax
exemption. There was no evidence in the record that any of these
various governmental units had as part of its governmental purposes
the delivery of health care, a factor the plurality deemed crucial
to charitable use of the property.
Provena Hospitals had a policy of accepting all patients regardless
of ability to pay, and no patient who presented for care was denied
care due to inability to pay for the service. The charity-care
policy provided free or discounted care based upon a sliding scale
tied to the federal poverty guidelines. It also had an asset test
that would require payment even for those with incomes within the
poverty guidelines if their assets indicated an ability to pay.
Provena Hospitals would not classify a patient as eligible for
discounted or free care under its charity-care policy until it had
first verified that the patient did not have sufficient insurance
(whether private or governmental) and could not otherwise afford to
pay for the service under the guidelines in the charity-care
policy. In other words, Provena Hospitals would bill for its
services if it did not have sufficient information to determine
eligibility; however, there were absolutely no examples of any
patient being refused care for inability to pay. During the
relevant tax year, Provena Hospitals did not advertise the
availability of charity care, and it referred nonpaying patients to
collection agencies. In addition, virtually all patients were
paying patients through either private insurance, Medicare,
Medicaid, or self-pay. Virtually all of Provena Hospitals'
support came from fee income, and there was nothing in the record
to indicate that there were material charitable contributions to
Provena Hospitals, a factor the plurality found to be crucial under
Illinois law. The plurality also did not consider the level of
donations to any separately incorporated foundation or other
affiliates.
Illinois Two-Part Test for Exemption
Under Illinois law, real property will be exempt if the owner of
the property establishes, by clear and convincing evidence, both:
(i) that the property is owned by an institution of public charity,
and (ii) that the property is actually and exclusively used for
charitable purposes and not with a view to
profit.1
The First Prong—Institution of Public
Charity
As to the "institution of public charity" requirement,
in Methodist Old Peoples Home v. Korzen2 the
Illinois Supreme Court established a five-part test for whether or
not an institution is an institution of public charity. The five
criteria are: (i) the institution has no capital stock or
shareholders; (ii) the institution earns no profits or
dividends but rather derives funds mainly from private and public
charity and holds them in trust for the purposes expressed in
the charter; (iii) the institution dispenses charity to all who
need it and apply for it; (iv) the institution does not provide
gain or profit in a private sense to any person connected with it;
and (v) the institution does not appear to place any obstacles in
the way of those who need and would avail themselves of the
charitable benefits it dispenses (emphasis supplied). The majority
agreed that Provena Hospitals did not have sufficient evidence in
the record to establish that it met the second criterion of the
five-part Methodist Old Peoples Home test for
charitable-institution status.
The Second Prong—Actually and Exclusively
Used for Charitable Purposes
However, the plurality and the remaining justices differed
dramatically on the meaning of "charity" for purposes of
whether or not the property was "actually and exclusively used
for charitable purposes." In this regard, the plurality
conflated the disjunctive listing of charitable uses in the common
law into one and only one charitable use: lessening the burdens of
government. Moreover, under the plurality's view, it is not
enough to show that the use lessens the burden of the state or
federal government. Under the plurality's view, the activity
has to lessen the burden of the specific governmental units
granting the exemption for the real property. Finally, under the
plurality's view, to show that a use lessens the burden of a
governmental unit, it has to be shown that the use of the property
is both a type of use that is charitable under the
plurality's narrow view and that the use is on terms
that are charitable.
The Plurality's View of Charity Care
While never expressly saying so, the plurality apparently agreed
that giving away care on the premises without any intent ever to
receive compensation for that care is a type of charitable
use. However, the plurality made clear that, in order for free care
to be on charitable terms, the applicant needs to show
considerably more than merely never intending to receive payment.
In this regard, the plurality indicated that some undefined quantum
of care is needed. Merely having a policy of treating all comers
regardless of ability to pay and never turning anyone away due to
inability to pay is not enough. In the plurality's view, almost
nothing Provena did was good enough. For example:
- Any Medicare or Medicaid shortfall was disregarded and was not considered charity care on the grounds that any payment disqualifies care as being charitable, and participation in the programs is voluntary, not mandatory.
- Emergency-room service provided to all patients presenting there was disregarded because it is mandated by state and federal law.
- According to the plurality, screening patients to ensure that they are really eligible for charity care before spending charitable assets is not the approach of a prudent fiduciary ensuring that charitable assets are spent only for charitable purposes; rather, it is the functional equivalent of a for-profit institution's approach to writing off a bad debt. Such arguments by the IRS have been soundly rejected at the federal level in the St. David's Health Care case.
- Provena was not allowed to "rationalize" the fact that it did not provide enough care just because it served all the indigent who applied for care. Instead, to the plurality, this was evidence that Provena was failing to carry out its Catholic health-care mission. In the plurality's view, if there were too few poor, uninsured, and underinsured in the area to meet the plurality's undefined quantum-of-care metric, then Provena should not operate there but should move its operations to where there were enough patients eligible for charity care.
- Ambulance subsidies did not constitute sufficient charitable activity because, among other things, the ambulances delivered patients to the emergency room, which was viewed as a feeder of patients to the hospital, which was viewed as operating for profit.
- Activities that promoted the health of the community, while providing a community benefit, were, in the plurality's view, not charitable.
- Training of community members and wellness activities were dismissed as marketing.
- Residency programs were dismissed on the grounds that Provena was paid for those programs.
The Dissent's View of the Plurality
Opinion
Two of the five justices dissented from the overly restrictive
charitable-use findings. The dissent took issue with the
plurality's quantum-of-care metric, and it took issue with the
notion that in order to be exempt, Provena Hospitals had to show
that its charity care alleviated some identified governmental
burden of one of the jurisdictions involved. As to the
quantum-of-care point, the dissent concluded that the plurality had
inserted a requirement into the statute which had not been there,
thus usurping the legislative function, and that the
quantum-of-care approach had been rejected by well-reasoned case
law in other jurisdictions in favor of a more flexible
community-benefit approach. As to the narrow view that the only use
that is charitable is one that lessens the burden of the
governmental unit granting exemption, the dissent said the
plurality had turned a part of the rationale for exemption into a
condition for exemption not found in the statute.
Conclusion
As noted, the Provena Covenant opinion settles the exemption issue for the 43 parcels of real property at issue for the 2002 tax year, but it does not establish any new law, even in Illinois. Charitable-care providers throughout the United States, however, can expect that state and local taxing jurisdictions across the country will look at the plurality opinion as a blueprint that can help them defeat real property exemption claims in their jurisdictions.
Footnotes
1. 35 ILCS 200/15-65 (West 2002).
2. 39 Ill. 2d 149, 156–57 (1968).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.