In Covenant Healthcare System, Inc v City of Wauwatosa, Appeal Nos 2009AP1469 and 2009AP1470 (August 10, 2010), a Wisconsin court of appeals reversed a trial court's ruling that an outpatient clinic affiliated with a traditional hospital was tax-exempt. The court of appeals determined the property was a "doctor's office," which, under Wisconsin law, renders taxable property that is otherwise exempt as a hospital. The tax years at issue were 2003-2006.

The outpatient clinic, St. Joseph Outpatient Center (the "Clinic"), was located just outside of Milwaukee in Wauwatosa, Wisconsin. It was owned and operated by St. Joseph Hospital Regional Medical Center, Inc., which also operated a traditional hospital in Milwaukee. The Clinic was designed as an extension of the hospital, and many of the same outpatient services offered at the hospital in Milwaukee also were offered at the Clinic. The two facilities were functionally integrated. All hospital and outpatient records were accessible from either location, departments at both locations generally were run by the same person, and both facilities operated under the same license. The motivations for constructing the Clinic were to free space at the Milwaukee facility, add convenience for patients, reduce or eliminate inefficiencies at the Milwaukee facility and recruit doctors, among others.

The Clinic did not offer inpatient care. Outpatient services included cardio/pulmonary services, laboratory services, outpatient surgery and wound care, and patients needed to arrange appointments to receive treatment. The Clinic generally did not accept patients transported by ambulance, but did operate a twenty-four hour urgent care service. The urgent care service (which occupied less than ten percent of the Clinic's space) operated on six levels of emergencies, with one being the lowest level and six being the highest. Patients at levels four through six were stabilized and then transferred to a more traditional emergency room or admitted at a traditional hospital. The urgent care service also offered surgery, but only for patients whose estimated recovery period was four hours or less. The most common conditions treated by the urgent care service were broken bones, injuries requiring sutures, sprains and strains, accidents and falls, asthma, allergy attacks, eye injuries, rashes, minor burns, colds and the flu. Physicians treating patients at the Clinic were provided cubicles in which to do paperwork and make telephone calls.

The appellate court cited St. Clare Hospital of Monroe, Wis., Inc. v. City of Monroe, 209 Wis. 2d 364, 563 N.W.2d 170 (Ct. App. 1997), as the controlling authority for whether a property is a "doctor's office." The test, according to the appellate court, is a factual one that "depends on the nature of services provided and the manner in which those services are delivered to the patient." The court of appeals cited St. Clare for the proposition that a doctor's office, as opposed to a hospital, "is a place where doctors see patients, mostly by appointment, during scheduled business hours, and have their offices." The court distinguished a traditional hospital as a place offering inpatient, overnight care. Under this standard, the appellate court held that the Clinic was a doctor's office because it (1) did not provide inpatient services, (2) provided doctors with space to do paperwork and (3) saw most patients by appointment during normal business hours.

Covenant argued its urgent care service made it distinguishable from a traditional doctor's office, but the court was not persuaded, noting that the most common injuries treated by the urgent care service were similar to those treated at a traditional doctor's office. The court of appeals also found it significant that only surgeries with short recovery times (four hours or less) were performed in the urgent care. Finally, while the Clinic could accept patients by ambulance "in the event of a disaster, pandemic or epidemic," it typically did not do so. The court of appeals found all these policies consistent with a traditional doctor's office and an emphasis on routine, short-term care. Put another way, the court of appeals felt the Clinic, through its urgent care service, merely performed its services as a twenty-four hour doctor's office.

A dissenting judge dismissed the majority's holding by concluding that none of the doctors working at the Clinic had offices there. Implicit in the statement is that the Clinic's offering cubicle space for dictation and telephone calls did not amount to a traditional doctor's office. From there, the dissent concluded that the Clinic property was exempt because it supported and enhanced the efficient functioning of the Milwaukee facility.

The Covenant Healthcare case differs from recent decisions in other states because the holding did not hinge on the level of charity care provided by the Clinic. Indeed, the opinion by the court of appeals is devoid of any detail on that issue. Nevertheless, the holding in Covenant Healthcare is significant in any state having a "doctor's office" or similar carve-out from the exemption for charitable hospitals. As the majority opinion noted, the line between a traditional hospital and a doctor's office is becoming blurred, making it more difficult to distinguish the two.