Last week, the Illinois 4th District Appellate Court ruled that Provena Covenant Medical Center (Hospital) was not entitled to its long-held Illinois property tax exemption. While this is an Illinois case, it is likely to quickly have national ramifications with local taxing jurisdictions attempting to revoke hospital tax exemptions to help relieve the burdens on local government budgets.

The Hospital devoted only 0.7% of its total revenue to charity care. Of 110,000 admissions to the Hospital only 196 patients received free care and 106 discounted care in the year at issue. While the Court held that a strict numerical ratio was inappropriate as the Hospital could not manufacture patients in need of charitable care, it found that the Hospital did not meet the requirement for a property tax exemption under Illinois law because the Hospital (1) did not dispense charity to all who needed it or applied for it and (2) placed obstacles in the way of those seeking charitable care. The Court held that neither not-for-profit status nor the provision of healthcare services alone is sufficient to qualify for a tax exemption under Illinois law.

To be exempt from Illinois property tax, the Court held that the primary use of the Hospital's property must be for charitable care. While the Court found that a fixed threshold percentage of charitable care was not appropriate for property tax exemption, it held that the volume of charitable care was relevant to the exemption determination. The Court then evaluated the Hospital's charitable care policy and held that it was "merely … a pretense of charity, a pro forma procedure that was not calculated to make a serious evaluation of [a patient's] need" to assure that all who needed charitable care received it. The Hospital's charitable care policy based the waiver or discounting of fees upon the patient's assets and income. However, the Hospital's policy did not take into account the amount of the patient's medical expenses. Consequently, the Court found that the reduction of charges was unrelated to a patient's actual financial need because the "policy ignored completely the financial burden incurred by the patients or families for the medical services rendered…. A true charitable care policy would be more meaningful and would result in a fair evaluation of the patient's ability to pay." Because the policy ignored patients' liabilities, the policy posed, according to the Court, an obstacle to the dispensation of charity care to the needy.

The Court then found that much of the Hospital's claimed charitable care was illusory because in most cases where the Hospital provided discounted charitable care, the patients' remaining balances exceeded the Hospital's average costs in providing the care. Thus, even in instances where discounted care was provided, the Hospital had margin contribution and "therefore, [it] extended no charity at all to those patients."

The Court also held that the Hospital's policy of providing healthcare to all who apply for it does not suffice as a charitable care policy. Simply because the Hospital turns no patient away based on financial circumstances, it does not follow that the Hospital provides charitable care. Specifically, despite the nature of their admission to the Hospital, patients remain contractually liable to the Hospital for their charges.

The Court finally held that the Hospital's write-off of bad debt is not charity, as the write-off involves only the Hospital and its financial records. The Court noted that charity is a gift from one person to another, but a write-off does not relieve the patient's burden because the debtor-creditor relationship remains intact. Moreover, the Court further noted that the Hospital accepted payments on accounts written off, which, according to the Court, undermined the Hospital's argument that write-offs were charitable.

One final important factor in the Court's decision was the standard of review applied. The Court held that it was required to uphold the Illinois Department of Revenue's decision unless the Court found it to be clearly erroneous. Such a standard of review required the Hospital to demonstrate clearly and conclusively that it was a charitable institution, which the Hospital could not demonstrate under the factors set out by the Court.