Illinois courts review hospital tax exemptions, with millions in tax revenue, viability in the balance

By Justin Stoltzfus | Jan 24, 2018

CHICAGO — Illinois courts are wrestling with the idea of which hospital networks and major healthcare provider groups should pay property taxes—and a lot of revenue hangs in the balance.

Experts agree that the amounts paid by these large businesses, when they are assessed and levied, are sizeable, but there are different opinions on a changing criteria for tax-exempt status.

"(Hospitals) are very significant and large-scale taxpayers," Scott Metcalf, an attorney at Franczek Radelet, told the Cook County Record, explaining that the sums of money involved can vary depending on various factors.

Prior to a state law passed in 2012, hospitals had to meet a high bar to be tax exempt, a standard Metcalf called "non-profit on steroids." However, he said, the state has determined that hospitals can be tax exempt based on the amounts of Medicaid services they provide to residents, and that statute is being challenged in court.

Obviously, Metcalf said, if a hospital suddenly starts paying property taxes, other taxpayers could pay less, all other things being equal.

Metcalf cited the case of Provena Covenant Hospital in Champaign, where the Illinois Supreme Court in 2010 upheld state officials' decision to revoke that hospital's tax exemption before it was restored under the 2012 law.

There are certainly ample test cases of hospitals around the country paying taxes on their real estate holdings. Though it is unclear how much Provena's eventual tax burden was, a Chicago Tribune report showed that after Champaign County took away the hospital's tax exemption at the county level, Provena ended up paying around $1.1 million annually.

As for the outcome for other Illinois hospitals, Stephen Moore, an attorney at Hinshaw & Culbertson, said courts are looking at ruling on tax-exempt criteria now, citing the case of Oswald v. Hamer, which centers on the state's charitable exemption rules. In that case, a panel of the Illinois First District Appellate Court upheld the state's exemption law as constitutional. That is the opposite result reached by the state's Fourth District Appellate Court, which found in an earlier case, involving the Carle Foundation Hospital in Urbana, the state's exemption law was essentially an unconstitutional permit to hospitals to "buy an ... exemption" by providing charity care in exchange for a tax exemption. The Illinois Supreme Court considered the Carle Foundation case, but decided to sidestep the larger constitutional questions, potentially preserving those for a better legal vehicle, perhaps through the Oswald case.

"Oswald may well provide a ruling that gives clarity," Moore said.

It's understandable, he said, that a taxing body would want to recoup every dollar it can in revenue, at a time when many hospitals claim to be barely hanging on, asserting a sudden less of tax-exempt status could push them under. Moore mentioned rural hospitals are particularly vulnerable.

Danny Chun, spokesman for the Illinois Hospital Association, agrees.

"We believe it would have a tremendously negative impact," Chun said on a loss of tax exemption for healthcare networks, explaining that such a burden would divert resources away from the delivery of healthcare services.

Chun said 40 percent of hospitals in Illinois are in some form of financial trouble.

"It would make them less able to provide services," Chun said. "We believe the law (on tax exemption) is constitutional and should be upheld."

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Organizations in this Story

Franczek Radelet P.C. Hinshaw & Culbertson LLP Illinois Department of Revenue Illinois Hospital Association Illinois Supreme Court

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