Three Illinois Non-profit Hospitals Lose Tax-Exempt Status, More Rejections Expected

August 23, 2011

According to Crain's Chicago Business, three prominent Illinois non-profit hospitals recently lost their tax-exempt status and may now be forced to pay millions of dollars in tax revenues. Our Illinois medical malpractice attorneys are concerned that this decision could further compromise the overall quality of patient care, which is already threatened by cash-strapped hospitals operating at minimum staffing levels.

Reports indicate that this is the first of more than a dozen other rulings expected from the Illinois Department of Revenue over the last few weeks of August 2011. The hospitals that were denied their property tax exemptions include Northwestern's Prentice Women's Hospital, Decatur Memorial Hospital, and Edward Hospital in Naperville. The state felt that these hospitals were operating more like businesses than charities, citing a lack of charity and community benefit programs.

The revenue department based its decision on an Illinois Supreme Court ruling handed down last year, which held that Provena Covenant Medical Center in Urbana was not providing enough free services to the poor to qualify for a tax break. Approximately 0.7% of the hospital's revenue was dedicated to charity care. Since the decision, the hospital has been forced to pay about $1.2 million in property taxes.

In order to qualify as a charitable institution, the primary requirement is that the hospital must "dispense charity to all who need and apply." The amount of charity care may vary, depending on the community and its level of need.

The standard for tax-exempt status appears to be getting higher. Tax applications from Northwestern indicate that 1.85% of its $1.7 billion net revenue in 2007 went towards charity care. About 0.96% of Decatur Memorial Hospital's $252 million net revenue helped provide free services to those in need. And Edward Hospital in Naperville reported charity care amounting to 1.04% of $448 million in net patient revenue.

A major concern that arises from these rulings is that hospitals may be forced to increase overall costs for patients and employees, and reduce the number and quality of services that are available. Medicare and Medicaid rates are currently so low that they typically do not cover all of a hospital's costs. In addition, new federal health care laws will put additional burdens on these financially struggling hospitals. Taking on additional property tax expenses may further jeopardize the level of care that hospitals provide.

The hospitals have 60 days to appeal and seek an administrative hearing, and at least two of them have already suggested that they plan to mount a vigorous defense.

Our Chicago medical malpractice lawyers understand that all Illinois hospital patients deserve the highest quality of care possible, regardless of their financial abilities. Millions of dollars of tax revenue are at stake for dozens of area hospitals, and this money could be used to provide essential services. Patients typically pay the price when hospitals are struggling to meet significant financial burdens, because services are reduced or eliminated and workers are laid off.

Right now there is no clear standard for the amount of charity care that a hospital needs to provide in order to qualify for a property tax exemption. The latest rulings suggest that the state is taking a tougher stance on non-profit hospitals seeking to qualify for tax-exempt status. With at least 15 other Illinois hospital waiting to see if they qualify as charitable institutions, it is not clear just how far the state is willing to go. Currently, there is no revenue percentage or dollar amount that is being used as a threshold. However, with the healthcare industry already facing significant financial pressures, additional tax break rejections could be detrimental to all community members in need of quality patient care.