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Illinois AG Weighs Appeal of Ruling in Provena Health Case

Tuesday, July 24, 2007
The Bond Buyer

DATELINE: CHICAGO

The Illinois attorney general's office is considering an appeal of a court
ruling last week overturning a state decision to strip a Provena Health hospital
of its property tax exemption for failing to provide sufficient charity care -
an issue that is facing heightened scrutiny from government regulators.

The ruling affects only about $1.4 million in property payments annually owed by
Provena and may not be the final word if an appeal is filed as expected, but it
is a case that is being followed by many in the not-for-profit hospital arena as
the movement to regulate charity care levels grows.

Most recently, U.S. Sen. Charles Grassley, R-Iowa, the ranking Republican on the
Senate Finance Committee, last week suggested that Congress consider setting a
minimum threshold for hospital spending on uncompensated care to warrant their
exemption from income taxes and the tax-exempt status of their bond issues.

The ruling from Sangamon County Circuit Court Judge Patrick Londrigan came late
Friday in the form of a summary judgment issued from the bench after Provena and
the state presented oral arguments in the case. The Illinois Department of
Revenue initially moved to strip Mokena-based Provena Health's Urbana hospital
Provena Covenant of its exemption from property taxes in 2004 following a
Champaign County Board of Review recommendation.

The recommendation was based on the finding that the hospital provided less than
1% of its revenues for free care to the poor and uninsured in violation of
existing state law that governs charitable organizations. An administrative law
judge sided with the hospital but the Department of Revenue rejected the judge's
ruling, leading to Provena's filing of an appeal at the circuit court level.
Provena was the first of three hospitals that state revenue officials moved to
strip of their tax-exemption.

"We believe the director of the Illinois Department of Revenue reviewed and
correctly concluded that 0.7% of net patient revenues for the poor fails to
satisfy Illinois law," said Cara Smith, a deputy in Attorney General Lisa
Madigan's office. "We are reviewing the transcripts of the hearing and
considering an appeal of the ruling."

Provena saves about $1.4 million annually because of the exemption and has been
required to pay about $5 million since it lost its exemption. Provena officials
have long argued that the system's overall contribution to the community
warranted its exempt status.

"Qualifications for a charitable exemption have nothing to do with the quantum
of free care given away by a hospital in keeping with 100 years of precedent
that recognizes charitable health care is a much broader concept," said Patrick
Coffey, an attorney at Lord Bissell and Brook, which represents Provena.

Industry experts following the case believe the ruling provides just one more
example of why a legislative resolution is needed on the issue of charity care.

"In the Provena case, they are still in the grade school level of the court
system, but the timing was amazing given the Internal Revenue Service report and
Sen. Grassley's proposal coming out just two days earlier," said James Unland,
president of the Health Capital Group. "A move by the federal government makes
the most sense because it provides a level playing field for everyone, and
frankly I think that is a better way to go."

A preliminary IRS report released last Thursday reviewed the 2003-2005 results
of 487 not-for-profit hospitals that responded to a 2006 questionnaire. It found
that 45% spend less than 3% of their revenue on uncompensated care. Figures from
the Congressional Budget Office show that not-for-profit hospitals received $12
billion in tax benefits in 2002 because of their exempt status.

The report noted the difficulty in assessing some of the material provided by
hospitals.

"The lack of consistency or uniformity in classifying and reporting
uncompensated care and various types of community benefit often makes it
difficult to assess whether a hospital is in compliance with current law," Lois
G. Lerner, director of the IRS' exempt organizations division, said in a
statement. "That's one reason more analysis is needed."

Also on Thursday, Grassley released a report floating the imposition of a
mandate that hospitals spend the greater of 5% of either operating expenses or
revenues on charity care to qualify for tax-exempt benefits.

The American Hospital Association has countered such claims that hospitals are
failing short of providing sufficient free care, saying that the same hospitals
that were part of the IRS survey provided $4.1 billion in community benefits in
addition to $5.2 billion of free charity care.

At the state level, the Sangamon County judge's ruling lends support to the
arguments of those who support pending state legislation that requires a minimum
8% of operating costs be spent on charity care. Madigan sponsored the
legislation along with new billing and collection rules early last year, but it
was put on hold as the office attempted to negotiate a compromise with the
industry.

Just the threat prompted bond insurers to halt any new coverage policies in the
state, forcing several borrowers to put deals on hold. That moratorium has since
lifted amid assurances of a compromise. A separate compromise on the billing and
collection piece was worked out and approved by the General Assembly last year.
Madigan aide Smith said the office remains in negotiations with the hospital
industry on the charity care bill.

In defense of the industry, the Illinois Hospital Association earlier this year
released a report saying that the 133 hospitals affected under the proposed
legislation would have to spend an additional $739 million on charity care under
the original legislation, an amount some financially struggling hospitals cannot
afford.

The report said not-for-profit hospitals here provided $3.7 billion in community
benefits over fiscal 2004 and fiscal 2005 including free care and other
community programs and events. Hospitals also provide an economic boost with
their expenditures valued at roughly $56 billion. The industry also spends about
$11 billion a year in salaries and benefits for 232,000 employees.

Similar reports sponsored by hospital associations have come out in other states
such as Minnesota, where Attorney General Mike Hatch has been among the critics
focusing a keener eye on the industry. Earlier this year, the Minnesota Hospital
Association released a report concluding that the state's nonprofit hospitals
provide nearly $1 billion of community benefits annually, an amount equal to a
little more than 8% of their operating expenses.



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