Chicago's biggest hospitals' tax-exempt status is under scrutiny after landmark court ruling
Monday, April 26, 2010
Crain's Chicago Business
by Mike Colias
State officials are preparing to decide the fate of property tax
exemptions worth tens of millions of dollars for some of Chicago's
The requests, sought by Northwestern Memorial, Children's Memorial and
others, represent the first big test of how far-reaching an Illinois
Supreme Court decision on charity care last month will be for hospitals
used to having their tax exemptions rubber-stamped.
The ruling, which sided with state officials who yanked Urbana-based
Provena Covenant Medical Center's exemption for failing to provide
enough free care to the needy, casts uncertainty over a backlog of more
than 15 requests for major tax breaks from local hospitals. Many legal
watchers believe some will lose their exemptions.
"Are hospitals nervous? Absolutely," says Elizabeth Mills, a health care
attorney at Proskauer Rose LLP in Chicago who specializes in tax
The pending requests likely will intensify a years-long battle between
the powerful hospital industry and Illinois Attorney General Lisa
Madigan, who has pressed for tougher charity standards for non-profit
hospitals and whose office represented the state in the Provena case.
This next phase could pit Ms. Madigan and state revenue officials
against some of Chicago's most influential institutions, whose boards
are loaded with names like Crown and Pritzker.
Getting tossed onto the tax rolls would deal a blow to the bottom lines
of some major institutions awaiting decisions from the Illinois
Department of Revenue, which waged an eight-year battle against Provena.
Those include Children's, Advocate Condell Medical Center and
Northwestern, which is asking for a tax exemption on the $500-million
Prentice Women's hospital it opened in 2007.
Elmhurst Memorial Hospital's annual property tax bill, for example,
could range from $5.2 million to $7 million if state officials deny it
an exemption for the $400-million replacement facility it's building,
hospital-valuation consultants estimate. The hospital's operating profit
for fiscal 2009 was $7.7 million. A spokesman says the hospital plans
to seek an exemption.
A Cook County assessor's report from 2007 said the county's 54 private,
non-profit hospitals would pay up to $241 million in annual property
taxes if they all lost their exemptions.
The hospitals now at risk are those that by law must apply for a new
property tax exemption because of a change in ownership or major
upgrades to facilities. Because of a spate of campus expansions and
acquisitions in the past few years, an unusually large number of
hospitals falls into that category.
Sherman Hospital in Elgin has applied for tax-free status on its
recently opened, $310-million replacement facility, which could carry a
tax bill of between $5.1 million and $7.7 million if put on the rolls,
consultants estimate. A spokeswoman didn't return calls for comment.
Adventist Bolingbrook Hospital is seeking an exemption on a $152-million
facility it opened in 2008. If denied, it would be on the hook for $2.6
million in annual property taxes, according to Will County officials. A
spokeswoman says the hospital is "taking a wait-and-see approach" to
the state's decision.
Other big hospitals aren't currently in the queue but are expanding and
likely will have to apply in coming years. Rush University Medical
Center is midway through a $1-billion campus makeover. University of
Chicago Medical Center just broke ground on a $700-million hospital
Their fates depend on how the Department of Revenue sizes up their
charitable efforts. One key measure that sunk Provena: Its free care in
2002, the year for which it sought a tax exemption, amounted to just
0.7% of total patient revenue. Local and state officials, and later the
state Supreme Court, decided that wasn't enough.
Most hospitals with pending exemptions did better — but some just
barely. A few fell short.
The former Rush North Shore Medical Center in Skokie, which was acquired
by NorthShore University HealthSystem last year, spent 0.3% of its
$175.8 million in revenue on free care in 2008, state records show. A
spokeswoman says the figure doesn't represent the hospital's charitable
efforts under NorthShore's ownership.
Children's Memorial's charity spending that year was 0.4% of revenue. A
spokeswoman says that because kids generally have insurance coverage via
public aid, very few families apply for charity care.
Northwestern's charity care has risen from 1.9% of net revenue in fiscal
2007 to 2.5%, or $31.3 million, in fiscal 2009, a spokeswoman says.
It's still unclear how much charity is enough in the eyes of the state
and the courts, and whether other "community benefits" that non-profit
hospitals provide should count — thorny questions that lie at the heart
of the debate.
State law doesn't define an appropriate charity level for hospitals,
which is why Ms. Madigan and others have pushed for a clear threshold.
The Illinois Supreme Court's ruling didn't specify a benchmark.
John Durso, an attorney at Ungaretti & Harris LLP in Chicago who
represents some local hospitals seeking exemptions, says his clients are
more diligent now about making a case for keeping their charitable
status, and they hope to persuade state officials to look beyond free
"That's the big question: Is the only number they're looking at free or
reduced care? Or are they going to look at a broader concept that takes
into account all the community benefits hospitals provide?" Mr. Durso
A Department of Revenue spokeswoman says: "We'll be reviewing each case
based on the facts and the law now that the Supreme Court has reached a
decision on Provena."
Ms. Madigan declines to comment. Last week, David Buysse, a deputy chief
in her office, rattled his saber during a gathering of hospital
managers and execs, citing hospitals whose charity-spending levels still
fall short of Provena's.
"There are hospitals throughout the state that have improved their
(charitable) performance," he said. "And there are some that have not."