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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 biggest hospitals.

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 exemptions.

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.

AT RISK

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 pavilion.

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.

REQUIREMENTS UNCLEAR

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 care.

"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 says.

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."



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