Illinois Law Spells Out Criteria for Charitable Care Tax Exemption for Hospitals

After years of challenges to nonprofit hospital’s property tax exemptions and confusion about the criteria to meet the requirements for the charitable exemption, legislation expanding the laws governing the charitable exemption from property tax for nonprofit hospitals (SB 2194) passed the Illinois legislature and was signed into law by Governor Pat Quinn. The legislation, which became effective June 14, 2012, includes key provision reflecting and incorporating the Illinois Hospital Association’s (IHA’s) framework on property and sales tax exemptions for nonprofit hospitals and an income tax credit for investor-owned hospitals.

The move to expand the law came after the Illinois Supreme Court decision upheld the revocation of the hospital’s property tax exemption in Provena Covenant Medical Center v. Dept. of Revenue (236 Ill. 2d 368 (Ill.2010)). The case brought attention to  the uncertainty surrounding the test for charitable property tax exemption. In 2011, the Illinois Department of Revenue challenged the property tax exemptions of hospitals in the state including Prentice Women’s Hospital, Edward Hospital, and Decatur Memorial Center, finding that they did not provide enough charity care to qualify for the property tax exemption.

Under the new law, to retain exempt status, nonprofit hospitals are required to provide unreimbursed services to the poor or government entities in an amount at least equal to the property tax that would have been assessed on the hospital’s property, while for-profit hospitals would get a property tax credit for the value of such services, John D. Colombo, Professor of Law at the University of Illinois explained. The definition of unreimbursed costs of services to the poor and underserved is very broad and includes classic charity care, Medicaid shortfalls, and Medicare shortfalls for beneficiaries eligible for both Medicare and Medicaid as well as providing, paying for, or subsidizing goods, activities, or services that relive the burden of government related to the health care of low-income individuals, he added. Colombo provides a commentary on the law in his blog post of June 4, 2012.

Generally, a hospital applicant will be issued a charitable exemption if the value of services or activities included in the new exemption criteria for the year at issue (hospital year) equals or exceeds the relevant hospital’s estimated property tax liability for the year for which the exemption is sought, as reported in the CCH Tax-Exempt Advisor Newsletter of July 25, 2012. The criteria established will be applied on a case-by-case basis for exemption applicants. The estimated property tax is calculated using a statutory formula based on the fair market value of the property. Any hospital property parcel or portion thereof that is owned, leased, licensed, or operated by a for-proft entity cannot qualify for an exemption, CCH reported.

The following specific services and activities listed in SB 2194 will be considered for purposes of making calculations required for exemption:

  • Charity care, free or discounted services provided in accordance with the hospital’s financial assistance policy, measured at cost, including discounts;
  • Health services to low-income and underserved individuals;
  • Financial or in-kind subsidies of state or local governments that pay for or subsidize activities or programs related to health care for low-income or underserved individuals;
  • Support for state health care programs for low-income individuals;
  • Subsidy for individuals that are dually eligible for Medicare and Medicaid;
  • Relief of the burden of government related to health care for low-income individuals; and
  • Any other activity by the hospital that the Department of Revenue determines relieves the burden of government or addresses the health of low-income or underserved individuals.

According to IHA, “passage of SB 2194 was the result of many rounds of negotiations and discussions by IHA with numerous stakeholders, intense behind the scenes advocacy, scores of meetings with key legislators and various parties, a statewide PR campaign, and outstanding efforts by members across the state.”