August 16, 2011

Three Hospital Property Tax-Exemption Rulings Issued by DOR

The Illinois Department of Revenue (DOR) today issued initial rulings denying the property tax-exemption applications of three hospitals - Northwestern Memorial's Prentice Women's Hospital, Edward Hospital in Naperville and Decatur Memorial Hospital. IHA is deeply disappointed by these rulings. While it is important to note that these rulings are only the first step in the process, IHA is very concerned that hospitals will have to devote precious time and resources to dealing with these challenges.

Because the Department did not provide any explanation for its initial rulings in these cases, it is not known what criteria and standards the Department used. As is typical in these cases, DOR only issued very brief conclusory statements that the property is not exempt.

IHA has continuously been engaged in ongoing discussions with various state officials, including officials from DOR and the Attorney General's Office, in the wake of the March, 2010 Supreme Court decision regarding nonprofit hospital property tax exemption. We are continuing to hold these discussions in an effort to work out a legislative solution to preserve the tax-exempt status of not-for-profit hospitals and mitigate any potential harm from adverse tax-exemption decisions.

IHA will hold a special member briefing call on this issue within the next few days; we will send you a notice when that call is scheduled.

In the meantime, the DOR's action today will likely prompt inquiries from the media and the public. IHA has issued a media statement (click here). To see an Associated Press story on the rulings, click here.

We have also prepared the following talking points that you can use with your local media.

Suggested Talking Points:

• Requiring non-profit hospitals to pay property taxes would divert hundreds of millions of dollars away from critical health care services at a time of increasing demand and dwindling resources. Hospitals are experiencing payment reductions from Medicare, Medicaid, Workers Compensation and private insurance. The loss of tax exemptions could force hospitals that are already struggling to survive to close or to severely reduce services and jobs.
• Imposing property taxes on a community nonprofit hospital is like imposing taxes on the community itself. A county would not divert money from its schools by taking them to pay for other services. Yet this is what happens when a non-profit hospital is taxed. Monies that would have gone toward health care are instead diverted for other local purposes.
• The Department of Revenue's initial rulings in these few cases, if upheld, creates great uncertainty for hospitals and the health care delivery system. [It is important to note that these rulings are not final and that hospitals have an opportunity for further review and hearings on their tax-exemption applications.]
• Uncertainty over tax exemption harms the ability of hospitals to transform health care. The federal government demands that hospitals "re-tool" for the future, which increases the cost of running a hospital - by adopting electronic health records, reducing infection rates, purchasing lift equipment, etc. and at the same time, reducing costs. Hospitals are being proactive to structure themselves to best meet these challenges of the future through consolidation, mergers, affiliations, etc. Not knowing whether an entity is exempt from taxes severely hampers these types of legal restructuring and hospitals are avoiding strategies that might require a new application for property tax exemption from the Department of Revenue - even if those strategies make the most sense.
• Uncertainty over tax exemption makes obtaining capital more difficult. The uncertainty over tax exemption - and the possibility that hospitals will be burdened with millions of dollars in new expenses - makes borrowing more difficult and expensive. Investors have already expressed concern about the credit-worthiness of Illinois hospitals. Hospitals unable to borrow cannot modernize, acquire the latest technology, and replace aging structures.
• Uncertainty over tax exemption thwarts hospital contributions to the economy. Hospitals contribute more than $75 billion to the Illinois economy annually. Hospitals provide more than 425,000 direct and indirect jobs to Illinoisans, and are one of the few sectors still creating jobs during the economic downturn. A threat to hospitals' financial health, via loss of property tax exemptions, is a threat to jobs and the Illinois economy.
• Severely impacts newly constructed rural Critical Access Hospitals. In the last few years, a number of rural Critical Access Hospitals have built new facilities on what was previously farmland. These new facilities are needed to meet the future challenges of health care delivery in these communities. However, the unintended consequence is that as these facilities need to reapply for property tax exemption and all exemptions have been on hold, these Critical Access Hospitals are now paying hundreds of thousands of dollars in property tax, stretching their financial sustainability to the maximum.
• Concerns regarding billing and collections have been resolved. Questions about hospital tax exemption in Illinois started a number of years ago. At the core of the concern were a few publicized anecdotes of hospital billing and collection activities, the growing uninsured population and the level of discounts and free care hospitals provided to the uninsured. These concerns have been addressed:
• Hospitals helped pass the Community Benefits Act in 2003.
• Hospitals helped to pass the Fair Patient Billing Act in 2006.
• Hospitals helped to pass the Hospital Uninsured Patient Discount Act in 2008.
• Hospital charity care reported to the Attorney General has more than doubled since 2005.