The rules for how much charitable care nonprofit hospitals must provide to get a tax break could change in this legislative session.
Not many businesses would provide a service without expecting payment in return.
Hospitals often do that. If a woman in labor rushes into the emergency room, staff cares for her and the baby regardless of the family's ability to pay.
Most Illinois hospitals are not-for-profit entities with a mission to care for anyone who comes through their doors, whether they have private insurance, get public aid or have no health coverage at all. In turn, nonprofit hospitals get a break on some state and local taxes so they can continue caring for the uninsured and others who sink below the federal poverty level.
In 2005, 14 percent of Illinoisans, or about 1.8 million people, lacked health insurance, according to the U.S. Census Bureau. Twelve percent, or about 1.4 million Illinoisans, lived below the federal poverty level, which is less than $20,000 for a family of four. While the federal-state Medicaid program reimburses hospitals for caring for the poor and disabled, the reimbursements fall below the cost of providing the care.
Emergency rooms, burn centers and high-risk neonatal centers all lose money for nonprofit hospitals because of low reimbursement levels, says Bettina French, spokeswoman for the Illinois Hospital Association. Nevertheless, nonprofit hospitals provide the services when for-profit hospitals won't.
Other costs hospitals incur aren't subsidized by the government at all. If a patient has private insurance or no insurance and can't afford to pay the medical bills, hospitals eat the costs, French says. That patient can apply for so-called charitable care, which allows the hospital to get a tax break. But the rules for how much charitable care nonprofit hospitals must provide to get a tax break could change in this legislative session.
Last year, Illinois Attorney General Lisa Madigan urged some Democratic state lawmakers to introduce a measure that would clarify what hospitals need to do to keep getting tax breaks.
She plans to renew her push this year.
"Right now, hospitals that receive entire loaves of bread for free are handing out crumbs when it comes to providing health care to some of the most vulnerable Illinoisans," Madigan said in a statement last January. "It is clear that we must create standards and hold hospitals accountable to fulfill their charity care responsibilities."
On one hand, the Illinois Hospital Association says hospitals in this state already provide more than $1 billion in charitable care. On the other hand, the state wants to ensure that nonprofit hospitals fulfill their obligations under federal law, which requires them to care for anyone whose health would be jeopardized if he or she didn't get screened, treated or transferred elsewhere.
Madigan is expected to revive and possibly recast legislation that initially required nonprofit hospitals to devote a minimum of 8 percent of their operating costs to charitable care.
The attorney general's office spent last summer and fall talking to hospitals and fine-tuning the proposal, which could change the 8 percent requirement for tax-exempt status. Illinois' not-for-profit hospitals hope the revised measure will lower the required percentage and expand the definition of charity care, such as including unmet Medicaid and Medicare costs.
Meanwhile, an ongoing court case has raised a question about whether a central Illinois hospital qualifies for a property tax exemption. Hospitals around the state fear the decision may mean the services they provide for free or for reduced prices may not meet the state's current standard.
Last fall, the Illinois Department of Revenue denied a local property tax exemption for Provena Covenant Medical Center in Urbana. The decision confirmed the Champaign County Board's vote to reject the hospital's tax-exempt status for 2002.
Department records show Provena brought in more than $113 million that year, and spent more than $831,000 on charitable care. That's less than 1 percent of its 2002 revenue.
"This small amount of charitable care is so seriously insufficient that it simply cannot withstand the constitutional scrutiny required to justify a property tax exemption," wrote Brian Hamer, Department of Revenue director.
The property is owned by Provena Health, a Catholic health system that includes six hospitals and many other long-term care facilities, clinics and other services in Illinois and Indiana. Provena Covenant also has contracts with private companies to run its emergency room, labs and other hospital services.
It differs from for-profit hospitals in that "they're owned by the stockholders. We're owned by our governing board of sisters," says Gregory Alford, Provena spokesman. "Any excess revenues go right back into the facilities, and that's why paying property taxes hurts the community — because it's taking away more than $1 million a year that could be used to buy new equipment, to expand access to care, to do a lot of different things."
Provena appealed in Sangamon County circuit court and wrote in a statement last fall that the department's ruling "undermines our charitable mission and threatens every hospital in the state." The hospital reported it has paid $4.8 million in property taxes since 2003 and committed more than $11.3 million in "charitable benefits to the community" in 2005. But its definition of community benefits includes more services than the definition of charity care in the department's ruling.
"It's not as though this is a real high-margin business here," Alford says. "It doesn't take a lot to really disrupt the bottom line in health care, and hospitals particularly. So taking $1 million for taxes every year does make a significant difference."
The Hospital Association called the ruling "outrageous" and warned that it could open the door for the state to impose new tax burdens on all not-for-profit hospitals, forcing them to reduce services and eventually leading to increased costs to patients and employers.
The attorney general's office is representing the revenue department in Provena's appeal but remains engaged in trying to reform the hospital charity-care issue, says spokeswoman Cara Smith.
If the state were to enact the original 8 percent requirement, the Hospital Association warns the added cost statewide could total $739 million in uncompensated care.
The association and some Republican lawmakers hope to see revisions in the attorney general's proposal. They argue that the 8 percent figure chosen by the attorney general's office is arbitrary. They also believe the definition of charitable care is too narrow. And they warn the proposed rules would unevenly affect hospitals in rural and urban areas.
Smith says Illinois case law establishes 3 percent as the absolute minimum amount hospitals need to spend on charitable care. She adds that the office met with numerous hospitals in more than 50 meetings since last year, and the office consulted with hospital financial experts who recommended using a percentage of operating costs as an equitable measuring stick. It would establish one standard for charitable care provided by hospitals in rural, urban or suburban areas, she says.
Regardless of the number, the Hospital Association is concerned that requiring a percentage of operating costs for charitable care means that if a hospital's costs go up, so does the amount it must dedicate to that care, says French.
"That means every time that a hospital buys a new piece of equipment or hires more nurses, then costs go up," she says. "It's a percent of a higher figure. If the hospital wants to improve its equipment or its staff, suddenly they're punished. It's a perverse incentive."
Another challenge is defining charity care, which could have implications for hospitals throughout the state, says state Sen. Dale Righter, a Mattoon Republican.
His hometown includes Sarah Bush Lincoln Health Center and its associated clinics throughout his district. Minority spokesman on the Senate Health and Human Services Committee, Righter calls the initial charity-care legislation "overly restrictive," in that it would set a one-size-fits-all definition for what would be appropriate levels of charitable care.
"I feel so strongly about this," he says. "This is exactly the wrong direction to go to help deal with the issue of the uninsured. We should look for ways to lift up providers who are providing free and reduced health care, not tie them down to some rigid standard."
Instead of relying solely on a percentage of hospitals' operating costs, he suggests, the state also should consider the median income and the number of health centers in each area.
Smith says while Illinois case law defines charitable care as "expenditures that directly benefit the medically needy," the attorney general is sensitive to the hospitals' concerns.
In mid-January, French said the Hospital Association still didn't know how or when the attorney general would propose a new standard. But she hopes whatever is decided, it requires less than 8 percent of operating costs.
Although the original measure barely squeaked out of a House committee without Republican support, a compromise is possible.
"Nobody's evil in this situation," French says. "It really boils down to the problem of the uninsured. It's a huge problem, and it doesn't make sense to make the hospitals bear the burden. It's a social problem that somebody's got to solve some time. But hospitals can't do it alone."
"The attorney general is smart and is a good person," she adds. "There's bound to be some sort of an acceptable compromise that won't hurt this health care system."
Bethany Carson can be reached at capitolbureau@aol.com.
Illinois Issues, February 2007
