The Charity Care Requirement for Hospital Property Tax Exemptions

THE “CHARITY CARE” REQUIREMENT FOR HOSPITAL
PROPERTY TAX EXEMPTIONS
Edward J. Bernert
Christopher J. Swift
Baker & Hostetler LLP
Baker & Hostetler LLP
65 E. State Street, Suite 2100 3200 National City Center
Columbus, OH 43215
1900 East 9 th Street
(614) 228-1541 Cleveland, OH 44114-3485
ebernert@bakerlaw.com (216) 621-0200
cswift@bakerlaw.com
American Bar Association
Section of Taxation
State & Local Tax Committee
May 5, 2009

THE “CHARITY CARE” REQUIREMENT FOR HOSPITAL PROPERTY
TAX EXEMPTIONS
Edward J. Bernert
Christopher J. Swift
I. Introduction
Hospitals throughout the United States are accorded the benefits of a charitable
exemption from various state and local ad valorem property taxes. The issue we examine
is the role of a “charity care” requirement, meaning a certain level of “free or discounted
medical care” as a condition to hospitals obtaining charitable exemptions from property
taxes.
A case pending before the Illinois Supreme Court has attracted considerable
attention because it presents a high profile opportunity for that Court to decide whether a
quantified level of charity care is the sine qua non of the charity exemption in Illinois,
Provena Covenant Medical Center v. Illinois Department of Revenue, 384 Ill. App. 3d
734, 894 N.E. 2d 452 (4 th Dist. August 26, 2008), cert. granted, Illinois Supreme Court,
Case No. 107328. The appellate court in Provena upheld the Director of the Illinois
Department of Revenue (Director) and denied an exemption in large measure because of
an inadequate demonstration of a level of free care.
A recent decision by the Connecticut Supreme Court--St. Joseph’s Living Center,
Inc. v. Town of Windham, 240 Conn. 695 (March 24, 2009)--while denying the
exemption in that case, nevertheless chose to reject arguments that were successfully
advanced in Provena. The Connecticut Supreme Court followed the line of cases from
other states that focus on the overall charitable nature of the health care institution in
contrast to limiting the analysis to specific activities, such as free care for the poor, in
gauging qualification for exemption.
These two cases, and the decisions of other state supreme courts, provide useful
vehicles to address the role of quantified charity care in the granting to hospitals of
charitable exemptions from property taxes. This issue has been addressed in a number of
decisions but remains a subject of dispute, including in Ohio, in which the issue is being
litigated at the Ohio Board of Tax Appeals.
The issue is one of state not federal law. State charitable property tax exemptions
are not assured for owners that qualify for federal income tax exemption under Internal
Revenue Code §501(c)(3). While the state and local property tax exemptions do not
depend on qualification under federal law, the policies under the Internal Revenue Code
likely will impact the manner in which the state exemptions are examined.
A reexamination of the federal income tax exemption of hospitals is under way.
Beginning with the 2008 and 2009 returns, the Federal Form 990, Return of Organization
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Exemption from Income Tax, has expanded the disclosure requirements applicable to
hospitals claiming income tax exemption, including a reporting of the hospital’s charity
care policies in new Schedule H. Also, United States Senator Charles Grassley of Iowa
has focused his efforts on the charitable exemption for the federal income tax available to
hospitals and has vowed to change the manner in which the income tax exemption is
administered.
This report will not address the federal income tax law. Instead, we (1) examine
the Illinois appellate court decision in Provena and the issues relevant to the availability
of the charitable exemption to Provena likely to be addressed by the Illinois Supreme
Court, 1 (2) compare that Illinois appellate decision with the St. Joseph’s case in
Connecticut and several decisions of other state supreme courts that have addressed the
charitable exemption for hospitals, and (3) examine tax statutes in Pennsylvania and
Texas that address the charity care issue legislatively.
II.
Illinois--The Provena Case
A. Introduction
Provena Hospitals (Provena) is a nonprofit, full service general acute-care
hospital located in Champaign County, Illinois. The owner of the hospital qualified
under IRC §501(c)(3) for a charitable exemption and qualified for exemption from the
Illinois sales and use taxes as a charity. Provena sought property tax exemption from the
Champaign County Board of Review, which denied the exemption. Provena appealed the
decision and the Administrative Law Judge (ALJ) assigned to the appeal recommended
exemption on the basis that Provena was a charitable institution and its property was used
primarily for charitable purposes. The Director disagreed with the recommendation of
the ALJ. The appellate court in Provena described the actions of the Director in the
following terms:
The Director disagreed with the ALJ's recommendation and
denied an exemption for charitable uses. The primary
reason for his decision was that in 2002, the tax year in
question, [Provena] devoted only 0.7% of its total revenue
to charity care. Of 110,000 admissions in 2002, [Provena]
gave free care to only 196 patients and discounted care to
only 106 patients; and [Provena] hired collection agencies
to recover the remaining balances from 64 of the patients to
whom it had given discounts.
Provena challenged the decision of the Director in an administrative review to the circuit
court, and advanced the following argument:
…under the [Illinois] supreme court's decisions, charities
were not defined by percentages and that, in any event,
1 We will not address the religious use exemption issue also raised in the Provena appeal.
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[Provena] dispensed an ample amount of charity to the
community in forms other than charity care. [Provena] had
a charity-care policy based on federal poverty guidelines,
and it advertised the availability of "financial assistance."
According to Provena, [it] gave this financial assistance to
every patient who needed and requested it, and the number
of indigent people who walked in through the door and
availed themselves of the charity-care policy simply was
beyond [Provena’s] control. Also, Provena argued,
considering the meager rates of reimbursement the
government paid, treating Medicare and Medicaid patients
was itself an act of charity. Provena further argued--indeed,
the parties had stipulated--that [Provena] was a faith-based
institution founded, organized, owned, and operated as an
apostolic mission and health-care ministry of the Catholic
Church.
The circuit court found in favor of Provena. The Director appealed, and as noted,
the appellate court denied the exemption. The Illinois Supreme Court has accepted the
case for appeal. At this writing, the matter is being briefed and oral argument has not yet
been scheduled.
B. The Illinois Law
Ill. Const. 1970, art. IX, §6. It provides:
"The General Assembly by law may exempt from taxation
only the property of the [s]tate, units of local government
and school districts[,] and property used exclusively for
agricultural and horticultural societies[] and for school,
religious, cemetery[,] and charitable purposes. The General
Assembly by law may grant homestead exemptions or rent
credits." Ill. Const. 1970, art. IX, §6.
The Illinois statute, 35 ILCS 200/15-65(a) (West 2002)
provides:
"All property of the following is exempt when actually and
exclusively used for charitable or beneficent purposes[] and
not leased or otherwise used with a view to profit:
(a) Institutions of public charity."
In Methodist Old Peoples Home v. Korzen, 39 Ill. 2d 149, 157, 233 N.E.2d 537,
541-42 (1968), the Illinois Supreme Court listed six "distinctive characteristics of a
charitable institution:"
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(1) the institution bestows benefits upon an indefinite number of persons
for their general welfare, or the benefits in some way reduce the burdens
on government;
(2) the institution has no capital, capital stock, or shareholders and does
not profit from the enterprise;
(3) the funds of the institution are derived mainly from private and public
charity and are held in trust for the purposes expressed in the charter;
(4) charity is dispensed to all who need it and apply for it;
(5) the institution puts no obstacles in the way of those seeking the
charitable benefits; and
(6) the primary use of the property is for charitable purposes.
From the above, it may be concluded that providing care for the sick is not per se
a charitable activity. Further, maintaining nonprofit status is required but not sufficient.
The appellate court examined whether Provena was providing a benefit to the
public and thereby alleviating a burden on government. The court found an absence of
public benefit in that Provena was selling medical services.
The record was unclear as to the extent to which Provena was financed by
voluntary contributions. The court acknowledged that modern hospitals do not receive
many, if any, private contributions. Provena responded that providing medical care is a
charitable purpose and Provena focused its argument on the charitable aspect of the
original gift that supported founding the organization rather than on-going support. The
appellate court reasoned that the fact that most of the financing came from “contractual
charges” “goes against a charitable identity.”
The Director’s principal argument was the that Provena failed to prove “how
much” charity care that it gifted to the public to qualify for exemption. The appellate
court concluded that Provena must engage in a mission of giving, i.e. treating patients for
free or for a reduced rate, in other words, the hospital must provide uncompensated
medical care. Although Provena turned no one away, the court concluded that Provena
did not prove that those who could not afford care were cared for without charge.
C. The Role of the Quantitative Test—“The Illusion of Charity”
The Director placed great emphasis on the failure by Provena to provide a
particular percentage of charity care. Provena protested against the employment of a
quantitative test because neither the Constitution nor statutes of Illinois set forth such a
standard. Provena noted that the Director never committed to a particular level of charity
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care that would be sufficient. Moreover, according to Provena and the Illinois Hospital
Association as amicus, the amount of charity care depends on the economic status of the
patients that happen to come to the hospital.
The appellate court concluded that the quantity of charity care was important and
that the 0.7% charity care found by the Director was insufficient to qualify for the
charitable exemption. The court refused to overturn the inference by the Director that the
“small” amount of charity care showed that Provena had not been dispensing charity care
to all who needed it. While Provena had a charity care policy based on the income
thresholds for the patients, the Director criticized the policy because the policy was said
to ignore the size of the bill for medical services while focusing solely on the income
status of the patient. Thus, the policy failed to distinguish between a patient with a
$1,000 bill and a second patient with a $100,000 bill.
The appellate court agreed with the Director that the use of collection agencies,
for patients who qualified for charity care, presented a barrier to claiming charitable
exemption. The court seemed concerned that the use of collection agencies for charity
patients would deter those patients by the “prospects of crushing financial liability.”
The appellate court then addressed the issue of determining how to calculate the
amount of charity care in the case of the hospital receiving only partial payment for its
services. The first question must be whether the reduction is measured by reference to
(1) the patient charges made by the hospital or (2) its costs. The measure of donated care
would of course be much greater if comparing the amount billed to the announced
charges for that service in contrast to comparing the amount billed to the costs incurred
by the hospital. The court chose to employ cost as the comparison. Using costs, the
court then considered the measure to be used: either marginal costs for an additional
patient or the average costs. The marginal costs for an additional patient may be small
but Provena argued, and the court agreed, that the average cost is a better indicator than
marginal costs.
Using costs to compare, the appellate court expressed concern that the discounted
charges were not charity care because Provena continued to make a profit albeit at a
lower margin. The court referenced the Director’s argument as follows:
In 2002, pursuant to its charity care policy, [Provena]
treated some patients for free and discounted its bills for
other patients. Apparently, in calculating the amount of its
charity care, [Provena] used the average cost of the
discounted portions of the bills. The Director stated:
"The applicant has asserted in several different
contexts that the cost of waiving charges pursuant to
its charity care policy in 2002 was $831,724 …
while the revenue it waived amounted to
$1,758,940 …. To obtain the cost figure, the
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[a]applicant took the total cost of providing care in
the hospital and the total billed amounts and
developed a cost[-]to[-]charge ratio. The ratio was
applied to the charges generated. [Citations to
record.] $1,758,940 divided by $831,724 equals
2.1148."
As the Director explained, in the case of a patient whose
bill [Provena] discounted by 50%, the markup inherent in
the remaining 50% more than consumed the charity care in
the 50% discount, if charity care were measured by average
cost. The Director reasoned as follows:
"[A] patient entitled to a 50% waiver based upon
her level on the poverty income scale[] and who
received a $50,000 bill would be left with a $25,000
balance after application of the sliding scale
reduction. This $25,000 outstanding bill, if paid by
the patient, actually would have generated an
average mark[]up of $1,358 for [Provena]. ($50,000
divided by 2.1148 equals $23,642. The difference of
$1[,]358, based upon [Provena’s] formula,
apparently would have been the margin above its
costs for the preferred service.) It is impossible to
conclude that this policy truly is charity as
contemplated by the [prior precedent] guidelines.
Thus, *** the Department's counsel would appear
to be correct in characterizing this practice as 'the
illusion of charity.'"
Thus, it would appear that in the case of the patients whose
bills [Provena] discounted by 50% or 25%, [Provena]
actually came out ahead (at least, in terms of what the
patients owed) and, therefore, extended no charity at all to
those patients. The figure of $831,724, small as it is relative
to [Provena] total revenues, appears to be an exaggeration.
The appellate court thus applied the charity care concept in the context of a need
for a certain quantity of free care. Should such a quantified standard of free care be
deemed necessary to qualify for exemption, however, other issues then are implicated.
One important debate as to how to calculate the charity care standard is the extent to
which uncollectible amounts can contribute to that charity care. Thus, a person comes
into the emergency room and the hospital serves that patient. Thereafter, the hospital
receives less than the amount billed. If the patient is covered under Medicare or
Medicaid, well-known subsidies are involved in providing such care. Moreover, the
hospital may be forced to write off a significant portion of the bills because the patient
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proves unable to pay after the economic situation of the patient is established—perhaps
after a debt collector is involved.
The Provena court accepted that a hospital should collect amounts from patients
who can pay. Moreover, the court acknowledged the need to employ collection agencies.
The court, however, concluded that a bad debt is not charity, even if the end result is the
same with the hospital discounting or writing off the cost of its services. The appellate
court would contrast the providing of services without the expectation of compensation,
which is charity, from the providing of services and proceeding as a creditor but then
concluding as a matter of business judgment to abandon the collection of the fee. The
court concluded that the creditor relationship even without collection is still the negation
of charity.
The appellate court rejected qualification for exemption based on the existence of
other charitable benefits provided to the community by Provena, which the court
characterized as the use of the federal income tax community benefit standard, rather than
the standard employed for the Illinois property tax. These other contributions asserted by
Provena were the following:
Crisis Nursery Services & Support;
Volunteer (community benefit) classes/services;
Emergency Medical Services (training & support
to community and area agencies);
Charitable subsidy of an ambulance service;
Donations to Other Not-for-Profits (less value
of participation);
Behavioral health community benefits; and
Subsidy for graduate medical education.
Finally the appellate court rejected the public policy concerns raised by the amici
in the case. The court acknowledged that public policy issues were the responsibility of
the legislature and not the courts. The Provena court then turned that argument against
Provena by declining to permit continuation of the charitable exemption for Provena until
the legislature addressed the concerns expressed by the appellate court on the Provena
record. The court concluded its reasoning as follows:
It is of obvious public benefit for any community to have
available one or more modern hospitals, but until such time
as the legislature sees fit to either change or make definite
the formula for the determination of the medical/charitable
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use of real property, Provena cannot, on the record before
us here, prevail in its attempt to exempt itself from real
estate taxation.
The appellate court concluded that Provena did not qualify for the charitable exemption. 2
At this writing, the Provena case is before the Illinois Supreme Court and is being
briefed.
III.
Connecticut--St. Joseph’s Living Center
Earlier this Spring, the Connecticut Supreme Court decided St. Joseph’s Living
Center, Inc. v. Town of Windham, 290 Conn. 295 (March 24, 2009). While the
conclusion that the medical facility was not entitled to exemption paralleled the Illinois
decision in Provena, the analysis of the charity care requirement in the two decisions is
very different.
In St. Joseph’s, the town assessor denied a charitable exemption to St. Joseph’s
Living Center, Inc. (Center), a skilled nursing facility because the facility did not provide
free care to any of its patients. The Center was a nonprofit organization exempt from
federal income taxes under IRC §501(c)(3). The principal source of the Center’s revenue
was patient charges including charges made to patients covered under Medicaid and
Medicare programs and thus subject to the subsidies inherent in those programs. The
Center did receive some charitable contributions with the amounts ranging over the years
from $19,000 to $52,000.
The Center was found to not discriminate on the basis of ability to pay, had never
forced a patient to leave for failure to pay, nor accorded admission preference to those
covered by private insurance. Staff salaries were slightly below market rates.
The majority opinion reflected what was styled the “modern approach to defining
a charitable use or purpose” which was said to be “rather broad and liberal.” “Charity
embraces anything that tends to promote the well-being of social man.” The Court then
provided the following:
The provision of long-term health care and spiritual support
to the elderly in a nonprofit, nondiscriminatory manner and
without regard to individual financial circumstances is a
charitable purpose.
The Court refused to find that the existence of a net gain (a surplus) would
disqualify the entity from exemption. The Court focused instead on the application (use)
of the funds. The Court then addressed the fact that facility looked to payment from the
patients in the following terms:
2 The court also found that Provena did not qualify for a religious exemption.
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The trial court found that ‘‘[s]services provided to private
pay[ing] patients . . . are simply not charitable services . . .
.’’ Both the town and the court seem to equate the term
‘‘charitable’’ with ‘‘free,’’ and conclude that the
acceptance of private paying patients renders the Center’s
purpose not exclusively charitable. We do not agree. The
trial court’s conclusion that merely charging a fee to those
who have the means to pay renders the Center’s purpose
not exclusively charitable is not in keeping with our
precedents, and is belied by the realities of the modern
health care system.
This court never has held that accepting payment or
charging a fee, without more, alters the character of a
charitable or otherwise tax-exempt organization. In Yale
University v. New Haven, 71 Conn. 316, 42 A. 87 (1899),
we declared what common sense requires: ‘‘A church is
none the less a church, because the worshippers contribute
to the support of services by way of pew rent. A hospital is
none the less a hospital, because the beneficiaries
contribute something towards its maintenance. And a
college is none the less a college, because its beneficiaries
share the cost of maintenance . . . .’’ Id., 328. Likewise, a
charitable, nonprofit nursing home is no less charitable
simply because some patients pay for all or part of the cost
of their care.
Ultimately, the Court denied exemption because of a deviation between the Center’s
charter and its activities. (The Center provided rehabilitative care, which was an activity
that was found not to be set forth in its charter as one of its charitable purposes.)
Presumably the Center can secure an exemption by amending its charter or limiting its
rehabilitative care program. In any case, the Court’s analysis of the effect of private pay
for the services rendered differs from the approach taken by the Illinois appellate court in
Provena. The Court in St. Joseph’s applied an analysis of the overall nature of the
activities of the property owner in contrast to an analysis of one factor--the amount of
free or discounted care.
IV.
Charitable Exemption for Medical Facilities in Other States
A. Case Law
1. Utah—Intermountain Health Care
In 1985, the Supreme Court of Utah rendered a decision that has been influential
thereafter. Utah County v. Intermountain Health Care, Inc. 709 P.2d 265 (Utah 1985).
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At issue were property tax exemption for Utah Valley Hospital owned and
operated by Intermountain Health Care (IHC) and American Fork Hospital leased and
operated by IHC. The Utah Supreme Court rejected the granting of exemption under the
provisions of the Utah Constitution. No one questioned that the properties were exempt
under the Utah statutes but the issue was whether the Utah Constitution permitted the
exemption.
IHC charged patients whenever the patients could pay. The Court noted that the
“care of the sick” traditionally had been treated as a charitable activity. The Court,
however, upon reviewing the history of the exemption concluded that changes in the
manner in which healthcare is provided required a re-examination. The Court
summarized its review of the history of the charitable exemption for hospitals in the
following terms:
We are convinced that traditional assumptions bear little
relationship to the economics of the medical-industrial
complex of the 1980's. Nonprofit hospitals were
traditionally treated as tax-exempt charitable institutions
because, until late in the 19th century, they were true
charities providing custodial care for those who were both
sick and poor. The hospitals' income was derived largely or
entirely from voluntary charitable donations, not
government subsidies, taxes, or patient fees. The function
and status of hospitals began to change in the late 19th
century; the transformation was substantially completed by
the 1920's. "From charities, dependent on voluntary gifts,
[hospitals] developed into market institutions financed
increasingly out of payments from patients." The
transformation was multidimensional: hospitals were
redefined from social welfare to medical treatment
institutions; their charitable foundation was replaced by a
business basis; and their orientation shifted to
"professionals, and their patients," away from "patrons and
the poor." Footnotes omitted.
The Utah Court concluded that the manner in which health care was being
delivered in the 1980’s was sufficiently different from the older model, that the
nonprofits hospital should not be exempt but instead treated the same as for-profit
hospitals. The Court concluded that the rates being charged by the nonprofit hospitals
were comparable to those charged by for-profits.
While no person was turned away for lack of funds, IHC was found to have
avoided advertising the free services to avoid being “deluged” with such claims for
services. The Court observed that IHC did not consider itself in the “business of
providing hospital care to the poor.”
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The Court found that there was no evidence that the exemption is a substantial
factor in the operation of the hospital. The Court thus found no basis to apply the burden
theory in support of exemption, i.e. that the charitable organization should enjoy
exemption because of the relief of a public burden arising from the operation of the
exempt property. The Court expressed concern that if the burden were being relieved,
that relief should be reflected in lowered rates for services compared to those rates
charged by for-profit organizations. The Court also observed that while the surplus was
being used to expand benefit services, that benefit was realized at the expense of patients
being made to pay market rates. Accordingly, the Court failed to find that IHC was
providing the requisite gift to the community.
In summarizing its decision, the Court observed that the IHC had expended
“minimal effort to show charity.” The Court suggested that a nonprofit hospital could
prevail in the future but presumably the hospital would have to show some relief of
poverty to qualify for the exemption.
Justice Stewart of the Utah Supreme Court filed a vigorous dissent. He surveyed
the laws of other states, focused on the benefit of the initial gift to begin the organization
provided by the Church of Jesus Christ of Latter-Day Saints. Justice Stewart would have
considered the effect of the subsidy under Medicare and Medicaid and even took issue
with the majority that the overall fees for the hospitals as tertiary care facilities were less
than the rates that would be charged otherwise. Justice Stewart contrasted nonprofit and
for-profit hospitals by their willingness to enter into less profitable operations.
Justice Howe also separately dissented. In the course of his dissent, he questioned
the majority opinion on the basis that the majority did not cite a single case in which
exemption was denied for an insufficient quantity of free care. Justice Howe concluded
that Utah would be alone in focusing on quantity as opposed to availability of charity
care.
Currently, the Intermountain decision is referenced in the “Property Tax
Exemptions Standard of Practice,” Revised June 2007, issued by the Property Tax
Division of the Utah State Tax Commission. The Charitable Property Tax Exemption
Standards relevant to a Nonprofit Hospital and Nursing Home are set forth in Appendix
2D to the Standards of Practice. That Appendix in Standard V states that the total gift to
the community must exceed on an annual basis its property tax liability. The type of
quantifiable activities, however, include community education, medical discounts,
donations of time and donations of money in addition to indigent care.
2. Virginia—Richmond Memorial Hospital
In City of Richmond v. Richmond Memorial Hospital, 202 Va. 86, 116 S.E. 2d 79
(1960), the issue was whether the right to exemption “depends solely upon the extent to
which free service is rendered.” The Court rejected that standard and concluded that the
exemption depends not upon the number of patients who are treated free of charge, but
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the nature of the institutions and the purpose of the operations. The Constitution of
Virginia did not require that services be rendered for free as the basis for exemption.
3. Michigan—Wexford Medical Group
In 2006, the Michigan Supreme Court rejected a focus solely on the value of free
care to qualify for property tax exemption for a medical facility. Instead, the Court
examined the overall purpose of the health care provider. Wexford Medical Group v. City
of Cadillac, 474 Mich. 192, 713 N.W. 2d 734 (2006). The decision of the Supreme Court
reversed both the Michigan Tax Tribunal and the Michigan Court of Appeals.
Wexford Medical Group, doing business as Great Lakes Family Care (Wexford),
is a nonprofit organization providing health care in a federally designated health
professional shortage area. Wexford had a charity care policy and open access policy for
Medicare and Medicaid patients. Wexford provided a number of health-based
community services that were not otherwise provided in the community. The Court
recited the relevant financial data regarding Wexford's operations in the following terms:
In accord with its mission, petitioner has a "charity care"
policy and an "open-access" policy for Medicare and
Medicaid patients. The charity care policy provides free
and discounted health care to anyone whose income is up to
twice the federal poverty level. Under its open-access
policy, patients are treated on a first-come, first-served
basis, and petitioner places no limit on the number of
Medicare and Medicaid patients it will treat. In 2000, two
patients took advantage of the charity care program; 11
patients used it in 2001. The total value of care rendered to
these 13 patients was $2,400. Petitioner also reported that
50 percent of its patients utilized Medicare or Medicaid,
which it stated was a significantly higher percentage than
was true for other providers in the area.
In the years at issue, petitioner's annual budget was $10
million, and it handled approximately 40,000 to 44,000
patient visits a year. Petitioner's expected fee collection was
as follows: 83 percent recovery from self-pay patients, 75
percent from Blue Cross Blue Shield patients, 60.3 percent
from Medicare patients, and 40.4 percent from Medicaid
patients. Under its policy of accepting patients who cannot
pay their Medicare or Medicaid co-pays, petitioner
provided below-cost health care totaling nearly $2 million
more than its receipts. Overall, petitioner suffered financial
losses in 1999, 2000, and 2001 of $575,000, $731,000, and
$673,000, respectively. These losses were subsidized by its
parent companies. And while petitioner's goal was to
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eventually become profitable, its agent testified that any
surplus would be invested back into the organization in
accord with its statement of purpose.
The Michigan Supreme Court found that the Legislature had not provided a
measuring device to gauge the charitable composition. In contrast to the Illinois Court of
Appeals in Provena, the Michigan Court refused to declare a certain percentage of
resources committed to charity care standard to qualify for exemption. The Court
described its reasoning as follows:
The Tax Tribunal and the Court of Appeals focused
exclusively on the dollar amount of free health care
petitioner gifted as part of its charity care program, looking
no further into the nature of petitioner's organization. This
was error because it is clear that both tribunals had in mind
a monetary threshold that is not only not discernable from
the statute, but that would be, by its very nature, quite
arbitrary.
As petitioner aptly pointed out, there are multiple reasons
why inventing legislative intent in this regard would be illadvised
and most unworkable. In fact, the difficulties with
formulating a monetary threshold illuminate why setting
one is the Legislature's purview, not the courts'. To set such
a threshold, significant questions would have to be
grappled with. For instance, a court would have to
determine how to account for the indigent who do not
identify themselves as such but who nonetheless fail to pay.
A court would have to determine whether facilities that
provide vital health care should be treated more leniently
than some other type of charity because of the nature of its
work, or even if a health care provider in an underserved
area, such as petitioner, is more deserving of exemption
than one serving an area of lesser need. A court would need
to consider whether to premise the exemption on whether
the institution had a surplus and whether providing belowcost
care constitutes charity. Clearly, courts are unequipped
to handle these and many other unanswered questions.
Simply put, these are matters for the Legislature.
The Michigan decision thus is consistent with the reasoning (if not the outcome) of the
Connecticut Supreme Court in St. Joseph’s but contrary to the Illinois Court of Appeals
in the Provena case. Putting aside the question of whether a quantified charity care
standard is appropriate, the Michigan Supreme Court’s approach of not assuming some
unspecified numerical value for required charity care absent legislative action is more
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defensible than the Illinois approach of assuming the existence of some unidentified
value of charity care requirement until the Illinois Legislature defines the standard.
4. Ohio—Cleveland Clinic Foundation
The examination of the relevant Ohio Supreme Court decisions would appear to
compel a finding that Ohio law does not employ a quantified value of charity care for
hospitals to obtain property tax exemption. A 1968 decision of the Ohio Supreme Court
that was cited with approval by the Connecticut Supreme Court in the St. Joseph’s case in
Connecticut, is Bowers v. Akron City Hospital, 16 Ohio St. 2d 94, 243 N.E. 2d 95 (1968).
The Ohio Supreme Court addressed the implication of the hospital receiving payment for
its services in the following respect:
It is the use of property rather than the fact that revenues
are collected and received from property which is
controlling. [citation omitted]. Nor do reasonable charges
exacted from beneficiaries of a charitable institution detract
from its eleemosynary character.
16 Ohio St. 2d 94, 96.
Then two years ago, the Ohio Supreme Court declined an invitation to deny exemption
for a health care facility based on inadequate free care. Community Health Professionals,
Inc. v. Levin, 113 Ohio St. 3d 432, 2007-Ohio-2336. The Court cited the Akron City
Hospital decision with approval and at 22 addressed the Tax Commissioner’s argument
as follows:
We acknowledge the position of the Tax Commissioner
that [the medical provider] does not use its property in
furtherance of or incidentally to its charitable purposes,
because it charges patients for services rendered, accepts
payment from private and government sources, writes off
unpaid amounts, and does not offer its services free of
charge or in accordance with a sliding scale [i.e. based on
the ability of the patient to pay]. However, these
circumstances concern the question of whether [medical
provider] is a charitable institution, which, as we have
emphasized, is not before this court. Moreover, to the
extent that the Tax Commissioner's argument relates to the
use of this property, we stated in Bethesda Healthcare [Inc.
v. Wilkins], 101 Ohio St.3d 420, 2004-Ohio-1749, 806
N.E.2d 142, that "[w]hether an institution renders sufficient
services to persons who are unable to afford them to be
considered as making charitable use of property must be
determined on the totality of the circumstances." Id. at 39.
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We also stated there that "we must consider the overall
operation being conducted."
Because of the procedural posture of the case, and the conclusion of the Court that
the Tax Commissioner had not preserved in his notice of appeal the issue of whether the
institution as opposed to the use of the property was charitable, the Court’s embrace of
the “totality of the circumstances” rather than an quantified charity care standard is dicta.
Nevertheless, Akron City Hospital and the Bethesda Healthcare case cited in the
Community Health Professionals case suggests that the view of Ohio Supreme Court
would appear to be consistent with the Connecticut Supreme Court in this regard and to
reflect a rejection of the focus on free care alone announced in the Illinois appellate court
decision in Provena.
The issue, however again is being litigated in Ohio. In a Final Determination of
the Ohio Tax Commissioner in Cleveland Clinic Foundation, DTE No. KE 4775,
unreported, the Tax Commissioner declared that a charitable health facility must have “as
its primary purpose the provision of health services to those in need without regard to
ability to pay.” The Tax Commissioner also stated that at a minimum four percent (4%)
of the persons being served must be charity cases.
The Cleveland Clinic Foundation appealed. The appeal is before the Ohio Board
of Tax Appeals in Cleveland Clinic Foundation (Beachwood Family Health and Surgery
Center) et al v. Wilkins et al, Case Nos. 2005-V-1726, 2006-V-99 and 2006-H-117. The
case is undergoing discovery and already has produced a Supreme Court decision on the
confidentiality of trade secrets and whether a party seeking exemption has waived
confidentiality protection merely by filing for exemption when the filed exemption is a
public record. Cleveland Clinic Foundation v. Levin, 120 Ohio St.3d 1210, 2008-Ohio-
6197. (The Supreme Court found that the Cleveland Clinic had not waived its claim to
confidentiality.) The final resolution of this appeal is probably some time off.
V. Statutes
At least two states have inserted some degree of quantified charity care in the
statutes defining the standards for property tax exemption.
A. Pennsylvania
In Pennsylvania, the prevention and treatment of disease or injury qualifies as a
charitable activity but the Pennsylvania statute in 10 P.S. §375 sets forth various
quantified criteria that institutions of purely public charity must meet to obtain charitable
status. The institution must donate or render gratuitously a substantial portion of its
services. One of the ways in which the institution can qualify is to provide wholly
gratuitous goods or service to at least 5% of those receiving similar goods or services.
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B. Texas
The Texas Tax Code, §11.1801 provides specific criteria for nonprofit hospitals to
qualify for exemption, in addition to the traditional requirements set forth in Texas Tax
Code, §11.18, in the following terms:
(a) To qualify as a charitable organization …, a nonprofit
hospital or hospital system must provide charity care and
community benefits as follows:
(1) charity care and government-sponsored indigent
health care must be provided at a level that is reasonable in
relation to the community needs, as determined through the
community needs assessment, the available resources of the
hospital or hospital system, and the tax-exempt benefits
received by the hospital or hospital system;
(2) charity care and government-sponsored indigent
health care must be provided in an amount equal to at least
four percent of the hospital's or hospital system's net patient
revenue;
(3) charity care and government-sponsored indigent
health care must be provided in an amount equal to at least
100 percent of the hospital's or hospital system's taxexempt
benefits, excluding federal income tax; or
(4) charity care and community benefits must be
provided in a combined amount equal to at least five
percent of the hospital's or hospital system's net patient
revenue, provided that charity care and governmentsponsored
indigent health care are provided in an amount
equal to at least four percent of net patient revenue.
Exceptions exist for a nonprofit hospital that has been designated as a disproportionate
share hospital under Medicaid and for nonprofit hospitals in smaller counties designated
as health professional shortage areas. Charitable care requirements are also spelled out in
some detail in Tex. Health & Safety Code §311.041, et seq.
VI.
Conclusion
The cases and statutes in the states surveyed show that a nonprofit institution that
is involved in the prevention and treatment of illness does not thereby qualify as a
charitable organization for property tax purposes. Some additional element of benefit to
the community is required. Some courts have applied a court-imposed limitation on the
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charitable exemption solely by reference to a quantified charity care requirement, i.e. a
percentage of charity care patients compared to the total population of patients that must
be served or a percentage of free care to total revenue. Several state supreme courts,
however, rejected the narrow focus on free care in favor of an examination of the totality
of the circumstances. At least two states, Pennsylvania and Texas, incorporate quantified
free or indigent care standards into the statutes but those statutes also include
consideration of potential benefits for the community that are not limited to providing
free services. It will be interesting to see if the litigation in Illinois, Ohio and other states
result in court-imposed quantified levels of charity care in the absence of statutory
enactments.
102765228.2
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