Opinion ID: 3135617
Heading Depth: 1
Heading Rank: 2

Heading: facts

Text: The appellant property owner and taxpayer in this case is Provena Hospitals. Provena Hospitals is one of four subsidiaries of Provena Health, a corporation created when the Servants of the Holy Heart and two other groups affiliated with the Roman Catholic Church merged their health-care operations.1 Provena Hospitals was formed through the consolidation of four Catholic-related health-care organizations and is organized as a not-for-profit corporation under the laws of Illinois. The articles of consolidation for Provena Hospitals state that the purpose of the corporation is to “coordinate the activities of Provena Hospitals’ subsidiaries or other organizations that are affiliated with Provena Hospitals as they pursue their religious, charitable, educational and scientific purposes” and “to offer at all times high quality and cost effective healthcare and human services to the consuming public.” Provena Hospitals is exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code (26 U.S.C. §501(c)(3) 1 According to Provena Health’s table of organization, its other three units are Provena Senior Services, which operates numerous nursing homes and adult care facilities; Provena Home Care; and Provena Ventures, which consists of Provena Properties and Provena Enterprises. Provena Enterprises, in turn, is comprised of Medicentre Laboratories and Bennett Operating Company. -2- (1988)). The Illinois Department of Revenue has also determined that the corporation is exempt from this state’s retailers’ occupation tax (see 35 ILCS 120/1 et seq. (West 2002)), service occupation tax (see 35 ILCS 115/1 et seq. (West 2002)), use tax (see 35 ILCS 105/1 et seq. (West 2002)), and service use tax (see 35 ILCS 110/1 et seq. (West 2002)). In addition, the Illinois Attorney General has concluded that the corporation “meets the qualifications of Section 3(a) of ‘An Act to Regulate Solicitation and Collection of Funds for Charitable Purposes’ [225 ILCS 460/3(a) (West 2002)] and Section 4 of ‘The Charitable Trust Act’ [760 ILCS 55/1 (West 2002)]” and constitutes a religious organization exempt from filing annual financial reports under those statutes. Provena Hospitals owns and operates six hospitals, including Provena Covenant Medical Center (PCMC), a full-service hospital located in the City of Urbana. PCMC was created through the merger of Burnham City Hospital and Mercy Hospital. It is one of two general acute care hospitals in Champaign/Urbana and serves a 13county area in east central Illinois. The services it provides include a 24-hour emergency department; a birthing center; intensive care, neonatal intensive care, and pediatrics units; surgical, cardiac care, cancer treatment, rehabilitation and behavioral health services; and home health care, including hospice. It offers case management services to assist older persons to remain in their homes and runs various support groups and health-related classes. It also provides smoking cessation clinics and screening programs for high cholesterol and blood pressure as well as pastoral care. PCMC maintains between 260 and 268 licensed beds. Each year it admits approximately “10,000 inpatients and 100,000 outpatients.” Some 60% of its inpatient admissions originate through the hospital’s emergency room, which treats some 27,000 visitors annually. PCMC provides an emergency department because it is required to do so by the Hospital Emergency Service Act (210 ILCS 80/0.01 et seq. (West 2002)). Where emergency room services are offered, a certain level of health care is required to be provided to every person who seeks treatment there. That is so as a matter of both state (210 ILCS 80/1 (West 2002); see also 210 ILCS 70/1 (West 2002)) and federal (42 U.S.C. §1395dd) law. Staffing PCMC are approximately 1,000 employees, 400 -3- volunteers and 200 physicians. The physicians are not employed or paid by the hospital. They are merely credentialed to provide services there in exchange for paying $50 per year in dues to the hospital’s library fund, and agreeing to serve on hospital committees and to be on call to attend patients without their own physicians. With respect to the emergency department, PCMC contracts with a for-profit private company to provide the necessary physicians. The company, not the hospital, bills patients and any third-party payors directly for emergency room services. The company likewise pursues payment of those bills independently from PCMC. Just as PCMC relies on private physicians to fill its medical staff, it utilizes numerous third-party providers to furnish other services at the hospital. Among these are pharmacy, laundry, MRI/CT and lab services, and staffing for the rehabilitation and cardiovascular surgery programs. The company providing lab services is one of the businesses owned by Provena Enterprises, a Provena Health subsidiary. It is operated for profit. Provena Hospitals’ employees do not work gratuitously. Everyone employed by the corporation, including those with religious affiliations, are paid for their services. Compensation rates for senior executives are reviewed annually and compared against national surveys. Provena Health “has targeted the 75th percentile of the market for senior executive total cash compensation.” According to the record, PCMC’s inpatient admissions encompass three broad categories of patients: those who have private health insurance, those who are on Medicare or Medicaid, and those who are “self pay (uninsured).” PCMC has agreements with some private third-party payers which provide for payment at rates different from “its established rates.” The payment amounts under these agreements cover the actual costs of care. The amounts PCMC receives from Medicare and Medicaid are not sufficient to cover the costs of care. Although PCMC has the right to collect a certain portion of the charges directly from Medicare and Medicaid patients and has exercised that right, there is still a gap between the amount of payments received and the costs of care for such patients. For 2002, PCMC calculated the difference to be $7,418,150 in the case of Medicare patients and $3,105,217 for Medicaid patients. PCMC was not required to participate in the Medicare and -4- Medicaid programs, but did so because it believed participation was “consistent with its mission.” Participation was also necessary in order for Provena Hospitals to qualify for tax exemption under federal law. In addition, it provided the institution with a steady revenue stream. During 2002, Provena Hospitals’ “net patient service revenue” was $713,911,000, representing approximately 96.5% of the corporation’s total revenue. No findings were made regarding the precise source of the remainder of its revenue. Provena Hospitals’ “expenses and losses” exceeded its “revenue and gains” during this period by $4,869,000. In other words, the corporation was in the red. The following year, this changed. The corporation’s revenue and gains exceeded its expenses and losses by $10,548,000. Of Provena Hospitals’ “net patient service revenue” for 2002, $113,494,000, or approximately 16%, was generated by PCMC. Unlike its parent, PCMC realized a net gain of income over “expenses and losses” of $2,165,388 for that year. This surplus existed even after provision for uncollectible accounts receivable (i.e., bad debt) in the amount of $7,101,000. Virtually none of PCMC’s income was derived from charitable contributions. The dollar amount of “unrestricted donations” received by PCMC for the year ending Dec. 31, 2002, was a mere $6,938. PCMC experienced a modest net loss in 2003. The record discloses, however, that Provena Hospitals’ auditors showed accrued property tax liabilities in the amount of $1.1 million per year for both 2002 and 2003 in the accounts payable and accrued expenses portions of the 2003 balance sheet. Had only the 2003 property tax been posted against the revenue and gains for 2003, that year would also have shown a net gain for PCMC. In years when PCMC realizes a net gain, the gain is “reinvested in order to sustain and further [the corporation’s] charitable mission and ministry.” No findings were made regarding how much of the reinvestment occurs at PCMC and how much is allocated to other aspects of Provena Hospitals’ operations. Nor were specific findings made regarding the particular purposes to which the reinvested funds were put. The record indicates, however, that PCMC “generally needs approximately two to four million dollars in margin each year to replace broken items and fix non-operating equipment.” -5- In 2002, PCMC budgeted $813,694 for advertising and advertised in newspapers, phone directories, event playbills, and Chamber of Commerce publications; on television and radio; and through public signage. Its also advertised using “booths, tables, and/or tents at community health or nonprofit fundraising events; sponsorship of sports teams and other community events; and banner advertisements at sponsored community events.” The ads taken out by PCMC in 2002 covered a variety of matters, including employee want ads. None of its ads that year mentioned free or discounted medical care.2 While not mentioned in PCMC’s advertisements, a charity care policy was in place at the hospital, and the parties stipulated that PCMC’s staff made “outreach efforts to communicate the availability of charity care and other assistance to patients.” The charity care policy, which was shared with at least one other hospital under Provena Hospitals’ auspices, provided that the institution would “offer, to the extent that it is financially able, admission for care or treatment, and the use of the hospital facilities and services regardless of race, color, creed, sex, national origin, ancestry or ability to pay for these services.”3 The charity policy was not self-executing. An application was required. Whether an application would be granted was determined by PCMC on a case-by-case basis using eligibility criteria based on federal poverty guidelines. A sliding scale was employed. Persons whose income was below the guidelines were eligible for “a 100% 2 In subsequent years, Provena Hospitals altered its advertisements and increased its efforts to communicate the availability of charity care to patients. The case before us is concerned only with the situation as of 2002. With respect to that time period, the Director of Revenue bluntly concluded that “the record does not show that [PCMC] made any material effort to publicize the availability of charity care to those who were most in need of it.” 3 Of course, to the extent this policy addresses racial and other forms of noneconomic discrimination, it does not concern “charity” at all as we use that term today. Treating all persons equally regardless of such factors as race, religion or gender is no longer considered a matter of grace. In most situations, it is a legal requirement. -6- reduction from the patient portion of the billed charges.” Persons whose income was not more than 125% of the guidelines could qualify for a 75% reduction. With an income level not more than 150% of the guidelines the discount fell to 50%. At an income level not more than 200% of the guidelines, the potential reduction was 25%.4 Eligibility was also affected by the value of an applicant’s assets. Patients who qualified based on low income might nevertheless be rendered ineligible if the equity in their principal residence exceeded $10,000 or they held other assets valued at more than $5,000. PCMC’s policy specified that the hospital would give a charity care application to anyone who requested one, but it was the patient’s responsibility to provide all the information necessary to verify income level and other requested information. To verify income, a patient was required to present documentation “such as check stubs, income tax returns, and bank statements.” PCMC believed that its charity care program should be the payer of last resort. It encouraged patients to apply for charity care before receiving services, and if a patient failed to obtain an advance determination of eligibility under the program, normal collection practices were followed. PCMC would look first to private insurance, if there was any; then pursue any possible sources of reimbursement from the government. Failing that, the hospital would seek payment from the patient directly. Short-term collection matters were handled by Provena Hospitals’ “Extended Business Office.” Staffed by a small group of employees in Joliet, the Extended Business Office would typically make three or four phone calls and send three or four statements to patients owing outstanding balances.5 If a balance remained unpaid following such 4 Uninsured patients appear to have been billed for services at PCMC’s full “established” rates. Using Provena Hospitals’ figures, its actual cost of service was only about 47% of the price it charged such patients. As a result, the corporation could still garner a surplus in cases where it conferred discounts at the 25% and 50% levels. 5 Provena Hospitals’ explanation for utilizing collection agencies was that its own financial system “[did] not have a mechanism for sending -7- efforts, which typically did not extend beyond three months, Provena Hospitals would treat the account as “bad debt” and refer it to a collection agency. From time to time, the collection agencies would seek and were given authorization to pursue legal action against an account “on which, over the course of several months, the agency had not received any response, cooperation or payment from the patient.” Provena Hospitals’ decision as to whether to pursue legal action against a patient depended on review of the particular account. During 2002, it did not have a blanket policy requiring referral to a collection attorney in every case. The fact that a patient’s account had been referred to collection did not disqualify the patient from applying to the charity care program. Applications would be considered “[a]t any time during the collection process.” PCMC had financial counselors to assist patients with paying outstanding balances and review all payment options with them. The counselors helped patients seek and qualify for financial assistance from other sources. Where a patient was given an application for charity care but failed to return it, the counselors would send letters and call the patients to remind them to do so. During 2002, the amount of aid provided by Provena Hospitals to PCMC patients under the facility’s charity care program was modest. The hospital waived $1,758,940 in charges, representing an actual cost to it of only $831,724. This was equivalent to only 0.723% of PCMC’s revenues for that year and was $268,276 less than the $1.1 million in tax benefits which Provena stood to receive if its claim for a property tax exemption were granted.6 The number of patients benefitting from the charitable care program was similarly small. During 2002, only 302 of PCMC’s statements to patients on a long-term basis.” 6 The disparity between the amount of free or discounted care dispensed and the amount of property tax that would be saved through receipt of a charitable exemption is in no way unique to the case before us here. Excluding bad debt, “the amount of uncompensated care provided by as many as three-quarters of nonprofit hospitals is less than their tax benefits.” J. Colombo, Federal and State Tax Exemption Policy, Medical Debt and Healthcare for the Poor, 51 St. Louis L.J. 433, 433 n.2 (2007). -8- 10,000 inpatient and 100,000 outpatient admissions were granted reductions in their bills under the charitable care program. That figure is equivalent to just 0.27% of the hospital’s total annual patient census. The PCMC complex is comprised of 43 separate real estate parcels. The main PCMC hospital building consists of parcels bearing the parcel identification numbers 91-21-07-404-001 through 91-2107-404-010 and measures 395,685 square feet. Of this, 795 square feet (0.2% of the total) are used for the outpatient pharmacy; 1,592 square feet (0.4%) are devoted to the gift shop; 3,933 square feet (0.99%) are leased to the Board of Trustees of the University of Illinois; and 9,319 square feet (2.4%) are occupied by the hospital’s emergency department. An additional 22,065 square feet (5.6%) is leased to for-profit entities or otherwise used for purposes which, the parties agree, render the space ineligible for any real estate tax exemption. In addition to the main hospital building, the PCMC complex includes a parking garage, which consists of parcels numbered 91-2107-408-001 through 91-21-07-408-011; a cancer center, consisting of parcels 91-21-07-403-006 through 91-21-07-403-009; the cancer center’s parking lot, which includes parcels 91-21-07-403-001 through 91-21-07-403-005; the Crisis Nursery of Champaign/Urbana, which occupies parcels 91-21-07-407-001 through 91-21-07-407-003; and the Crisis Center’s parking lot, situated on parcel 91-21-07-407004. The complex also includes six additional parking lots: B, which is on parcel 46-21-07-336-001; C, which consists of parcel 46-21-07338-006; D, which is located on parcel 46-21-07-337-006; E, which is on a parcel identified as 91-21-07-408-012; H, which includes parcels numbered 46-21-07-336-002 and 46-21-07-336-003; and a lot for PCMS employees covering parcels 91-21-07-409-18, 91-21-07409-19, and 91-21-07-409-23. Provena Hospitals applied to the Champaign County board of review to exempt all 43 of the parcels in the PCMC complex from property taxes for 2002. Exemption was requested under section 15–65(a) of the Property Tax Code (35 ILCS 200/15–65(a) (West 2002)) on the grounds that the parcels were owned by an institution of public charity and that the property was “actually and exclusively used for charitable or beneficent purposes, and not leased or -9- otherwise used with a view to profit.” The board of review recommended this application be denied. The Illinois Department of Revenue agreed and denied the application in February of 2004, ruling that the property “was not in exempt ownership” and “not in exempt use.” As suggested earlier in this opinion, the tax to which the disputed property was subject totaled approximately $1.1 million. In March of 2004, PCMC paid that sum, under protest, to the treasurer of Champaign County. 7 It then filed a timely petition for a hearing on the exemption decision pursuant to section 8–35(b) of the Property Tax Code (35 ILCS 200/8–35(b) (West 2002)). The parties subsequently realized that because PCMC itself is not a legal “person,” the exemption request should be treated as if it had been submitted by Provena Hospitals, which holds title to the 43 parcels at issue here. Because the parties agree that Provena Hospitals is the proper party to seek the exemption, we shall consider it to be the true applicant, as did the appellate court. 384 Ill. App. 3d 734. In requesting a hearing on denial of the exemption, counsel for Provena Hospitals asserted that it could provide “clear evidence that it is a charitable organization entitled to charitable exemptions for the subject properties in accordance with section 15–65 of the Property Tax Code (35 ILCS 200/15–65 (West 2002)), Illinois case law and exemption determinations made by [the Department of Revenue] for other charitable institutions.” Initially, no claim was made that any of the 43 subject properties might also qualify for exemption under section 15–40 of the Property Tax Code (35 ILCS 200/15–40 (West 2002)), which pertains to property used exclusively for “religious purposes,” “school and religious purposes,” or “orphanages,” or that they might be exempt from property tax under any other provision of Illinois law. Later in the proceedings, however, Provena Hospitals asserted that the evidence “also conclusively establishes that [the] property also qualifies for exemption based on religious use.” 7 Provena Hospitals subsequently managed to obtain a refund of the tax pending this appeal. The propriety of that refund is the subject of a separate appeal, and Provena has acknowledged that it could be ordered to repay any taxes legally levied against it. -10- After a lengthy hearing at which voluminous evidence was presented, the administrative law judge (ALJ) assigned to the case recommended that 94.4% of the subject parcels be granted a charitable exemption. She did not address and made no findings regarding Provena Hospitals’ alternate claim for a religious exemption. The Director of Revenue rejected the ALJ’s recommendation. He believed that under the evidence and the law, Provena Hospitals had failed to meet its burden of establishing that the property at issue here qualified for a charitable exemption. The Director further concluded that the property did not qualify for a religious exemption under section 15–40 of the Property Tax Code (35 ILCS 200/15–40 (West 2002)).8 The circuit court of Sangamon County disagreed with the Director on both counts. In a written order entered on administrative review pursuant to the Administrative Review Law (735 ILCS 5/3–101 et seq. (West 2002)), the circuit court held that Provena Hospitals was entitled to both a charitable tax exemption and a religious tax exemption for the subject parcels. As noted earlier in this opinion, the appellate court subsequently reversed. Rejecting the circuit court’s view, it held that the Director’s decision to deny Provena Hospitals either a charitable or religious exemption for the disputed property was not clearly erroneous. 384 Ill. App. 3d 734. It is in this posture that the matter now comes before our court.