Opinion ID: 1966956
Heading Depth: 3
Heading Rank: 1

Heading: Employee-Physician Clinics.

Text: The landscape of rural Iowa is changing, and so too are the methods and manner of delivering public services. For sure, in years gone by, physician clinics were operated as private businesses independent of hospitals, and they were not considered essential to the operation of a hospital. See Readlyn Hosp., 223 Iowa at 345, 272 N.W. at 92. A community with a hospital would attract doctors to the area who would, in turn, establish their own clinic practices, much like certain natural resources or unique features of a community attract various interdependent enterprises. Thus, physician clinics have traditionally been considered to be independent of hospitals, and clinic services are recognized to serve a slightly different purpose in delivering health care services than by hospitals. See City of Springfield v. Comm'r of Revenue, 380 N.W.2d 802, 806 (Minn.1986). Yet, even the most ardent traditions are not always impervious to the march of time. The record in this case reveals that Van Buren County, and perhaps other rural areas around the country, have been experiencing a critical shortage of physicians. Without a sufficient number of physicians to staff a hospital, or any physicians at all, it is not unreasonable to believe that the hospital will eventually be forced to abandon its noble pursuit, and become a remnant of the past. The county trustees responsibly and thoughtfully responded to this emerging crisis by considering new ways to retain and attract physicians to preserve the hospital and maintain its ability to provide quality health care to the community. While the approach adopted by the trustees crossed traditional paths, we have no occasion to doubt the underlying motive or purpose. We fully understand that the operation of physician clinics may in another period of time have been viewed to be outside the role of county government. We also recognize our obligation to preserve the sound principles of the past and avoid unwarranted exemptions to taxation when the objects and methods of exempting property become too remote from the traditionally recognized objects and methods. Harvard Cmty. Health Plan, Inc. v. Bd. of Assessors, 384 Mass. 536, 427 N.E.2d 1159, 1163 (1981) (quoting Boston Chamber of Commerce v. Assessors of Boston, 315 Mass. 712, 718, 54 N.E.2d 199, 202 (1944)). However, changes in social and economic conditions often require government to change directions and consider new approaches to the delivery of services. Moreover, our traditional approach to construing a statute providing for an exemption from taxation must not tie us to past notions of the meaning of the statutory phrase public use. Instead, we must carefully construe the phrase consistent with the objectives and purposes sought to be accomplished by the statute, while considering the degree to which these objects affect public welfare. Roe v. Kervick, 42 N.J. 191, 199 A.2d 834, 842 (1964). This necessarily requires us to construe public use in a flexible manner to permit the statute to meet the changing needs of the public and society. In addressing the meaning of public purpose, the New Jersey Supreme Court thoughtfully said: Generally speaking, it [public purpose] connotes an activity which serves as a benefit to the community as a whole, and which, at the same time is directly related to the functions of government. Moreover, it cannot be static in its implications. To be serviceable it must expand when necessary to encompass changing public needs of a modern dynamic society. Thus, it is incapable of exact or perduring definition. In such instance where the test is to be applied the decision must be reached with reference to the object sought to be accomplished and to the degree and manner in which the object affects the public welfare. Id. The evidence in this case supports the conclusion that the clinics, in this rural setting, have become a reasonably necessary and essential component of the viable overall operation of this hospital. The use of the property as physician clinics constitutes a public use because the clinics have become an important link to the very existence of the hospital. This was supported by the evidence in the case and the decision of the hospital trustees. The slight differences in purposes between clinics and hospitals may continue to exist in rural Iowa, but the two entities have nevertheless become uniquely interwoven in a rural setting. For sure, physician clinics provide a private benefit, but we think such a benefit in this case fits well within the permissible incidental private benefit to the greater public benefit. The Board points to decisions in numerous other jurisdictions that have refused to exempt physician clinics merged into hospital settings from property taxation, even when faced with claims that the clinics are necessary to recruit and maintain physicians or to satisfy patient needs. See Crittenden Hosp. Ass'n v. Bd. of Equalization, 330 Ark. 767, 958 S.W.2d 512 (1997); Chisago Health Servs. v. Comm'r of Revenue, 462 N.W.2d 386 (Minn.1990); City of Springfield, 380 N.W.2d at 805; St. Clair Hosp. of Monroe, Wis., Inc. v. City of Monroe, 209 Wis.2d 364, 563 N.W.2d 170 (Ct.App.1997). However, a review of these cases reveals critical differences between the statutory exemption for public property under consideration and our statute. One notable difference is the frequent statutory requirement in other jurisdictions that the public property be used exclusively for public purposes. See City of Springfield, 380 N.W.2d at 804; Crittenden Hosp. Ass'n, 958 S.W.2d at 513. We have previously indicated that our legislature has broadened our municipal property exemption by removing the word entirely from the statute. See City of Osceola, 490 N.W.2d at 541-42. Additionally, these cases from other jurisdictions recognize, as we have, how the particular facts of each case ultimately guide the outcome, as well as the influence of the standard of review. See South Iowa Methodist Homes, Inc., 173 N.W.2d at 533 ([i]n each case there is some distinguishing feature or statute which commands us to decide each case on its own unique facts); see also City of Springfield, 380 N.W.2d at 805 (exemption denied but circumstances of case presented extremely close decision); Greater Anchorage Area Borough v. Sisters of Charity, 553 P.2d 467, 471 n. 12 (Alaska 1976) (case did not raise question whether exemption was necessary to secure services of doctors for the hospital to function). In considering all the facts in this case, we conclude the physician clinics operated by the Van Buren County Hospital are devoted to public use. We next turn to consider whether the clinics are held for a pecuniary profit. The Board points to evidence that the revenue from the clinic exceeded expenses in 1998 and 1999, which is indicative of a pecuniary profit. However, these figures do not include such unassigned expenses as employee benefits and building and equipment depreciation. Additionally, the community contributes a substantial amount of volunteer hours. This diminishes the amount of salaries paid and therefore decreases the expense totals. Evangelical Lutheran Good Samaritan Soc'y v. Bd. of Review, 267 N.W.2d 413, 415 (Iowa Ct.App.1978). In any event, any realized surpluses are reinvested into the hospital and clinics through maintenance, repairs, and expansion of the facilities. See, e.g., Mingledorff v. Vaughan Regional Med. Ctr., Inc., 682 So.2d at 415, 418 (Ala.1996); Bethesda Found. v. Bd. of Review, 453 N.W.2d 224, 228 (Iowa Ct.App.1990); Twilight Acres, Inc. v. Bd. of Review, 346 N.W.2d 40, 42 (Iowa Ct.App.1984); Evangelical Lutheran Good Samaritan Soc'y, 267 N.W.2d at 416; Appeal of Cmty. Gen. Hosp., 708 A.2d 124, 130 (Pa. Commw.Ct.1998); Med. Ctr. Hosp. of Vermont, Inc. v. City of Burlington, 152 Vt. 611, 566 A.2d 1352, 1357 (1989). Additionally, no private individuals affiliated with the hospital, such as the hospital administration or Board of Trustees, reap individual benefits from excess funds. Mingledorff, 682 So.2d at 418; Twilight Acres, Inc., 346 N.W.2d at 42; Evangelical Lutheran Good Samaritan Soc'y, 267 N.W.2d at 416 n. 7; Hotel Dieu v. Williams, 410 So.2d 1111, 1112 (La.1982); Appeal of Cmty. Gen. Hosp., 708 A.2d at 130. In fact, members of the Board of Trustees receive no compensation. Iowa Code § 347.19; see Twilight Acres, Inc., 346 N.W.2d at 42; Evangelical Lutheran Good Samaritan Soc'y, 267 N.W.2d at 416 n. 7. Moreover, in order for small rural county hospitals like Van Buren County Hospital to survive financially, the operating income must exceed expenses. See Twilight Acres, Inc., 346 N.W.2d at 42 (any entity must generate more revenue than expenses to remain in operation). Additionally, profit or loss is not the determinative test. An institution that operates at a loss is not necessarily guaranteed a tax-exempt status. Mayflower Homes, Inc. v. Wapello County Bd. of Review, 472 N.W.2d 632, 634 (Iowa Ct. App.1991); see Readlyn Hosp., 223 Iowa at 345, 272 N.W. at 92 (denying hospital tax exemption, despite fact that hospital operated at a loss). We have previously determined the hospital established the clinics for the institutional purpose of maintaining the future of the hospital. Even if the clinics realize a profit from time to time, this does not mean the property is held for the purpose of making a financial profit. See Smyth County Cmty. Hosp. v. Town of Marion, 259 Va. 328, 527 S.E.2d 401, 405 (2000); see also Richards v. Iowa Dep't of Revenue, 414 N.W.2d 344, 353 (Iowa 1987) (determining whether a patient will be able to pay at least some charges does not indicate pecuniary intent); Evangelical Lutheran Good Samaritan Soc'y, 267 N.W.2d at 416 (To require that the society sustain operating deficits in order to perpetuate its real estate tax exemption is unsound and would discourage responsible management practices.). The clinics are held for the purpose of maintaining the overall operation of the hospital, and any profit it may realize is merely incidental. Finally, the Board argues that the effect of an exemption for the physician clinic areas placed two other small part-time clinics that provide family practice services in other towns in the county at a competitive disadvantage with the hospital clinic because these two clinics pay property tax. While we question the dubious nature of the claim of unfair competition, we acknowledge the general policy of the law to make all property owners share in the common burden of taxation. Moreover, an exemption from uniform taxation tends to give an unfair competitive advantage to the exempted facility over similar privately owned facilities. Chisago Health Servs., 462 N.W.2d at 391. Yet, while this unfair result may be a justification for taxing public property used in a private manner, it is not a reason to tax public property put to public use. Our legislature has made the determination to exempt municipal property used for public purposes, and we have determined under the facts of this case that the hospital is not primarily operating the clinic for private use and any private use is merely incidental to the greater public purpose. Consequently, any unfair competitive advantage is similarly incidental, and a product of the judgment of our legislature in providing for a municipal exception. In truth, we think the exemption claimed by the hospital fits neatly within the rationale for exempting public property.