Three Illinois hospitals may lose tax-exempt status

Illinois board says hospitals shouldn't qualify as 'charities'

August 16, 2011

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According to the Illinois Health Association, one in three state hospitals are operating in the red.

The Illinois Department of Revenue announced Tuesday that three Illinois hospitals are in danger of losing their tax-exempt status. They are Northwestern Memorial's Prentice Women's Hospital in Chicago, Edward Hospital in Naperville and Decatur Memorial Hospital in Decatur.

The department's ruling comes during an ongoing battle in Illinois over the tax-exempt status of hospitals. An Illinois Supreme Court case from 1968 established five criteria that hospitals have to meet to qualify as "charities." 

Illinois Department of Revenue spokeswoman Susan Hofer says they are: "a charity may not have stock, capital or shareholders; a charity derives its funds mainly from private and public charities; a charity dispenses charity to all who need it and those who apply for it; a charity does not provide gain or profit in a private sense to any person connected with it; a charity places no obstacles in the way of those who need and would avail themselves of that charity."

If hospitals meet those criteria, the institutions become exempt from taxes on all their property, including everything from hospital rooms, to gift shops, to parking lots. Last year the Illinois Supreme Court ruled that downstate Provena Hospital didn't qualify, and therefore had to start paying property tax.

The Illinois Department of Revenue now uses the Provena ruling, alongside the 1968 criteria, as a kind of precedent to guide decisions on charity qualifications. The department doesn't have jurisdiction to investigate every hospital, however. Instead, it can only review hospitals that enter their administrative system when a parcel of a hospital changes ownership or changes use.

Mark Deaton, General Counsel of the Illinois Hospital Association, said decision makers are interpreting the court's definition of charity far too narrowly. He said if more hospitals lose their status and have to pay property taxes, it would be a serious blow to patients and the growing health care sector -- a sector he  calls "one of the few bright spots in the Illinois economy."

Deaton said patient care could be compromised if more hospitals are forced to pay property taxes. 

"[That] could push hospitals into having to cut back, slow down modernization, slow down hiring, slow down plans to expand services," he said.

The three hospitals being denied tax exempt status have 60 days to ask an administrative judge to review the decision. Illinois Department of Revenue spokeswoman Susan Hofer says her agency is reviewing the charity status of between ten and 15 additional hospitals.