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Volume XII, Number 187


July 05, 2022

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Illinois Legislature Clarifies Requirements for Non-Profit Hospital Property Tax Exemption, Increases Charity Care Requirements

In response to the uncertainty created by the Illinois Supreme Court’s decision in Provena Covenant Medical Center v. Dept. of Revenue, on May 29th the Illinois Senate passed Senate Bill 2194 (SB 2194), previously passed by the House, which includes new standards for property tax exemption and sales and use tax exemption for non-profit hospitals, as well as an income tax credit for taxable hospitals.  In addition, the Senate passed Senate Bill 3261 (SB 3261), previously passed by the House, which increases requirements for hospitals to provide charity care to uninsured persons for medically necessary treatment.  Governor Quinn is expected to sign both bills into law.  Both will take effect when signed.  The text of the applicable sections of SB 2194 is available at: http://www.ilga.gov/legislation/97/SB/PDF/09700SB2194ham003.pdf.  The full text of SB 3261 is available at:  http://www.ilga.gov/legislation/97/SB/PDF/09700SB3261lv.pdf

Tax Exemption

SB 2194 establishes that Illinois non-profit hospitals may qualify for property tax exemption if the value of certain “qualified services or activities” that the non-profit hospital provides is equal to or exceeds the estimated value of the hospital’s property tax liability.  The test is applied on a hospital-by-hospital basis solely with respect to property and activities in Illinois.  Non-profit hospitals that satisfy this test for property tax exemption also will be exempt from state sales and use tax.  The following are the services and activities that count, and that may be valued for comparison against the hospital’s property tax liability:

  • Charity care.  Free or discounted services provided pursuant to the hospital’s financial assistance policy, measured at cost, including discounts provided under the Hospital Uninsured Patient Discount Act. 
  • Health services to low-income and underserved individuals.  Other unreimbursed costs of providing without charge, paying for, or subsidizing goods, activities, or services for the purpose of addressing the health of lowincome or underserved individuals.  Those activities or services may include, but are not limited to:  financial or in-kind support to affiliated or unaffiliated hospitals, hospital affiliates, community clinics or programs that treat lowincome or underserved individuals; paying for or subsidizing health care professionals who care for low-income or underserved individuals; providing or subsidizing outreach or education services to low-income or underserved individuals for disease management and prevention; free or subsidized goods, supplies, or services needed by low-income or underserved individuals because of their medical condition; and prenatal or childbirth outreach to low-income or underserved persons. 
  • Subsidy of State or local governments.  Direct or indirect financial or in-kind subsidies of State or local governments by the hospital that pay for or subsidize activities or programs related to health care for low-income or underserved patients. 
  • Support for State health care programs for low-income individuals.  At the election of the hospital for each applicable year, either (a) 10% of payments to the relevant hospital entity and any hospital affiliate designated by the relevant hospital entity under Medicaid or other means-tested programs such as General Assistance, All Kids and SCHIP, or (b) the amount of subsidy provided to State or local government in treating Medicaid recipients and recipients of means-tested programs.  The amount of subsidy will be calculated in the same manner as unreimbursed costs for Medicaid and other means-tested government programs in Schedule H of IRS Form 990. 
  • Dual-eligible subsidy.  The amount of subsidy provided to government by treating dual-eligible Medicare/Medicaid patients.  The subsidy is calculated by multiplying the hospital’s unreimbursed costs for Medicare, calculated in the same manner as determined in Schedule H of IRS Form 990, by the hospital’s ratio of dual-eligible patients to total Medicare patients. 
  • Relief of the burden of government related to health care of low-income individuals.  Except to the extent taken into account elsewhere, the portion of unreimbursed costs attributed to providing, paying for, or subsidizing goods, activities, or services that relieve the burden of government related to health care for low-income individuals.  Such activities or services include, but are not limited to, providing emergency, trauma, burn, neonatal, psychiatric, rehabilitation or other special services; providing medical education; and conducting medical research or training of health care professionals.  The portion of those unreimbursed costs attributable to benefiting low-income individuals shall be determined using a ratio calculated by adding the costs attributable to charity, Medicaid and other means-tested government programs, disabled Medicare patients under age 65, and dual-eligible Medicare/Medicaid patients and dividing by the hospital’s total costs.  Costs for the numerator and denominator are to be determined by multiplying gross charges by the cost to charge ratio taken from the hospital’s most recently filed Medicare cost report (CMS 2252-10 Worksheet C, Part I).  In the case of emergency services, the ratio shall be calculated using costs (gross charges multiplied by the cost to charge ratio) of patients treated in the hospital’s emergency department. 
  • Any other activity provided by the hospital that the Department of Revenue determines relieves the burden of government or addresses the health of low-income or underserved individuals. Notably, any particular qualified services or activities eligible to be included in this calculation may not be counted under more than one of the above categories, and the amount of unreimbursed costs and subsidies need not be reduced by restricted or unrestricted charitable donations.

Estimation of Exempt Property Tax Liability

In performing the comparative analysis, estimated property tax liability  means the estimated dollar amount of property tax that would be owed, with respect to the exempt portion of each of the properties that are already fully or partially exempt or for which an exemption in whole or in part is currently being sought and then aggregated as if the exempt portion were subject to tax.  The calculation for determining the estimated property tax liability is the lesser of the actual assessed value or the estimated assessed value of the exempt portion multiplied by the state equalization rate and the applicable tax rate.  The estimated assessed value equals the sum of the estimated fair market value of the exempt portion of buildings, less depreciation, multiplied by the assessment factor plus the estimated assessed value of land.

Income Tax Credit

SB 2194 also provides that hospitals that are not exempt under the federal income tax code may receive a credit against state income taxes equal to the lesser of:  (a) the amount of property taxes paid on real property used for hospital purposes, or (b) the cost of free or discounted services provided pursuant to the hospital financial assistance policy, measured at cost.

Increased Charity Care Requirements

A companion bill, SB3261, strengthens hospital charity care obligations by requiring hospitals to provide a charitable discount of 100% of its charges for all medically necessary health care services exceeding $300 to uninsured individuals that apply for such a discount and who have a family income of not more than 200% of the federal poverty guidelines (not more than 125% of the federal poverty guidelines for rural and critical access hospitals).

In addition, SB3261 directs the Illinois Attorney General to promulgate rules by June 30, 2013, that will:

  • establish standard language to be included in hospital financial assistance application forms; and
  • establish uses of presumptive eligibility for financial assistance determinations. 

Drinker Biddle Comment:  Once the bills are signed, Illinois will become the fourth state in the nation to impose measurable charity care requirements in return for tax exemption (following Utah, Texas, and Pennsylvania).  Given the ten years of legal wrangling postProvena and the uncertainty stemming from the constitutional source of charitable tax exemption in Illinois, it seems unlikely that nonprofit hospitals in that state could have fared better than this carefully-hewn combination of measurable charity care obligations and property tax relief.  This development is best viewed in the context of its unique underlying state law and with the expectation of one or more constitutionally-based challenges to the legislation almost certainly lying ahead.  

© 2022 Faegre Drinker Biddle & Reath LLP. All Rights Reserved.National Law Review, Volume II, Number 170

About this Author

T.J. Sullivan, Tax lawyer, Drinker Biddle

T. J. Sullivan advises tax-exempt organizations on complex regulatory and business issues. He is widely acclaimed by peers as outstanding in matters related to tax-exempt entities including hospitals, HMOs, and clinics. T.J.’s practice encompasses complex transactions including corporate reorganizations, joint ventures, and acquisitions, and he brings significant regulatory experience to his work.

In addition, T.J. regularly assists health systems and trade associations in mergers, acquisitions, and sale transactions, as well as counseling them in...

Eric Berman, Drinker Biddle Law Firm, Chicago, Healthcare Law Attorney

Eric M. Berman represents pharmaceutical and device manufacturers, hospitals and health systems, and physician groups on a wide variety of health care related matters. Eric provides counsel on regulatory compliance and transactional matters relating to medical research and health information privacy and data security for both the life science and health care provider industries. He also represents health care providers on matters ranging from major strategic mergers and affiliations to day-to-day support to general counsel departments, which includes...