Provena Covenant Medical Center v. Department of Revenue: The Decision That May End Charitable Exemptions for Nonprofit Hospitals

  I.  Introduction  

The recent decision by the Illinois Supreme Court regarding tax exemption for hospitals is troubling for the already volatile and uncertain future of many hospitals that are facing increasing difficulties in the current economic market.  The Illinois Supreme Court held that Provena Medical Center in Urbana does not provide enough charity care to qualify for the tax exemption provided for hospitals that care for uninsured and poor patients without generating a profit or collecting fees.[1]  The decision has generated significant criticism for relying on old precedent, failing to take into account current economic conditions, and for failing to provide clear guidelines for nonprofit hospitals that want to qualify for tax exemption in Illinois.[2]  The implications of this decision while not precisely known can have wide ranging consequences for hospital financing and access to healthcare for low income and uninsured individuals.  What are hospitals required to do to quality for tax exemption in Illinois?  What financial implications does this have on nonprofit hospitals?  What implications does this have on patients?  Will this decision effectively end charitable exemptions for nonprofit hospitals?  This article will attempt to briefly outline the issue and provide the possible policy implications of this decision.  Part II considers the law governing tax exemption in Illinois.  Part III considers the Provena decision and the courts rationale for denying tax exemption.  Part IV considers the criticisms of the decision specifically that the court applied an outdated test for charitable care, failed to take into account current market conditions and the constant changes in medicine and technology, failed to take into account bad debt as part of charitable care, and failed to provide clear guidelines for nonprofit hospitals that tare trying to qualify for tax exemption.  Part V concludes with many unanswered questions to this current and controversial decision. 

 II.    Tax Exemption in Illinois

Under Illinois law taxation is the rule and all property must pay taxes unless specifically exempt by Statute.[3]  The burden to show tax exemption is heavy and all facts and debatable questions must be construed in favor of taxation.[4]  The tax exemption for charitable organizations derives from section 6 of the Illinois Constitution which provides “General Assembly may, by law, exempt from taxation property owned by “the State, units of local government and school districts” and property “used exclusively for agricultural and horticultural societies, and for school, religious, cemetery and charitable purposes.”[5]  The General Assemble passed a provision that provided what type of property qualifies for the charitable tax exemption.  Section 15-65 of the Property Tax Code provides that in order for a property to qualify for the charitable exemption it requires not only that the property be “actually and exclusively used for charitable or beneficent purposes, and not leased or otherwise used with a view to profit,” but also that it be owned by an institution of public charity or certain other entities, including “old people's homes,” qualifying not-for-profit health maintenance organizations, free public libraries and historical societies.”[6]  However, the statute does not explicitly mention hospitals or health care facilities.  As a result of the vague standards set out in the statute the courts have developed a test to determine whether a nonprofit hospital is entitled to tax exemption.[7]           

The test was first articulated in Methodist Old Peoples Home v. Korzen, in which the court identified five factors that the organization must fulfill in order to qualify as a charitable institution and hence receive the tax exemption.[8]  First, the court defined charity as  a gift to be applied * * * for the benefit of an indefinite number of persons, persuading them to an educational or religious conviction, for their general welfare-or in some way reducing the burdens of government.”[9]  Then the court provided the following five factors that courts must consider when determining whether an organization qualifies as a charitable institution: (1) it has no capital, capital stock, or shareholders, (2) it earns no profits or dividends but rather derives its funds mainly from private and public charity and holds them in trust for the purposes expressed in the charter, (3) it dispenses charity to all who need it and apply for it, (4) it does not provide gain or profit in a private sense to any person connected with it; and (5) it does not appear to place any obstacles in the way of those who need and would avail themselves of the charitable benefits it dispenses.”[10]  The court determines whether an institution qualifies for tax exemption on a case by case basis considering all the factors outlined above.[11]  

III.       Provena Decision

The court in Provena concluded that Provena Medical center does not qualify for tax exemption because it does not derive enough of its revenue from charitable care. The court analyzed each of the factors outlined in Korzen and concluded that Provena only satisfied two of the necessary factors and therefore did not qualify for the tax exemption.[12]  Provena satisfies the first factor because it has no capital, capital stock, or shareholders and the fourth factor because it does not provide gain or profit in a private sense to any person connected with it.[13]  While Provena does subcontract many of its services to third party, for profit providers this does not preclude the institutions care from being characterized as charity.   However, the court stated that Provena failed to fulfill the other factors outlined in Korzen.  Specifically, Provena’s funds are not generated primarily from private and public charity rather the overwhelming majority of its funds are derived providing medical services for a fee.[14]  The court found that only $6,938 out of total revenues of $739,293,000 could be traced to charitable donations and there was no evidence of hospital's charitable expenditures or evidence showing that local government's burden in treating indigents was reduced.[15] 

Also, the court noted that the hospital failed to fulfill factors three and five because it did not show with clear and convincing evidence that it dispensed charity to all who needed it and applied for it and did not appear to place any obstacles in the way of those who needed and would have availed themselves of the charitable benefits it dispenses.[16]  Provena did not advertise that it was a charitable organization, patients were billed for services regularly and when they could not pay they were automatically referred to collections agencies.[17]  Hospital charges were waived only after it was determined that patients did not have insurance coverage, were not eligible for Medicare or Medicaid, lacked the resources to pay the bill directly, and could document that he or she qualified for participation in the institution's charitable care program.[18]


Provena alleges several important arguments in response to the courts analysis of the Korzen factors.  First, Provena alleged that the hospital provided care to everyone who requested it regardless of their financial circumstances and that they discounted care for poor individuals.[19] However, the court rejected this argument because patients were regularly billed for their services and when they could not pay they were automatically referred to collections agencies.[20] Furthermore, the court stated that the discounted care was illusory because uninsured patients were charged “established” rates, which were more than double the actual costs of care and therefore the hospital was still able to generate a profit.[21]    

Finally, Provena urged the court to consider its treatment of Medicare and Medicaid patients as charitable care because the payments it receives for treating such patients do not cover the full costs of care.[22]  The court rejected this argument stating that accepting Medicare and Medicaid patients is optional and also in the financial interest of the organization since the corporation receives a reliable stream of revenue and is able to generate income from hospital resources that might otherwise be underutilized.[23]


IV.       Criticisms of the Provena  Decision  

One of the main criticisms of Provena is that the court relied on old precedent to determine whether hospitals should be granted tax exemption without taking into account current market and social conditions.  Since the courts decision in Korzen in 1968, the hospital industry has endured drastic changes.  Medicine and technology has evolved and therefore the cost of providing medical care has increased.[24]  Due to the technological advances medical facilities are becoming more competitive and as a result spending more money to keep their facilities state of the art and efficient.[25]


The hospital industry has also changed with respect to the amount of uninsured and underinsured patients that are seeking care.  With the current economic crisis the amount of uninsured individuals has grown from 44.8 million in 2005 to 47 million in 2006.[26]  In addition, the amount of individuals on Medicare and Medicaid programs has also grown significantly.[27]  As a result, the amount of underpayments for Medicare and Medicaid have significantly grown.[28] Underpayments are defined as “the difference between the costs incurred and the reimbursements received for delivering care to patients.”[29]  The underpayments for Medicaid and Medicare have increased from 3.8 billion in 2000 to 32 billion in 2008.[30]  Therefore, as a result of the rising number of uninsured individuals and low reimbursement rates hospitals are enduring more costs associated with bad debt.  Bad debt is the charges the hospital expects to collect for the services but for which it does not receive payment and includes losses incurred from low reimbursement rates from Medicare and Medicaid.[31] 


The court in Provena failed to take into account the constantly changing scientific and economic factors and decided that bad debt cannot be considered when calculating how much charity care a hospital provides.  Medicare and Medicaid provide care to elderly and low income individuals that otherwise would have problems accessing health care.  Doesn’t providing low income individuals and other disadvantaged and vulnerable members of society with care considered charitable?  Doesn't Medicare and Medicaid further the goals of charitable institutions?  Courts in Illinois have reasoned that bad debt that results from low reimbursements from Medicare and Medicaid could not be considered charity care because the “hospital negotiated preferential rates for these programs and that there was no indication the hospital agreed to accept these patients due to its charitable mission.”[32] Furthermore, the court in Provena claimed that the hospital receives a steady stream of income from Medicare and Medicaid patients and therefore it’s not considered charity care. 


Tax exemption provides relief to hospitals that are already facing economic difficulties.  Tax exemption also allows hospitals to continue their operations by providing high quality care and helps hospitals further their charitable mission by providing free or discounted care to poor individuals.[33]  By making it more difficult for hospitals to qualify for tax exemption the court is threatening the quality and access of health care for Illinois residents.[34]  As a result hospitals are cutting services, staff, and closing facilities.[35]  The implications for denying tax exemption can be detrimental to the financial health of many nonprofit hospitals and for uninsured individuals who need access to care.[36]


V.    Conclusion 

What does the future hold for nonprofit hospitals?  This question generates many different responses but ultimately the future is uncertain.  Provena was decided on March 18, 2010 and therefore how this decision will affect other nonprofit hospitals is yet to be seen.  Many critics suspect that this decision will hurt hospitals financially because they will not be granted tax exemption under this strict standard.[37]  The uncertainty and fear for the future also derives from the fact that the court failed to articulate clear guidelines for hospitals trying to qualifying for tax exemption.[38]  Instead the court relied on old precedent and applied it without taking into account how much the health care industry has changed over the decades.  Currently the health care industry is experiencing even more changes with the economic crisis and the health care reform.  In today's economy hospitals are faced with more obstacles to overcome such as increasing numbers of uninsured individuals, high state deficits, and plummeting reimbursement rates.[39] A recent study of hospitals in 28 states indicates that more than half of them reported negative operating margins.[40]  The tax exemption used to be a way for nonprofit hospitals to escape the financial burdens of providing uncompensated or discounted care. Provena has challenged the purpose underlying the tax exemption for nonprofit hospitals and has left the future of health care in Illinois uncertain.[41] What is clear from the decision is that bad debt resulting from uncompensated care cannot be taken into account when calculating charity care.  The detrimental affect this will have on nonprofit hospitals is yet to be seen.  However, given recent studies indicating that reimbursement rates are lower than ever before and bad debt is increasing will surely have some effect on hospital financing.[42] By creating a difficult standard to meet that does not take into account the current nature of the health care industry the court has made the future of charitable care seem bleak. This decision while attempting to strengthen the need for charity care has in fact undermined it by making it difficult for hospitals to qualify for tax exemption which is essential to providing free care.  Now hospitals will have even less money to provide for those individuals that need it the most.


[1] Provena Covenant Medical Center v. Department of Revenue, 2010 WL 966858, 10 (2010).
[2] Joseph Hylak-Reinholtz, The Charitable Purpose Exemption and Illinois Hospitals: Its Time to Retire the Methodist Test, 21 DCBA Brief 39, 43-44 (2009).
[3] Board of Certified Safety Professionals of the Americas, Inc. v. Johnson, 112 Ill.2d 542 (1986).
[4] Provena, supra note 1, at 9. 
[7] Katie Stewart, Property Tax Exemptions for Nonprofit Hospitals: The Implications of Provena Medical Center v. Department of Revenue, 62 Tax Law 1157, 1163 (2009).
[8] Methodist Old Peoples Home v. Korzen, 39 Ill.2d 149, 156-57 (1968). 
[9] Id.
[10] Id.
[11] Provena, supra note 1, at 10.
[12] Id. at 11.
[13] Id.
[14] Id.
[15] Id. at 3-4.
[16] Id. at 14.
[17] Id.
[18] Id.
[19] Id. at 15.
[20] Id.
[21] Id.
[22] Id. at 16.
[23] Id.
[24] Robert S. McWhorter, The Industries Most at Risk in Bankruptcy: Legal and Financial Experts on What to Expect, Avoiding Financial Trouble, and Thoughts on the Future, 2008 WL 5689292, 109 (2008). 
[25] Id.
[26] Id.
[27] Under Payment for Medicare and Medicaid Fact Sheet, American Hospital Association. (last visited March 3, 2010).
[28] Id.
[29] Id.
[30] Id.
[32] Joseph Hylak-Reinholtz, The Charitable Purpose Exemption and Illinois Hospitals: Its Time to Retire the Methodist Test, 21 DCBA Brief 39, 42 (2009).
[33] Brief of American Hospital Association as Amici Curiae Supporting Plaintiffs, Provena Covenant Medical Center v. Department of Revenue, 2010 WL 966858, 10 (2010) (No. 2006-MR-000597).
[34] Id. at 20.
[35] Id.
[36] Id.
[37] Id.
[38] Hylak-Reinholtz, supra note 32, at 43-44.
[39] McWhorter, supra note 24, at 109.
[40] Hospital Margins Sink with Economy,, available at
[41] Brief of American Hospital Association, supra note 33, at 19. 
[42] McWhorter, supra note 24, at 109.