Now this is interesting: (Some) Illinois hospitals losing tax-exempt status

Safety-net providers and urban teaching hospitals might come out ahead if one could trade the nonprofit exemption for a functional Medicaid system.

From the Chicago Tribune and AP.

The decisions were announced to the hospitals Tuesday morning, Revenue Department officials told The Associated Press. They follow last year’s Illinois Supreme Court ruling that found a central Illinois hospital wasn’t doing enough free or discounted treatment of the poor to qualify for an exemption, costing it $1.2 million in local property tax payments per year.

In addition to Prentice Women’s Hospital [a Northwestern facility] in Chicago’s Gold Coast neighborhood, the revenue department now has decided that Edward Hospital in Naperville and Decatur Memorial Hospital in Decatur don’t quality for property tax exemptions. The hospitals have 60 days to ask an administrative law judge to review the decisions. In Illinois, property taxes are collected by county governments, and the Department of Revenue decides which institutions are eligible for tax exemptions.

In a written statement, Illinois Hospital Association President Maryjane A. Wurth said she was disappointed and “deeply concerned” by the Revenue Department’s preliminary rulings, and worries that the hospitals will be forced to reduce services and increase costs for patients and employers.

It’s neither surprising nor inappropriate that state policymakers are holding hospitals to account. A large research literature documents that while some nonprofit hospitals provide great community benefit, many provide very little. Many nonprofit hospitals implicitly or explicitly decline to treat poor people, determine everything from their location to their service mix to maximize economic gain, even if this gain is not, strictly speaking, distributed as profit. Many of these same hospitals perform little medical research or other valuable activities that might merit implicit or explicit state support.

As someone who cares about the future of the medical safety-net and urban teaching hospitals, I’d trade the loss of nonprofit prerogatives for fair and timely Medicaid reimbursement. Our hospital, and others that really carry the load, is being badly damaged by Medicaid’s low reimbursement rates and other program problems. Unfortunately this will not get any better in a state experiencing very serious budget deficits and governance difficulties.

I suspect that we are heading for the mother of local political fights. I can’t imagine that these hospitals–and others in the crosshairs–will take this lightly.

Author: Harold Pollack

Harold Pollack is Helen Ross Professor of Social Service Administration at the University of Chicago. He has served on three expert committees of the National Academies of Science. His recent research appears in such journals as Addiction, Journal of the American Medical Association, and American Journal of Public Health. He writes regularly on HIV prevention, crime and drug policy, health reform, and disability policy for American Prospect,, and other news outlets. His essay, "Lessons from an Emergency Room Nightmare" was selected for the collection The Best American Medical Writing, 2009. He recently participated, with zero critical acclaim, in the University of Chicago's annual Latke-Hamentaschen debate.

13 thoughts on “Now this is interesting: (Some) Illinois hospitals losing tax-exempt status”

  1. Harold,

    Of course they won’t. But the not-for-profit status carries certain obligations with it, and if they aren’t meeting their obligations, that’s tough. They’re supposed to have accountants to track that sort of thing.

    If I were the ALJ, I’d offer them an out: sign a binding agreement to provide the care they failed to provide over the next X years, and pay for the annual audits to determine that they are adhering to the agreement. Follow the settlement terms and all’s forgiven. Fail, and the entire tax bill is due immediately.

    Of course, local governments are even more crunched than State governments now, and I can’t see them passing on a recurring $1.2M windfall.

    The swap of NFP exemptions for fair and timely Medicaid reimbursement would be an interesting cost-benefit analysis. How would that affect a University-owned hospital? County- or State-owned hospitals? If allowed to maintain their NFP exemptions they would have a serious advantage over private NFPs, if any remain. They would benefit from the Medicaid reforms and keep their tax-exempt status. Talk about having your cake and eating it…

  2. The other obvious place they could look to get the $1.2 million is to stop providing reduced-cost or no-cost services at all, or in the amount of $1.2 million a year.

    Our system of property tax and property tax exemptions is pretty incoherent: in some cases the benefit of the nonprofit’s services is local, and sort of matches the jurisdictional lines of the communities asked to forgo revenues, in some cases the nonprofit may be some rich man’s museum of old Cord motorcars, where the benefit is spread over other old Cord aficionados nationwide (and THEY are a charitable class, right?!) or, more sympathetically, a charity distributing private aid in Central America. In either case, it’s not clear that, say, Fresno has a charitable interest in these places.

    Some ‘nonprofit’ hospitals are awfully cozy, and pay high salaries and put local grandees on the board. Not terribly sympathetic, if they are refraining from paying taxes to a strapped jurisdiction. The tax deduction for charitable donations has similar problems – again, museum for old Cord motorcars, why am I paying higher taxes so some guy can have this fun toy?

  3. “…,why am I paying higher taxes so some guy can have this fun toy?”

    Why am I paying higher taxes so you can get the kind of government spending you want?

  4. I have a great deal of sympathy for nonprofit hospitals, having worked at one, but (iirc) at many nonprofit hospitals, the total value of the quantifiable community benefits (using the Catholic Health Association’s methodology) they provide doesn’t exceed the (estimated) value of their tax exemptions.

    I don’t believe, though, that the IL hospitals are at risk of losing their 501(c)(3) status – only their state tax exemptions.

  5. dave schutz wrote, “Our system of property tax and property tax exemptions is pretty incoherent…”

    Right. There shouldn’t be property tax exemptions for being a non-profit or a church or…that just encourages gaming of the system.

    Improvements of nonprofits could be taxed lightly or not at all, but the land should still be taxed. Of course that applies to property taxes in general, not just those possibly falling on nonprofits.

  6. “…hospitals will be forced to reduce services and increase costs for patients and employers. ”
    Isn’t reducing services what is triggering the loss of tax-exempt status? If they could increase their services to the poor, they could retain the tax-free status and reduce costs instead. How hard is that to figure out?

  7. In some situations, all “not-for-profit” means is “we’ve solved the agency problem by not being accountable to anyone”. If you don’t have shareholders at least demanding dividends, then you can pretty much run your business as a fiefdom (except without the levies).

    It’s sad to think that the moral decay of the for-profit business world has infected the not-for-profits, but it seems likely.

  8. The most “interesting” part of the article was this line. “There was no dollar amount or percentage of revenue used as a threshold.”

    I’ve worked enough with regulators to know that when there’s no objective standard, there will be problems. I’m perfectly fine with any particular institution being judged as a for-profit enterprise if there’s some comprehensible basis for the judgment, but the standard should be set before the institution is punished for not meeting it.

  9. SamChevre – Colbert said: “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”
    The functional standard in these cases is quite clear: least hissing.

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