Provena Covenant Med. Ctr. v. The Dep't Of Revenue

Decision Date18 March 2010
Docket NumberNo. 107328.,107328.
Citation925 N.E.2d 1131,236 Ill.2d 368,339 Ill.Dec. 10
PartiesPROVENA COVENANT MEDICAL CENTER et al., Appellants,v.The DEPARTMENT OF REVENUE et al., Appellees.
CourtIllinois Supreme Court

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Patrick S. Coffey, Timothy M. Maggio and Hugh S. Balsam, of Locke Lord Bissell & Liddell LLP, Chicago, for appellants.

Lisa Madigan, Attorney General, Springfield (Michael A. Scodro, Solicitor General, and Evan Siegel, Assistant Attorney General, Chicago, of counsel), for appellees.

James A. Serritella, James C. Geoly, Susan M. Horner and Susan J. Overbey, of Burke, Warren, MacKay & Serritella, P.C., Chicago (Lisa J. Gilden, Washington, D.C., of counsel), for amici curiae Illinois Catholic Health Association et al.

Mark D. Deaton and Kathleen T. Pankau, Naperville, for amicus curiae Illinois Hospital Association.

Catherine E. Stetson and Jessica L. Ellsworth, of Hogan & Hartson LLP, and Melinda Reid Hatton and Maureen Mudron, all of Washington, D.C., for amicus curiae American Hospital Association.

Alan Alop, Miriam Hallbauer and Caroline Chapman, all of Chicago, for amicus curiae Legal Assistance Foundation of Metropolitan Chicago.

OPINION

Justice KARMEIER delivered the judgment of the court, with opinion.

The central issue in this case is whether Provena Hospitals established that it was entitled to a charitable exemption under section 15-65 of the Property Tax Code (35 ILCS 200/15-65 (West 2002)) for the 2002 tax year for various parcels of real estate it owns in Urbana. The Director of Revenue determined that it had not and denied the exemption. Provena Hospitals then filed a complaint for administrative review in the circuit court of Sangamon County. Following a hearing, the circuit court determined that Provena Hospitals was entitled to both a charitable and religious exemption (35 ILCS 200/15-40(a)(1) (West 2002)). The Department of Revenue appealed. The appellate court found the Department's arguments to be meritorious and reversed the judgment of the circuit court. 384 Ill.App.3d 734, 323 Ill.Dec. 685, 894 N.E.2d 452. We granted Provena Hospitals' petition for leave to appeal. 210 Ill.2d R. 315. We subsequently allowed the American Hospital Association, the Illinois Hospital Association, and the Catholic Health Association of the United States and related organizations to file friend of the court briefs in support of Provena Hospitals. We also granted leave to the Center for Tax and Budget Accountability and the Legal Assistance Foundation of Metropolitan Chicago to file friend of the court briefs in support of the Department of Revenue. For the reasons that follow, we now affirm the judgment of the appellate court upholding the decision by the Department of Revenue to deny the exemption.

BACKGROUND

The appellant property owner and taxpayer in this case is Provena Hospitals. Provena Hospitals is one of four subsidiaries of Provena Health, a corporation created when the Servants of the Holy Heart and two other groups affiliated with the Roman Catholic Church merged their health-care operations.1 Provena Hospitals was formed through the consolidation of four Catholic-related health-care organizations and is organized as a not-for-profit corporation under the laws of Illinois. The articles of consolidation for Provena Hospitals state that the purpose of the corporation is to “coordinate the activities of Provena Hospitals' subsidiaries or other organizations that are affiliated with Provena Hospitals as they pursue their religious, charitable, educational and scientific purposes” and “to offer at all times high quality and cost effective healthcare and human services to the consuming public.”

Provena Hospitals is exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code (26 U.S.C. § 501(c)(3) (1988)). The Illinois Department of Revenue has also determined that the corporation is exempt from this state's retailers' occupation tax (see 35 ILCS 120/1 et seq. (West 2002)), service occupation tax (see 35 ILCS 115/1 et seq. (West 2002)), use tax (see 35 ILCS 105/1 et seq. (West 2002)), and service use tax (see 35 ILCS 110/1 et seq. (West 2002)). In addition, the Illinois Attorney General has concluded that the corporation “meets the qualifications of Section 3(a) of ‘An Act to Regulate Solicitation and Collection of Funds for Charitable Purposes' [225 ILCS 460/3(a) (West 2002) ] and Section 4 of ‘The Charitable Trust Act [760 ILCS 55/1 (West 2002) ] and constitutes a religious organization exempt from filing annual financial reports under those statutes.

Provena Hospitals owns and operates six hospitals, including Provena Covenant Medical Center (PCMC), a full-service hospital located in the City of Urbana. PCMC was created through the merger of Burnham City Hospital and Mercy Hospital. It is one of two general acute care hospitals in Champaign/Urbana and serves a 13-county area in east central Illinois. The services it provides include a 24-hour emergency department; a birthing center; intensive care, neonatal intensive care, and pediatrics units; surgical, cardiac care cancer treatment, rehabilitation and behavioral health services; and home health care, including hospice. It offers case management services to assist older persons to remain in their homes and runs various support groups and health-related classes. It also provides smoking cessation clinics and screening programs for high cholesterol and blood pressure as well as pastoral care.

PCMC maintains between 260 and 268 licensed beds. Each year it admits approximately “10,000 inpatients and 100,000 outpatients.” Some 60% of its inpatient admissions originate through the hospital's emergency room, which treats some 27,000 visitors annually.

PCMC provides an emergency department because it is required to do so by the Hospital Emergency Service Act (210 ILCS 80/0.01 et seq. (West 2002)). Where emergency room services are offered, a certain level of health care is required to be provided to every person who seeks treatment there. That is so as a matter of both state (210 ILCS 80/1 (West 2002); see also 210 ILCS 70/1 (West 2002)) and federal (42 U.S.C. § 1395dd) law.

Staffing PCMC are approximately 1,000 employees, 400 volunteers and 200 physicians. The physicians are not employed or paid by the hospital. They are merely credentialed to provide services there in exchange for paying $50 per year in dues to the hospital's library fund, and agreeing to serve on hospital committees and to be on call to attend patients without their own physicians. With respect to the emergency department, PCMC contracts with a for-profit private company to provide the necessary physicians. The company, not the hospital, bills patients and any third-party payors directly for emergency room services. The company likewise pursues payment of those bills independently from PCMC.

Just as PCMC relies on private physicians to fill its medical staff, it utilizes numerous third-party providers to furnish other services at the hospital. Among these are pharmacy, laundry, MRI/CT and lab services, and staffing for the rehabilitation and cardiovascular surgery programs. The company providing lab services is one of the businesses owned by Provena Enterprises, a Provena Health subsidiary. It is operated for profit.

Provena Hospitals' employees do not work gratuitously. Everyone employed by the corporation, including those with religious affiliations, are paid for their services. Compensation rates for senior executives are reviewed annually and compared against national surveys. Provena Health “has targeted the 75th percentile of the market for senior executive total cash compensation.”

According to the record, PCMC's inpatient admissions encompass three broad categories of patients: those who have private health insurance, those who are on Medicare or Medicaid, and those who are “self pay (uninsured).” PCMC has agreements with some private third-party payers which provide for payment at rates different from “its established rates.” The payment amounts under these agreements cover the actual costs of care. The amounts PCMC receives from Medicare and Medicaid are not sufficient to cover the costs of care. Although PCMC has the right to collect a certain portion of the charges directly from Medicare and Medicaid patients and has exercised that right, there is still a gap between the amount of payments received and the costs of care for such patients. For 2002, PCMC calculated the difference to be $7,418,150 in the case of Medicare patients and $3,105,217 for Medicaid patients.

PCMC was not required to participate in the Medicare and Medicaid programs, but did so because it believed participation was “consistent with its mission.” Participation was also necessary in order for Provena Hospitals to qualify for tax exemption under federal law. In addition, it provided the institution with a steady revenue stream.

During 2002, Provena Hospitals' “net patient service revenue” was $713,911,000, representing approximately 96.5% of the corporation's total revenue. No findings were made regarding the precise source of the remainder of its revenue. Provena Hospitals' “expenses and losses” exceeded its “revenue and gains” during this period by $4,869,000. In other words, the corporation was in the red. The following year, this changed. The corporation's revenue and gains exceeded its expenses and losses by $10,548,000.

Of Provena Hospitals' “net patient service revenue” for 2002, $113,494,000, or approximately 16%, was generated by PCMC. Unlike its parent, PCMC realized a net gain of income over “expenses and losses” of $2,165,388 for that year. This surplus existed even after provision for uncollectible accounts receivable (i.e., bad debt) in the amount of $7,101,000. Virtually none of PCMC's income was derived from charitable contributions. The dollar amount of “unrestricted donations”...

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