VAN BUREN COUNTY HOSP. v. Bd. of Review

• Citation: 650 N.W.2d 580
• Decision Date: 05 September 2002
• Docket Number: No. 00-1535.,00-1535.
• Parties: VAN BUREN COUNTY HOSPITAL AND CLINICS, Appellant, v. BOARD OF REVIEW OF VAN BUREN COUNTY, Appellee.
• Court: United States State Supreme Court of Iowa

650 N.W.2d 580

VAN BUREN COUNTY HOSPITAL AND CLINICS, Appellant, v. BOARD OF REVIEW OF VAN BUREN COUNTY, Appellee.

No. 00-1535.

Supreme Court of Iowa.

September 5, 2002.

Mark R. Schuling of Brick, Gentry, Bowers, Swartz, Stoltze, Schuling & Levis, P.C., Des Moines, for appellant.

Frank W. Pechacek, Jr. and Michael J. Davenport of Willson & Pechacek, P.L.C., Council Bluffs, for appellee.

J. Kirk Norris, Des Moines, for amicus curiae Iowa Hospital Association.

CADY, Justice.

This appeal requires us to determine whether portions of a county hospital used as a medical clinic for physicians and a clinic for specialists, as well as portions of the hospital property used to provide employment placement services and agricultural health and safety instructional courses, were entitled to an exemption from property taxation pursuant to Iowa Code section 427.1 (1997). The Board of Review of Van Buren County (Board) denied the county hospital's claim for exemption. The Board found the portion of the property in dispute was not devoted to a public or charitable use and was operated with a view to realizing a pecuniary profit. The district court affirmed the Board's decision on judicial review. On our review, we conclude the property was exempt from taxation. We reverse the decision of the district court and remand the case for further consideration.

I. Background Facts and Proceedings.

Van Buren County is located in the southeastern part of Iowa. It is primarily a rural county and is one of Iowa's least populated. Between the 1980 and 1990 census, the population of Van Buren County decreased from 8626 to 7676 citizens. The unemployment rate is relatively high compared to other parts of the state, and most residents work in agricultural-related fields.

The county has one hospital. It is located in the town of Keosauqua and is owned by Van Buren County Hospital. The hospital property has always been exempt from property taxation.

In 1997, the hospital constructed an addition to its existing complex at the cost of $3.5 million. The addition included a new emergency room, a physician's clinic, and a specialist's clinic.

The hospital constructed the clinic areas as part of a plan to employ the three physicians who practiced medicine in the community and provide them with an area to treat and care for their patients in a clinic setting. This plan was conceived after the hospital had been unable to recruit new physicians into the area during the preceding six years. During this time, the number of physicians who utilized the hospital and provided care to the hospital patients decreased. Furthermore, it was anticipated that there would soon only be two physicians at the hospital. The three physicians practiced in a private clinic in Keosauqua, with a satellite clinic in Farmington. There were two other physicians who provided medical services in Van Buren County, but they were not affiliated with the hospital. One physician maintained a satellite clinic in Farmington, and the other maintained a satellite clinic in the town of Milton.

The small number of doctors serving the hospital, including the emergency room, made it increasingly difficult for the hospital to provide adequate care to the residents of the county. The hospital trustees feared the hospital would lose its ability to provide emergency and obstetric services. They also feared the lack of physicians could eventually force them to close the hospital. Without hospital services, residents would be forced to travel twenty to thirty miles to obtain emergency treatment.

In response to the growing crisis facing the hospital, the trustees entered into an agreement with the three physicians in the community to purchase their medical practice and hire them as employees of the hospital. Under the physician-employee agreements entered into by the hospital, the employee doctors were required to provide health care services at both the Keosauqua hospital and the clinic in Farmington. The doctors were responsible for hospital rounds, responding to emergency calls, and sharing on-call responsibilities. The employment agreement further prohibited the doctors from engaging in the private practice of medicine, either independently or with another association of physicians.

Physician compensation was based, in part, on each individual doctor's productivity. In addition to a base salary, each doctor received fifty-five percent of the collected billings in excess of the base salary, with some limitations and adjustments. Despite the presence of incentive compensation, the hospital mandated the employee doctors to provide treatment to individuals in emergency situations, irrespective of the patient's ability to pay. The compensation arrangement was considered very competitive for rural physicians, and the trustees believed the nature of the arrangement would attract other physicians to the area.

In a similar manner, the hospital created a specialty-physician clinic in the hospital. This was done around the same time the local doctors were hired as employees. The decision to create a specialty clinic stemmed from the unavailability of specialty care in the community. Specialists did not frequent the community on a regular basis, if at all. Consequently, residents were forced to travel long distances to receive the necessary care. After failing to successfully attract specialists to the area, the hospital entered into an agreement with the University of Iowa Hospitals and Clinics to provide part-time specialty care to the residents of Van Buren County. Under the agreements, approximately twenty-two specialists provide treatment and consultation services in such areas as cardiology consultation, pulmonary diseases, rheumatology, psychiatric, vascular surgery, hematology/oncology, general orthopedics, general dermatology, and general urology.

The specialists in each care area see patients in varying intervals every month, resembling a clinic-type format. To comply with federal law, the hospital entered into a lease with the University of Iowa at the market rate. Pursuant to the lease agreement, a full-day rental of the clinic space costs $75, while a half-day rental is $50. In general, each specialist visits the hospital from one-half day to three days each month. Furthermore, the hospital maintains control over the specialty clinicians by furnishing supplies and staff. In addition, most patients schedule appointments by directly contacting the hospital. However, the hospital is not involved with the patients' bills and does not receive revenues from the specialty doctors' services.

Around the same time as the clinics were established, the hospital also created a Job Opportunities Department located at the main hospital campus in Keosauqua. The objective of Job Opportunities is to provide employment assistance, placement, counseling, and evaluation for the unemployed residents of Van Buren County. Additionally, Job Opportunities provides clients with access to free computer usage and professional clothing. The clients are primarily mentally and physically disabled and are not charged for the assistance. It is the only employment service bureau in the community. In placing clients, Job Opportunities contracts with entities within and outside of Van Buren County for vocational services. If Job Opportunities does contract with a county other than Van Buren County, Van Buren County remains involved by subcontracting under the original agreement.

The hospital also created a Farm Health and Safety Department located in the Farmington clinic. This division is also associated with the University of Iowa, and serves as an agricultural health and safety center for the southeastern counties of Iowa. The purpose of the agricultural center is to educate agricultural workers and other individuals who must satisfy federal and state safety guidelines on the prevention of work-related injuries, deaths, and illnesses. The center also provides free health screenings to Van Buren County farmers.

Following the construction of the hospital addition, the Van Buren County Assessor granted tax-exempt status to the new emergency room area. However, it assessed those areas of the new addition used as clinics.¹ It also assessed the area of the hospital devoted to the Job Opportunities Department, as well as the Farmington Clinic including the Farm Health and Safety Department.

The hospital timely protested the tax assessments. See Iowa Code § 441.37(1)(c) (permitting protest of assessment by taxpayer). The Board denied the hospital's claims for exemptions and affirmed the assessor's decision. The hospital then appealed to the district court. See id. § 441.38(1) (protesting taxpayer may appeal from board of review's decision to district court).

At the trial before the district court, the hospital administrator explained the reasoning underlying the Board of Trustees' decision to revise the original physical and operational structures of the hospital. In evaluating the community's needs, the Board of Trustees found the hospital lacked essential services that needed to be provided in order for the hospital to remain viable. Similarly, the failure of other small rural county hospitals to address their community's needs had resulted in termination of the facilities. The hospital administrator testified that the hospital's primary responsibility was to satisfy the community's health care needs in a cost-effective manner and in a close proximity. The administrator acknowledged the financial stability of the hospital was a concern to the hospital trustees.

The Board presented two expert witnesses. A certified public accountant concluded the hospital did not qualify for the charitable institution exemption because it provided a minimal amount of charity care. Moreover, the accountant found the hospital enforced an aggressive collections policy, which was indicative of a pecuniary profit motive....