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Health Care Law
The newsletter of the ISBA’s Section on Health Care Law

June 2010, vol. 26, no. 4

Provena Covenant Medical Center v. The Department of Revenue: Hospital property tax exemptions and the charitable use requirement

On March 18, 2010, the Illinois Supreme Court rendered its decision in the property tax appeal filed by Provena Covenant Medical Center (PCMC) holding that PCMC was not entitled to a property tax exemption under section 15–65 of the Property Tax Code, 35 ILCS 200/15–65.1 Section 15-65 provides, in relevant part, as follows:

All property of the following is exempt when actually and exclusively used for charitable or beneficent purposes, and not leased or otherwise used with a view to profit:

(a) Institutions of public charity.2

The five members of the supreme court participating in the decision unanimously ruled that Provena failed to demonstrate that it satisfied the statutory requirement that it was an “institution of public charity.” A plurality of the court further ruled that the hospital failed to demonstrate that it satisfied the constitutional and statutory requirement that the subject property was “actually and exclusively used for charitable or beneficent purposes.” This article explores the requirements necessary to establish a property tax exemption by a nonprofit hospital and the unresolved issues that are expected to continue to persist under Illinois law.

Summary of the Facts

Provena Hospitals owns and operates six hospitals including PCMC. In 2002, Provena Hospitals, the legal entity owning the subject property, applied for a property tax exemption with respect to all 43 parcels which were a part of the PCMC complex, the division that actually used the property under section 15-65(a). Ultimately, the Illinois Department of Revenue denied the exemption application and Provena sought judicial review by filing suit in the circuit court. The circuit court disagreed with the Department of Revenue, holding that Provena Hospitals was entitled to the exemption on both charitable and religious grounds.3 The appellate court subsequently reversed.4 Thereafter, the Illinois Supreme Court agreed to hear the case.5

Provena Hospitals is the relevant entity for purposes of the “charitable ownership” requirement and PCMC is the relevant unit for purposes of the “charitable use” requirement. PCMC maintains between 260-268 licensed beds. It admits 10,000 inpatients annually and 100,000 outpatients. The emergency room treats 27,000 visitors every year. In 2002, Provena Hospitals realized a net loss of $4.8 million on revenues of $713.9 million. PCMC realized a net profit of $2.1 million on revenues of $113.4 million. PCMC waived charges of $1.7 million for 302 patients under its sliding-scale charity care program. The cost of the services provided under the charity program was $831,000 (47 percent of the waived charges) which was $268,000 less than the value of the property tax exemption. The supreme court calculated the cost of the charity care program to be 0.723 percent of PCMC’s revenues.

Institutions of Public Charity
(Charitable Ownership)

In its Provena decision, the Illinois Supreme Court utilized the five criteria established in the case of Methodist Old Peoples Home v. Korzen, as the distinctive characteristics of a charitable institution:6

(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.

The supreme court stated that a determination of whether a hospital is a “charitable institution” requires that the entity satisfy certain conditions which must be determined on a case-by-case basis.7 The court did not address the question of whether all five factors are required to be present in order to satisfy the statutory requirement of ownership by a “charitable institution”. However, it appears as though the court would have accepted something less than all of the five criteria as being sufficient.8

The court found that Provena Hospitals was not a “charitable institution” because it satisfied only two of the five criteria. Provena Hospitals did not have shareholders (#1) and was not operated for private inurement (#4).9 However, since the hospital derived over 95 percent of its revenues from providing medical services for a fee, the court reasoned that it did not “derive its funds mainly from private and public charity” and failed the second criteria.10 Additionally, the court held that Provena Hospitals failed to establish by clear and convincing evidence that it “dispenses charity to all who need it and apply for it” (#3) or that it did not “place any obstacles in the way of those who need and would avail themselves of the charitable benefits” (#5).11 The court agreed with the Department of Revenue that Provena Hospitals, the corporate entity and the true owner of the real estate parcels, did not introduce sufficient evidence of its charitable expenditures to establish that it was a charitable institution.12

Actually and Exclusively Used for Charitable or Beneficent Purposes (Charitable Use)

The supreme court described the constitutional and statutory requirement of “used exclusively for . . . charitable purposes” to mean that charitable or beneficent purposes are the primary ones for which the property is utilized.13 A “charitable or beneficent purpose” was defined as “a gift . . . for the benefit of an indefinite number of persons . . . by relieving their bodies from disease, suffering or constraint . . . or otherwise lessening the burdens of government.”14 While the court did acknowledge that PCMC’s operations may have reduced the burdens faced by the federal and state governments in providing health care, PCMC failed to establish any lessening of the burdens of the specific local units of government that stood to gain by the collection of the local property taxes.15 The court stated that the hospital was, “required to demonstrate that its use of the property helped alleviate the financial burdens faced by the county or at least one of the other entities supported by the county’s taxpayers.”16 The court further noted that, even if there was proof that PCMC provided the types of service that lessened the burdens of local government, PCMC would be required to prove that the “terms of service” also relieved the burdens of local government. The fee-for-service arrangement utilized by PCMC would not meet this additional “terms of service” requirement. The court stated that “services extended . . . for value received . . . do not relieve the [s]tate of its burden.”17

The court ruled that PCMC failed to meet its burden of showing that the property was “actually and exclusively used for charitable or beneficent purposes” as required by Section 15-65. The property was primarily devoted to the care and treatment of patients in exchange for compensation through private insurance, Medicare and Medicaid, or direct payment from the patient or the patient’s family.18 The court determined that the number of uninsured patients receiving free or discounted care and the dollar value of the care they received were de minimus.19

PCMC contended that the bad debts that it incurred should be considered in measuring the dollar-value of charity care. The court acknowledged that PCMC did treat all patients requesting services without regard to the person’s ability to pay for the services. However, because PCMC subsequently sought payment for these services, the court reasoned that, “[a]s a practical matter, there was little to distinguish the way in which Provena Hospitals dispensed its ‘charity’ from the way in which a for-profit institution would write off bad debt.”20 In light of this ruling, it is now clear that the Illinois courts will not consider hospital bad debts as any form of charity for purposes of exemption under the Illinois Property Tax Code.

PCMC contended that any discounts from “published rates” should be viewed as charity care.21 The court rejected this argument on the grounds that the “published rates” included a gross profit margin. The court reasoned that discounts of between 25 percent-50 percent off of these “published rates” would still allow the PCMC to cover its costs of services.22 Further, the court observed that the hospital recouped these discounts through “cross-subsidies” from the higher fees paid by insured patients.23 The court held that, “ [i]t is essential to a gift that it should be without consideration. . . When patients are treated for a fee, consideration is passed. The treatment therefore would not qualify as a gift. If it were not a gift, it could not be charitable.”24 In the court’s view, any consideration received was full consideration and, therefore, there was no element of a gift and no charity.

PCMC next contended its treatment of Medicare and Medicaid patients should be characterized as charity care because the payments received for treating such patients do not cover the full costs of care.25 The court rejected this argument on the grounds that participation in Medicare and Medicaid is optional, that these programs generate a reliable stream of revenue, allow the hospital to generate income from potentially underutilized hospital resources, and produce favorable tax treatment under federal law.26 Similar to other discounted services, the court observed that gifts are gratuitous and that hospitals do not serve Medicare and Medicaid patients gratuitously.

PCMC argued that “charitable use” should include the broader federal tax code concept of “community benefits.” PCMC asserted that the subsidies it provided for, among other services, ambulance service, a crisis nursery, graduate medical education, behavioral health services, and emergency services training constituted “community benefits” which should be characterized as “charitable use” for purpose of the section 15-65.27 The court also rejected this argument stating that community benefit is not the test.28 The court reasoned that private, for-profit companies frequently offer comparable services as a benefit for employees and customers and as a means for generating publicity and goodwill for the organization.29

The court did recognize that the four parcels used by the Crisis Nursery constituted the strongest claim for being used exclusively for charitable purposes.30 However, since Provena Hospitals failed the initial requirement of being a “charitable institution,” the claim for a property tax exemption must fail even if these four parcels were used exclusively for charitable purposes.

Provena Hospital’s final argument, that it qualified for a religious exemption under 35 ILCS 200/15–40(a)(1), was likewise unsuccessful. The court observed that the property in question must be used exclusively for religious purposes and that advancing religion was not identified as the corporation’s dominant purpose. In this case, the primary purpose for which the property was used was providing medical care to patients for a fee.31

In a separate opinion, Justice Burke, writing for herself and Justice Freeman, concurred with the plurality opinion that Provena Hospital failed to establish that it was a charitable institution under section 15-65 or that it qualified for a religious exemption under section 15-40.32 However, Justice Burke dissented from the plurality opinion with respect to the issue of charitable use. The plurality noted that the “dollar value of the care” provided was “de minimus.” The dissent the rejected the concept of a “quantum of care requirement and monetary threshold” as conditions for evaluating charitable use.33 The dissent believed that these were matters best left to the legislative branch. Justice Burke relied upon decisions from the Supreme Courts of Michigan and Vermont in rejecting a “quantum of care” requirement on the grounds that such a standard would be both arbitrary and unworkable.34 A judicially-mandated “quantum of care” requirement would create, she opined, chaotic uncertainty and infinite confusion and there would be neither certainty nor uniformity in the application of the statute.35

Justice Burke also disagreed with the plurality’s conclusion that Provena was “required to demonstrate that its use of the property helped alleviate the financial burdens faced by the county or at least one of the other entities supported by the county’s taxpayers.” The dissent stated that alleviating some burden on government is the reason underlying the tax exemption on properties, not the test for determining eligibility and that Provena did demonstrate that it alleviated some burden on government. 36 Finally, Justice Burke concluded that the discussion of charitable use in the Provena decision did not command a majority of the court and, therefore, is not binding under the doctrine of stare decisis.37

Analysis of the Provena decision

The Illinois Supreme Court’s Provena decision is the latest entry into a long-running debate regarding the appropriate tax treatment of nonprofit hospitals. In 2006, the Joint Committee on Taxation, a nonpartisan committee of Congress, estimated that nonprofit hospitals received tax benefits of $12.6 billion measured in 2002 dollars. 38 In support of the recent health care reform legislation, the federal government reports that there was $2.2 billion of uncompensated health care services provided to residents of Illinois.39 In short, there are literally billions of dollars at stake in terms of both tax relief provided to nonprofit hospitals and the charity care returned to the community by these nonprofit hospitals. The precise measurement of these costs and benefits will undoubtedly become a central aspect of this continuing debate.

While the Illinois Supreme Court enunciated five distinctive characteristics of a “charitable institution,” the application of these five characteristics to an Illinois private, nonprofit hospital boils down to a single question: Did the hospital demonstrate through its charitable expenditures that it provided charity care to all in need who apply for it? 40 If the hospital can prove that it is dispensing charity, then any potential obstacles to exemption would be insignificant as the needy are successfully requesting and receiving charity care.

There are at least four aspects of the Provena plurality opinion discussing “charitable use” that are expected to merit further discussion and analysis:

1. The “lessening of the burdens of government” requirement is reduced to a quid pro quo equation – the value of charity care to the local units of government otherwise losing the tax revenues must be equal to or greater than the tax savings realized by the hospital;

2. The characterization of all hospital bad debt as equivalent to ordinary for-profit corporate bad debt and devoid of any charity element;41

3. The characterization of all hospital discounted services as equivalent to ordinary discounts in a bargained-for exchange and devoid of any charity element; 42

4. The rejection of the “community benefits” standard used to measure charity care and the adoption of the more stringent standard of a free medical services requirement.43

At a minimum, these four issues will continue to be discussed as the larger question of tax relief for nonprofit hospitals becomes more focused. ■


Brian J. McKenna is an Attorney, a Certified Public Accountant and Chartered Financial Analyst on the faculty at Governors State University. He is a former IRS Agent and General Tax Attorney-Litigation for Santa Fe Railway. Nancy K. McKenna is an Attorney and a Registered Nurse on the faculty at Saint Xavier University. She is the former Vice President and Deputy General Counsel for Provena Health System.

1. Provena Covenant Med. Ctr. v. Dep’t of Revenue, 2010 Ill. LEXIS 289 (Ill. Sup., Mar. 18, 2010).

2. Article IX, section 6, of the 1970 Illinois Constitution (lll. Const. 1970, art. IX, §6) provides that the General Assembly may exempt from taxation property “used exclusively for . . . charitable purposes.” Section 15-65 executes the constitutional grant to exempt property but imposes the additional requirement that the property must be owned by a “charitable institution”. The Illinois Supreme Court’s reading of the “charitable use” requirement involves both a statutory interpretation of section 15-65 of the Property Tax Code and also section 6 of article IX of the 1970 Illinois Constitution.

3. Provena Covenant Med. Ctr v. Dep’t of Revenue, No. 2006-MR-597 (Ill. Cir. Ct. July 20, 2007). On August 8, 2007 the trial court issued its written order and judgment. See 2007 WL 4913149 (Ill. Cir. 2007).

4. Provena Covenant Med. Ctr v. Dep’t of Revenue, 384 Ill. App. 3d 734, 894 N.E.2d 452 (4th Dist. 2008).

5. Provena Covenant Med. Ctr. v. Dep’t of Revenue, 229 Ill. 2d 694, 900 N.E.2d 1126 (2008).

6. Methodist Old Peoples Home v. Korzen, 39 Ill. 2d 149, 233 N.E.2d 537 (1968). While the Provena court interpreted Methodist Old Peoples Home, as establishing a five criteria standard, the Third District Appellate Court read the case as establishing a six-factor test: “ (1) it is set up for the benefit of an indeterminate number of persons; (2) it has no capital, capital stock or shareholders and earns no profits or dividends; (3) it derives its funds primarily from public and private charity and holds those funds in trust for the objectives and purposes expressed in the charter; (4) it dispenses charity to all who need and apply for it, does not provide gain or profit in the private sense to any person connected with it, and does not appear to place obstacles of any character in the way of those who need and would avail themselves of the charitable benefits it dispenses; (5) the property is actually and factually used exclusively for the charitable purpose, regardless of any intent expressed in the organization’s charter or bylaws; and (6) charity use is the primary purpose for which the property is used and not a secondary or incidental purpose.” Riverside Medical Center v. Dep’t of Revenue, 342 Ill.App.3d 603, 607, 759 N.E.2d 361,365 (3d Dist. 2003).

7. Provena, 2010 Ill. LEXIS 289, at *30 (Ill. Sup., Mar. 18, 2010).

8. The court recognized that private nonprofit hospitals have qualified as a charitable institution under the Illinois Property Tax Code. See People ex rel. Cannon v. Southern Illinois Hospital Corp., 404 Ill. 66, 69-70, 88 N.E.2d 20, 21-22 (1949), but that there is no blanket exemption for hospitals. See Coyne Electrical School v. Paschen, 12 Ill. 2d 387, 394, 146 N.E.2d 73, 77 (1957). These comments would be incongruous with criteria #2 which requires that the hospital “derives its funds mainly from private and public charity.” If this criterion were literally applied to every private nonprofit hospital in Illinois, it would create a blanket denial of the exemption as these hospitals derive their funds primarily from the delivery of medical services.

9. Provena, 2010 Ill. LEXIS 289, at *30-31.

10. Id. at *33

11. Id. at *33-34

12. Id. at *34.

13. Id. at *35.

14. Id. at *36 quoting Methodist Old Peoples Home v. Korzen, 39 Ill. 2d 149, 233 N.E.2d 537 (1968).

15. Id. at *38-39.

16. Id. at *39.

17. Id. at *39-40 quoting the appellate court in Provena Covenant Med. Ctr v. Dep’t of Revenue, 384 Ill. App. 734, 744, 894 N.E.2d 452, 462 (4th Dist. 2008) which, in turn, quoted Willows v. Munson, 43 Ill. 2d 203, 208, 251 N.E.2d 249, 252 (1969).

18. Id. at *41.

19. Id.

20. Id. at *42.

21. Id. at *45.

22. Id.

23. Id.

24. Id. at *47.

25. Id.

26. Id. at *47-48.

27. Id. at *49-50.

28. Id. at *50.

29. Id. at *53.

30. Id. at *58-59.

31. Id. at *61-62.

32. Id. at *64.

33. Id. at *65.

34. Wexford Medical Group v.City of Cadillac, 474 Mich. 192, 713 N.W.2d 734 (2006); Medical Center Hospital of Vermont, Inc. v. City of Burlington, 152 Vt. 611, 566 A.2d 1352 (1989).

35. Id. at *70.

36. Id. at *70-71.

37. Id. at *71.

38. The following values of exemptions for nonprofit hospitals and their supporting organizations in 2002: $2.5 billion in federal income tax, $1.8 billion in federal bond financing, $1.8 billion in federal charitable contributions, $500 million in state corporate income tax, $2.8 billion in state and local sales taxes, and $3.1 billion in local property tax. See Congressional Budget Office, Nonprofit Hospitals and Tax Arbitrage (Washington, D.C.: Dec. 2006).

39. <>.

40. Virtually every Illinois private nonprofit hospital will satisfy both criteria #1 (no capital stock) and criteria #4 (no private inurement) while failing criteria #2 (charity as the primary source of revenues). This leaves only criteria #3 (dispensing charity) and criteria #5 (no obstacles). These two requirements can be easily collapsed into a single requirement. The Riverside Medical Center Court interpreted Methodist Old Peoples Home as requiring six-factors but it combined the Provena court criteria (#3 and #5) into a single factor (# 4).

41. Hospital bad debt typically arises from two sources: insured patients who do not pay their co-pays and uninsured patients. Challenges Facing the Hospital Revenue Cycle- Bad debt, charity, and collections top the list , Health Care Collector: The Monthly Newsletter for Health Care Collectors, Vol. 23, No. 9 (Feb. 2010) While the bad debts incurred with respect to the insured patients resembles corporate bad debts, the bad debts incurred from uninsured patients are distinct. Hospitals are required to treat all patients who present and are in need of medical services irrespective of their ability to pay for these services. 210 ILCS 80/1; 210 ILCS 70/1; 42 U.S.C. § 1395dd. There is no comparable requirement for any for-profit business and virtually every for-profit business would only agree to provide trade credit to uninsured patients if they were proven to be credit-worthy. A recent IRS survey of 544 nonprofit hospitals reported that 44 percent of the hospitals include bad debt in the calculation of uncompensated care. IRS Exempt Organizations (TE/GE) Hospital Compliance Project Final Report, p.98, (Feb. 2009) available at <,,id=203109,00.html>. Clearly, a case can be made for the inclusion of some bad debts in the determination of charity care.

42. Hospital discounted services, also known as shortfalls, arise in a number of ways. For example, a discount offered to a private insurance company clearly resembles the ordinary discounts that might be found in the bargained-for exchange. These discounts hardly resemble any form of charity. However, discounts offered to uninsured patients could be viewed as a below-market exchange which is part charity and part valuable consideration. The middle-ground in the discounted services debate pertains to discounts offered under federal and state programs. PCMC reported a Medicare shortfall of $7.4 million and a Medicaid shortfall of $3.1 million. The IRS survey of 544 nonprofit hospitals reported that 51 percent of the hospitals include discounted services in the calculation of uncompensated care. Supra, n. 11.

43. The “community benefit” standard was developed by the Internal Revenue Service in 1969 as a more comprehensive measure of the services that nonprofit hospitals provide to a community. J.Colombo, Hospital Property Tax Exemption in Illinois: Exploring the Policy Gaps, 37 Loy. U. Chi. L.J. 493, 496-497 (2006). Illinois has adopted this standard in its community hospital reporting requirements. 210 ILCS 76/1 et seq. While the plurality opinion rejected this more comprehensive approach, it is probable that this will continue to be the measure of hospital benefits under federal law and any legislative amendment in Illinois would address how to define and calculate charity care.