Cases before two states’ high courts are threatening to upend health care centers’ long-held real estate tax exemptions – a prospect that should send a thunderclap of warning through Massachusetts’ mammoth health sector.
The attorney general of Illinois is urging that state’s Supreme Court to uphold a lower court decision that denied a property tax exemption to Urbana’s Provena Covenant Medical Center. The Illinois AG is arguing Provena doesn’t provide enough discounted care to be classified as a charitable organization.
And in neighboring Connecticut, the state’s highest court recently upheld a challenge to a rehab and assisted living facility’s charitable exemption.
The concept that nonprofit health care providers shouldn’t be exempt from local taxes “is pretty revolutionary,” said Elliott Pollack, a partner in the Hartford offices of the law firm Pullman & Comley.
Pollack watched the Connecticut case wend its way through the courts. Connecticut assessors will frequently challenge property tax exemptions on principle, he said. It’s rare, though, that those challenges are upheld.
“If it sticks, it would be a significant sea change.”
“As health care became more complicated, nonprofits started to look more like businesses,” said Marianne Ajemian, a partner in the real estate and finance practice at Nutter McClennen & Fish in Boston. “These questions have been out there for awhile. They’re now being compounded by economic crisis. Many hospitals are not in a position to suddenly take on a larger tax burden.”
No Uniform Standards
In Massachusetts, Ajemian added, there are no uniform standards dictating when property tax exemptions apply, and when they don’t. “That’s part of the problem,” she said. “There aren’t many SJC cases that address it. It’s not an area of law that’s as well-defined as it could be. It’s evolving.”
In the Connecticut case, decided in March, the state’s highest court yanked a rehab and assisted living center’s exemption because the vast majority of the center’s patients had their care paid for by private or public funds – not charitable funds.
The court found special fault with the center’s rehab unit, which took Medicare reimbursements and also treated wealthier patients. One justice joked that the center would even treat Tiger Woods. And that lack of charitable giving, the court ruled, was cause for revoking its property tax exemption.
The Connecticut rehab wing “infected the whole operation,” Pollack argued. “You couldn’t separate the two.” He added, “In many respects, it’s difficult to distinguish the activities of not-for-profit organizations from activities of for-profit organizations. Health care is generally eligible for the exemption. The lesson is the court will look with great scrutiny at exemption.”
That’s especially true “if you stray from your announced corporate purposes, and in so straying, get into an area that’s dubious,” Pollack argued.
Pollack said local taxing authorities across the country are now waiting on the outcome of the Illinois case. High court decisions in one state aren’t binding in others, but they can generate momentum that sweeps from one state to another.
Much will also depend on the ultimate shape of federal health care reform efforts, Ajemian said. That’s especially true since the rationale for revoking tax exemptions has rested on quantifying free and charitable care. In Massachusetts, a good chunk of that care is reimbursed by the state; the ballooning cost of that uncompensated care pool was one of the factors behind the state’s own health care overhaul.
The future of free care “depends on reform,” Ajemian said. “At its genesis, exempt organizations would provide care to the needy. If there’s a universal requirement, and government care, the corollary is, shouldn’t the institutions step up and provide another input into the system?”
