Medicaid reform seeks to put to restthe debate over hospital charity care

By Jamey Dunn

Changes to the state’s Medicaid program, which Gov. Pat Quinn recently signed into law, were heralded as historic reform and are expected to shave billions off of the state’s liability under the program. But the sweeping plan also attempts to resolve some longstanding disputes over health care policy in Illinois. This is part one in a two-part series that looks at those components of the new law.

The reform package, which contained five separate bills, will make a number of changes. It will reduce some services offered through Medicaid, increase taxes on cigarettes and other tobacco products and give coverage to thousands of uninsured residents of Cook County.

The plan also aims to resolve the longstanding issue of what hospitals must do to be considered charitable organizations eligible for local property tax exemptions. 

Under the new law, hospitals must provide charity care and other services that are equal to the tax liability that they would have incurred without the exemption. If they do not meet the threshold, they can make donations to other charitable health care providers. For-profit hospitals will also be able to earn tax credits for charitable care that they provide.

In the past, hospitals have argued that there were no clear standards for what they must do to receive the exemption. A 2010 Illinois Supreme Court ruling found that Provena Covenant Medical Center in Champaign County did not qualify for the tax exemption. The court said the hospital was not offering truly charitable care but instead, it was writing off bad debt, much like a for-profit hospital would. The ruling went on to spell out parameters for measuring what is or isn’t charity care, but it did not set a specific threshold that hospitals must meet.

Following the ruling, the Illinois Department of Revenue pulled exempt status from Northwestern Memorial Hospital's Prentice Women's Hospital in Chicago, Edward Hospital in Naperville and Decatur Memorial Hospital. The department said it used characteristics defined in the Provena decision to determine the later rulings.

However, Democratic Supreme Court Justices Anne Burke and Charles Freeman disagreed with part of the ruling, saying the court does not have the power to set the standards for defining charity. “This can only cause confusion, speculation and uncertainty for everyone: institutions, taxing bodies and the courts. Because the [Illinois Supreme Court] imposes such a standard, without the authority to do so, I cannot agree with it,” Burke wrote in her dissent.

After the Provena decision, lawmakers voiced concerns that such uncertainty would encourage cash-strapped municipalities to target nonprofit hospitals in search of revenue. “I have a concern now that we are going to see a rush of local governments trying to go after other health facilities. Thinking that this is a way to get some quick revenue from property taxes … the government may get a few extra dollars in property taxes, but then government is going to have to start providing all those services that those health care facilities used to provide,” Rockford Republican Sen. Dave Syverson, the minority spokesperson of the Senate Public Health Committee, said after the ruling.

“Some legislative response is probably going to have to be made to protect those health care facilities,” he added.

Quinn put a hold on any new rulings from the Department of Revenue and tried to work out a separate deal with hospitals. But the March 1, 2012, deadline he set for reaching an agreement came and went with no results.
Instead, the solution came in May at the end of the spring legislative session, slipping somewhat under the radar as just one component of a proposal to reduce the state’s Medicaid liability by $2.7 billion.

While the new law could mark the end of the debate, some say there are likely to be few changes in the way that hospitals operate as a result. “I’m not sure, to tell you the truth, that a whole lot will change,” said John Colombo, a tax law professor at the University of Illinois. “My sense is that this isn’t going to affect the behavior of hospitals in any major way.” Colombo, whose research primarily focuses on tax-exempt organizations, said the standard is set up in a way that hospitals will likely be able to meet it with what they are already doing. “Even those hospitals [that don’t reach the threshold] at the end of the day, all they have to do is total up what they were missing the mark by and then cut a check."

He added, “Think about it, right, this bill was favored and pushed by the Illinois Hospital Association.”

Previously Colombo said that hospitals argued that any community outreach was charitable. But he said that would change under the law. “You don’t get to count every single dollar that you put into health fairs.” He said that the new law does make an important distinction. It requires hospitals to show that whatever they classify as charitable care for the exemption has to be targeted at those who cannot afford health care. “At least the bill seems to concede that when it comes to assessing charitableness of hospitals, it’s all about services that help the poor. It’s all about services that help some underserved population.”

Colombo said his concern with setting a black and white threshold for qualifying for the exemption may discourage hospitals from going beyond what is required of them and could prompt some to scale back on charity care. “Five years from now, are we going to find that all hospitals have magically converged on this single number?” Colombo asked. “When there is a numerical target, pressures will combine to structure operations so that you hit the target, maybe exceed it just a little bit so you have some cushion. But there’s no real reason to do anything but that target. If you hit your target, why would you do anything more?”

He advocates instead weighing what charity-care hospitals provide that for-profit hospitals are less willing to offer, such as services that are unlikely to turn a profit. He lists trauma centers and emergency psychiatric care as examples. “Why is it that the Chicago Symphony orchestra is a tax-exempt charitable organization? Because it can’t exist in the private market. Same with the Field Museum. Same with the Shedd Aquarium,” Colombo said. “What is it that nonprofit hospitals do, if anything, that for-profit hospitals do not do? That ought to be our inquiry.”

Danny Chun, vice president of corporate communications and marketing for the Illinois Hospital Association, said the association did not lobby specifically for the standards that define charity care in Senate Bill 3261. “I don’t want people to be left with the impression that we proposed it, that we supported it and that we pushed for it.” He said his organization backed the plan as a whole. While he said there were some pieces that the group liked and some it did not, Medicaid reform would not have happened without every component that was passed. “In order for all those bills to move, they had to be part of a package.” Chun said the Medicaid reform package should really be viewed as an overhaul of health care in the state. “At the end of the day ... those five bills were all health-care related. ... Several of the measures had nothing to do with Medicaid in a direct way.”

However, Chun said the hospital association is “very pleased” that a specific threshold that is “clear and transparent to everyone” has been set for hospitals seeking the tax exemption. “It’s not a free pass because it does hold hospitals accountable. It sets very clear parameters of what hospitals need to do.”

Sen. Heather Steans, who worked on the Medicaid reform package, agreed that the tax exemption issue may not have been resolved without being rolled into a larger proposal. “That has been out there languishing for decades.”

She said it was easier to get agreements on the charity care issue and Medicaid reform if providers could consider them all at once and have an idea of what the lay of the land would be going forward. “So everything is known, and you know how you can and can’t survive. You sort of have to solve it all at once.”

Indeed, Fitch Rating agency praised the provision for creating a consistent standard. "Fitch believes the legislation provides long-overdue clarity as to what constitutes charity care and should not negatively affect the Illinois hospitals we rate,” said a written statement from the agency.

Steans said the give and take of negotiation allowed controversial topics to be put on the table. Hospitals have resisted attaching a dollar amount of charity that must be given to get the exemption. Attorney General Lisa Madigan pushed without success in 2006 to require that hospitals spend 8 percent of revenue on charity for the exemption. “It’s really hard sometimes to win stuff against these lobbying groups, unfortunately,” Steans, a Chicago Democrat, said. “It’s one or the other on this one. It’s not all good, not all bad.”

"The Medicaid legislation was the result of hard work and negotiations between our administration, members of the General Assembly and various stakeholders. Bills on the same topic are frequently packaged by the legislature," said a written statement from Quinn's office. "It was decided that introducing a package of bills would help ensure that these important reforms reached the Governor’s desk. Decisions such as including charity care were made after discussions and work with all parties, including the Illinois Hospital Association. It is not unusual to have healthcare bills considered alongside one another."

Madigan also supports the charity-care provisions in the new law. “Providing access to quality health care has been a consistent priority for Attorney General Madigan. We are pleased that Illinois will now have a standard by which hospitals must provide free health care for people who cannot afford it. Our office engaged in discussions throughout the spring session with our primary goal being to ensure that people and families in need can access health care when they need it the most,” said a prepared statement from her office.

Colombo agreed. “It’s messy; it’s sausage. This is just the way the process works. ... You go through legislative compromise, and you end up with a product that often doesn’t satisfy everybody.” Colombo said it is possible that the Illinois Supreme Court might take issue with some of the provisions in the bill, such as allowing hospitals to count as charity care the shortfalls between Medicaid reimbursements and the actual cost of services they provide —a direct contradiction to the Supreme Court ruing. “The opinion says Medicaid shortfalls don’t count. The bill says they do. .. .It’s going to be interesting if it ever ends up before the Illinois Supreme Court.” However, he said it is unlikely that the law would end up before the court. “Maybe it could get challenged by a local school district or somebody who has a stake in local tax revenue.”

Overall, Colombo acknowledged that the standards for charity care and the threshold for the exemption are likely a “win” for the hospitals. But he said that not even the standards set in the Provena decision were necessarily here to stay. “There would have been more litigation. We wouldn’t have had this settled for years. ... It’s not a slam dunk that the Provena version of this would have survived another round of litigation."

Chun said that as federal health care reform goes into effect, the number of so-called charity care patients, who cannot afford care and are not covered by insurance or a safety net program, would shrink significantly. Many will obtain federally subsidized insurance or be added to the Medicaid program. He said that hospitals would need flexibility in what can be dubbed as charitable. “There are all kinds of other things that hospitals do to serve the uninsured and the under-insured and low-income that are not strictly classified as charity care.” Chun points to community clinics, preventative care and screening and vaccination programs offered by hospitals. And yes, even participation in the Medicaid program. “Hospitals have stepped up by partnering with the state to help support the Medicaid program.” Which means “low rates, low pay and slow pay.” He said some hospitals are waiting up to six months for reimbursements. “That’s why you can’t just look at charity care anymore. ... The numbers are going to change. The needs are going to change. How we serve people and where we serve them is going to change,” he said. “Looking at health care through an old snapshot and old framework pre-[federal] health reform just doesn’t make sense these days.”

Colombo also said that there is a need to modernize thinking about hospitals and charity care. But he is looking a little further back in time.

 “The real issue is, are hospitals really charities at all?” he said. “Hospitals got labeled as charitable in the 1800s and early 1900s, when hospitals were places where poor people went to die. ... The thing that we call a hospital today did not exist.” He added: “Maybe we need to let go of the past, and we need to just recognize that an industry that is labeled as charitable because of what they did 100 years ago isn’t charitable anymore. They’re running a business.”

 Colombo argued that it does not make sense to try to tackle health care problems with tax policy. “When we have poor people who are starving, do we say to the local Kroger’s, ‘You could be tax exempt if you gave food to poor people?’ We don’t do that. We have food stamps,” he said. “Why don’t we just treat [hospitals] like grocery stores? ‘You sell your product, and we will deal with access to your product for the poor through other government programs.”

House approves cigarette tax increase

By Ashley Griffin with Jamey Dunn contributing 

Illinoisans could see higher-priced tobacco products under the emerging Medicaid reforms.

On Friday, Senate Bill 2194, which is an important component in the multi-bill Medicaid reform legislation that aims to cut $2.7 billion from the state’s Medicaid liability, passed on the House floor with 60 “yes” votes and 52 “no” votes. The proposed legislation features a $1-a-pack cigarette tax and would increase taxes on other tobacco products, such as cigars and loose tobacco, to bring them in line with the taxes on cigarettes.

Rep. Barbara Flynn Currie, sponsor of the bill, said that the tax would bring in about $700 million, including federal Medicaid matching funds. She said the revenue estimates take the possibility of declining tobacco sales into account. She said that since the state raised the cigarette tax a decade ago, the revenues have gotten smaller but not disappeared. “Yes, there’s a bit of decline over time because nationwide smoking rates are on the decline, but we still have a lot more revenue from that increase than we would have [without it].”

Advocates of the bill believe that the tax would not only generate new revenue, it would also improve public health in Illinois. “If there is a public health initiative that can result in 60,000 people quitting smoking, that can result in 60,000 deaths avoided, that can result in decreasing the number of youth that may start smoking by 80,000 while stabilizing a very important and crucial safety net of Medicaid in our state, then I will buy that for $1,” said Dr. LaMar Hasbrouck, director of the Illinois Department of Public Health.

Frank Chaloupka, an economics professor at the University of Illinois at Chicago, said an increase in the tobacco tax would generate new revenue, save money on treating diseases caused by tobacco use and reduce other economic effects, such as lost productivity. “Tobacco tax increases are what I would consider a win win win.” He estimates that the state spends $1.8 billion through the Medicaid program to treat tobacco-related diseases, and tobacco use causes $5 billion in lost productivity in the state. Chaloupka, who has been studying tobacco tax policy for more than 20 years, said the increase would cause almost 60,000 current smokers to quit and keep more than 77,000 kids from every taking the habit up. “Kids are very responsive to increases in taxes and prices,” he said. “Because people stop smoking, because fewer kids take up smoking, we’re looking at significant pubic health benefits.”

But some argue that the tax increase would hurt Illinois businesses. According to Bill Fleischli, executive vice president of the Illinois Petroleum Marketers Association, testified in a committee hearing that retailers could see 20 percent reduction in cigarette sales under the new tax and could lead to many smokers going out of state to purchase cigarettes. “Our customers who purchase their cigarettes are going to border communities, the Internet or through illegal vendors, costing us money and the state of Illinois money in sales tax. A tax will take $300 million out of the retail community,” Fleischli said.

Rep. Jim Sacia — a Pecatonica Republican whose district borders Wisconsin and Iowa, said that he has gotten many calls urging him to vote against the increase. But he says that his view on it has “evolved” because of the budget challenges the state is facing. “We are in the midst of the worst crisis this state has ever seen,” he said. “It’s a tough vote, but it’s the right vote

The proposal will make changes to the hospitals assessment program in order to bring in more federal matching funds. Curry said that tweak would produce about $100 million in revenue. The proposal would also set  requirements for hospitals to have charity care status, which allows them to receive a local property tax exemption. That issue has been the subject of a court ruling and a point of contention between hospitals and the Illinois Department of Revenue.  For more on the standard for charity care status, see Illinois Issues September 2009, Illinois Issues February 2007, and this timeline.

Curry warned today that without approval of the bill, lawmakers would be forced to make even more painful cuts to the state budget. “This bill all by itself is worth $800 million. Without it, as you know, we will have to go back and make further cuts, further terrible, dreadful, Draconian cuts in the Medicaid program. And if we can’t do that, we’re just going to have to cut every other area of state government proportionally,” Currie said.

The legislation now heads to the Senate. Gov. Pat Quinn released a statement today supporting the tax. “Today’s action will improve the health of our people and lower the burden of smoking-related conditions on our Medicaid system, while helping to fill the $2.7 billion Medicaid shortfall and stabilize the system for those that need it. 

We hope senators will follow their colleagues in the House and quickly pass this legislation, which is critical to rescuing Medicaid,” said Quinn in a prepared statement.

The elusive standard of charitable care

By Bethany Jaeger

The Illinois Supreme Court has to decide which standard to use when considering a highly anticipated case about what not-for-profit hospitals have to do to qualify for local property tax exemptions. While the case specifically deals with Provena Covenant Medical Center in Champaign County, the court decision has potential to affect about 160 nonprofit hospitals throughout Illinois.

We previewed the six-year-old case in the September edition of Illinois Issues magazine. Provena filed for a property tax exemption in 2002 based on its status as a charitable organization, but the Illinois Department of Revenue denied the charitable exemption two years later. The hospital later applied for an exemption based on its status as a religious institution. (See a timeline of the case here.)

Both sides presented oral arguments before the Illinois Supreme Court this morning with drastically different beliefs about what should count when considering charitable exemptions and what evidence the court should consider in deference when determining whether Provena qualifies for that property tax exemption.

On one hand, Provena’s lawyer, Patrick Coffey with Locke, Lord, Bissell & Liddell in Chicago, argued that the justices should undertake a brand new review of whether the denial of the hospital’s charitable exemption violates the state Constitution. The state charter gives the General Assembly authority to exempt “property of the state, units of local government and school districts and property used exclusively for agricultural and horticultural societies, and for school, religious, cemetery and charitable purposes.”

On the other hand, the Illinois Department of Revenue, represented by Assistant Attorney General Evan Siegel, argued that the justices should give deference to the lower administrative orders issued by department director Brian Hamer and affirmed by the 4th District Court of Appeals. The thinking is that the Department of Revenue has expertise in property tax matters and was the authoritative body reviewing evidence provided by 15 witnesses and two experts during administrative hearings, so the court should give a high level of respect to the administrative findings when reviewing the case.

Which standard the court chooses affects how it would consider a 2004 recommendation of an administrative law judge. After the administrative hearings, the administrative law judge found that the hospital met the standard for charitable exemption. Hamer, however, disagreed. He had the final administrative opinion to reject the tax exemption. He deemed some of the evidence irrelevant and decided that Provena didn’t qualify for a tax exemption because it dedicated only 0.7 percent of its revenue that year to providing so-called charity care to 302 patients out of 110,000 patients admitted. “I find that the property does not qualify for the charitable institution tax exemption because the evidence is clear that this property is not used exclusively for charitable purposes,” he wrote.

The two sides further disagree about whether a certain percentage of charitable care should be a deciding factor in its tax-exempt status. Coffey argued that the standard for whether not-for-profit hospitals qualify for property tax exemptions should not be whether the hospitals designate a certain percentage of their income to providing free care to needy patients.

“That has never been the requirement, and it shouldn’t be the requirement,” he said to five of seven justices. Justices Thomas Kilbride of Rock Island and Rita Garman of Danville recused themselves and did not participate in the oral arguments.

Instead, Coffey said the determination should be on a case-by-case basis and should count the hospital’s total contribution to the community. “It’s not out of bounds to consider how much free care was given, but they have also gone beyond.” For instance, Provena operates Crisis Nursery, a 24/7 child abuse prevention and support service and provided more than $13.5 million on such “community benefits” in 2002, according to the hospital’s Supreme Court filing.

Siegel, however, argued that the dominant factor when deciding charitable exemptions is the primary use of the property. He refers to a six-point test established by a 1968 Illinois Supreme Court case Methodist Old Peoples Home v. Bernard Korzen. (Read the six criteria for nonprofit institutions in our September issue.)

“It doesn’t matter whether an organization itself … is a charitable organization,” Siegel said. “What matters on that analysis is whether it is using the property for a charitable purpose.” He added that tax exemptions are granted on an annual basis. “Just because you have it for one year doesn’t mean you have it for every year.”

Justice Robert Thomas asked whether the state expected the court to set a minimum requirement of a certain percentage of charitable care. Siegel said no, that the court already determined in 1907 that a hospital must provide a “substantial amount” of free care. “All the court need do in this case on this critical factor is decide that 0.7 percent revenues in a year that only 302 people out of 110,000 admissions obtained free and discounted care is not substantial.”

In addition to the charitable exemption, the two sides differed about whether the religious exemption should be part of the court’s consideration because of a discrepancy in the record.

Chief Justice Thomas Fitzgerald questioned several times how Hamer could have ruled that Provena did not qualify for a charitable exemption based on its religious affiliation when the administrative law judge never addressed that question. “I’m still puzzled at how the director based his finding upon a statement that wasn’t there.”

“Well, it was mistaken, absolutely,” Siegel responded. “But I believe that he read the [administrative law judge’s] opinion as not giving much weight to the religious exemption.”

Coffey argued that the administrative law judge did not address the religious exemption because she already found that an exemption was warranted as a charitable organization, and Hamer rejected the religious exemption without explanation.

In addition to differing over other details, the two sides predominantly argued that their opponents were trying to change the standard of determining whether hospitals qualify for property tax exemptions.

“Provena [provided] free and reduced care to just 302 patients,” Siegel said. “That’s not a large proportion. The primary use of the property is treatment of patients with insurance. By arguing that 0.7 percent is sufficient, Provena is trying to alter the constitutional standard. And it is for this court, not the legislature, to determine what constitutes a constitutional charitable use.”

Coffey countered that the state is the one trying to base a decision on a standard that has never been used by the court, referring to the use of a certain percentage needed to qualify for a tax exemption. He said a proposal to set a minimum percentage of charitable care should go through the legislative process, not the court system.

It is up to the court to decide which standard to use. Although Justices Kilbride and Garman recused themselves and are not required to disclose their reasons, a majority opinion still requires four justices, according to Joseph Tybor, Illinois Supreme Court spokesman.