A non profit organization is one that, like the name implies, doesn’t exist with the intention of making a profit. There’s a lot more that goes into it than that, though, and the lines between for profit and non-profit activities sometimes get blurred. An Illinois hospital recently learned a tough lesson in respecting those boundaries.
The Illinois hospital was not entitled to a charitable exemption from tax even though it had no capital, capital stock, or shareholders, and as a corporation, it did not profit from its enterprise. The hospital was formed as part of a conglomerate of six hospitals, and there was no evidence to show that the owner had built the hospital solely to relieve the county of the need to build a hospital. The evidence instead showed that the hospital did what most hospitals do – it sold and provided medical services. At most, only 3%-4% of the hospital’s total revenue was derived from public and private charity.
There was no record of the amount of charity that the owner provided. In fact, the charity-care program wasn’t even free. It was fee-based and looked only at a patient’s income relative to the federal poverty guidelines. It didn’t consider the amount of the medical bill or the patient’s other liabilities. Nor did the hospital spend a great deal of its time or money providing free medical services. Financial records showed that the hospital devoted only 0.7% of its revenue to charity care. Even though there isn’t a defined minimum (or maximum) percentage that a hospital needs to meet to be considered a charitable hospital, the court felt that with 0.7% the hospital wasn’t dispensing charity to all who needed it and, therefore, wasn’t being used exclusively for charitable purposes.
When the court drilled down further, they found problems in the reduced-fee calculation, too. It was a straight percentage waiver – i.e., if your income qualified you to receive a 50% deduction that’s what you got – whether your bill was $1,000 or $50,000. The court didn’t see how such a policy truly benefitted the needy. In fact, after reviewing the financial records the court found that the owner’s average-cost method used to calculate the amount of charity care provided actually left the owner making a profit on those patients. At that point the court saw no charity being extended at all.
The court also looked at the hospital’s collection policies. They found that while it was not wrong for a charitable organization to use collection agencies, the owner had sent over 10,000 accounts to a collection agency while giving charity care to only 302 patients. This could (and did) lead to a reasonable assumption by the court that many of the hospital’s patients must not have been receiving charity care in the first place. After all, they were getting bills that they couldn’t afford to pay.
At the end of the day the court concluded that yes, the hospital did help everyone who came through the door, but the fact that they were billed and expected to pay for those services, did not make the hospital a charity.
The hospital lost the religious exemption as well. Again, despite its stated mission to serve as a Catholic health-care ministry and charitable hospital, the hospital was really run as a business (with religious overtones). This was evidenced by the facts that 99.99% of its patients were required to pay for treatment, its use of collection agencies, and its advertising expenditures.
On reading the file I got the sense the court was less than impressed with the hospital’s arguments or its defenders, who warned “adverse social consequences” would result if the exemption were denied. Referring to decisions in other jurisdictions, the court said that the term charity had become magical gibberish to sanctify any socially beneficial use of property that a court deemed worthy of subsidy. It also noted that the Illinois Constitution had a list of properties that were tax-exempt, and hospitals were not among them.