On Wednesday the Illinois Supreme Court will begin hearing arguments in a hospital tax dispute that could ultimately impact the way hospitals do business and consumers receive care in Iowa and throughout the nation.

The Illinois case focuses on Provena Covenant Medical Center, a Catholic-run hospital in Champaign County, and its disagreement with first the local tax review board and then the Illinois Department of Revenue surrounding the facility’s property tax exemption. All of Iowa’s 117 community hospitals are private nonprofit — owned either by government, churches or some other nonprofit entity. In Iowa, just like the rest of America, most hospitals pay no property tax. In Iowa the “charitable” distinction, according to a spokesman from the Iowa Department of Revenue, is made on a case-by-case basis, and, like Illinois, is not subject to certain thresholds of charity in relation to revenue.

The Illinois Supreme Court, however, is being asked to decide if such a designation needs to be clarified according to how much charity is actually provided. For example, should unpaid medical bills owed to a hospital or the amount of services a hospital offers for free be included in a formula that would determine whether or not a facility could operate as tax-exempt?

Although the decision handed down by the Illinois court will only have an immediate impact on the neighboring state, it will also likely set precedent for consideration by other states. In addition, on the federal level, many hospitals with a property tax exemption also benefit from income tax exemption and are allowed to use tax-exempt bonding for capital improvements. Due to the national debate involving health care, and the estimated expense of proposed reform efforts, the Illinois decision could also impact these other national areas of tax exemption for hospitals.

If the court finds that such tax exemptions should be qualified, and that many existing hospitals don’t meet the benchmark, the hospitals are going to have the additional monetary liability of those payments. The additional burden could force hospitals to re-think how they provide charity care, if they can afford existing specialty services or even if smaller and more rural facilities are worth the time, money and effort.

“[Hospitals] might seek to pass on the tax burdens, but ultimately there will be an impact on community services,” wrote Patrick Coffey, attorney for Provena Covenant, in documents filed with the court.

The Illinois case, which began in 2002, has been decided differently by the courts on its way to the state’s high court. An initial court hearing allowed Provena Covenant to keep its tax-exempt status. Last year, justices from the 4th District Appellate Court reversed the decision, citing charity care by the hospital amounted to less than 1 percent of its revenue. The hospital was required to pay more than $5 million in property taxes, but has since been granted a refund as a part of the appeals process.

Brian Hamer, director of the Illinois Department of Revenue, was adamant in his summary of the case that the property used by Provena Covenant was not eligible for tax exemption under either “charitable use” or religious purposes.

“The primary basis of my conclusion is simple: Covenant admitted that its 2002 revenues exceeded $113,000,000 and its charitable activities cost it only $831,724, or about .7 percent of total revenue,” wrote Hamer. “The property tax exemption it requested was worth over $1,100,000… to obtain the exemption Covenant was required to prove that its primary purpose of charitable care. These financial figures fall short of meeting the primary purpose standard.”

In brief filed in anticipation of the Supreme Court proceedings, Illinois Attorney General Lisa Madigan took the case for charitable use a step further by stating that the hospital purposefully interacted with patients in a way that “concealed the availability of charity care” and submitted many unmet obligations to debt collections.

The Illinois ruling would be of most significance to the 50 percent of Iowa’s hospitals (19 owned by religious organizations and 39 owned by other nonprofits) that are not government-run. According to the 2007 annual survey of hospitals by the American Hospital Association, Iowa’s 117 total hospitals have had a 175.8 percent increase in bad debt and charity since 1998. The hospitals used 4.7 percent, or $612.8 million, of their 2007 gross patient revenue for uncompensated care. In addition, Iowa’s hospitals reported that roughly another $113 million was spent during 2007 on community benefit services such as coalition building, clinical research, in-kind or cash donations, indigent prescription services and community health education.

A spokesman for the Iowa Department of Revenue also notes that while the land used for the hospitals proper may be granted a tax exemption, the status does not carry over to additional properties such as parking ramps and doctor’s offices.