Not too long ago, casual observers could see a clear difference between a doctor's office and an acute-care hospital.
Clinic tackles tax challenge
Supreme Court to rule on exemption eligibility
That distinction has become far more fuzzy with the boom of urgent-care clinics and hospital-physician alignment, much to the consternation of taxing authorities in states such as Wisconsin, where the law allows hospitals—but not doctor's offices—to claim exemptions from taxes.
That's why a standalone medical office building and outpatient center in the Milwaukee suburb of Wauwatosa has found itself among the myriad not-for-profit hospitals across the country that are fighting municipal challenges to their tax exemptions.
Last week, the St. Joseph Outpatient Center filed written legal arguments with the Wisconsin Supreme Court, which has agreed to enter the eight-year legal battle in Wauwatosa. The healthcare provider stands to win back $7 million in paid taxes, but observers hope the ruling will clarify how clinical and office space used by physicians is classified as taxable.
The Wisconsin case follows the widely publicized trial of 202-bed Provena Covenant Medical Center in Urbana, Ill., a Catholic hospital that lost its tax exemption after assessors argued—and the state Supreme Court agreed—that it didn't provide enough free care to the poor. Hospitals in Boston and Baltimore last year began making payments in lieu of taxes after city officials leaned on the large institutions to help cover budget deficits.
In Ohio, the Cleveland Clinic is still appealing a case in which a tax assessor ruled that the Beachwood Family Health and Surgery Center must provide charity care to at least 4% of its clients to show it was providing enough public good to qualify for tax exemption.
“Certainly the financial condition of counties and cities is stressed, and as a result, they are going to be pushing the envelope and seeking to increase tax-base revenues, so it wouldn't be surprising if more of these situations start to present,” said Jack Poteet, principal of Hospital Appraisal Services, Overland Park, Kan.
Wauwatosa City Assessor Steve Miner has heard similar arguments about local governments' motivations to add to the tax rolls, and he said they miss the point. Adding new properties to the tax rolls doesn't enrich a local government, but rather only redistributes the tax burden, he said.
“If there is more value in a community, the (tax) rate is lower. So that's a good thing for everyone,” he said. “You don't get a windfall, ever. That's just not how it works.”
Although tax exemption is an issue for hospital administrators across the country, legal experts said the implications of the Wauwatosa case appear to be limited to hospitals in Wisconsin because of the unusual wording of the state's tax-exemption law that specifically excludes doctor's offices.
But the case is being closely monitored across Wisconsin, particularly at rural and critical-access hospitals, whose slim margins and far-flung outpatient operations may prove particularly at risk from an adverse ruling out of the state Supreme Court.
“Rural hospitals, in an effort to provide outreach to wide geographic areas, may have facilities that provide services on an outpatient basis,” said David Edquist, an attorney with von Briesen & Roper, which has filed friend-of-the-court briefs in the Wauwatosa case for the Wisconsin Hospital Association.
Between 2003 and 2006, Covenant Healthcare System—now owned by Wheaton Franciscan Healthcare—asked for tax exemption on three floors of a five-floor medical building that included a 24-hour urgent-care center for injuries such as broken bones and space for by-appointment procedures such as cardio/pulmonary services and outpatient surgeries, along with physician office space.
The assessor's office denied the exemptions, but after a nine-day-long bench trial in 2007, a Milwaukee County Circuit Court judge agreed with the hospital. A two-judge majority of a three-member state appeals court overturned that ruling, saying the building was taxable because it was being used as a doctor's office.
“It is a place where doctors see patients, mostly by appointment, during scheduled business hours, and have their offices. A hospital, on the other hand, is a place that offers ‘inpatient, overnight care,'” the majority judges wrote. “We view the urgent care (center) as permitting the clinic to perform its services as a doctor's office on a twenty-four-hour basis.”
In an e-mailed statement, a Wheaton Franciscan spokeswoman said the appellate judges' observations about the center's business hours, lack of inpatient services and physician office space would apply to “virtually any space dedicated to providing hospital outpatient services, within a hospital or at a remote location.”
“In all respects, the outpatient center functions in the same manner as if its services were provided within the four walls of a hospital,” spokeswoman Anne Ballentine wrote. “We are optimistic that the Supreme Court will come to the same conclusion as the original Circuit Court judge and will rule in our favor.”
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