ILLINOIS ATTORNEY GENERAL MADIGAN CONTINUES HER CRUSADE AGAINST ILLINOIS CHARITABLE HOSPITALS: SHOW ME THE STUDY

Who can argue with Attorney General Lisa Madigan?  Shouldn’t the Illinois State Legislature enact something called the Tax-Exempt Hospital Responsibility Act?  What could possibly be wrong with any legislation that mandates that tax-exempt hospitals be more charitable?  After all, the Illinois State Legislature has already determined that the proposed legislation would neither increase nor decrease the number of judges needed in Illinois (Administrative Office of the Illinois Courts).  Nor would the legislation have any impact on any public pension fund or retirement system in Illinois (Committee on Government Forecasting and Accountability). Its good to know Illinois’ elected officials are so diligent before enacting legislation that ties property tax exemption (and other state tax exemptions and access to tax-exempt bonding) to the provision of charitable health care services equal to 8% of an otherwise tax-exempt hospital’s operating costs.  But have they been diligent enough?

Our very own Jack Siegel's book,  A Desktop Guide for Non-Profit Directors, Officers and Advisors: Avoiding Trouble While Doing Good is scheduled to hit the streets before the end of March.  The page proofs are now complete and production is about to commence.  Here is what noted lawyer, authority, and author Bruce R. Hopkins had to say about an advance copy of Siegel's book. Jack Siegel – lawyer, accountant, management consultant, and computer whiz – takes the putative director or officer of a nonprofit organization on a useful and often entertaining voyage throughout the realm of the tax-exempt organizations universe, pointing out its quirks, foibles, and legal liabilities along the way.  His handbook will make mandatory – and arresting – reading for those who are already serving as trustees, directors, officers, and key employees of exempt organizations, particularly charitable ones. Mr. Siegel’s goal, in which he succeeds, is to help directors and officers of nonprofit organizations “make better decisions.”  He recognizes that his book is arriving in the midst of government officials’ and other policymakers’ intense examination of corporate principles and practices of exempt organizations.  He correctly notes, nonetheless, that “good governance cannot be mandated; there must be buy-in from those charged with governing.”  Siegel wisely notes the need for emphasis on what he terms the “secondary aspects” of running an organization: control, red tape avoidance, risk management, and administration.  The book is full of large policy analyses and paragraphs on the details, such as board size, board committees, board meeting formats, the contents of minutes, and the duties of officers. Salted with some excellent real-life examples, what also sets this book apart from most in its genre is the tone: the writing style, the brusqueness, the blunt.  He complains that too many directors “check their good judgment at the boardroom door.”  He advises individuals who “desire agreement and demand adulation” to stay off boards; he insists on “commitment” and “institutional tension” with the executive director.  He warns prospective directors that some organizations want, in addition to time and judgment, “either your money or your ability to raise money.”  To my delight, he extols the virtues of “some level of expenditures” for qualified lawyers and accountants. Please join me in adding this most helpful handbook to your nonprofit library. Pre-order your copy of the Guide today by clicking here

Absolutely not.  As we predicted about a month ago, this legislation will benefit large corporate law firms and will likely drive many tax-exempt hospitals out of existence.  We will have to wait awhile longer before we know for sure whether hospitals will be closing their doors.  But the first part of our prediction was right on the money. Yesterday, Illinois hospital officials expressed “strong concerns” about AG Madigan’s proposed legislation, according to a Chicago Sun-Times article by Lori Rackl, Health Care Reporter (Proposed Care Law Has Hospitals Quaking).  And where was that concern expressed?  At a conference sponsored by Ungaretti & Harris, a Chicago law firm with a significant health care practice.  Well you can’t blame lawyers for making the best of someone else’s bad situation.  We suspect other law firms are also gearing up their marketing campaigns.  Although the lawyers will likely make sympathetic noises about how unfair and ill conceived AG Madigan’s legislation is, they pray for its quick passage each night as they drink their warm cocoa, opening up an entirely new regulatory regime that will generate millions of dollars in legal fees.  Well maybe not so quick--after all there are lobbying fees to be gotten.

We really don’t know whether AG Madigan’s proposal is ill-conceived. We aren’t health care economists or policy wonks.  The problem is: Neither is AG Madigan or the members of the legislative committees that are currently reviewing the legislation.  How do we know that?  Take a look at the Web site describing the legislation's progress as it moves through the sausage grinder in Springfield.  You will get nice pictures and bios of Illinois’ elective representatives as they jump on the bandwagon by co-sponsoring the bill, but you won’t get much else.

Do a search of AG Madigan’s Web site and you will not find any policy analysis, economic studies, or anything besides a few press releases extolling AG Madigan’s proposal as good public policy.  We ran multiple searches, but found nothing.  If it sounds good, why bother with such formalities? 

Unfortunately, the train has already left the station.  The attorney who hosted the Ungaretti & Harris conference is predicting the legislation will land on Governor Rod Blagojevich’s desk by April of this year.  We can’t imagine the good Governor vetoing this legislation: It provides more health care (at least in the short run) and doesn’t cost the state a nickel.  Governors hate unfunded federal mandates, but they have little trouble imposing their own mandates on those operating within their states.

In a February 15, 2006 press release, AG Madigan claims:

"My legislative reform effort follows years of investigation, the comprehensive study of a task force of experts and the extensive experience of my office’s Health Care Bureau.  My effort is intended to set a clear standard for tax-exempt hospitals to follow and, consequently, to improve the provision of care for the poor and uninsured,” Madigan said.  “The legislation is specifically refined to consider the mission and the work of tax-exempt hospitals and to allow them to preserve their tax-exempt status to build on their current efforts to provide care to those who need it."

As already noted, a search of the AG Madigan’s Web site turns up no evidence of an investigation or a comprehensive study.  Why is it so easy to obtain the press releases and the text of the legislation, but not the underlying analysis? 

The legislation is “specifically refined...” claims one press release.  Well if it was so well thought out, why has an Illinois House amendment been necessary to create a major exemption from the legislation's core mandate?  Specifically, a hospital will be able to obtain a one-year exemption if the hospital can demonstrate that compliance with the 8% requirement will jeopardize the continued operation of the hospital.  There will be no limit on the number of times the hospital can obtain the exemption.  Of course, the legislation provides AG Madigan with authority to develop a procedure for determining whether the exemption is available.  This will inevitably mean costly studies and expensive legal appeals.  It will also mean that AG Madigan will wield unchecked discretionary power.  Hospitals will likely find that they must make concessions to get the exemption.  That is exactly what tax-exempt organizations experienced for years at the federal level when dealing with the IRS.  That unchecked power resulted in Congress passing the intermediate sanctions to make the IRS review process more transparent.

Will there be any tax-exempt hospitals in Illinois in five years?  The Sun-Times article reports that the Alexian Brothers Health System estimated that had the law been in affect in 2004, it would have cost the Alexian Brothers System $27 million to comply.  We were curious how this number would impact on  the Alexian Brothers System so we pulled the Alexain Brothers System IRS  Form 990 for 2004.  Total revenue on Line 12 is $20.18 million so $27 million initially appears as if it would have a very signficant impact on the Alexian Brothers System.  However, the Alexain Brothers System appears to be a holding or management company rather than an operating hospital.  Consequently, there may be separate hospitals that are not reflected on the tax return.  The person who was quoted in the article may have been referring to the impact on affiliated hospitals that file their own tax returns.  Rather than guessing, we would like to see a study that shows the projected impact of AG Madigan's proposal on operating hospitals

We would suggest that AG Madigan either have an independent body undertake a study or post any existing study in a more conspicious place on her Web site so that the public has an opportunity to evaluate it.  Does it make sense to force hospitals to hire an army of lawyers each year to perfect an exemption that is necessary to avoid insolvency?  We think not.

Internal Revenue Service - Circular 230 Disclosure: As provided for in Treasury regulations, any advice (but none is intended) relating to federal taxes that is contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

THE FOREGOING IS NOT AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. IF LEGAL ADVICE IS REQUIRED, THE NON-PROFIT OR OTHER PARTY IN QUESTION SHOULD SEEK THE ADVICE OF QUALIFIED LEGAL COUNSEL. If you liked this post, please visit http://www.charitygovernance.com for a description of our Guide/Tutorial for non-profit directors and officers entitled “Avoiding Trouble While Doing Good: A Guide for the Non-Profit Director and Officer.” Copyright 2006, Auto Didactix LLC. All Rights Reserved. You may not copy any portion of this post to a computer "clipboard" for re-posting anywhere or e-mailing, or otherwise reproduce this post. If you want others to review this post, you may provide them with a link to this web blog. Any use of the material or ideas in this post by reporters or other publishers shall make reference to Jack Siegel, author of "Avoiding Trouble While Doing Good, A Guide for the Non-Profit Director and Officer" and this web blog.  For additional information call 773-325-2124