Illinois Supreme Court Debates Constitutionality of Nursing Home Tax

During its November term, the Illinois Supreme Court heard oral argument in Grand Chapter, Order of the Eastern Star of the State of Illinois v. Topinka. Grand Chapter is a direct appeal from the Circuit Court’s holding that a “bed tax” on Illinois nursing homes violated various provisions of the state Constitution. The statute at issue, 305 ILCS 5/5E-10, imposes a “fee” of “$1.50 for each licensed nursing bed day for the calendar quarter.” The statute provides that the fee may not be “billed or passed on to any resident of a nursing home operated by the nursing home provider.” The proceeds of the tax are deposited “into the Long-Term Care Provider Fund.”

Counsel for the State began the argument, arguing that the bed fee is reasonable and passes muster under the Court’s uniformity standards. The three main reasons that the Circuit Court provided for striking down the statute don’t hold up to scrutiny. Counsel argued that statutes are presumed to be constitutional under the uniformity clause (Art. IX, Section 2). The General Assembly has broad discretion to classify different groups of taxpayers, so review under the uniformity clause is deferential. To prevail, counsel argues, a plaintiff must bear the heavy burden of demonstrating that neither the facts nor the law support the enactment. On the other hand, counsel argued, all the State has to show is that the facts can be reasonably conceived so as to sustain the classification. The process, according to counsel, is similar to rational basis due process review: if the basis for the statute is not arbitrary, there can be no further inquiry into the legislative purpose. Counsel argued that the fee is reasonable because it serves the legitimate purpose of supporting indigent and at risk populations in the area of health care by contributing to the Long Term Care Provider Fund. Of the $650 million in the Fund, $557 million was directed in 2011 to the Department of Health Care and Family Services. Another $2 million was directed to the Department of Public Health, which licenses all nursing homes in the state, including the plaintiff. Because the plaintiff is a nursing home, according to counsel it benefits from improvements to the regulation and licensing process. Therefore, although it’s not a requirement to survive under the uniformity clause, in fact the plaintiff does benefit from the fee. Counsel argued that the Circuit Court’s view that the uniformity clause requires that a taxpayer receive some sort of quid pro quo for a fee to be lawful is simply wrong. The second flaw in the Court’s reasoning was the notion that the Long Term Care Provider Fund solely supports Medicaid, and the plaintiff has no Medicaid patients. The third flaw in the Court’s order was the proposition that the plaintiff was exempt from the fee on the grounds that it is a charity. Counsel returned to the first point: the view that the uniformity clause requires that a fee be aimed at a harm caused by the taxed entities, or a benefit given to them. In fact, counsel argued, just the opposite is true. A small group of taxpayers can be required to subsidize a larger group, or a different group, or the public at large.

Justice Burke asked whether this was a tax for the general welfare, or a fee for services. Counsel responded that it was more akin to a focused fee, or a limited general revenue measure. The Long Term Care Provider Fund funds more than just Medicaid; it is involved in about half a dozen different areas. Under the plaintiff’s theory, counsel argued, requiring a retiree to pay taxes used to support youth programs violates the uniformity clause. If that theory were upheld, the state’s entire taxing structure would collapse.

Counsel argued that the Circuit Court had relied on the Supreme Court’s decision in Primeco Personal Communications v. Illinois Commerce Commission, but in fact, that decision is distinguishable. In Primeco, the Court found a uniformity clause violation because dissimilar entities were treated similarly. It doesn’t follow, counsel argued, that the plaintiff must be exempt from the bed fee. In fact, the plaintiff is nearly identical to other nursing home entities in the system – there is no material difference between them and any other licensed home. The key distinction between the plaintiff and any other home is the fact that plaintiff limits residents to members of its order, but that doesn’t change the analysis. The second issue was the theory that the bed fee was solely for supporting Medicaid. This was factually incorrect, counsel argued. Medicaid is not the sole purpose of the fee. The third problem with the Circuit Court’s order was the mistaken idea that charities are by definition exempt. In fact, under the plain language of the statute, they are not. Counsel concluded by arguing that if the basis for the plaintiff’s challenge is the notion that the language of the statute exempted charities, that was a non-constitutional argument, and since the case was up on a Rule 302(a) constitutional issue, there was no jurisdiction to consider such matters.

Counsel for the plaintiff spoke next. He argued that the plaintiff is a charitable and fraternal organization first incorporated in 1885. The plaintiff has been offering nursing home care for indigent women since the late 1800s. The plaintiff is a non-profit operating on donations and spending about $2 million a year on patient care. Almost all patients are indigent at the time they enter the home, counsel argued, although a few contribute what assets they have, with the plaintiff making up the rest. Counsel disputed the view that it has anything to do with the Department – in fact, the Department doesn’t inspect, regulate or license them. Counsel insisted that the record shows that not one penny of the fee is spent on anything that benefits the plaintiff. Chief Justice Garman asked whether there was anything in the statute indicating charities were exempt. Counsel responded that the statute provides that only facilities charging patients are subject to the fee. Justice Thomas asked whether both counsel’s argument and the trial court’s reasoning rests on the proposition that the sole purpose of the bed fee is to reimburse providers participating in Medicaid. Counsel said no. Justice Thomas wondered whether the language of the statute doesn’t clearly suggest that Medicaid reimbursement is only one of the purposes of the statute. Counsel agreed that that’s what the statute says, but argued that the Court should go beyond that to the findings of the legislature. Justice Thomas asked whether, if that was the import of the plain language, the Court even could go behind the language to consider the legislature’s aims. Counsel answered that when the legislature enacted the statute, it said that the purpose of the law was to provide Medicaid funding, period. Justice Thomas asked how the Court could avoid doing violence to statutory construction rules by going behind the plain language? Counsel denied that he was asking the Court to do that, and again insisted that the expenditures from the Fund have nothing to do with the plaintiff. Justice Thomas pointed out that initially, plaintiff had argued that the Court should look to the legislature’s purpose, and now, counsel was saying that even the other enumerated purposes don’t affect the plaintiff. Counsel responded that Medicaid is woefully underfunded, and to argue that the money is used for other purposes is a fallacy. Justice Thomas read several of the other statutory purposes and asked again whether counsel was arguing that none of those purposes impacted the plaintiff. Counsel agreed that they did not. Justice Thomas asked, if the Court disagrees, whether Primeco is off the table. Counsel answered that under Primeco, the Court should be looking at the purpose of the legislation to decide if the classification it makes is reasonable. The purpose of the bed fee is to raise funds for Medicaid. Justice Kilbride asked counsel why he said that nursing home standards don’t apply. Counsel responded that the plaintiff is regulated by the Department of Public Health. Justice Kilbride suggested that the question was whether the fee goes towards supporting the laundry list of activities in the statute. Counsel answered that there was no evidence of that; in fact, the criminal background checks for employees – one purpose cited by the State – are paid for by the plaintiff. Justice Kilbride pointed out that the State was arguing that the plaintiff was eligible for reimbursement for those expenses. Counsel responded that the plaintiff was not eligible for reimbursement pursuant to federal law. Counsel argued that federal law controls what the State must do to get matching funds for Medicaid. The State submits a proposal to the Center for Medicare and Medicaid Services, they review it, and the parties enter into a written contract. The State repealed their then-existing law and enacted a new funding mechanism. The next year, the legislature enacted the bed fee. Justice Thomas asked what the authority was for the proposition that the statute fell if none of its purposes benefited the plaintiff – after all, a taxpayer can’t opt out of public school taxes if he or she sends the kids to private school. Counsel answered that the legislature has created a very narrow class to fund what amounts to a general welfare tax. When the legislature does that, members of the class must have some kind of connection to the issue – it must be aimed at a problem they helped create, or they must benefit from the funds. But the plaintiff not only doesn’t contribute to the problem Medicaid is aimed at, it helps alleviate the problem, since the women the plaintiff cares for would otherwise be on Medicaid. Justice Karmeier pointed out that counsel had argued that the plaintiff doesn’t charge, but in fact, the plaintiff requires that residents surrender whatever assets they have, or pay half their costs if they have income – is that not charging for the services? Counsel answered that it was not under the meaning of the statute. Charging means being compensated for providing a bed. Counsel argued that there was no precedent for taking money from charities to support for-profit business.

In rebuttal, counsel for the State argued that the plaintiff is seeking the creation of a charitable exemption where none exists. The plaintiff’s argument was purely statutory, and the Court therefore has no jurisdiction in a Rule 302(a) appeal to proceed. Counsel argued that plaintiff is claiming it is a charitable operation because it operates at a loss, but in fact, it requires surrender of assets or monthly payments from those able to afford it. There was nothing in the record to support finding the plaintiff a charity – no sales tax exemption, no property tax exemption. The plaintiff’s claim that not one penny from the Fund benefits it is legally irrelevant. The taxing class is not narrow, counsel argued; it encompasses every nursing home in the State. Counsel argued that in fact, Section 5B – the Medicaid section – was not at issue here. The record shows that $2 million from the Fund goes to the licensing operations of the Department of Public Health, which licenses – among others – the plaintiff. Counsel argued that state funding of programs benefiting the indigent and at risk means that they have the health care and life skills they need, and thereby reduces the burden on the nursing home system. Counsel referred to Justice Thomas’ question about going behind the plain language, and argued that under rational basis analysis, all that’s needed is a non-arbitrary reason for the statute. There is no need to show that the plaintiff either directly benefits from the statute, or that the bed fee is aimed at a problem the plaintiff helped create.

We expect Grand Chapter to be decided in approximately ninety to one hundred days.

Image courtesy of Flickr by Ulrich Joho (no changes).