Wisconsin Supreme Court Concludes Offsite Hospital Operated Outpatient Clinic Is Exempt From Property Tax

25 July 2011 Publication
Author(s): C. Frederick Geilfuss II Lynette M. Zigman

Legal News Alert: Health Care

On July 19, 2011, the Wisconsin Supreme Court issued its much-anticipated opinion in Covenant Healthcare System, Inc. v. City of Wauwatosa. The court concluded that Covenant’s off-campus outpatient clinic was exempt from property tax because it was used for the primary purpose of a hospital, it did not constitute a doctor’s office, it was not property used for commercial purposes, and no benefit from it inured to a private member.

Wisconsin hospitals with offsite hospital-based operations will want to consider filing for a property tax exemption for such facilities on real estate it owns. The exemption is not automatic, and the Covenant decision, as reflected below, provides lessons as to steps a Wisconsin hospital will want to consider and implement with respect to its offsite outpatient facilities.


In 2003, Covenant, a non-profit entity, constructed an outpatient clinic and transferred the building and equipment to St. Joseph Regional Medical Center, a non-profit entity for which Covenant served as the sole corporate member. St. Joseph operated an acute care inpatient hospital approximately five miles from the outpatient clinic and operated the outpatient clinic as a provider-based department of St. Joseph. The outpatient clinic was constructed to hospital standards, was accredited by the joint commission, and offered a gift shop and cafeteria to patients and visitors. It provided a range of outpatient services, including an urgent care center, outpatient surgery, pain management, and physical therapy, among other services. The outpatient clinic did not have inpatient beds.

Covenant sought a property tax exemption for the portion of the facility used and operated by St. Joseph as a hospital-based department of the hospital. The city assessor denied the exemption. The trial court, after a nine-day trial, concluded the outpatient clinic was exempt from property taxation. The court of appeals reversed and concluded the outpatient clinic was a doctor’s office and, therefore, was not eligible for an exemption under the applicable Wisconsin statute.

The Wisconsin Supreme Court reversed the court of appeals. It concluded that the outpatient clinic qualified for the property tax exemption notwithstanding the fact that it offered no inpatient beds and was located more than five miles from the inpatient hospital operated by St. Joseph. The court’s conclusion was premised on a number of factors that were peculiar to the St. Joseph situation.

It is not safe to assume that every off-campus department of a hospital that is operated as provider based for purposes of the Medicare program will qualify as exempt from property tax. Rather, it is important for a hospital to document the presence of a number of factors for such an outpatient operation to qualify as property tax exempt.


The Wisconsin Supreme Court looked at four different issues in concluding that the St. Joseph outpatient clinic was tax exempt. The court’s discussion of the four issues and certain factors it considered in addressing those issues, provide some lessons that a hospital should review as it seeks a property tax exemption.

Was the Outpatient Clinic Used Exclusively for the Purposes of a Hospital?

The court concluded that the fact that the outpatient clinic was offsite and five miles from the St. Joseph inpatient hospital did not mean that the facility was disqualified from being used for purposes of a hospital. In reaching the conclusion that the outpatient clinic was used for the purposes of a hospital the court noted the outpatient clinic was utilized by St. Joseph because of “genuine limitations” at the inpatient hospital.

In particular, there was evidence that the outpatient clinic was pursued to reduce, and has reduced, diversion of patients from the inpatient hospital. The outpatient clinic also was developed to house hyperbaric chambers for which there were space limitations at the inpatient hospital.

The court also observed that the outpatient clinic fulfilled the primary purpose of the inpatient hospital in other ways: freeing up space for outpatient services, delivering services more conveniently and efficiently, creating a single unit to address special health needs, and providing modern facilities.

The court further noted that systems were fully integrated, including records and systems. Based on all these factors, the court found the outpatient clinic served the purposes of the hospital.

Lessons. The key lesson on this issue is that a hospital opening an off-campus location should document the reasons why the operations that are part of the outpatient clinic are being located offsite and how the interests of the hospital are furthered by doing so. The reasons the court found persuasive discussed above are examples of reasons to relocate certain operations offsite.

Is the Outpatient Clinic a Doctor’s Office?

This issue caused the most uncertainty in obtaining the property tax exemption. Both the court of appeals and the dissenting Supreme Court justice concluded that the outpatient clinic was a doctor’s office and, thus, should not be property tax exempt. The majority concluded that it was not a doctor’s office.

The majority analyzed seven factors in assessing this issue and found that five of the seven favored a conclusion that the outpatient clinic was not a doctor’s office. The majority also noted some other matters that bolstered its conclusion. The factors and their application to the outpatient clinic are as follows:

  • Whether Physicians Practicing at the Outpatient Clinic Receive Variable Compensation to the Extent of Their Services
    The court found the physicians do not receive variable compensation based on the extent of their services. This factor was not explained in any depth, but presumably it means that the physicians were not paid variable compensation by the outpatient clinic, but rather billed patients directly for the professional services provided at the outpatient clinic. This factor weighed in favor of exemption.
  • Whether the Physicians Receive Extra Compensation for Overseeing Non-Physician Staff
    The court found that the non-physician staff was employed by the hospital, not the physicians, and there was no extra compensation paid to the physicians for overseeing the non-physician staff. This reflected that the non-physician staff did not work for the physicians and weighed in favor of the exemption.
  • Whether the Bills for the Outpatient Clinic Were Generated Using the Same Software as for the Inpatient Facility of St. Joseph
    The court found that the same software generated both bills. This reflected integration of the services between inpatient hospital and the outpatient clinic and weighed in favor of the exemption.
  • Whether the Physicians Had Their Own Offices at the Outpatient Clinic
    The court found no physician had his/her own office; rather, each physician shared access to unassigned cubicles when seeing patients at the outpatient clinic. This suggested that, like physicians using the facilities of a hospital to see patients, the physicians using the outpatient clinic did not have dedicated office space. This factor weighed in favor of the exemption.
  • Whether the Physicians Own or Lease the Building or Equipment of the Outpatient Clinic
    The court found that St. Joseph, not the physicians, leased and, thus, controlled and operated the equipment and space. The physicians did not pay rent for their use of the outpatient clinic. St. Joseph billed patients for use of the facility. This factor weighed in favor of the exemption.
  • Whether the Outpatient Clinic Provides Inpatient Services
    The court found no inpatient services were provided at the outpatient clinic. This factor weighed against the exemption.
  • Whether Most Patients Are Seen by Physicians at the Outpatient Clinic by Appointment During Regular Business Hours
    The court found that most patients were seen by appointment. This factor weighed against the exemption.
  • Further Considerations
    The court also mentioned that the presence of a gift shop and cafeteria for use by patients, staff, and visitors, which were not typical of a doctor’s office, bolstered the conclusion that the outpatient clinic was not a doctor’s office. The fact that the patients of the outpatient clinic receive separate bills for professional services and for a facility fee supported the conclusion that it was not a doctor’s office.

In weighing all seven factors and the other matters noted, the court concluded that the outpatient clinic was not a doctor’s office.

Lessons. For a hospital seeking an exemption this discussion suggests some important criteria. It will be important not to have physicians with dedicated office space in the outpatient location. As is common in hospital-based operations the hospital should be billing a facility fee and not charging the physicians rent. The compensation of the physicians both for the professional services provided and for oversight of non-physician hospital personnel also should be analyzed. Ownership of the space and equipment and integration of software and systems also will be important issues. The presence of other factors, such as a gift shop and cafeteria, also will be factors. A hospital may want to consider structuring operations to reflect these factors as it considers its application for an exemption.

Was the Outpatient Clinic Used for Commercial Purposes?

The court explained that the fact that the facility was operated to generate revenues in excess of expenses did not mean that it was operated for commercial purposes. As the court stated: “A not-for-profit entity is ‘not required to use only red ink in keeping its books and ledgers.’”

Instead, the court stated the test as to whether the outpatient clinic was operated for commercial purposes was whether making a profit was its primary aim.

The court noted that the outpatient clinic was devoted to the diagnosis, treatment, and care of the sick, injured, and disabled. It listed several goals beyond profit margin. Its business plan promoted faith-based health care. And, it served Medicare and Medicaid patients.

With all these factors, the court concluded the primary aim was not profit generation and the outpatient clinic was not operated for commercial purposes.

Lessons. The lessons on this point are to articulate the reasons and purposes for the outpatient operation with an emphasis on the provision of and access to quality health care. Taking Medicare/Medicaid patients and offering a charity care policy also will be important.

Did Any Part of the Net Earnings Inure to the Benefit of Any Shareholder, Member, Director, or Officer?

The court analyzed this question as turning on whether Covenant, a not-for-profit hospital corporation that was the corporate member of St. Joseph, qualified as a “member” as that term is used in the Wisconsin property tax exemption statute. The court analyzed the issue and concluded that a not-for-profit corporation is not a “member” for determining whether net earnings improperly inure to a member.

Lessons. There is little from a planning perspective with respect to this issue. Tax exempt entities with not-for-profit corporate members, which is a typical structure, should not cause concerns on qualifications for the exemption.


The Wisconsin Supreme Court has made it clear that offsite outpatient departments of a hospital may qualify for a property tax exemption in Wisconsin. Hospitals with offsite departments that are not currently tax exempt will want to consider filing for a property tax exemption. In doing so, they will want to consider certain lessons, noted above, on how to structure the outpatient clinic to help ensure their outpatient facilities are property tax exempt.

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues. If you have any questions about this alert or would like to discuss the topic further, please contact your Foley attorney or the following:

C. Frederick Geilfuss
Milwaukee, Wisconsin

Lynette M. Zigman
Milwaukee, Wisconsin

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