New Jersey hos­pi­tal’s loss of tax ex­emp­tion sends a warn­ing

Modern Healthcare - - NEWS - By Lisa Schencker

Many not-for-profit hos­pi­tals across the coun­try could lose their tax ex­emp­tion if the same anal­y­sis of for-profit ac­tiv­i­ties is ap­plied to them as a New Jersey Tax Court judge re­cently used in re­vok­ing a Mor­ris­town hos­pi­tal’s prop­erty-tax ex­emp­tion, ex­perts say.

Tax Court Judge Vito Bianco de­cided last month that be­cause Mor­ris­town Med­i­cal Cen­ter op­er­ates in many ways like a for-profit busi­ness, it should not be ex­empt from prop­erty taxes. The hos­pi­tal and its par­ent, At­lantic Health Sys­tem, brought the law­suit against the city of Mor­ris­town af­ter the mu­nic­i­pal­ity had de­nied the hos­pi­tal’s claims for prop­erty-tax ex­emp­tions for sev­eral years.

The rul­ing comes at a time when the tax-ex­empt sta­tus of not-for-profit hos­pi­tals faces in­creased scru­tiny amid con­cerns that some are act­ing more like for-profit en­ti­ties, es­pe­cially when it comes to lim­ited com­mu­nity ben­e­fit ac­tiv­i­ties and ag­gres­sive debt col­lec­tion. Though the judge’s rul­ing af­fected only the Mor­ris­town hos­pi­tal, ex­perts say it could have im­pli­ca­tions for hos­pi­tals else­where.

“The facts they have here are not unique at all to Mor­ris­town,” said Michael Meiss­ner, a tax part­ner at Squire Pat­ton Boggs. “If this stan­dard were ap­plied across the board or across the coun­try, you would have a lot of hos­pi­tals that would have some se­ri­ous con­cerns.”

The judge in the Mor­ris­town case sug­gested as much. “If it is true that all non­profit hos­pi­tals op­er­ate like the Hos­pi­tal in this case, as was the tes­ti­mony here, then for pur­poses of the prop­erty-tax ex­emp­tion, mod­ern non­profit hos­pi­tals are es­sen­tially le­gal fic­tions,” Bianco wrote.

The judge noted that the hos­pi­tal has re­la­tion­ships with for-profit sub­sidiaries and owns a num­ber of for­profit physi­cian prac­tices. The court was “un­able to dis­cern be­tween non­profit ac­tiv­i­ties car­ried out by the Hos­pi­tal on the Sub­ject Prop­erty, and the for-profit ac­tiv­i­ties car­ried out by pri­vate physi­cians,” he wrote. “By en­tan- gling and co-min­gling its ac­tiv­i­ties with for-profit en­ti­ties, the Hos­pi­tal al­lowed its prop­erty to be used for for­bid­den for-profit ac­tiv­i­ties.”

In ad­di­tion, the hos­pi­tal paid its ex­ec­u­tives un­rea­son­ably high salaries, in­clud­ing $5 mil­lion to its CEO in 2005, the judge said.

In a joint state­ment, At­lantic Health and the mu­nic­i­pal­ity of Mor­ris­town said the judge last week granted a re­quest by the par­ties for more time to set­tle the mat­ter.

Hos­pi­tals in Illi­nois, Ohio and Penn­syl­va­nia also have faced tax chal­lenges.

Jim Flynn, who heads the healthcare prac­tice group at Bricker & Eck­ler, said more chal­lenges to hos­pi­tals’ prop­erty tax-ex­empt sta­tus are likely as state and lo­cal gov­ern­ments hunt for in­creased prop­erty rev­enue to ease bud­get crunches. “It’s not the first one of these, and it’s not go­ing to be the last,” he said. “This de­ci­sion is ob­vi­ously a bad sign for the way that trend is flow­ing.”

Many of the prac­tices cited by the judge, such as trans­ac­tions be­tween Mor­ris­town Med­i­cal Cen­ter and for­profit physi­cians, are rel­a­tively com- mon to not-for-profit hos­pi­tals, he said.

The hos­pi­tal’s ex­ec­u­tive com­pen­sa­tion also is not par­tic­u­larly unique, Meiss­ner said. “Cer­tainly, they are not the only hos­pi­tal sys­tem in the coun­try where the CEO is mak­ing mul­ti­ple mil­lions of dol­lars to run the hos­pi­tal sys­tem,” he said.

Not-for-profit hos­pi­tals in the U.S. re­ceived a col­lec­tive $24.6 bil­lion tax break in 2011, about twice as much as a decade ear­lier, ac­cord­ing to a re­cent study in Health Af­fairs. That in­cludes fed­eral and state taxes and the abil­ity to raise money through tax-ex­empt do­na­tions and mu­nic­i­pal bonds.

It can be dif­fi­cult for hos­pi­tals to meet the goals of the re­formed U.S. healthcare sys­tem, in­clud­ing im­prov­ing care while low­er­ing costs, with­out en­ter­ing into many of the types of busi­ness ar­range­ments crit­i­cized by the judge in the Mor­ris­town case, said Don Stu­art, a part­ner at Waller Lans­den Dortch & Davis who also leads the Amer­i­can Health Lawyers As­so­ci­a­tion’s tax and fi­nance prac­tice group. “Hos­pi­tals are be­ing pushed out there to be­come cre­ative and col­lab­o­rate and do more with what they have,” Stu­art said.

The Mor­ris­town case was some­what un­usual, Stu­art said, in that the court fo­cused on the hos­pi­tal’s oper­a­tions and struc­ture rather than the ben­e­fit it pro­vides to the com­mu­nity. The case may prompt hos­pi­tals to work with state law­mak­ers to more clearly de­fine what they must do to pre­serve their tax ex­emp­tion, Stu­art added.

For ex­am­ple, Illi­nois passed a law that re­quires not-for-profit hos­pi­tals to pro­vide cer­tain ser­vices whose value is equal to the amount of tax sav­ings they re­ceive from their prop­erty tax ex­emp­tion. Stu­art said New Jersey hos­pi­tals may push for sim­i­lar clar­ity.

Bianco said in his opin­ion the is­sue of how to han­dle hos­pi­tals’ tax ex­emp­tions is more ap­pro­pri­ate for the Leg­is­la­ture than the courts. “If the prop­er­ty­tax ex­emp­tion for mod­ern non­profit hos­pi­tals is to ex­ist at all in New Jersey go­ing for­ward, then it is a func­tion of the Leg­is­la­ture and not the courts to pro­mul­gate what the terms and con­di­tions will be,” he wrote.

“The facts they have here are not unique at all to Mor­ris­town. If this stan­dard were ap­plied across the board or across the coun­try, you would have a lot of hos­pi­tals that would have some se­ri­ous con­cerns.”

Michael Meiss­ner Tax part­ner Squire Pat­ton Boggs

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