Hos­pi­tal tax set­tle­ment in N.J. amps up bat­tle over ex­emp­tions

Modern Healthcare - - NEWS - By Lisa Schencker

A na­tion­wide bat­tle is brew­ing over whether not-for-profit hos­pi­tals re­sem­ble other busi­nesses so much that they should be pay­ing taxes to lo­cal gov­ern­ments for the sub­stan­tial swaths of property they own.

That fight might soon move to the New Jer­sey Leg­is­la­ture, as well as oth­ers across the coun­try, as mu­nic­i­pal­i­ties ask hos­pi­tals to pay up.

Mor­ris­town (N.J.) Med­i­cal Cen­ter agreed last week to pay $26 mil­lion to the town of Mor­ris­town, a com­mu­nity of about 19,000 an hour from New York City. The 662-bed hos­pi­tal, part of At­lantic Health Sys­tem, reached the set­tle­ment with lo­cal of­fi­cials fol­low­ing a scathing rul­ing by a state tax judge, who con­cluded that if all hos­pi­tals op­er­ate the same way, “then for pur­poses of the property-tax ex­emp­tion, mod­ern non­profit hos­pi­tals are es­sen­tially le­gal fic­tions.”

The hos­pi­tal will pay the town

$15.5 mil­lion, in­clud­ing $5.5 mil­lion in penal­ties and in­ter­est over the next 10 years. Also, start­ing next year, the med­i­cal cen­ter will pay about $1 mil­lion in an­nual taxes on 24% of its property for the next 10 years.

At­lantic CEO Brian Grag­no­lati said in a writ­ten state­ment that the agree­ment will give both the sys­tem and the town “clar­ity around fi­nan­cial obli­ga­tions.”

But the rest of the not-for-profit hos­pi­tal com­mu­nity in the state is still look­ing for an­swers.

Betsy Ryan, CEO of the New Jer­sey Hos­pi­tal As­so­ci­a­tion, said she expects the larger is­sue to be taken up in the Leg­is­la­ture. The as­so­ci­a­tion has formed a task force to look into the mat­ter.

“It’s too soon to say what the leg­is­la­tion would look like, but as cre­ated by the court de­ci­sion, there is a great deal of un­cer­tainty out there as to how not­for-profit hos­pi­tals would be treated by their mu­nic­i­pal­i­ties,” Ryan said. Many hos­pi­tals, she said, would be sur­prised to read the rul­ing that went against Mor­ris­town Med­i­cal Cen­ter be­cause it “calls into ques­tion a lot of ac­tiv­i­ties that oc­cur at hos­pi­tals all around the state and per­haps the coun­try.”

Michael Meiss­ner, a tax part­ner at Squire Pat­ton Boggs said hos­pi­tals across the U.S. should be aware that mu­nic­i­pal­i­ties are tak­ing a closer look at tax ex­emp­tions.

“I think a hos­pi­tal that is in a city with fi­nan­cial chal­lenges, which pretty much de­scribes most cities, ought to be aware of the chang­ing land­scape and at least take steps to deal with it,” Meiss­ner said. Those steps could in­clude keep­ing records about how a hos­pi­tal is ben­e­fit­ing its com­mu­nity and track­ing its pro­grams in case it’s ques­tioned, he said.

In Illi­nois, state law­mak­ers in 2012 passed leg­is­la­tion sup­ported by the Illi­nois Hos­pi­tal As­so­ci­a­tion that clar­i­fied the rules for tax-ex­empt hos­pi­tals af­ter the Illi­nois Supreme Court nixed a hos­pi­tal’s property tax ex­emp­tion. That ap­pears to be where New Jer­sey is headed, and the sto­ry­line will prob­a­bly re­peat.

“If this kind of chal­lenge spreads to other states,” Meiss­ner said, “you’ll see hos­pi­tals and other ex­empt or­ga­ni­za­tions, col­leges and the like, go­ing to state leg­is­la­tures and say­ing, ‘Let’s set up what the rules are, what we need to do, what ser­vices and char­ity ben­e­fits we need to pro­vide to be ex­empt.’ ”

Mor­ris­town Med­i­cal Cen­ter agreed to pay $26 mil­lion in the tax case.

Michael Meiss­ner, a tax part­ner

at Squire Pat­ton Boggs said hos­pi­tals across the U.S. should be aware that mu­nic­i­pal­i­ties are tak­ing a closer look at tax ex­emp­tions.

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