Under a microscope
Tax-exempt case rulings are being watched carefully
Nonprofit hospitals and municipalities and school districts across Pennsylvania are closely watching the tax assessment cases involving Tower Health.
The Chester County cases involving Phoenixville, Brandywine and Jennersville hospitals and another tax assessment dispute involving Pottstown Hospital are on appeal.
In October, a Chester County judge rejected Tower’s bid for property tax exemptions for three of its Chester County hospitals. Noting the money the hospitals transferred to Tower, Judge Jeffrey Sommer ruled the hospitals are more aligned with for-profit companies.
Also in October, a Montgomery County judge ruled the opposite from the Chester County judge — that Pottstown Hospital can continue to be exempt from property taxes, rejecting the Pottstown School District’s challenge to the status. The district had argued that pay incentives for executives and a push for higher compensation for former CEO Clint Matthews at Tower was more inline with for-profit companies.
Tower has praised the Montgomery County ruling and criticized the Chester County decision.
Attorneys William D. Kennedy and Jared R. Johnson of Berwynbased White and Williams LLP, representing the health provider, called the Chester County ruling “a shot across the bow” of nonprofit hospitals throughout the state.
“A recent trial court decision could have significant, long-term consequences for the financial models of Pennsylvania nonprofit health care providers,” wrote Kennedy and Johnson . “Ruling that three nonprofit Chester County hospitals of the Reading, Pa.,based non-profit Tower Health system are not tax exempt ‘charities,’ a judge has ordered them to begin paying millions in annual local property taxes which fund local school districts.”
Attracting attention
The Tower Health decision has led local municipalities and school districts across the state to consider tendering property tax notices to nonprofit health care entities that long have been deemed exempt from such expenses, Kennedy and Johnson said.
Representatives of the Pennsylvania School Board Association and the Hospital Association of Pennsylvania agreed the decision has their attention.
“The (charitable) exemption has really gotten out of hand,” said Stuart Knade, chief legal officer of the PSBA. “If you want to cut your property taxes in half, put the other half of properties on the tax rolls.”
As it has in similar cases, PSBA will likely file a friend of the court brief as the case is appealed.
The Hospital Association of Pennsylvania is also following the case closely.
“We aren’t able to comment on the specifics of this case as we haven’t been directly involved at this point.” said Liam Migdail, director of media relations at HAP. “But we have been closely following this issue in general and can offer some context.”
Migdail said the association has seen an uptick over the past few years in municipal governments and school districts challenging the taxexempt status of hospitals as they face funding challenges and look to bring in additional revenue.
“HAP has been following several of these cases,” Migdail said in an email. “Up until now, they have mostly been decided in favor of the hospitals. We will continue to follow this case as it is appealed.”
Officials from West Reading, where Tower’s flagship Reading Hospital is located, are also interested.
“We are closely following the tax assessment litigation involving Tower Health Hospitals,” said Jack R. Gombach West Reading borough council president. “Throughout COVID-19 Tower Health was an excellent partner that took extraordinary measure to assist the borough to ensure the well-being of its employees and residents. I am confident that regardless of the outcome of the pending litigation, the new Tower Health leadership will treat the borough of West Reading and its residents fairly.”
A representative of Wyomissing School District could not be reached for comment.
According to a 2018 Reading Eagle article, Tower Health makes an annual payment in lieu of taxes of about $610,000 per year to West Reading and contributes $408,500 in financial support and professional services to the school district. It is unclear how long those agreements are in effect. A 2018 estimate put Berks County’s lost revenue from Tower at about $11 million.
What’s at stake
It’s a lot of money for communities and hospitals.
For example, Pottstown Hospital’s removal from the tax rolls costs the Pottstown School District roughly $924,000 a year in property tax revenue. The hospital’s continued absence from the property tax rolls also costs the borough more than $200,000 per year in property tax revenues.
Since 2018, the district has spent more than $200,000 on legal fees mounting the unsuccessful challenge, the Pottstown Mercury reported.
Meanwhile, attorneys Kennedy and Johnson noted that the Chester County decision could impact nonprofit health care organizations such as skilled nursing facilities, retirement communities and home health care enterprises.
Migdail said preserving tax-exempt status is something “that’s been incredibly important to hospitals across Pennsylvania and nationally for a long time.” Two-thirds of Pennsylvania hospitals are organized as nonprofits.
Migdail said Pennsylvania hospitals provided $809 million in unreimbursed care during fiscal year 2020.
Many hospitals also absorb the significant cost of underpayments from Medicare and Medicaid, which is increasing due to demographic shifts, he said.
He argued that hospitals serve as economic flagships in their communities, directly and indirectly generating more than $155 billion a year in economic activity (about 20% of the state’s total gross domestic product) and supporting 615,000 jobs (one in nine statewide).
Knade argued that allowing property tax exemptions for nonprofit hospitals has the effect of creating an obligation to support charities people did not choose and goes far beyond what was originally conceived for entities that gave uncompensated services to needy people.
He noted that payments or services in lieu of taxes are typically how cases are settled. The problem with such agreements is that they are usually for a limited period, and then the entity remains exempt.
Appeals
White and Johnson said the Chester County judge implored the Legislature “for a long-overdue modernization of the tax-status statutes to fit the current world of health care reimbursements.”
Kennedy and Johnston said hospitals have long organized as nonprofit corporations and received recognition as tax-exempt organizations by the IRS. More than two decades after forprofit hospitals entered the market, there are still twice as many nonprofit hospitals as there are for-profits in the U.S.
They warned nonprofits to pay close attention to the Chester County decision and review how and why revenue from a licensed health care enterprise is transferred to a parent company as well as the overall amount of executive compensation and billing and accounting practices with respect to genuinely uncompensated — as opposed to undercompensated — care.
Tower has appealed the Chester County ruling based on what it contends are factual and procedural errors and a flawed legal analysis. It has praised the Montgomery County ruling, which the Pottstown School District has appealed.
“We are particularly pleased the court acknowledged the more than $47 million in capital investments Tower Health has made at (Pottstown) Hospital since its acquisition, and the more than $43 million in uncompensated care we provided in fiscal year 2020 alone,” Tower said in a statement. “Tower Health continues to invest in Pottstown Hospital and its service to the community.”
Tower’s recent financial statements don’t discuss the possibility of paying taxes. Tower recently wrote off $370 million in value of its hospitals. Not including the write-off, Tower posted a $243.5 million loss for fiscal 2021, which ended June 30. It’s regarded as an improvement over fiscal 2020, when it lost $415.3 million. Tower announced in September it would close Jennersville and sell Chestnut Hill and about 20 urgent cares to Trinity Health Mid-Atlantic.