Property tax exemptions and local hospitals: the Tower Health example

Photo: Ben Hasty, Reading Eagle.

Reading, Pennsylvania-based Tower Health, which started with Reading Hospital but like most hospitals grew into a larger network, including a misguided attempt to expand into Philadelphia and its suburbs by buying a set of community hospitals from a for profit hospital firm, which has been a financial disaster ("Tower Health records massive loss on St. Chris and other hospitals it bought in Philadelphia region," "Tower is selling Chestnut Hill Hospital, closing Jennersville, as it digs out from massive losses," Philadelphia Inquirer), is also dealing with a series of property tax cases.

When the hospitals were owned by a for profit firm, they weren't eligible for a tax exemption.  That changed when Tower Health, ostensibly a nonprofit, purchased them, costing localities including school districts a significant amount of tax revenue.

Chester County challenged the tax exemption for three hospitals which Tower Health is now selling or closing, while Montgomery County challenged the tax exemption for Pottstown Hospital, which is still operating ("Tower Health fights for its tax-exempt status, and local governments are watching," Reading Eagle).

The Chester County court ruled that Tower's exemptions were unjustified, although Tower is challenging the ruling, while Montgomery County's ruling was the opposite.

One of the points made in the Chester County case was that the hospital system doesn't really function much differently from a for profit hospital chain in that funds are redirected to the parent, and that the hospitals don't provide all that much free care for charity patients, merely provide care to people who have Medicaid or Medicare coverage anyway.  The judge relied on these points in making the decision.

The Montgomery case was based on compensation and incentives being based on for profit hospital metrics and were significantly out of line for nonprofits.

Separately I came across an article ("Sanford reports $65 million in payouts to former executives," Sioux Falls Business) about the "tie off" compensation being provided to the former CEO of South Dakota based Sanford Health which has multiple facilities in South Dakota and surrounding states, but as far afield as California.  

It's $46 million!!!!!!!!!!!!!!

Sanford Health is a nonprofit.

This definitely reiterates the point made by Montgomery County, Pennsylvania in its challenge of the property tax exemption for Pottstown Hospital.

2.  Payments in lieu of taxes/PILOTs.  Cities tend to have a preponderance of nonprofit institutions with property tax exemptions, which has a serious impact on municipal finance.  Some nonprofit institutions make an annual payment to cities to cover some of the costs that they impose.  

-- Payments in Lieu of Taxes: Balancing Municipal and Nonprofit Interests, Lincoln Land Institute
-- "PAYMENTS IN LIEU OF TROUBLE: NONPROFIT PILOTS AS EXTORTION OR EFFICIENT PUBLIC FINANCE?," NYU Environmental Law Journal

But most officials complain that the payments generally come nowhere near compensating communities for costs incurred.

3.  Not all nonprofits may be tax exempt when it comes to property.  Generally, state law dictates whether or not nonprofits are entitled to property tax exemptions.  In most states it's categorical and an exemption is provided automatically.

By contrast, in DC, to receive a property tax exemption, the organization has to provide a high degree of service within the city, to the city.  For example, national trade associations or think tanks (Heritage Foundation, etc.) generally are deemed to not provide services to DC residents proper, so they aren't entitled to a property tax exemption.

It would be reasonable to create a "table of authorities" on the criteria for which nonprofits are entitled or not entitled to property tax exemptions, by use category/type of organization, for example hospitals, universities, etc.

The analogy would be how nonprofits can be taxed on "unrelated business income" which is generated by activities not related to the nonprofit purpose.