Court Rejects Property Tax Exemptions for 4 PA Non-Profit Hospitals

Several non-profit hospitals in Pennsylvania have failed to convince a court that they are purely public charities and, therefore, should qualify for property tax exemptions.

The Pennsylvania Commonwealth Court ruled that the hospitals — Pottstown Hospital, Phoenixville Hospital, Brandywine Hospital, and Jennersville Hospital — were not exempt from local property taxes, per the court cases obtained by RSM.

The hospitals were owned by Tower Health, LLC, which purchased the facilities to be run as non-profit hospitals in northeastern Pennsylvania. RSM reports that the hospitals were operated as limited liability companies, with Tower Health as the sole shareholder of each.

However, in the last year, Brandywine Hospital closed and Tower Health sold Jennersville Hospital to ChristianaCare.

The hospitals paid “exorbitant” fees to Tower Health, ranging from $1 million to over $21 million, according to the court cases, including an appeal to a trial court. The funds covered management fees, central business office fees, and bond issue interest payment obligations.

However, the trial court found the fees went to purposes other than hospital support. Additionally, executives at Tower Health received bonuses based on the company’s financial performance, with at least 40 percent of executive bonuses being based on financial versus clinical or patient satisfaction metrics. The percentage was substantial enough to support the argument that the incentive structure drove profit-seeking behavior.

Finally, the trial court also ruled that interest payments on bonds for the purchase of other properties were improper and “[n]ot one penny from the bonds were [sic] applied to support and to increase the efficiency of and facilities of each hospital.”

Entities, including hospitals, must show that they operate as “purely public charity” institutions to qualify for an exemption. By law, that means the entity advances a charitable purpose, donates or provides gratuitously a substantial portion of its services, benefits a substantial and indefinite class of persons who are legitimate subjects of charity, relieves the government of some of its burden, and operates entirely free from private profit motive.

The court said the hospitals could not satisfy the latter criterion of a purely public charity institution—operating entirely free from private profit motive. Tower Health can appeal the decision.

Leaders at RSM said that the cases in Pennsylvania “illustrate some of the challenges of obtaining and retaining state and local tax exemptions” and highlight steps [non-profits] can take to ensure they continue to qualify for those exemptions.”

Nearly all states have similar rules for tax exemptions for non-profit companies, although RSM leaders noted that Pennsylvania has “an incredibly complex and nuanced local real property tax regime, as well as public charity exemptions granted in the state constitution and limited by case law.”

Regardless, hospital leaders need to understand the scope of state laws dictating tax exemptions for non-profit entities, especially since they can vary from federal exempt organization provisions.

RSM leaders advised companies to assess their bonus structures, particularly if bonuses are tied to financial metrics, since that may raise questions about a company’s profit motives. Additionally, companies should have comprehensive record-keeping and auditing in place to mitigate threats to their organization’s exempt status.

Non-profit hospitals have been under the spotlight lately. Some experts have questioned whether community investments and charity care from non-profit health systems justify tax exemptions.  An 2021 report from the Lown Institute Hospitals Index also revealed that nearly three-quarters of private non-profit hospitals spent less on community health investments than they received in tax breaks in 2018.

However, the American Hospital Association maintains community benefits from non-profit hospitals exceed the federal revenue foregone due to tax exemption.