A Pa. hospital’s revoked property tax exemption is a ‘warning shot’ to other nonprofits, expert says

This story originally appeared on Spotlight PA.

A Commonwealth Court judge recently revoked a Southeastern Pennsylvania hospital’s property tax exemption and denied appeals regarding three others, decisions that one expert said should serve as a “warning shot” for nonprofit facilities statewide.

In response to a case brought by the Pottstown School District, Judge Christine Fizzano Cannon found that the nonprofit Tower Health system was operating a Montgomery County hospital with the motive of profit. She also upheld rulings that three Chester County hospitals owned by Tower Health aren’t eligible for property tax exemptions.

In Pennsylvania, a nonprofit organization must prove it is a “purely public charity” to qualify for a property tax exemption. The state Supreme Court in a 1985 ruling created five standards. An organization must show it:

• Advances a charitable purpose.
• Donates or renders 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.
• Operates entirely free from private profit motive.

Cannon said that Tower Health charged the hospitals exorbitant management fees and rewarded executives for the financial success of the hospitals, meaning it did not meet the fifth standard.

Tower Health did not respond to a request for comment about whether it plans to appeal. Court records show the three Chester County hospitals have filed motions for reconsideration.

Pennsylvania schools are primarily funded by property taxes, and tax exemptions can add up to millions of dollars every year.

Stephen Rodriguez, superintendent of the Pottstown School District — which brought the case against Pottstown Hospital and Tower Health —said the tax exemption made the district lose out on roughly $900,000 annually.

“A million dollars is, you know, 10, 12 teachers,” he said.

Of the state’s 148 general, medical, and surgical hospitals, 131 were nonprofits in 2021, according to the Pennsylvania Department of Health.

Cannon’s decisions are a “warning shot” to those facilities, said David Hyman, a professor of health law and policy at Georgetown who studies nonprofit hospitals’ tax exemptions. But the repercussions for other hospitals, he said, will depend, in part, on whether local taxing authorities are willing to bring lawsuits.

The last time there was a significant push by taxing authorities to challenge the tax-exempt status of hospitals in Pennsylvania was three decades ago, Modern Healthcare reported.

In 1990, an Erie County judge ruled the parent corporation of Hamot Medical Center used the hospital to generate money for real estate investments. The facility lost its exemption.

Three years later, the hospital regained tax-exempt status and agreed to pay 50% of the taxes it would otherwise owe to the city, the county, and the school district. The hospital, now UPMC Hamot, currently has a similar agreement.

Since then, several other hospitals in Pennsylvania have also agreed to make payments in lieu of taxes, or PILOTs, in order to avoid the risk of litigation.

But a decade-long push in Pittsburgh against UPMC, a large nonprofit health care system headquartered there, shows just how difficult it can be to force providers into voluntary agreements that recoup a meaningful amount of money.

UPMC owns $2.1 billion worth of tax-exempt property in Allegheny County, according to a joint report from the county’s and city’s controllers. In 2021, UPMC’s “exemptions reduced its tax liability by $9.8 million to the county, $13.9 million to Pittsburgh, and $58.3 million to all local governments and school districts,” according to the report.

Between 1973 and 2006, Pittsburgh recouped only 8% of the taxes lost to UPMC’s tax exemption through PILOTs, according to the controllers.

Pittsburgh Controller Michael Lamb said there hasn’t been a PILOT agreement with any of the city’s larger nonprofits for at least 10 years. “Even when we had a PILOT agreement with other nonprofits, we didn’t have one with UPMC,” he said.

In 2013, Pittsburgh filed a lawsuit to strip UPMC of its tax-exempt status, but a judge dismissed the case, saying the city should have sued subsidiary organizations. Then-Mayor Bill Peduto decided in 2014 to focus on PILOT negotiations rather than pursue further legal action.

Seven years later, Peduto announced the formation of OnePGH, a new nonprofit that would liaise between the city and its largest nonprofits. He said UPMC and other large nonprofits would collectively contribute $115 million over five years to programs to address inequities in Pittsburgh.

Peduto’s successor, Ed Gainey, criticized the program as “too little … too late” during his campaign, and later pulled out of it.

While running for office, Gainey also promised to resume legal action against UPMC. But at the moment, there are no plans to challenge the tax-exempt status of UPMC or other nonprofits in court, said city spokesperson Maria Montaño.

Instead, Gainey earlier this year launched a citywide review of tax-exempt property.

“This is one avenue,” Montaño said. “It’s our first step in making sure everybody pays their fair share.”

Pittsburgh’s new review will examine whether each nonprofit that has received a property tax exemption is meeting the standards set by the state Supreme Court in the ‘80s.

If nonprofit hospitals are not providing enough community benefit, they don’t deserve an exemption, Hyman said. “And if the consequence of that is they shut down, we shouldn’t subsidize things,” he said.

Much of Hyman’s research compares the charity care provided by nonprofit and for-profit hospitals. Hyman said many nonprofit hospitals nationwide are not providing enough charity care to warrant receiving tax exemptions, especially because for-profit hospitals also provide charity care.

A 2022 report from the Lown Institute, a nonpartisan think tank, found the tax exemptions granted to UPMC far exceed the value of charity care and community investment that the system provides. UPMC disputed the findings.