Healthcare News & Insights

Nonprofit hospitals may have to pay property taxes

The future of nonprofit hospitals being exempt from local taxes may be in jeopardy, all thanks to a recent legal decision that prompted a tax settlement for a New Jersey hospital. 

ThinkstockPhotos-179255814National tax exemptions are set by the IRS, and they require nonprofit hospitals to meet certain standards (such as having explicit policies relating to charity care).

However, local taxes are at the discretion of each state. And a New Jersey tax judge ruled one nonprofit hospital shouldn’t be exempt from property tax payments.

Due to this decision (as discussed in a Modern Healthcare article), Atlantic Health System, owner of Morristown Medical Center, has agreed to pay $26 million to the municipality of Morristown, NJ.

Relationships with for-profits

According to the judge, the most significant reason why Morristown Medical Center was liable for property tax payments was that its operations weren’t any different than those of a for-profit hospital. And if nonprofit hospitals are run in a similar fashion, “for purposes of the property tax exemption, modern nonprofit hospitals are essentially legal fictions, the court said.”

The judge specifically cited several reasons why Morristown Medical Center may not fully qualify as a nonprofit hospital, as noted by Modern Healthcare. The facility has close relationships with for-profit subsidiaries, and the hospital also owned several for-profit physician practices. Because of these circumstances, it was tough to distinguish between the hospital’s for-profit and nonprofit activities.

Many nonprofit hospitals across the country have similar financial ties with for-profit entities. If this logic were applied to their operations, they’d also be in danger of losing their nonprofit status.

Settlement sign of trend?

After the judge’s decision, Morristown Medical Center decided to settle with the municipality, agreeing to pay $15.5 million (including over $5 million in penalties) in the next 10 years. It’ll pay an additional $1 million in taxes each year for the next decade.

This settlement means the days of nonprofit hospitals enjoying property tax breaks could be over soon. Right now in New Jersey, the issue is expected to move to the state’s legislature so officials can create clear guidelines for what exactly nonprofit hospitals should be paying.

Per Modern Healthcare, other hospitals that have dealt with legal battles in recent years over their eligibility for property-tax exemptions include Provena Covenant Medical Center in Illinois and UPMC in Pittsburgh.

Similar legal conflicts could start arising throughout the country, especially as cash-strapped areas start exploring alternate avenues for revenue. So it’s important to keep an eye out for any pending changes regarding hospitals and their nonprofit status coming out of your state legislature – and to make your voice heard about any relevant laws.

We’ll keep you posted on any further developments.

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