The New Jersey Tax Court revoked Morristown Medical Center’s property tax exemption in June, triggering $2.5M-$3M in annual taxes going forward. Of the hospital’s 40+ acre property, only the visitor parking garage, auditorium and fitness center remain exempt. Last month, the hospital entered into a settlement agreement with the taxing authorities whereby it will pay $15.5M in back taxes as a result of the court case, which originated in 2006. In 43 pages, the Tax Court detailed its concerns with the hospital. The decision was unique in that it evaluated the “entangled” nature of the hospital system’s nonprofit and for-profit components rather than looking to charitable care and contributions. This case will cause Pennsylvania hospitals and their ancillary facilities to continue to be more closely scrutinized.
Reasons for the revocation included:
- The majority of physicians in the hospital were private, for-profit doctors not employed by the hospital: (i) “voluntary physicians” who served in the community and had hospital privileges and (ii) “RAP doctors” who held exclusive hospital contracts to provide medical services such as radiology, anesthesiology, pathology and emergency services. The for-profit “voluntary physicians” admitted 83% of the hospital’s patients. These physicians issued invoices directly to the patients, not through the hospital billing system. The for-profit physicians also had full access to the entire hospital and no restrictions were in place to limit where in the hospital they could actually practice. When pressed to highlight the location of for-profit medical services on a floor plan, the hospital was unable to do so. “These physicians operate on a for-profit basis and are therefore subject to taxation. Accordingly, the court must be able to determine where these physicians practice on the Subject Property in order to identify the areas of the Hospital that are subject to taxation. Likewise, the court must be able to determine where these physicians do not practice on the Subject Property in order to identify the areas of the Hospital where exemption may be preserved. Such a delineation is not possible in this case.”
- The hospital employed a small percentage of non-profit physicians who also utilized the hospital. The non-profit physician employment contracts were found to be drafted in a manner that allowed for profit sharing. These physicians were given an incentive component in addition to their base compensation, with the incentive pools being derived from departmental expense savings. The excess was split between the hospital and the non-profit physicians.
- The hospital is part of a health network that includes several for-profit entities: 5 captive P.C.s; at least 10 additional for-profit affiliates; and a captive insurance trust fund organized under the laws of the Cayman Islands. The Court seemed to particularly dislike overlap in Directors and Officers for the nonprofits and for-profits, even where the officers were largely passive and did not oversee day-to-day operations of the for-profit affiliates. Holding joint Board meetings between the for-profits and nonprofits was also criticized.
- The hospital made substantial loans to the for-profit affiliates. Specifically with respect to the captive insurance trust fund, the hospital “entangled” its activities with the trust fund by loaning it millions of dollars, paying millions of dollars of expenses and guaranteeing a $10M line of credit.