School districts score major win over Tower Health in property-tax cases

Commonwealth Court on Friday ruled that four Tower Health hospitals, including one that has been sold, are not eligible for property-tax exemptions.

The decisions are a significant victory for the four school districts in Chester and Montgomery Counties that are home to Brandywine, Jennersville, Phoenixville, and Pottstown Hospitals. Each district filed its own suit.

If the decisions withstand a potential appeal to the state Supreme Court, they could have a major impact on Pennsylvania’s nonprofit hospitals, which historically have had a relatively easy road to property-tax exemption as long as they treat people regardless of their ability to pay.

Commonwealth Court’s key finding was that Tower did not meet one of Pennsylvania’s requirements for property-tax exemption because too much executive pay was tied to Tower’s financial performance.

“We agree with the trial court’s characterization of the Tower Health executive salaries at issue as ‘eye popping,’ ” Judge Christine Fizzano Cannon wrote in a decision involving Pottstown School District. She also wrote that Tower’s policy of tying 40% of the executives’ bonuses to the nonprofit hospitals’ financial performance was overly oriented toward profits.

In that case, Commonwealth Court overruled a Montgomery County Court of Common Pleas judge who decided in October 2021 that Pottstown Hospital deserved the exemption and did not have to pay $924,000 in yearly property taxes. She also wrote that Tower’s policy of tying 40% of the executives’ bonuses to the nonprofit hospitals’ financial performance was overly oriented toward profits.

Pottstown’s superintendent Stephen Rodriguez said he was thrilled by the decision. “This decision is validation that our concerns with Tower Health were appropriate. They did not meet the measure of the law and should be paying their fair share of taxes and I look forward to them paying up.”

Tower said it was reviewing the rulings and had no comment.

The other cases involved three school districts in Chester County: Avon Grove School District, Coatesville Area School District, and Phoenixville Area School District. Those districts received a favorable lower court ruling in October 2021 from Judge Jeffrey R. Sommer of the Chester County Court of Common Pleas.

Sommer found that the three hospitals did not qualify for property-tax exemption for three main reasons: They do not provide enough free services, the hospitals’ businesses are too intertwined with doctors at for-profit practices, and they don’t operate free of private profit motives because of how they structure executive compensation.

In his decision, Sommer said he expected and welcomed review by appeals courts, and suggested that the tests used to determine whether a nonprofit hospital is eligible for property-tax exemption no longer fit the structure of health care in the 21st century.

In its appeal, Tower argued that Sommer’s opinion was riddled with factual and procedural errors and should be tossed.

Commonwealth Court agreed that there were errors but found that none of them were fatal to Sommer’s ruling. In a notable win for hospitals, the appeals court disagreed with Sommer’s finding that allowing doctors from for-profit practices undermined Phoenixville Hospital’s bid for tax exemption.

But the Commonwealth Court judges agreed with Sommer’s finding that the ever-rising management fees Phoenixville Hospital paid to Tower Health demonstrated that Tower and the hospital had a profit motive. “We find no error in the trial court’s reasoning,” Cannon wrote.

“The Phoenixville Area School District is pleased that the Commonwealth Court upheld Judge Sommer’s decision and affirmed that the Phoenixville Hospital should be paying its fair share of taxes,” said district superintendent Alan Fegley.

Fegely said in 2021 that the school district wanted nearly $1 million in taxes from the hospital.

Of the four rulings, the Phoenixville and Pottstown decisions are the most significant in a practical sense for the school districts, because Tower intends to continue operating hospitals in those counties.

Brandywine Hospital, near Coatesville, likely lost its exemption when it closed last year. That mean the property was no longer being used for a charitable purpose.

Tower sold the shuttered Jennersville Hospital, in West Penn Township, to ChristianaCare last year.