Tower Health is denied property-tax exemption for three Chester County hospitals

A Chester County judge rejected Tower Health’s bid for property tax exemptions for Brandywine, Jennersville, and Phoenixville Hospitals, saying those operations had become too similar to for-profit companies and didn’t deserve to be free of property taxes.

The decision strikes another blow to Tower, which vowed to appeal as it struggles to reverse large losses. It represents a rare loss for any nonprofit hospital.

The ruling also shows how health care is becoming more complicated and far removed from its philanthropic roots, at least according to one judge.

The 44-page decision came a week after a Montgomery County judge ruled in favor of Tower’s application for a property-tax exemption for Pottstown Hospital, reflecting the messiness in Pennsylvania of determining nonprofit property tax exemptions based on a jumble of state laws and legal precedent.

“These outdated, competing, and often contradictory sources no longer offer appropriate direction as each one fails to reflect the current state of medical care and the delivery of such in the 21st century,” Judge Jeffrey R. Sommer of the Chester County Court of Common Pleas wrote in a decision signed Thursday.

Sommer, whose decision was full of commentary, said he anticipated an appeal and welcomed it.

» READ MORE: Former Tower Health CEO Clint Matthews’ push for more money revealed in Montco court papers

The case presents an occasion for appellate courts and legislatures to review property-tax exemptions in the health-care industry, Sommer said, and “to perhaps acknowledge that the existing tests, no matter where found, can no longer be applied to health care entities in the United States and particularly in Pennsylvania.”

The Philadelphia region is home to dozens of nonprofit hospitals, most of which are parts of complex businesses and bear little resemblance to the old model of hospitals supported by community largesse.

Experts said the decision could lead to changes in how requests for property-tax exemptions for nonprofit hospitals are evaluated.

“The judge is trying to ignite a spark and see if it catches,” said Robert Field, a professor of law and of health management and policy at Drexel University. “Partly, it’s municipalities and counties looking for more tax revenue, and partly, it’s the evolution of health care.”

A New Jersey judge in 2015 denied a hospital’s property tax exemption, concluding that it was too intertwined with for-profit businesses to qualify for the exemption. The state Legislature subsequently imposed a per-bed fee on hospitals that is supposed to be paid to their municipalities, though that law has been challenged in court.

“Tower Health is disappointed in this ruling and will appeal based on what we believe are numerous factual and procedural errors, and a flawed legal analysis,” Tower, based in West Reading, said in a statement.

A lawyer who represents school districts and municipalities in similar cases disagreed. “This is a very well-reasoned opinion,” said Pamela A. Van Blunk, who has offices in Swarthmore and Yardley.

For the three school districts in this case, Avon Grove, Coatesville, and Phoenixville, the nonprofit Tower Health’s purchase of the three hospitals from Community Health Systems Inc., a for-profit, meant the potential loss of hundreds of thousands of dollars in taxes.

“We are very pleased the court ruled decisively in our favor, saving nearly $1 million a year in annual taxes that the hospital was trying to push along to other school district taxpayers,” said Alan Fegley, superintendent of Phoenixville Area School District.

Circumstances for the two other districts, which did not respond to requests for comment, are different.

The three hospitals in Chester County that lost exemptions were among the five Tower bought for $426 million in 2017, as it sought to compete with bigger systems in Southeastern Pennsylvania. But those hospitals have since posted losses of more than $400 million, forcing Tower to attempt a retreat toward Reading with the closure of Jennersville and the pending sale of Chestnut Hill Hospital in Philadelphia.

Tower announced late last month that it plans to close Jennersville Hospital, in West Grove, effective Jan. 1. Brandywine Hospital remains open but its future is in doubt. In both cases, the properties would go back on the tax rolls if they were sold to for-profit businesses.

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.

Hospitals typically provide very few free services. To meet the requirement that they donate a substantial amount of services, they point to their participation in government insurance programs such as Medicare and Medicaid, which, they say, underpay them.

That’s often enough for judges, but it was not for Sommer.

Sommer agreed with Tower that “uncompensated Medicare costs may be considered in an exemption analysis,” but said Tower didn’t present enough evidence, leaving “the court merely to speculate as to the amounts of uncompensated care.”

Van Blunk, who was not involved in the Chester County cases, agreed. “You can’t just make a blind argument, because we have 200 Medicaid patients, we lost money,” she said. “How much did it cost you to provide the care to those 200 patients?” Without that information, it’s impossible to know how much should count as donated services, she said.

Under Pennsylvania Supreme Court precedent, an organization must “operate entirely free from private profit motive” in order to qualify for property-tax exemption.

Sommer found that bonus plans mostly tied to financial performance disqualified the hospitals from tax exemption. “It was very clear from the testimony of all witnesses that the health system was set up to be profitable and to reward executives at all levels when it was,” Sommer said.