A number of Pennsylvania not-for-profit hospitals and hospital systems are reassessing whether or not to continue making contributions to local schools and municipalities in lieu of real estate taxes in light of a recent favorable ruling from the state Supreme Court.
In March, the state's highest court ruled 6-1 that 248-bed Easton (Pa.) Hospital qualified for a property-tax exemption under state law as a charitable institution because it earns and reinvests its money in the public interest (April 17, p. 20).
The Borough of Wilson, Wilson Area School District and Northampton County in 1990 had challenged the hospital's historic tax exemption, saying it didn't operate entirely free of a private profit motive.
The taxing bodies were alleging that Easton owed annual real estate taxes of $600,000 from 1990 to 1995, or roughly $3.6 million. In fiscal 1999, Easton lost $901,000 on revenue of $231.8 million.
But the court's ruling means profits--no matter how high--won't risk a hospital's property-tax exemption as long as the money is put to charitable uses. Such uses include providing indigent care for free or reduced prices and working to meet special healthcare needs of the community.
The fear of losing their exemptions has prompted an estimated one-third of the state's 250 hospitals to make payments to school districts and municipalities over the past 15 years in lieu of real estate taxes. The state hospital association does not track such payments.
"I'm not aware of any hospitals declaring war on communities, but I know at least one that wants to stop paying but seeks to do it in a diplomatic way so as to minimize impact on the community," said Larry Silver, Easton's tax attorney, who declined to identify the hospital.
Another organization rethinking its position is the 495-bed, three-hospital Susquehanna Health System in Williamsport, Pa., which has been paying about $100,000 a year to the local school district to avoid litigation.
"That agreement is concluding this year, and we're obviously evaluating now whether it will be appropriate to consider any kind of arrangement given the Supreme Court decision," said Don Creamer, the system's president and chief executive officer.
Creamer said a separate and voluntary annual $30,000 payment to the city of Williamsport for police, fire and other municipal services will continue.
Chris Markley, the vice president of legal services for the 857-bed, four-hospital PinnacleHealth System in Harrisburg, said an agreement to pay $1 million annually to local school and municipal taxing districts ends in 2001 and will be reviewed.
Pinnacle was part of the Easton case but settled before the state Supreme Court ruling. "It was a risk-balancing decision," Markley said. "But if the Supreme Court had ruled the other way we could have faced back taxes, interest and penalties of close to $48 million dating back to 1993."
James Redmond, senior vice president of the Hospital and Healthsystem Association of Pennsylvania, said hospitals were pleased with the Supreme Court's decision. But he added that he doesn't expect a stampede of hospitals seeking to extricate themselves from tax-paying commitments.
Instead, Redmond said hospitals are worried about the effect of a 1997 state law that outlines how not-for-profit organizations can meet the property-tax exemption criteria established in a 1985 ruling by the state Supreme Court, which opened the door to the property-tax challenges. The constitutionality of that law has not been tested.