A nationwide battle is brewing over whether not-for-profit hospitals resemble other businesses so much that they should be paying taxes to local governments for the substantial swaths of property they own.
That fight might soon move to the New Jersey Legislature, as well as others across the country, as municipalities ask hospitals to pay up.
Morristown (N.J.) Medical Center agreed last week to pay $26 million to the town of Morristown, a community of about 19,000 an hour from New York City. The 662-bed hospital, part of Atlantic Health System, reached the settlement with local officials following a scathing ruling by a state tax judge, who concluded that if all hospitals operate the same way, “then for purposes of the property-tax exemption, modern nonprofit hospitals are essentially legal fictions.”
The hospital will pay the town $15.5 million, including $5.5 million in penalties and interest over the next 10 years. Also, starting next year, the medical center will pay about $1 million in annual taxes on 24% of its property for the next 10 years.
Atlantic CEO Brian Gragnolati said in a written statement that the agreement will give both the system and the town “clarity around financial obligations.”
But the rest of the not-for-profit hospital community in the state is still looking for answers.
Betsy Ryan, CEO of the New Jersey Hospital Association, said she expects the larger issue to be taken up in the Legislature. The association has formed a task force to look into the matter.
“It's too soon to say what the legislation would look like, but as created by the court decision, there is a great deal of uncertainty out there as to how not-for-profit hospitals would be treated by their municipalities,” Ryan said. Many hospitals, she said, would be surprised to read the ruling that went against Morristown Medical Center because it “calls into question a lot of activities that occur at hospitals all around the state and perhaps the country.”
Michael Meissner, a tax partner at Squire Patton Boggs said hospitals across the U.S. should be aware that municipalities are taking a closer look at tax exemptions.
“I think a hospital that is in a city with financial challenges, which pretty much describes most cities, ought to be aware of the changing landscape and at least take steps to deal with it,” Meissner said. Those steps could include keeping records about how a hospital is benefiting its community and tracking its programs in case it's questioned, he said.
In Illinois, state lawmakers in 2012 passed legislation supported by the Illinois Hospital Association that clarified the rules for tax-exempt hospitals after the Illinois Supreme Court nixed a hospital's property tax exemption. That appears to be where New Jersey is headed, and the storyline will probably repeat.
“If this kind of challenge spreads to other states,” Meissner said, “you'll see hospitals and other exempt organizations, colleges and the like, going to state legislatures and saying, 'Let's set up what the rules are, what we need to do, what services and charity benefits we need to provide to be exempt.' ”
