PA Hospital’s revoked property tax exemption is a “warning shot” for other nonprofits, experts say

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By Ashad Hajela | Spotlight PA

A Commonwealth Court judge recently revoked a southeastern Pennsylvania hospital’s property tax exemption and dismissed appeals against three others, decisions that one expert said should serve as a “warning shot” for nonprofits across the state.

In response to a case brought by the Pottstown School District, Judge Christine Fizzano Cannon found that the nonprofit Tower Health System operated a Montgomery County hospital for profit. She also upheld rulings that three Chester County hospitals owned by Tower Health are not eligible for property tax exemptions.

In Pennsylvania, a nonprofit organization must demonstrate that it is a “public charity only” to qualify for a property tax exemption. The state Supreme Court created five standards in a 1985 ruling. An organization must show:

• Sponsors a charitable cause.
• donates or provides a substantial part of its services free of charge.
• Favors a sizable and unspecified group of individuals who are legitimate subjects of charity.
• Relieves some of the burden on the government.
• Works completely free from private pursuit of profit.

Cannon said Tower Health has charged hospitals exorbitant management fees and rewarded executives for the hospitals’ financial success, meaning it doesn’t meet the fifth standard.

Tower Health did not respond to a request for comment on whether it intends to appeal. Court records show that Chester County’s three hospitals have filed requests for reconsideration.

Pennsylvania schools are funded primarily through property taxes, and tax exemptions can add up to millions of dollars each year.

Pottstown School District superintendent Stephen Rodriguez – who brought the case against Pottstown Hospital and Tower Health – said the tax exemption has caused the district to lose about $900,000 annually.

“A million dollars is, you know, 10, 12 teachers,” he said.

Of the state’s 148 general, medical, and surgical hospitals, 131 were nonprofit as of 2021, according to the Pennsylvania Department of Health.

Cannon’s decisions are a “warning shot” for those facilities, said David Hyman, a Georgetown professor of health care law and policy who studies tax exemptions for nonprofit hospitals. But the impact on other hospitals, he said, will depend in part on whether local tax authorities are willing to pursue lawsuits.

The last time there was a significant push by tax authorities to challenge the tax-exempt status of Pennsylvania hospitals was three decades ago, Modern Healthcare reported.

In 1990, an Erie County judge ruled that Hamot Medical Center’s parent company used the hospital to generate money for real estate investments. The facility lost its exemption.

Three years later, the hospital regained tax-exempt status and agreed to pay 50% of the taxes it would otherwise owe to the city, county, and school district. The hospital, now UPMC Hamot, currently has a similar arrangement.

Since then, several other Pennsylvania hospitals have also agreed to make payments in lieu of taxes or PILOTs to avoid the risk of litigation.

But a decade-long push in Pittsburgh against UPMC, a large nonprofit healthcare system headquartered there, shows how difficult it can be to force providers into voluntary agreements that recoup a significant amount of money.

UPMC owns $2.1 billion worth of tax-exempt property in Allegheny County, according to a joint report by county and city inspectors. In 2021, UPMC’s “exemptions reduced its tax liability by $9.8 million for the county, $13.9 million for Pittsburgh, and $58.3 million for all local governments and school districts,” it said in the report.

Between 1973 and 2006, Pittsburgh recovered only 8% of the taxes lost from UPMC’s tax exemption by PILOTs, according to controllers.

Pittsburgh Controller Michael Lamb said there hasn’t been a PILOT agreement with any of the city’s larger nonprofits for at least 10 years. “Even when we had a PILOT agreement with other nonprofits, we didn’t have one with UPMC,” he said.

In 2013, Pittsburgh filed a lawsuit to strip UPMC of its tax-exempt status, but a judge dismissed the case, saying the city should have sued affiliates. Then-Mayor Bill Peduto decided in 2014 to focus on PILOT negotiations rather than taking further legal action.

Seven years later, Peduto announced the creation of OnePGH, a new nonprofit organization that would provide a link between the city and its largest nonprofit organizations. He said UPMC and other major nonprofit organizations would collectively contribute $115 million over five years to programs to address injustices in Pittsburgh.

Peduto’s replacement, Ed Gainey, criticized the program as “too little…too late” during his campaign and later withdrew.

While running for office, Gainey also vowed to resume legal action against UPMC. But right now there are no plans to challenge UPMC’s or other nonprofits’ tax-exempt status in court, city spokeswoman Maria Montaño said.

Instead, Gainey launched a citywide review of tax-exempt properties earlier this year.

“This is an avenue,” said Montaño. “This is our first step in making sure everyone pays their fair share.”

Pittsburgh’s new review will examine whether each nonprofit that has received a property tax exemption meets the standards set by the Supreme Court in the ’80s.

If nonprofit hospitals don’t provide enough community service, they don’t deserve an exemption, Hyman said. “And if the consequence of that is that they close, we shouldn’t be subsidizing things,” he said.

Much of Hyman’s research compares the charitable care provided by not-for-profit and for-profit hospitals. Hyman said many nonprofit hospitals across the country do not provide enough charitable care to justify tax exemptions, particularly because for-profit hospitals also provide charitable care.

A 2022 report by the Lown Institute, a nonpartisan think tank, found that the tax exemptions granted to UPMC far outweigh the value of the charitable nurturing and community investment the system provides. UPMC disputed the findings.

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