Recent Commonwealth Court case strengthens city's hand in going after tax-exempt hospitals
PITTSBURGH (KDKA) — A recent Commonwealth Court decision affecting four school districts back east could have major implications on tax-exempt nonprofit hospitals in this region.
As KDKA-TV money editor Jon Delano explains, some say it's a warning shot to hospitals across the commonwealth that do not pay property taxes.
When exactly is a nonprofit health care system eligible for tax-exempt status?
"They're really three different types of hospitals in this country. There are nonprofit, for-profit, and government hospitals, and nonprofit does not mean tax-exempt," says Georgetown University Prof. David Hyman.
Hyman, who is both a medical doctor and an attorney, says a recent Commonwealth Court decision is a warning to all tax-exempt hospitals to increase their charitable service, forgive medical debt and operate free from the profit motive.
The court, he says, sent this message: "We understand that you deserve a tax exemption if you do the right thing, but if you stop doing the right thing you don't deserve a tax exemption and we should tax you and use that money for some other purpose."
Pottstown School District objected when a taxable for-profit hospital in its community was bought by a nonprofit health system that claimed the hospital was now tax-exempt.
Since 1985, Pennsylvania has applied what's called the "hup test" to determine whether a nonprofit medical facility is tax-exempt.
Does the hospital (a) advance a charitable purpose; (b) donate a substantial portion of its services; (c) benefit a substantial class of persons who are legitimate subjects of charity; (d) relieve the government of some of its burden; and (e) operate entirely free from private profit motive.
Do all five, and you're tax-exempt.
In this case, the court called executive salaries "eye-popping," well over $1 million with 40 percent of bonus pay linked to the hospital's financial performance.
That, the court said, signaled a private profit motive.
There is a fine line.
"Just like top corporate executives get paid a lot of money because they're running complicated business enterprises, top health care people are going to get paid pretty handsomely as well."
"You can go too far. If it looks like the top management is siphoning out, quote, all of the top profits of the business, then that start's to look like a for-profit business," says Hyman.
"More than a third of city land is tax-exempt," says Pittsburgh communications director Maria Montano.
Montano says whenever tax-exempts like UPMC, Allegheny Health Network, and others buy land, there's a hit on taxpayers.
"It feels like it grows year after year is coming off of the tax rolls. It makes it a challenge to fill those potholes or open up those swimming pools every summer," Montano said.
Prof. Hyman has studied this topic.
"There are some for-profit hospitals that are providing significantly more charity care than some non-profit hospitals, and that points to the irrationality of the way we're structuring the sizable subsidies that hospitals are getting," says Hyman.
Locally, Pittsburgh Mayor Ed Gainey has ordered the law department to examine every nonprofit tax-exempt parcel in the city to make sure it meets the "hup test" for tax exemption.
As for the Pottstown case, says Montano, "I do think this sort of strengthens the city's position here."
There's no strict timeline on when the city law department will report its findings, and nothing precludes a taxing authority, like Pittsburgh Public Schools, from challenging any hospital tax exemption.
That's what the Pottstown School District did, but this issue still seems a long way from resolution.
