A recent court decision issued in the Commonwealth of Pennsylvania has healthcare providers across the nation apprehensive about the future. The Tower Health opinion was the first to challenge the non-profit status of certain hospitals in the state. Although the opinion will likely be appealed, this precedence is more than enough to cause hospital administrators and healthcare providers to spring into defensive action.
Identifying as a Non-profit Healthcare Entity
Non-profit statuses and designations such as the 501(c)(3) require a significant amount of reporting. The Internal Revenue Service (IRS) provides special conditions under these organizational tax structures and require specific behavior. Non-profit hospitals, such as the three Tower Health locations in Pennsylvania, are tasked with providing healthcare services to communities in need. The implication is that services are provided at little to no cost when patients are unable to afford care and do not have health insurance coverage.
Charitable organizations such as non-profit hospitals are able to provide profitable services and pay reasonable salaries to executive staff members and essential administrators. Federal guidelines implemented and enforced by the IRS stipulate that these Board members cannot be paid in excess of one million per year without an excise tax penalty.
Non-profits and Property Taxes
Traditionally, non-profit healthcare entities were afforded a break on property taxes. In most cases throughout Pennsylvania, property taxes were nil or completely waived as long as the hospital met the criteria set forth by the IRS. For more than one hundred years, the Commonwealth has allowed non-profit healthcare entities the flexibility to largely operate without micromanagement. Judge Jeffrey Sommer detoured from previous hospital tax decisions by reviewing the status of the Jennersville Hospital.
As the sole corporate member of the three Tower Health locations, the Jennersville location was largely responsible to uphold the non-profit stipulations. Mountains of evidence pointed to infractions such as salary overpayments, exorbitant management fees, and other overhead costs which were not authorized within the charitable organization status. Further, Sommer concluded that health services provided to the community did not count as charitable because there were administrative and managerial fees associated with services rendered. The civil decision did not fully withdraw tax benefits, but did order Tower Health to pay millions in property taxes.
Lessons Learned for Healthcare Organizations
The unfortunate circumstances faced by Tower Health has prompted similar non-profit healthcare institutions to review their financial portfolios and organizational structure. The defensive measures are partially to avoid the same fate, but also to provide transparent and accurate details in case of potential audit. Hospitals and healthcare structures are often located in high rent districts and unexpected property tax payments could result in serious consequences, including bankruptcy or closures.
At Appraisal Economics, we have successfully served the healthcare community through extensive property tax valuations for several healthcare and non-profit community entities. Whether you are facing IRS tax review or simply want to ensure that your organization is properly structured, feel free to contact us today for a free consultation.