The whole country, including Wall Street, is watching New Jersey.
No pressure.
After Tax Court Judge Vito Bianco set a precedent in the property tax settlement between the town of Morristown and Atlantic Health last year, a double-track domino effect began. Whether by a legislative solution or court decision, many nonprofit hospitals are grappling with the idea of a new financial hurdle.
How are they going to pay these new taxes? Even more so, can they afford to?
A look at unaudited financial data collected by the New Jersey Hospital Association that was obtained by NJBIZ shows the operating margins of New Jersey hospitals are such that this is possible for some systems with higher margins, while others operating on razor-thin margins, or in the red, would suffer.
For example, the data show hospitals such as HackensackUMC Mountainside and St. Luke’s Warren Campus had higher than 10 percent margins in 2015, compared with Capital Health, Saint Francis Medical Center and Saint Michael’s Medical Center, all of which had negative margins.
Memorial Hospital of Salem County is operating on a negative 37 percent margin, according to the data.
So what to do?
Legislation that passed through both the Senate and Assembly was pocket-vetoed during the lame duck session by the governor, who called for a task force to study the issue. That measure took into account the inability of hospitals operating in the red to pay the community contributions.
“We just need relief,” Betsy Ryan, president of the New Jersey Hospital Association, said. “(Hospitals) are expending resources on attorneys rather than the business.”
And future relations between municipalities and hospitals are also at stake, she said.
While a new bill is in the works, the pocket veto set the stage for what many hoped to avoid after Bianco’s ruling — lawsuits.
The number of tax lawsuits has spiked to 28 since last fall, according to NJHA.
Meanwhile, the race to see which track — legislative or legal — wins the battle is still on, according to Ryan.
“There is some degree of uncertainty; legal fees are enormous to battle,” Ryan said. “It’s going to take years. Look at Morristown. That took many years to go through the court system, and more cases are on the docket now than when that case (began).
“Another impact we are seeing is I’ve heard there is a little bit of focus from Wall Street. This could make it more difficult for hospitals to borrow money. It’s a capital-intensive industry that needs to keep up with the latest technology, (so Wall Street interest) would be a grave concern.”
Gary Sokolow, an acute care hospital analyst at Fitch Ratings, said there is a long legal battle ahead, and agreed the issue is of interest.
If a hospital with a small operating margin doesn’t have room for capital improvements or an IT overhaul because it is faced with an expensive lawsuit, that would cause concern, Sokolow said.
Ratings for hospitals are based on the idea that margins, especially for nonprofits, are already low, Sokolow said. For example, an AA rating could be given to a hospital with a 3.4 percent operating margin, and a hospital with a 1.1 percent margin could receive a lower BBB rating.
RWJBarnabas Health CEO Barry Ostrowsky said a 3 percent margin is needed to survive, and anything below that is a struggle.
“If you are running less than 3 percent, there is no ability to make capital investments,” he said. “If you are running higher than that, that money should be used to invest in program expansion, social services” and other programs that help hospitals be the economic engines of a region.
Sokolow said the most expensive, and fastest depreciating capital improvement is technology, and an infrastructure overhaul can cost in the range of $20 million to more than $100 million.
And while some health systems, such as Atlantic Health and Hackensack University Health Network, already have municipal agreements in place, other systems are in limbo.
Which is why the rest of the country is watching New Jersey, according to Mary Beth Kuzmanovich, national director of health care services at Colliers International.
“(Other states) are looking at will it be a court-ruled outcome or a legislative outcome (in New Jersey)?” Kuzmanovich said. “They are looking at what financial model are (New Jerseyans) using … will it be a bed tax model? Or will it be a fee in lieu of services, and how will that fee be structured?”
About the data
As the effects of the Affordable Care Act are trickling down, the local pressure is starting to be felt in New Jersey. With changes to the types of payment for health care, a shift in risk and the ongoing chess match of hospital and physician consolidations, a lot of attention is being placed on the finances of the state’s nonprofit hospitals.
NJBIZ obtained unaudited information about hospital finances and metrics, collected by the New Jersey Hospital Association but not released to the public. The data, from 2014 and up to June 2015, sheds light on just how some of the systems can be affected by issues such as municipal tax assessment concerns, tiered networks and charity care.
Over the next three days, NJBIZ will present stories crafted from this data:
Day One: Taxes and nonprofits
Day Two: Tiered networks and payer mix
Day Three: Emergency rooms and fee-for-value
Illinois successfully passed a law that considered charity care levels in lieu of taxes.
“What’s common is you have a hospital in a community (and) the surrounding communities have to contribute,” Kuzmanovich said. “They are dealing with the residual effects of the hospital. Whether urban or suburban, where does the financial side of it go to? Does it go to the (municipality) where the hospital sits, or will it be shared at a wider level?
“I think that’s another key aspect of it.”
Ryan is sharing these findings, too. Since the ruling, she has been a coveted speaker across the country, including a recent trip to Ohio.
The question she gets asked the most is what New Jersey legislators are doing to help, she said.
She tells them: “We worked successfully and collaboratively on the community service fee bill during lame duck session and thought it was good approach.”
For now, there’s little more to say. Though the rest of the industry eagerly awaits an update.
(Editor’s note: An earlier version of this story made it appear as if Betsy Ryan, the head of New Jersey Hospital Association, had commented on the relationship between operating margins and community contributions. She did not. The suggestion was unintentional.)
