After Atlantic Health and the town of Morristown were able to announce a settlement regarding property tax issues that had been brewing since 2006, both sides had the same reaction.They felt the deal — $10 million upfront plus a plan for future payments of more than $15 million over the next 10 years — was fair.
And they both were glad the long ordeal was finally behind them.
Now it may be the rest of the state’s turn.
Prominent lawyers and lawmakers in the state said the deal is the hot-topic business issue in the industry.
Mark Manigan, a health care attorney for Brach Eichler, said other municipalities have been watching the case closely.
“In light of the property tax epidemic in New Jersey, it will come as no surprise that a number of towns are starting to look at hospitals and see dollar signs,” he said. “Unless the Legislature steps in, the Morristown settlement will be the first of many.”
How this is going to affect other nonprofits in the state, including how much hospitals should pay and who will decide, are all questions that remain.
David Wolfe, a tax attorney with Skoloff & Wolfe, said that, without a ruling from the court, it will be wait and see around the state.
“Barring a legal fix, other cases could be similarly resolved,” he said.
Wolfe said he was disappointed the case did not make its way to the state’s top court for a more definitive ruling.
But if municipalities and hospital systems are waiting for the Legislature to step in, they may be waiting awhile, Assemblyman Lou Greenwald (D-Voorhees) said.
Greenwald said towns and hospital systems around the state have had similar discussions since Tax Court Judge Vito Bianco ruled last June in favor of Morristown. Greenwald said he hopes the parties can work it out.
“The state’s role is if people resist,” he said.
Because of the various sizes and strengths of municipalities and systems around the state, Greenwald said it would be difficult to handle the issue through legislation.
“Finding a balance is important,” he said. “It could cripple the hospitals financially if they have to pay for the full value. On the other hand, if they pay nothing, then the burden on residents is significant.”
While municipalities are eager to benefit from settlements, the potential financial impact such settlements could have on the industry cannot be overlooked, said Michael Busler, an assistant professor of business studies at Stockton University.
If a hospital is viewed as a nonprofit, with no property taxes and no tax liability, it’s a more attractive investment and it improves the cash flow of the hospital, allowing it to borrow at a reasonable rate, Busler said.
“If the cash flow is decreased from property taxes, it becomes riskier for the investors,” he said.
Which would be a big problem for systems.
“Some hospitals are barely making it,” Busler said. “If you start adding taxes, and they are limited (by the Affordable Care Act) on how much they can raise rates, they might have to go under. It’s a very serious threat. It adds a whole new level of uncertainty.”
All of this comes at a time of great uncertainty and consolidation in the industry.
Vijar Kohli, portfolio manager at Golden Door Asset Management, said potential investment opportunities have played a role in mergers and acquisitions.
Now it’s in the IT departments, which have been lagging for years. Because of the requirements of electronic medical records, Kohli said health systems increasingly have needed to invest in overhauls of their IT systems.
All of this adds up to the uncertainty surrounding the industry.
“It’s yet another fiscal challenge for an industry already in the midst of an exceedingly complicated time,” Managan said.
Betsy Ryan, New Jersey Hospital Association CEO and president, said the industry has been getting ready for this moment.
“NJHA has been educating its members on the tax court’s ruling and its potential implications, but no, we aren’t advising them in any particular direction,” she said in a statement.
“We’ve formed a member task force to determine the best way to bring certainty to hospitals on this issue. We expect more than one bill to be introduced in Trenton, and we look forward to working with the Legislature and the Governor.”
Renee Steinhagen, with NJ Appleseed, said the settlement challenges the ways hospitals practice medicine, and is of special concern for physicians.
“it will be interesting to see if hospitals will move toward an employee-based system such as Cleveland Clinic, where doctors are (directly employed) not private practitioners,” she said.
The model used by the clinic pays doctors through the clinic rather than allows them to remain small business which lease space within a health facility, or as in some hospitals, independent contractors.
The terms of the Morristown settlement were as follows:
Atlantic Health will make the initial payment of $10 million, then pay another $5.5 million in penalties and interest in annual payments through the year 2025 to settle the years in dispute, 2006 to 2015.
The system also will begin making annual tax payments on 24 percent of the property, which was agreed to be valued at $40 million, through 2025. That will mean additional payments of $1.05 million a year for 10 years — making the total eventual tax payment more than $25 million.