Morristown targets medical center’s tax exemption in case with far-reaching ramifications

A judge is expected to rule within the next few months on Morristown’s lawsuit to revoke the property tax exemption for Morristown Medical Center — a case with potential ramifications for the millions of dollars in property tax exemptions that now benefit scores of hospitals statewide.Morristown argues the hospital operates through for-profit physician practices and other for-profit entities, and thus isn’t entitled to the exemption.

But the hospital’s parent, Atlantic Health System, contends the town is challenging a standard hospital operating model that is sanctioned by the state law that allows nonprofit hospitals to be exempt from local property taxes.

Attorney Martin Allen, who represents Morristown, is asking the judge to strip the hospital of its property tax exemption, but if the judge declines to go that far, the town alternatively seeks to collect property taxes on certain hospital operations that are outsourced to for-profit entities, such as the emergency department, radiology, pathology and anesthesia.

Kenneth J. Norcross, attorney for Atlantic Health, said that, for decades, hospitals have partnered with outside, for-profit medical practices to carry out their mission of delivering health care to the public. These physicians, typically organized as for-profit medical practices, enter the hospital daily to perform surgery and care for their patients. Norcross said the Legislature understood how hospitals operated when it allowed them to seek a property tax exemption from their local tax assessor.

Norcross, a partner with Drinker Biddle & Reath, argues that outsourcing hospital functions such as the emergency and the radiology departments is no different than the patient care provided by the independent, outside doctors who have privileges to practice at the hospital.

“Hospitals have operated with third-party professional service providers for 100 years,” Norcross said. “Doctors who provide services on hospital premises are not employees of the hospital, by and large. That arrangement is part and parcel of the way hospitals operate.”

Allen, a member of the Warren-based law firm DiFrancesco Bateman, said the town of Morristown takes a different view of the matter.

He said that, under state law, one test a nonprofit must meet to qualify for a property tax exemption is “whether or not the property is being operated in a profit-making manner.” He argued that there are a “series of transactions between (the hospital) and various owned, related and unrelated entities where the revenues of (the hospital) are flowing into for-profits.”

For example, Allen said the Morristown Medical Center outsources its emergency department to Parsippany-based Emergency Medical Associates, which serves a number of New Jersey hospitals.

“The ER is not staffed by doctors who are employees of the hospital: This is a for-profit practice and they bill the patients on their own,” Allen said. “When you go to the ER, you receive a bill from the facility (Morristown Medical Center) and you also receive a separate bill from the ER.”

Click here to subscribe to the NJBIZ e-newsletters

Allen said surgery patients also get separate bills from radiology and anesthesiology.

“So the question arises whether these areas of the hospital that are run by third-party, for-profit entities are taxable and not exempt from taxation,” Allen said.

Other issues raised by Morristown include executive compensation levels, which in some cases the town argues are “unreasonable and excessive.” Allen said Atlantic Health uses a process to evaluate its compensation that can skew salaries to the high side.

Atlantic Health is a tax-exempt organization under IRS rules, and Norcross said that, to qualify for that federal tax exemption, “There is a process you go through to make sure your compensation is not unreasonable and we comply with that process.”

This long-running case, which concerns the hospital’s property tax exemption for the years 2006, 2007 and 2008, is before Tax Court Judge Vito L. Bianco, who sits in Morristown. In 2010, Bianco ruled that certain office space the hospital rents to physicians, as well as the hospital’s café, could be taxed by Morristown. Norcross said Atlantic Health expects to appeal that 2010 ruling.

The case is being closely watched statewide, and Bianco’s decision won’t likely be the last word: Legal experts predict the case will eventually go before the state Supreme Court.

David B. Wolfe, a property tax attorney with Skoloff & Wolfe in Livingston, said: “This is a fascinating case and a very important case for municipalities and hospitals. It could have a significant impact on many hospitals throughout the state if the judge rules the main hospital is not entitled to a property tax exemption.”

He said Bianco’s ruling would not establish a precedent for future property tax cases; he said a ruling by the appellate division or by the state Supreme Court would create a precedent.

Wolfe said that, over the years, a few municipalities have successfully challenged a hospital’s property tax exemption for what he called “ancillary” activities such as office space leased to physicians. “What makes this case so unique and potentially so far-reaching is that this is the first case I’m aware of where the municipality has attempted to revoke the underlying exemption for the main hospital itself.”

He said he would advise hospitals to examine their internal organization and “to the extent that they can, clearly separate their for-profit and not-for-profit entities, and try to optimize the likelihood that they could withstand a challenge,” to their property tax exemption.

Hospital advocates argue for viewing the property tax exemption in the context of the community benefits hospitals provide.

Kerry McKean Kelly, spokeswoman for the New Jersey Hospital Association, said a study by the NJHA estimates the state’s hospitals provide more than $20 billion in annual economic benefits, including 144,000 jobs. In addition, they “provide about $2.8 billion in added community benefits — things like free and discounted health care services, immunization clinics, health screenings, support groups. It’s hard to quantify the full value of those offerings, but they are programs and services that community members come to rely on and that truly support the overall well-being of the host community.”

Kelly said the IRS requires tax-exempt hospitals to perform a community health needs assessment: “Hospitals take a close look at public health data for their community and tailor programs specific to unique local needs. So, if your community has a high incidence of diabetes, the hospital might develop a program that screens for diabetes and teaches individuals how to make healthier diet choices. Or, if the community health needs assessment shows a problem with childhood obesity, the hospital may partner with schools to create a fun program on nutrition and exercise.”

She said these programs are “part of the added and often immeasurable benefit that hospitals bring to their hometown.”

Norcross said Morristown Medical Center provides uncompensated care to low-income patients and loses money on certain programs because “they look around the community and say ‘What do we need to provide?’ That is their mission.”

Atlantic Health reported that in 2013 it contributed a total of $106.3 million in community benefits, of which Morristown Medical Center accounted for $52.6 million. That includes $22.7 million in charity care to patients who were uninsured, underinsured or unable to pay, and $16.3 million in uncompensated Medicaid services. And it included $11.6 million in subsidized health service which, while operating at a loss, are provided to meet community needs.

Allen said: “Everybody has only the best things to say about the professional nature of the hospital and the quality of the care. We just think the hospital should pay their fair share of taxes.”

ALSO ON NJBIZ:

‘Tallest building in N.J.’ planned for Jersey City

EDA approves $72.3M in incentives for eight new projects

60 job cuts coming at Newark brewery, report says