Many school systems rely on property taxes for most of their budget. When a school district in Chester County, Pennsylvania challenged the charitable results of three nonprofit hospitals owned by Tower Health, they exposed the unethical practices that allow many nonprofit hospitals to beat the system. The school district won.
Nonprofit hospitals are supposed to provide acceptable levels of free care to the community in exchange for not paying property taxes. The judge in this case concluded that the results for three Tower Health hospitals “did not show a substantial donation of services” and ordered the hospital to start paying taxes.
The basis for this decision is indisputable:
- Phoenixville Hospital | A mere 0.00076 percent of patients received free services (only 162 of 199,405 people to whom services were rendered last year)
- Brandywine Hospital | Just 0.052 percent of patients received free services
- Jennersville Hospital | Only 0.053 percent of patients received free services
The judge also ruled that lucrative executive bonus plans tied to financial performance disqualified the hospitals from a tax exemption. The compensation plan was clearly a pass through of tax savings to hospital executives.
Another revelation from this case reinforced that writing off bad debt does not equal donated services. “An institution that treats patients efficiently and at a cost lower than the stated reimbursement percentage gets the same payment as an inefficient institution,” the judge stated. “To write off bad debts is not charity when the hospitals decide not to pursue the collection of these accounts even though there was, in the hospitals’ determination, a means to pay. The bad debt write-offs do not equal an increase in donated care.”
The court also ruled that the hospitals’ reliance on a “master charge sheet” — a common feature in hospital finance offices — was meritless because the hospitals’ own witness testified that this charge master has no meaning or value. The witness stated, “The numbers, essentially, are pulled out of thin air and are created only because [the hospital] is required to have a charge sheet to satisfy federal requirements.”
The hospitals contended they had each lost money, revealing that Tower Health had charged them fees in excess of $43 million in 2020 alone. The court rightfully questioned the company’s administrative structure and executive compensation schemes that drained “huge sums…from the [hospitals and to Tower Health], resulting in the hospital ‘showing’ a large net loss.”
A Sign of Things to Come?
Although the Tower Health decision will likely be appealed, it sounds a warning bell for nonprofit hospitals and health systems that have avoided taxes for decades. The decision is a judicial duck test. If a nonprofit organization looks, acts, and compensates itself like a for-profit company, it may be treated like a for-profit company. At the very least, it won’t be treated like a “charity.”
It’s time for hospitals to become efficiently run, tax-paying citizens with rationale cost accounting and transparent pricing — especially those that aren’t living up to their mandate as charitable, nonprofit entities.