Pottstown Hospital should get property tax exemption, Pa. Supreme Court says

Overturning a lower court’s decision, the Pennsylvania Supreme Court ruled Friday in a closely watched case that Pottstown Hospital qualified for a property tax exemption as a nonprofit, despite linking executive bonuses to profits.

The central question in the case: To what extent can nonprofit hospitals like Pottstown reward executives for profits and still be entitled to local property tax exemptions?

In its 5-2 decision, the Supreme Court ruled that Pottstown Hospital’s financial bonuses were reasonable because nonprofits need to compete with for-profit companies for talent to run increasingly complex businesses.

Notably, the court disregarded the hospital’s ties to its owner, Tower Health, and its pay practices at the corporate level in reversing a 2023 Commonwealth Court decision in favor of Pottstown School District.

The decision to treat a hospital as separate from its owner was notable, given the widespread consolidation in healthcare in recent years. Corporate parent companies and their executives increasingly wield significant power over local hospital operations.

At stake for the school district and Pottstown Borough was a little more than $1 million in revenue.

“The Supreme Court in my opinion looked at the big picture and found that the greater good is served by allowing these compensation formulas,” said Carl S. Primavera, who specializes in real estate as a senior partner at Philadelphia law firm Klehr Harrison Harvey Branzburg LLP but was not involved in this case.

Pottstown’s superintendent Stephen Rodriguez said the district needs to review the decision before determining what its next steps would be.

“To say I’m disappointed for our students and our community is an understatement,” he said in a statement.

Tower Health said in statement: “Today’s decision from the Pa Supreme Court affirms that Pottstown Hospital continues to meet its charitable mission as a nonprofit and community resource.”

Under Pennsylvania law, organizations that qualify as nonprofits under IRS rules are not automatically granted local property tax exemptions. They have to apply for the exemption. If challenged, they have to prove that they meet a five-prong test established 40 years ago by the state Supreme Court.

The vague criteria include having a charitable purpose, such as education, arts, or healthcare, and giving away at no charge “a substantial portion of its services.”

In the Pottstown case, the fifth prong was at issue: They must “operate entirely free from private profit motive.”

Commonwealth Court Judge Christine Fizzano Cannon wrote in the February 2023 decision that Tower’s policy of tying 40% of its executives’ bonuses to the nonprofit hospitals’ financial performance was overly oriented toward profits.

But the Supreme Court focused on whether the use of financial incentives based on profitability was “reasonable.” The court had used that term in earlier decisions on nonprofit property tax exemptions, but it had never been defined.

To clarify what reasonable means in cases involving property tax exemptions, the court considered factors used to determine whether nonprofit executive pay is reasonable under federal law.

Those include comparing pay to executives in similar organizations, whether the pay was determined through arms-length bargaining, and the size and complexity of the organization being managed.

The court’s 46-page opinion, written by Chief Justice Debra Todd, found that Tower’s executive pay was “within fair market value as compared to similar executives at similar healthcare institutions.”

Notably, the high court focused on Pottstown Hospital, ignoring executive pay at its corporate parent, Tower Health. The Commonwealth Court had focused on the fees Pottstown Hospital paid Tower and on $2.25 million in pay for former Tower CEO Clint Matthews.

“The size of compensation of Tower Health’s executives and the amount of the management fees which the hospital paid Tower Health are insufficient by themselves to render the hospital ineligible for a tax exemption,” Todd wrote.

In dissent, Justice Sallie Updyke Mundy wrote that it makes little sense to allow nonprofits to reward profitability in the same way for-profits do, and then still get a tax exemption based on a complete lack of profit motive. Justice Kevin M. Dougherty joined her dissent.

“Corporations need to pick a lane, and if they want to be tax-exempt, they need to pick the charity lane,” Mundy wrote.

Staff writer Abraham Gutman contributed to this article.