As Nonprofit Hospitals Reap Big Tax Breaks, States Scrutinize Their Required Charity Spending

by | Jul 11, 2023 | Health

POTTSTOWN, Pa. — The public school system here had to scramble in 2018 when the local hospital, newly purchased, was converted to a tax-exempt nonprofit entity.

The takeover by Tower Health meant the 219-bed Pottstown Hospital no longer had to pay federal and state taxes. It also no longer had to pay local property taxes, taking away more than $900,000 a year from the already underfunded Pottstown School District, school officials said.

The district, about an hour’s drive from Philadelphia, had no choice but to trim expenses. It cut teacher aide positions and eliminated middle school foreign language classes.

“We have less curriculum, less coaches, less transportation,” said Superintendent Stephen Rodriguez.

The school system appealed Pottstown Hospital’s new nonprofit status, and earlier this year a state court struck down the facility’s property tax break. It cited the “eye-popping” compensation for multiple Tower Health executives as contrary to how Pennsylvania law defines a charity.

The court decision, which Tower Health is appealing, stunned the nonprofit hospital industry, which includes roughly 3,000 nongovernment tax-exempt hospitals nationwide.

“The ruling sent a warning shot to all nonprofit hospitals, highlighting that their state and local tax exemptions, which are often greater than their federal income tax exemptions, can be challenged by state and local courts,” said Ge Bai, a health policy expert at Johns Hopkins University.

The Pottstown case reflects the growing scrutiny of how much the nation’s nonprofit hospitals spend — and on what — to justi …

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