Tower Health loses bid to have 3 Chester County hospitals deemed tax exempt

Tower Health’s bid for property tax exemptions for three of its Chester County Hospitals — Brandywine, Jennersville and Phoenixville — has been rejected by a judge who ruled the hospitals are more aligned with for-profit companies.

The 44-page ruling by Judge Jeffrey Sommer of the Chester County Court of Common Pleas is a huge victory for the Avon Grove, Phoenixville and Coatesville school districts. Officials of those school districts said the ruling averts a loss of millions in revenue and could have necessitated a huge tax increase.

“We are very pleased the court ruled decisively in our favor,” said Alan Fegley, superintendent of Phoenixville Area School District. “This saves the taxpayers of Phoenixville nearly $1 million per year in annual taxes which should rightfully be paid by the hospital.”

M. Christopher Marchese, superintendent of the Avon Grove School District, said: “The Avon Grove School District is pleased with the favorable result for our taxpayers.”

The ruling is a setback for Tower Health as it works to stem recent losses. Tower lost nearly $80 million from January through March of this year. It was an improvement over the previous quarter when it lost nearly $111 million. Only Reading Hospital did not lose money in fiscal 2021, which ended June 30. In a cost-cutting move, Tower is set to close Jennersville Hospital by the end of the year and is selling Chestnut Hill Hospital in Philadelphia.

In a statement, nonprofit Tower Health, which owns six hospitals in the region, said it was “disappointed in this ruling and will appeal based on what we  believe are numerous factual and procedural errors, and a flawed legal analysis.”

In the ruling, Sommer concluded the three Chester County hospitals did not qualify for property tax exemptions because they do not provide nearly enough free services, they cooperate financially with doctors at for-profit practices and structure lucrative executive compensation packages. Lucrative bonus plans that are tied to financial performance disqualified the hospitals from a tax exemption, the judge ruled.

Phoenixville Hospital rendered services to 199,405 people last year, but only 152 received free services, or 0.00076 percent. At Brandywine Hospital, 0.052 percent of patients received free services and 0.053 percent at Jennersville. The judge opined the figures “did not show a substantial donation of services.”

In each hospital’s case, Sommer said there was testimony that they and others derive income from third-party physicians.

“Each hospital admitted that they do not employ any doctors other than a few residents in training,” he said in the ruling. “Instead, the hospitals grant privileges to physicians to provide medical care to patients. Approximately 10 percent of these doctors are employed by the acquired Tower Health Medical Group. This medical group is owned by Tower Health, not the individual hospitals. The remaining 90 percent of the doctors are employed by independent, third-party for-profit medical practices. A rough count of the groups produced for each hospital is that there are roughly 475 or more third party physicians who have privileges to treat patients at the hospitals.”

In their argument before the court, Tower executives argued that they take part in government insurance programs like Medicare and Medicaid, which they claim underpays them. However, Sommer said they did not provide enough evidence and financial details leaving the court to speculate on the amount of uncompensated care it provides. Medicare patients constitute 28 percent of patients at the three hospitals and 9 percent of Medicaid patients.

“An institution that treats patients efficiently and at a cost lower than the stated reimbursement percentage gets the same payment as in inefficient institution,” Sommer ruled. “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.”

Under Pennsylvania Supreme Court precedent, an organization must “operate entirely free from private profit motive” in order to qualify for property-tax exemption. Sommer found that bonus plans mostly tied to financial performance disqualified the hospitals from tax exemption.