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On February 10, 2023, the Pennsylvania Commonwealth Court (the “Court”) issued four related but distinct opinions (the “Tower Cases”) which it is reasonable to expect may be used by local taxing authorities to attempt to challenge the property tax-exempt status of certain Pennsylvania non-profit hospitals.1 The Tower Cases support the notion that the courts are going to scrutinize the real estate tax exemption of Pennsylvania non-profit hospitals, notwithstanding that they may have an open admissions policy, accept Medicare and Medicaid payments, and/or be money-losing operations. The Tower Cases, at the very least, put Pennsylvania non-profit hospitals on notice of the importance of continuously re-evaluating management fees, executive compensation, and financial assistance policies to ensure compliance with property tax exemption requirements. As hospitals and hospital systems continue to grow, the Pennsylvania courts continue to scrutinize what qualifies for real estate tax exemption. Therefore, in order to be best positioned to withstand such scrutiny, hospitals should take the teachings of the Tower Cases into account in making decisions for their own operations.


In 2017, Reading Health System, now known as Tower Health, LLC (“Tower”), purchased several for-profit hospital facilities and related properties in Montgomery and Chester Counties from Community Health Systems, including Brandywine Hospital, Jennersville Hospital, Phoenixville Hospital, and Pottstown Hospital (the “Tower Hospitals”).

Tower Health, which is tax-exempt through its status as a nonprofit under 26 U.S.C. § 501(c)(3), formed the following non-profit LLCs, of which it is the sole member of each, to run each of the Tower Hospitals: Brandywine Hospital, LLC Jennersville Hospital, LLC Phoenixville Hospital, LLC, and Pottstown Hospital, LLC (the “Hospital LLCs”).

In October of 2021, we wrote an article discussing the potential implications of a decision by Judge Jeffrey R. Sommer of the Chester County Court of Common Pleas (the “Chester County Trial Court”), rejecting the tax exemption bid of Brandywine Hospital, LLC, Jennersville Hospital, LLC, and Phoenixville Hospital, LLC (collectively, the “Chester Hospitals). The decision came just one week after the Montgomery County Court of Common Pleas ( “Montgomery County Trial Court”) ruled in favor of Tower Health’s bid for Pottstown Hospital’s property tax-exempt status.2

As we stated in our first article, Judge Sommer anticipated—and hoped—his decision would be appealed and lead to legislative and judicial evaluation of the current framework for evaluation of tax exemption of non-profit hospitals. The aforementioned cases were ultimately appealed; on February 10, 2023, despite dismissing the appeals in the three cases involving the Chester Hospitals due to procedural errors, the Commonwealth Court agreed with the Chester County Trial Court in its finding that the Chester Hospitals did not qualify for property tax exemption. The Commonwealth Court also reversed the ruling in favor of Pottstown Hospital, thereby denying the property tax exemption bid for each of the Tower Hospitals.

Applicable Law

An entity must qualify as an institution of purely public charity to be eligible for tax exemption, meaning it must: (1) satisfy the constitutional requirements set forth in Hospital Utilization Project v. Commonwealth, 487 A.2d 1306 (Pa. 1985) (the “HUP Test); (2) meet the statutory requirements of the Institutions of Purely Public Charity Act, commonly known as Act 55;3 and (3) act in accordance with additional requirements set forth under the Consolidated County Assessment Law (CCAL), to the extent such requirements are not inconsistent with Act 55.

An entity bears the burden of demonstrating that it satisfies the HUP Test’s five criteria to qualify as a purely public charity. An entity must show that it: (1) advances a charitable purpose; (2) donates or renders gratuitously a substantial portion of its services; (3) benefits a substantial and indefinite class of persons; (4) relieves the government of some of its burden; and (5) operates entirely free from private profit motive.

Importantly, with respect to the fifth criterion of the HUP Test, surplus revenue is not synonymous with private profit. Rather, an important consideration, which proved relevant in the Tower Cases, is whether the utilization of the revenue inures, directly or indirectly, to any private individual related to the charitable entity or related organization. Courts will consider, among other factors, the compensation of an institution’s executives to determine whether it includes a “private or pecuniary return”—specifically, whether the amount of executive compensation is reasonable, and the extent, if any, to which it is based on the financial performance of the institution.4   

Only after an entity demonstrates that it satisfies the HUP Test may it address the question of whether it satisfies the corresponding statutory criteria in Act 55. The requirements for Act 55 and the HUP test are similar, albeit not identical. An entity must also comply with the requirements set forth under CCAL, one of which requires that no “income or revenue is derived [for the institution or charity], other than from the recipients of the bounty of the institution or charity.”5


In each of the Tower Cases, the fifth criterion of the HUP test—that an entity operates “entirely free from profit motive”—proved insurmountable for the Hospital LLCs. We can recognize the implications of the Tower Cases by focusing on the findings of the Chester County Trial Court and Montgomery County Trial Court (collectively, the “Trial Courts”) that were subsequently underscored by the Commonwealth Court to support its finding that each of the Hospital LLCs failed to sustain their burden of demonstrating the absence of a profit motive behind the “exorbitant” management fees, central business office fees, and bond interest payments paid to Tower Health.

Evidence of Profit Motive

Management Fees

The Commonwealth Court recognized that the diversion of surplus monies into other entities that have a profit motive is evidence of a profit motive under Pennsylvania case law. As was recognized by the Trial Courts, the management fees increased, between 2018 and 2020, from a yearly rate of $3.5 million to $21.7 million for Phoenixville Hospital, $2.7 million to $15.58 million for Brandywine Hospital, $1.08 million to $6.1 million for Jennersville Hospital, and $4.4 million to $23.16 million for Pottstown Hospital. The Commonwealth Court, seemingly agreeing with the Chester Courts’ recognition that Tower Health “drew money from the hospitals without sufficient explanation and ‘at an alarming rate,’” specifically took issue with the following: (1) the Tower Hospitals did not evaluate whether management fees were reasonable for the services provided by Tower Health, (2) the Tower Hospitals did not negotiate the management and administrative fees paid to Tower Health, (3) the management fees charged went unquestioned by Tower Health and the Tower Hospitals, and (4) Tower Health presented no justification for its large management fees, nor did it study whether the Tower Hospitals actually received value for the fees charged to them.

Excessive Compensation

The Commonwealth Court also noted that the diversion of money to employees through excessive salaries and fringe benefits may provide evidence of a profit motive. The Commonwealth Court identified the federal excise tax imposed by the IRS on Tower Health as a nonprofit entity paying its executives in excess of $1 million per year, which the Hospital LLCs then inherited from Tower Health, as an indicator of “unreasonably high executive salaries” demonstrating a profit motive.

As was pointed out by the Chester County Trial Court, approximately half of the management fees paid by Tower Hospitals in 2018 were used to fund Tower Health executives’ compensation, with the IRS reporting approximately $6 million in salaries being paid to the administrative team of Tower Health. While the salary increases were purportedly furnished due to the executives’ work in support of the 2017 multi-property purchase transaction, the Commonwealth Court underscored the findings of the Chester Court that the executives “did nothing other than foster the purchase transaction, and there was no evidence that the executives’ services helped any individual hospital provide its services.”

That a substantial percentage of compensation was paid to Tower Health executives in a manner directly related to the entity’s financial performance was, according to the Commonwealth Court, indicative of a profit motive. There is no bright-line test of what constitutes a substantial percentage of compensation based on financial performance, however, the Commonwealth Court specifically addressed this consideration in the Pottstown Hospital Case, thereby providing new guidance as to which of its past cases serve as a proper lens of analysis for executive compensation with respect to the HUP Test.

The Commonwealth Court specifically rejected the Montgomery County Trial Court’s reliance on Phoebe Services, Inc. v. City of Allentown, disagreeing with the Montgomery County Trial Court that the “eye-popping” executive salaries at issue “must be deemed reasonable merely because they do not exceed the 90th percentile for such salaries.”6

Instead, the Commonwealth Court found In re Dunwoody Vill. more persuasive than Phoebe Services, as its facts were more analogous to those in the Tower Cases.7 Like the compensation paid to Tower Health executives, and unlike the compensation paid to executives in Phoebe Services, executive compensation in Dunwoody was directly tied to the institution’s financial performance. Accordingly, in the Pottstown Hospital Case, the Commonwealth Court opined that it was not restricted by Phoebe Services and concluded that tying 40% of executives’ bonus incentives to a hospital’s financial performance is “sufficiently substantial to indicate a private profit motive, contrary to the HUP Test.”

Obligated Group

The Commonwealth Court agreed with the Chester Court that although the individual LLCs did not receive any of the $590 million bond issues that served as operating capital and purchase funds used by Tower Health in acquiring the Tower Hospitals, each Hospital LLC was a member of an “obligated group” that pledged assets as collateral for the bond issue, and each pays proportional shares of interest on the bonds. Accordingly, the Commonwealth Court agreed that the use of interest payments on the bonds for the acquisition of properties other than the hospitals at issue was improper.

Gratuitous Services

The Tower Cases should also put non-profit hospitals on notice that acceptance of Medicare and Medicaid payments may no longer prove as charitable as was once recognized due to the payor reimbursement landscape.

In the Chester Cases, the Commonwealth Court specifically addressed the gratuitous services requirement of the HUP Test, recognizing that reimbursement shortfalls from Medicare and Medicaid support a finding of satisfaction of the gratuitous services requirement for property tax exemption. However, the Commonwealth Court found no error in the Chester County Trial Court finding that reimbursement shortfalls for Medicare and Medicaid patients do not, alone, render services provided gratuitous.

The Commonwealth Court made the following points clear. Although a patient’s inability to pay is not expressly part of the HUP Test, it is relevant to whether a service is considered gratuitous—accordingly, an entity choosing to write off bad debts rather than pursuing collection of amounts owed without considering whether patients with Medicare or Medicaid coverage are able to pay does not constitute an increase in donated care. Relatedly, an entity’s failure to consider whether patients with Medicare or Medicaid coverage also possess supplemental insurance coverage, which could be used to cover shortfalls in reimbursements, inflates the perceived amount of care donated.

The Chester Court noted that in 2019, in stark contrast to when the HUP Test was adopted, the government paid nearly one-half of the population’s health care costs; rather than relieving the government of a burden, then, the Commonwealth Court opined that the Tower Hospitals’ financial model was intended to “increase the burden on the government and reliance on government insurance payments.” Evidence of a master charge sheet with Medicare and Medicaid reimbursement amounts is also “meaningless” when a non-profit hospital provides no evidence of the actual cost of the procedure or the amount that other payors reimburse for the same procedures. In fact, the Commonwealth Court’s premonition that reimbursement amounts paid to the Tower Hospitals by Medicare or Medicaid were likely higher or closer to actual costs of services received from other payors was only bolstered by the fact that the Tower Hospitals provided a master sheet of charges without context.

Other Important Findings

For-Profit Medical Group Services

Although insignificant to the outcome of the case due to Tower Hospitals’ failure to satisfy the HUP Test or Act 55, the Commonwealth Court pushed back on the Chester County Trial Court’s finding that the Chester Hospitals derived income other than from the recipients of its bounty in violation of CCAL merely because the Chester Hospitals purchased some of their physician services from a medical group owned by Tower Health.

The Chester County Trial Court questioned the income that Tower Hospitals derived from non-employed physicians, rather than income directly from patient services, raising concerns as to the number of physicians employed by independent third-party for-profit medical practices. At the time the case was decided, the Chester County Trial Court’s decision served as a cautionary tale to healthcare systems that they may want to structure their hospitals to employ individuals who already are part of the system’s staff to avoid violating CCAL. However, in what will likely be applauded by non-profit health systems and healthcare providers, the Commonwealth Court pushed back on this notion, stating that any payments made to the third-party physicians were paid by the recipients of the Chester Hospitals’ bounty (i.e., its patients), who also pay the hospital directly for any services rendered by the hospital.

Prospective Standing

The Commonwealth Court also rejected the argument that a hospital does not have standing to seek a tax exemption when a purchase transaction involving the hospital is pending; to the contrary, a hospital has standing to seek a tax exemption prospectively as the equitable owner of the property at issue.

Key Takeaways Moving Forward

The Tower Cases provide an important checklist of factors that Pennsylvania courts will consider in evaluating whether hospitals qualify for real estate tax exemption and what instead is indicative of for-profit motive. In order for any hospital to evaluate its own risks in this regard, it may want to consider performing an internal review to identify and mitigate any policies or payments that may put its property tax exemption status in jeopardy.

It is worth noting that the Tower Cases do not suggest that health institutions that raise management fees charged to owned hospitals will, alone, render the hospitals unable to receive property tax exemption. However, the Tower Cases may indicate that a health institution is well-served to be able to provide reasoning, studies, and analysis to demonstrate how management fees paid to itself support those hospitals and the intended charitable beneficiaries (i.e., the patients and residents of their service communities) of their charity.

We have identified the following points as key takeaways from the Tower Cases:

  • Substantial increases in management fees and executive salaries must be supported through clear documentation of reason and/or need. For example: (1) if high compensation is due to the inability to recruit executives, an entity must record this inability, (2) if executives provide additional services than originally contemplated, the services should be documented where executive compensation is increased; and (3) high compensation and management fees should be questioned, negotiated, analyzed, and supported by evidence of value to the paying entity.
  • When a non-profit hospital pays its executive compensation in a way that is directly linked to financial performance, any such practice should be scrutinized in order to provide justification that doing so is consistent with such non-profit status.
  • While acceptance of Medicare and Medicaid payments remains significant, more may be needed to satisfy the gratuitous services requirement. A non-profit entity should ensure that its financial assistance policy includes the contemplation of a patient’s ability to pay and a patient’s supplemental insurance.
  • To demonstrate uncompensated costs, hospitals may point to agreements with providers that set compensation and demonstrate how compensation under Medicare and Medicaid programs pay in comparison.
  • A non-profit hospital may be able to utilize physician services from its for-profit medical group while still maintaining its tax exemption.

Putting all of the foregoing together, while the objective factors that the courts look to when evaluating real estate tax exemption are unchanged, the Tower Cases demonstrate that the Pennsylvania courts are continuously refining their perspective and forcing hospitals to defend their operations.  Recognizing that challenges to real estate tax exemption come without advance warning, hospitals are well-served to learn from the lessons of the Tower Cases to not fall victim to the same pitfalls.

  1. The “Tower Cases” include the following: Pottstown Sch. Dist. v. Montgomery Cnty. Bd. of Assessment Appeals, No. 1217 C.D. 2021, 2023 WL 1871505 (Pa. Commw. Ct. Feb. 10, 2023) (to be reported)(referred to as “Pottstown Case” in this Alert); Brandywine Hosp., LLC v. Cnty. of Chester Bd. of Assessment Appeals, Nos. 1279, 1280, 1283 & 1284 C.D. 2021, 2023 WL 1872005 (Pa. Commw. Ct. Feb. 10, 2023)(to be reported); Phoenixville Hosp., LLC v. Cnty. of Chester Bd. of Assessment Appeals, Nos. 1281, 1285 C.D. 2021, 2023 WL 1871695 (Pa. Commw. Ct. Feb. 10, 2023)(not to be reported); and Jennersville Hosp., LLC v. Cnty. of Chester Bd. of Assessment Appeals, Nos. 1282 & 1286 C.D. 2021, 2023 WL 1871705 (Pa. Commw. Ct. Feb. 10, 2023)(not to be reported).
  2. Pottstown School Dist. v. Montgomery County Bd. of Assessment Appeals, No. 2017-27756, 2022 WL 563076 (Pa.Com.Pl.Civil Div. Feb. 23, 2022)(rev’d by Pottstown Case).
  3. See Mesivtah Eitz Chaim of Bobov, Inc. v. Pike Cnty. Bd. of Assessment Appeals, 44 A.3d 3, 9 (Pa. 2012)(establishing the same).
  4. HUP, 487 A.2d at 1312 (quoting Episcopal Acad. v. Philadelphia, 25 A. 55, 56 (Pa. 1892)).
  5. 53 Pa.C.S. § 8812(b)(1).
  6. 262 A.3d 660, 670 (Pa. Cmwlth. 2021), appeal denied, 273 A.3d 509 (Pa. 2022)(finding that the HUP Test was not violated even where base salaries of certain executives were between the 75th and 90th percentile of market salary levels).
  7. 52 A.3d 408, 423 (Pa. Cmwlth. 2012)(finding that the institutional taxpayer failed to operate entirely free from private profit motive in paying a maximum incentive bonus of 24% to their Chief Executive Officer’s and 18-19% to their Chief Financial Officer).