Nonprofit Hospital Reaches Settlement On Taxes

In a tax settlement that could have implications for nonprofit hospitals in New Jersey and beyond, Atlantic Health System’s Morristown Medical Center agreed to pay the Town of Morristown, N.J, more than $15 million over the next decade, including deferred interest.

The settlement was approved by the Morristown Town Council on Tuesday but the dispute dates back almost a decade. Morristown has challenged the hospital’s property tax exemption, arguing that the system relies on for-profit doctors charging high fees for treatments, and no longer serves its nonprofit purpose, with the addition of gift shops, restaurants and cafes, and other facilities outside its nonprofit mission.

Starting next year and continuing through 2025, about 25 percent of the hospital property will be taxed at assessed value of $40 million, representing a tax payment of $1.05 million, in addition to a deferred interest payment of $550,000. The total $1.6 million will remain constant over 10 years because the deferred interest payment will be adjusted if the tax rate rises, according to a hospital spokeswoman. The assessment represents about a quarter of the medical center’s total square footage.

The 687-bed Morristown Medical Center is the largest of five hospitals within the Atlantic Health System (AHS), which last year reported almost 85,000 admissions and more than 1 million outpatient visits. The settlement relates to the Morristown hospital only. AHS pays tax on certain portions of its other hospitals and remains in discussion in those communities to address and resolve their property tax questions, the spokeswoman said.

Both sides recognized the value in avoiding further litigation, Morristown Mayor Tim Dougherty said, crediting Brian Gragnolati, who came on as the new president and CEO of AHS during the litigation.

In a statement, New Jersey Hospital Association President and CEO Betsy Ryan said they were pleased than an agreement had been reached. “We do expect this issue to now move on to the legislative arena, and we look forward to being part of that dialogue with lawmakers and the governor,” she said.

In a June ruling, a New Jersey Tax Court judge said that if the property tax exemption for nonprofit hospitals is to exist in New Jersey, it must be addressed by the Legislature.

At the same time, another New Jersey hospital filed for restructuring under a voluntary petition of Chapter 11. East Orange General Hospital, led by interim CEO Martin Bieber over the last year, has been struggling with old debt.

Monthly losses before interest, depreciation and amortization averaged 12 percent in 2014 but were reduced to 2 percent in the most recent month, according to Bieber, “Still, meeting old obligations on top of current obligations has contributed to the institution’s deteriorating cash position,” he said in a statement announcing the filing. “This filing will enable the hospital to remain current with its ongoing obligations while we renegotiate some contracts and emerge stronger,” he said.

The 211-bed acute care hospital will be acquired by Prospect Medical Holdings, Inc., of California. East Orange General is in negotiations with six independent lenders to provide Debtor in Possession financing. “The financing, combined with the hospital’s cash on hand will enable the hospital to pay its vendors and employees on a timely basis,” said Kenneth Rosen of Lowenstein Sandler, LLP, which is representing the hospital.