New Jersey Supreme Court Defines “Hospital Purposes” with regard to exemption of Nonprofit Hospital’s Offsite Wellness Center
Nonprofit hospitals are often characterized as greedy claimants of tax exemption for an expansive range of activities and facilities only loosely associated with their actual treatment facilities. Here, though, is a case where a hospital deserves credit for restraint with regard to its claim. In Hunterdon Medical Center v. Township of Readington (July 14, 2008), the New Jersey Supreme Court reversed and remanded an appellate court’s decision that a hospital’s off-site facility, at least one third of which housed a health center (with a pool, indoor track, a rock climbing wall, stairmasters, treadmills, and all sorts of aerobic equipment and weights) open to the public via membership dues, was not entitled to property tax exemption. The off-site facility also housed a physical therapy center and a cardio-pulmonary center used to treat hospital patients. The revocation of its property tax exemption cost the hospital $3.3 million and provided an opportunity for the Court to define “hospital purposes” as they relate to exemption of ancillary facilities. The Jersey Supreme Court stated that the following test should be applied in determining whether a hospital’s ancillary facility is used for “hospital purposes:”
1. The nature and extent of the services provided at the off-site location;
2. The extent to which the activity conducted in the facility is under the control or supervision of the hospital medical staff, or personnel;
3. Whether the facility serves primarily hospital patients and employees or primarily members of the general public.
Two additional considerations should be included in the analysis under factor three above when the hospital’s off-site activity is not one for which the hospital has been licensed to perform off site by regulatory authorities. See, e.g., N.J.A.C. 8:43G-2.11(c). Although neither should be treated as dispositive, they are: (1) whether the facility competes with like commercial or privately owned facilities; and, even if the answer to (1) is in the affirmative, (2) whether the facility, or the particular disputed part, is actually used predominantly by patients and hospital employees or by commercial members.
The Court determined that the lower court’s test to determine whether a hospital’s off-site facility was actually used for “hospital purposes” was too restrictive for purposes of the state’s property tax exemption for charitable activitiies, and did not sufficiently take into account modern day health care:
In our view, the analysis for “hospital purposes” must take into consideration the many medical pursuits permitted to the “modern” hospital in New Jersey. A hospital can no longer be restrictively equated with a nineteenth, or even twentieth,century vision of a monolithic building, in which is offered continuous inpatient care or emergency treatment, twenty-four hours per day, to the sick, disabled, and infirm. Licensing authorities have allowed hospital activities to evolve as inpatient stays have diminished. Today, treatment often is delivered on an outpatient basis at a hospital’s main facility, as well as at off-site facilities, backed up by the promise of ready inpatient care from the general, acute-care hospital when necessary. Thus, a fair definition of core “hospital purposes” must acknowledge the variety of activities that a modern hospital can be expected to perform for patients, be they inpatients or outpatients. That said, a hospital’s expansive view of its mission does not necessarily equate with “hospital purposes” in the tax exemption analysis.
All of this seems perfectly reasonable to me, at least in theory. But the application of a perfectly reasonable-sounding analysis with regard to health care, I think, has brought us to the present situation that seems to allow even altogether commercial fitness centers to attain tax exemption by association with a treatment facility, even as the market provides such services in more than sufficient supply. It would have been interesting, as a purely academic matter, to have seen how the appellate court applied the new analysis to the hospital’s members-only fitness center occupying the first floor of the facility. In fact, the hospital might have argued for exemption for its fitness center. Other nonprofit hospitals have, haven’t they? And successfully too. But the Court let stand that part of the lower court’s opinion denying property tax exemption for the fitness center. Apparently, (and surprisingly too) this hospital’s cert petition conceded the taxability of the fitness center (see footnote 17 of the opinion). We might speculate that the concession was motivated by the desire to maintain credibility with respect to its legal arguments. In any event, the hospital certainly deserves credit for the concession.
dkj