Hospital Property Tax Exemptions – The New Jersey Statute and Beyond – An Interview with Neil Eicher of NJHA
Hospital Property Tax Exemptions – The New Jersey Statute and Beyond – An Interview with Neil Eicher of NJHA
In this interview, Joel Swider sits down with Neil Eicher, Vice President of Government Affairs with the New Jersey Hospital Association, to discuss a recent bill that was signed into law in New Jersey related to property tax exemptions for nonprofit hospitals. The law brings resolution after almost 6 years of uncertainty in the wake of the NJ Tax Court decision in the Morristown Medical Center case which jeopardized hospital property tax exemptions in New Jersey. The interview covers the New Jersey statute as well as strategies for protecting property tax exemptions in other states through legislative efforts.
Attorney, Hall Render
Vice President of Government Affairs, New Jersey Hospital Association
Joel Swider: Hello, and welcome to the Health Care Real Estate Advisor podcast. I’m Joel Swider an attorney with Hall Render, the largest healthcare-focused law firm in the country. Our guest today is Neil Eicher, who is vice president of government affairs with the New Jersey Hospital Association. We’re going to be discussing legislation that was recently signed into law to restore property tax exemptions for nonprofit hospitals in New Jersey, but which also requires nonprofit hospitals to pay certain community service contribution payments, which we’ll get into in more detail. Neil, welcome back to the podcast.
Neil Eicher: Thank you, Joel. Thank you for having me and you guys do great work on this issue, so I appreciate being a part of it.
Joel Swider: Well, thanks Neil. So before we can understand and appreciate the text of the bill itself, that was recently signed into law, I think it would be helpful to explore some brief background of hospital tax exemptions in New Jersey. I think that there’s really a broader applicability here in other States where we’ve seen the gradual chipping away of property tax exemptions for nonprofit hospitals. And so I think the process is in some ways, just as important as the result, particularly for those who are looking at this case and who’ve been watching it as we have from other States looking to see what that’s going to look like in New Jersey in the future and how it might be translated or mistranslated in other States and other contexts. So, Neil, could you give us a little bit of a lay of the land? What did the landscape look like pre Morristown, which was the case that really sort of brought this issue to a head in 2015?
Neil Eicher: Yeah, sure thing. So the Morristown Memorial hospital tax court decision was a pivotal moment for the industry. As you said in summer of 2015, it’s sort of unexpected rolling from one tax court judge in New Jersey, challenging Morristown property tax exemption. Now, they had been in litigation for almost 10 years with a town that included, multiple mayors moving in and moving out, even a change in administration at the hospital level. So it did kind of predate when the decision was actually made. But the judge in that ruling, as I said, stated that Morristown should be paying property taxes. It wasn’t precedential, but it was certainly influential. And then it resulted in NJHA as the advocacy wing to start pushing for a legislative solution because the judge did actually make that statement.
Neil Eicher: And his court decision was that although they should be paying property taxes, the legislature needs to step in. And it’s interesting because our statute on tax exemption, property tax exemption goes back. I want to say 70 or 80 years. And in that exemption, there was no carve out for for-profit medical providers within a nonprofit hospital. So while we disagreed with the rolling for a variety of reasons, the fact that the judge said we need to step in and get a legislative solution is what changed the landscape for us.
Joel Swider: Okay. So what did happen after the Morristown Medical Center case? What has happened sort of bring us up to this current bill that was passed last month and signed what’s been happening in the intervening years. I know you guys have been working at this for a long time.
Neil Eicher: Yeah. So after the decision was rendered, we knew we had six months or so until the end of our legislative session to pass a bill. And again, this is in 2015. So we did pass a piece of legislation, very similar to what has been signed into law six years later. But unfortunately it was vetoed by the governor at the time and what we were afraid of and what actually happened was with the beginning of the tax year in 2016, we saw a flurry of litigation. In some cases, it’s the town putting the hospital on the tax rolls. And it’s the hospital that initiated the litigation. Sometimes it was the reverse, we had to deal with omitted assessments, which is just a clever way of kind of looking back at retroactive tax years up to two years prior to put entities back on the tax roll.
Neil Eicher: And then I think when we’re all said and done, we probably had 40 to 42 of our 59 nonprofit hospitals engaged in litigation. Now I should note that some of them settled, they had agreements with their towns. Ironically enough, many of those agreements were similar to the community contribution fees in this law, but they had expiration dates. Other hospitals were just involved in litigation and then some other hospitals didn’t see any lawsuits at all.
Joel Swider: So then leading up to, you mentioned there’ve been other attempts over the years, leading up to the current bill that was finally passed and signed. Even that once it was introduced in January, 2020, took over 13 months until it was finally signed. Was there more give and take at this time around as well?
Neil Eicher: Yes, absolutely. It was a very arduous legislative process. We’re happy with the result so we can kind of look back at it and figure out what worked and what didn’t, what started, having the speaker of our general assembly as the prime sponsor and only sponsors, five or six bills in a session that was a positive signal and also getting our Senate, President and Governor on board early, at least conceptually was important. What happened in practicality is as the bill started to move, we started to hear, or the legislators started to hear from very influential mayors who had problems with what this bill might mean for them, at least according to what their tax assessor told them, what they could get out of the hospital, if there was full property taxation on the facility.
Neil Eicher: So we did a lot of behind the scenes work with local mayors, local hospitals tried to resolve very territorial type of issues, but it actually worked as a benefit because what we were seeing was the creation of an adversarial relationship between the towns and the hospitals that didn’t exist prior to this Taxport decision. And having this discussion kind of helps move that smooth that over. So some of the amendments in the law dealt with, for example, walking in or grandfathering in current agreements that are in place between a town in a hospital, that would be the floor. If the legislation, or I guess the law will say, if it has to be greater, the hospitals is obligated to pay more. But that took care of a couple of towns. We made some changes to the offsite for-profit medical providers made it very crystal clear that the medical provider had to be exclusively working with the hospital for a hospital purpose.
Neil Eicher: That was an issue from some legislators previously thinking that non-profit hospitals would all of a sudden purchase a bunch of for-profit medical provider buildings, take them from tax paying entities to non tax paying entities. That was not the way we read it. And it’s obviously was not our intention, but we needed to make necessary changes. And then the last thing I’ll say, Joel, is you might may have noticed if you follow this at all, we went from $2 and 50 cents per bed, per day, contribution to the town, to $3 per bed per day contribution. That was because the governor’s office wanting to get a little bit of a higher rate from hospitals to towns. So that obviously we had to discuss that for a while, but we ultimately agreed to it. And there are other small changes, but those were the main ones.
Joel Swider: Well, Neil, let’s dive into the meat of the law a little bit, this nonprofit hospital property tax bill, or a 1135, as it’s been called, going through session, let’s start with what type of property or property owner is subject to the new law?
Neil Eicher: We first specifically to a nonprofit hospital. I’m sorry, nonprofit general acute care hospital. That’s important in case you’re a specialty hospital, rehab hospital. And according to your State’s definition of licensure for a general acute care hospital, that’s important, but for our purposes, for New Jersey’s purposes, a nonprofit general acute care hospital. So it’s that building in any other building that’s utilized by the nonprofit hospital solely for hospital purposes. As I mentioned previously, if it’s a for-profit medical provider, it has to be exclusive to that hospital who does this apply to and in all practicality, it’s your ER groups that maybe you contract with, maybe you have an anesthesiology group or wing cardiology, all the wrap services, pathology, those that may have for within your hospital, maybe it’s an attached wing of your hospital, but this is an important point of clarification because this had stalled the bill as well.
Neil Eicher: If you have, let’s say a for-profit medical provider group that is renting space or attached to the hospital or attached to the hospital and renting space, and they provide some assistance to patients from the hospital. So if it’s a cardiology group and let’s say they do 40% of services for the hospital, but they have 60% of patients come as walk-ins, they would not allow that part of that wing, that building would not receive a property tax exemption. They would still be required to pay property taxes. The normal arrangement is through the lease agreement with the hospital.
Neil Eicher: So we made it very clear. It has to be pretty much, well, it has to be a hundred percent of what that group does is for the hospital purpose. It also, if you have a McDonald’s, if you have a Starbucks within your hospital, that will remain taxed. Usually again, it’s done between the lease agreement with the facility that will not change. The cafeteria, however, would fall under the property tax exemption.
Joel Swider: Okay. So if you have an exemption, you qualify, you’re a general acute care hospital, you qualify for exemption, but there’s also this element of a community service contribution. What does that mean? And what does that look like?
Neil Eicher: So because of the statute that we were dealing with about the inability for Eddy for-profit activity to occur in a nonprofit entity to get property tax exemption, we recognize that with for-profit activity occurring in these hospitals, that we needed to modernize the law. It could be those groups that I mentioned previously, or it could be a specialist that has privileges in a hospital, whatever it may be, at least in New Jersey, there are for-profit entities working in a nonprofit entity and it puts our statute in jeopardy. So recognizing that things have changed, what we agreed to was that in exchange for, I guess, the codification or update to our property tax exemption, we would pay a fee to the town because we are also getting bigger. We are utilizing more municipal services. So as a recognition and actually just from the get-go trying to be a good player with the towns and not just try to railroad through something, we thought we would try to find that fair balance and at $2.50 at the time, the contribution will be $2 and 50 cents per bed per day, to each town.
Neil Eicher: I will note that you are, as a hospital, able to deduct any agreements that you already have. We call them voluntary agreements. Most people know them as pilots. We stayed away from the word pilot because there’s a strict definition in New Jersey statute that may have brought on issues after this became law. So we just call them voluntary agreements, voluntary arrangements. So if your obligation of now it’s up to $3 per bed per day, is $500,000 to your town. You have an agreement for $300,000 each year, maybe to pay for a public nurse in the school system, redo a park, whatever it might be, or just general money. You’re able to deduct that 300,000 from that 500,000, therefore you would owe $200,000 a year.
Neil Eicher: It would never go reverse. If your agreement is more than the requirement here, you can’t obviously deduct that. But that was again, a good faith effort by us. We just wanted to turn the spigot off of all these lawsuits, put something in there that was a fair that the towns would get something. And then we wouldn’t be spending money on legal fees. So that, that was the purpose of the community contribution that we thought it was important to be a good partner with our towns.
Joel Swider: That makes sense. And Neil, I mean, this applies to a lot of hospitals. I know you, you gave a couple of specific examples in some sort of variations of the general acute care hospital, but I mean, that’s a majority of New Jersey’s acute care hospitals will probably fall into the ambit of this statute. Is that right?
Neil Eicher: Yeah. Correct. We have 59 non-profit hospitals and 71 acute care hospitals.
Joel Swider: Okay. So are there any carve-outs from the ambit of the statute or other clarification’s that we should be aware of in terms of how this shook out?
Neil Eicher: I mean, I think it’s important to understand kind of your for-profit medical providers, the buildings associated with your nonprofit hospital, how it’s structured under your license. I think that’s very important. So I did talk about that, but I will say we did get abdication carve out. We have a specially cardiac hospital in New Jersey that doesn’t bill patients. They have a special OIG opinion from the federal government to have this exemption, not to, for example, go after Medicare patients for balanced billing. So we did insert a section in there that exempted them and that actually made it into final law.
Neil Eicher: So let’s say, other than that, no other real carve-outs, no hoodwinking that we were trying to do, we try to be as transparent as possible, where we needed the clarification, like I said on off-site for-profit medical providers and whether we’re going to buy them up and switch to property tax status, we made it very, very crystal clear that that wasn’t the intention. But it was very important to us on the for-profit medical provider to get that exemption for the emergency department. For example, if you have a for-profit medical group, if you have the third floor of your hospital has a cardiology group, that needs to be exempted. So other than that it’s pretty straightforward with, again, nonprofit general acute care hospitals.
Joel Swider: So Neil, as I read this statute and I’ve read now a number of them from other States, I find it to be pretty comprehensive in terms of, it’s pretty clear about its scope. It’s pretty clear about how it applies and how it works. There are two things that caught my eye though, as potential wrinkles, I guess you could say in terms of how this is going to be implemented, one of them is that there’s language requiring the New Jersey healthcare facilities, financing authority, and the director of the division of local government services to adopt regulations, to effectuate the bill, where do you see that going? And it sounds like it has to be done within four months following enactment and which may or may not end up taking place, but any thoughts on the regulatory aspect of this?
Neil Eicher: Sure thing. And I think it’s good for listeners to consider that in their own state. A lot of times when we have legislation going into the water, there is a requirement for the promulgation of regulations, but it’s very clear, from previous experience, that a statute is a statute. So you still have to implement it, still the letter of the law, even if the regulations don’t come. So you’re correct. There needs to be regulations within four months. I doubt that our department will meet that deadline. It’s been very difficult previously. And then of course we’re still trying to get out of COVID and a lot of other things that are affecting the work of the department. So I personally do not expect them to meet that four month deadline. However, what was important to us and maybe another consideration for your list just to make the language as specific as you can.
Neil Eicher: And even some of these provisions need further clarification. After six years, we tried our best to make it as clear as possible, but we still need some guidance on a few things from the various departments, but we did make a conscious effort to make it as specific as possible. So that once the bill was signed into law, we knew what to expect. Our members certainly knew what to expect following this for years and most of the towns as well. So I do think they’ll get to regulations eventually, but right now, we’re just kind of moving forward with our interpretation of the law until we get that guidance.
Joel Swider: So near the other wrinkle, if you will, that identified as I was reading it was, there’s a non-profit hospital community service contribution study commission, which has set up, which has as its goal, sort of looking at the financial impact, analyzing, analyzing the financial impact on effected hospitals and municipalities among other things. And I guess, again, as an observer from another State and who represents clients in additional States, I think it’s really interesting. I will really be curious to see how the study commission reports shake out and what is found, but could you give me a little bit more color to why that was in there and what the goal of it is?
Neil Eicher: Yeah. Yeah. You and me both, I’m interested to see what they come up with. We thought again, because a lot of this language was actually taken from our original bill that went forward in 2015. And the purpose of this bill, originally, I guess it still is, was to provide a stop gap, to put a pause on a lot of the legal suits because no one has really examined the role of healthcare entities, hospitals in particular, and how it relates to property taxes, New Jersey, by the way, has the highest property tax rate in the nation because we, variety of reasons. So property taxes are very, you know, interesting phrase here. So we needed, you know, some experts kind of sit down and take a view of the changing landscape of healthcare changing landscape of towns and property taxes.
Neil Eicher: So, that was the purpose. At the time the $2.50 now $3 contribution was meant as a stop gap. We knew that we needed to start paying something two minutes to Powell these, and by the way, it’s pretty much, it’s about 20 to $21 million a year annually, collectively in New Jersey. But we want this commission to review everything. And if they say, you know what, $3 is too low, we’re going to have to swallow that and accepted. Luckily, we have some good representation. One of the amendments that the governor’s office asked for some additional person from the governor’s office to sit on ex officio. So I do think this will be helpful and understanding kind of as we move forward. However, one thing I neglected to mention about the community contribution fee is that each year it goes up with an inflator of 2%.
Neil Eicher: So at minimum, it goes up 2% moving forward. So again, for the hospitals that are listening, this might sound like a good deal for the towns, even though they lobbied against it, but this bill and this law is essentially the floor of what hospitals must pay. Things will always continue to go up. So we needed to make sure the study commission was there, but at the same time, it is balanced. So it’s not swayed one way or the other, but Joel, kind of to your question about regulations, when that’s going to come, I know there are strict deadlines for this, but it’s possible that this doesn’t meet in a timeframe that the put in the bill.
Joel Swider: So Neil, let’s turn to the subject of sort of the effect or the fallout, if you will, both positive and potentially negative of the legislation. I think in some ways beauty’s in the eye of the beholder, but Kathy Bennett, who’s the president and CEO of the New Jersey Hospital Association, seemed overall positive about the new law in the news reports that I read. She said it was the right solution. And I do think that, I mean, just my personal opinion is that NJJ has done a great job of taking into account the various perspectives here and coming up with a solution that is equitable, but also puts New Jersey hospitals in your membership, in a better position than they were for the past five, six years and maybe more. Do other healthcare leaders in community organizations feel the same way about the bill or what sort of the anticipated effect?
Neil Eicher: Sure. So we were very as an association and by the way, where we represent all the hospitals in New Jersey, I know that’s somewhat unique in many States, so it’s-
Joel Swider: So it was sort of everybody
Neil Eicher: Everybody. Yeah. So we have a for-profit non-profit that adds up to 71 hospital members. We have 250 to 275 post-acute specially care type of maybe not core members, but affiliated members, business members, et cetera. So we count over 400 members in our membership, but of course our core membership is mostly general acute care hospitals for-profit and nonprofit, but we also have some behavioral health facilities and other post acutes that are core members. But to your point, everyone, all the non, all the acute care hospitals supported this, membership completely supported this. It was difficult at times going from $2.50 to $3 to make sure everyone’s comfortable with that. I should note I won’t name, but there was one health system that had four hospitals in New Jersey that had no pending litigation that wasn’t very happy with it. They were fine with MGHA pursuing and they were absolutely great partners in it, but they just made it clear that they didn’t support it.
Neil Eicher: It would mean over a million dollars to them each year that they would have to pay. There are other categories of members who may not have had lawsuits, but also knew that they could be next and we’re supportive. I think it was also supported by maybe not very publicly, but nursing home health associations, others that were nonprofits, but thought that maybe they could be next. Educational institutions also were supportive. We got the council, the center for nonprofit hospitals or sorry, center for nonprofits in New Jersey to be supportive because of kind of the snowballing effect that could happen watching what would happen to our hospital. So we did have some kind of ancillary support and really the only, the only opposition was the advocacy group that represented the towns, it kind of depends on your perspective.
Neil Eicher: They were making a case to their mayors, that hospitals needed to be taxed, a hundred percent of the market rate. We believe that we shouldn’t have need to pay anything, but at least we came up with a compromise, the pay something, again, over $20 million a year, the other side just fought it and wanted a full payment. So I think in general, just some of, I think in general, a lot of the healthcare leaders understood this was important to get this codification, even those who are advocacy groups for patients, et cetera, knew that we were spending money on legal fees. And as a nonprofit, you have to report to your board, you have certain community benefit requirements. So they knew we could put that money back into care. So I’m glad we got this done. And I think we had the right amount of support.
Joel Swider: So Neil, maybe to close here, I’m curious as well, you mentioned the towns and the advocacy against this effort, which sort of surprises me in some ways since the statute previously allowed for exemption. And it really wasn’t until Morristown, that was even in question, but what is the anticipated effect on legislation, excuse me, on litigation that was ongoing at the time that this was signed or maybe really everything that’s kind of come out since Morristown, what will happen with that litigation and what do you see there happening?
Neil Eicher: That’s a very good question. And I’m happy to be able to explain this a little bit. And again, every state’s different, but I think there might be some crossover on this statement, but with the legislation being signed into law, it codifies our property tax exemption. It refines the statute for the exemption. As I mentioned before, requires the community contribution fee. However, everyone wants to meet. Everyone must remember the separation of powers between the executive branch and the judicial branch.
Neil Eicher: So yes, the statute will go into effect, but it cannot throw out the lawsuits and the litigation that’s currently taking place between towns and hospitals. That’s the legal interpretation from our council. However, in all practical sense, since we only have three or four tax court judges, and our counsel has been the ones representing those, the hospitals, she has told us that every judge has been looking at the progress of the legislation and art, and they are going to point to the legislation as kind of the solution.
Neil Eicher: So for those of you, or you may maybe council or are looking at from a legal sense, it’s important to understand that just because you pass a law, doesn’t necessarily mean it overturns a tax court decision, but it will be very influential and making their decisions. So if you’re thinking about going our route and trying to make a lemonade out of lemons and just kind of dealing with a bad situation that was put in front of us, I would encourage you as you go through the legislative process to also think about how you can make sure the judicial branch is aware of what you’re trying to do before moving forward.
Joel Swider: Well, thanks so much for your time and expertise, Neil, and congratulations on getting this bill finally negotiated and signed into law. Where can our listeners go to learn more about the law or about your work at NJHA?
Neil Eicher: Sure. No. And, and thank you for having me. njha.com. Please visit us. We have a lot of different things that are available for non-members a non password protected that you can visit. My email is an email@example.com always feel free to send me a note. Again, it’s firstname.lastname@example.org. I’m happy to talk about this. This was six years in the making happiness done, still more to do, but yeah, I’d be happy to talk to anyone who wants to learn more about this.
Joel Swider: Great. Well, thanks again, Neil, and thanks to our listeners for joining us today. If you liked this podcast, then please subscribe and leave feedback for us using your Apple or Android device. And if you’re interested in more content on healthcare real estate, we also publish a newsletter called the Health Care Real Estate Advisor. If you’d like to be added to the list, please email me at email@example.com.