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Hunterdon Medical Center v. Readington Township

416 N.J. Super. 127, 3 A.3d 593 (App. Div. 2010)

TAXATION; HOSPITALS — Hospital-owned property being used as an off-site hospital-owned property is entitled to an exemption from real estate taxes depending on the nature and extent of the services provided there, the extent to which those activities are under the control or supervision of the hospital, and if the facility serves primarily hospital patients and employees.

A nonprofit hospital corporation operated an offsite building with a wellness center, a cardio-pulmonary rehabilitation service, a physical therapy (PT) service, and a pediatric practice. In a previous proceeding, the New Jersey Tax Court had found that only the space in the building exclusively dedicated to the cardio-pulmonary service qualified for a property tax exemption. The hospital argued that the tax exemption should also have applied to its PT service and it litigated the issue to the New Jersey Supreme Court.

On that appeal, the Supreme Court held that the issue, as presented, was whether the hospital’s operation of a PT service in the off-site building constituted hospital-owned property actually being used for the permitted exempt purpose (hospital purposes). The Court defined a hospital purpose as including any service required by its patients, medical or diagnostic. Such required services necessarily would include services associated with either pre- or post- admission to the hospital, whether as an in-patient or an out-patient. Three factors were developed to test the proposed use. The factors were: the nature and extent of the services provided at the off-site location; the extent to which the activity conducted in the facility was under the control or supervision of the hospital medical staff or personnel; and whether the facility served primarily hospital patients and employees or primarily members of the general public.

On remand, the Tax Court subsequently entered judgment in favor of the municipality on the issue of whether the PT service portion of the building was entitled to a tax exemption. The Court found that during the tax years in question no hospital admission was required and no physician’s prescription was necessary in order to utilize the PT service. No hospital medical supervision was given, and the PT staff was wholly comprised of non-physicians. The hospital’s Medical Director of Physical Therapy did not review treatment plans, and the physical therapy service was run by a part-time clinical director with no medical training. For those reasons, the Tax Court concluded that the hospital had not established that its PT services were provided pursuant to a core hospital purpose or that the PT service served primarily hospital patients who were referred to the service for continuation of treatment.

The hospital appealed and the Appellate Division reversed, finding that the PT service portion of the building was entitled to a tax exemption. The Court relied on the Supreme Court’s definition of a hospital’s core purposes to include any service, medical or diagnostic, required by its patients, including but not limited to those administered pre-admission and post-discharge. The Court felt that because wellness center customers were also using PT service equipment confounded the issue of whether the PT service served primarily hospital patients. The Court ruled the PT service’s equipment was utilized primarily for physical therapy. Additionally, the Court found that the lack of medical oversight of specially trained and licensed physical therapists did not necessarily provide evidence of a lack of integration with the hospital, but was simply indicative of the fact that medical oversight over physical therapy was not the norm. To the Court, there was sufficient integration between the PT services and the hospital. The PT employees were employees of the hospital. The service operated pursuant to the hospital’s by-laws, policies, and procedures. Billing were done through the hospital, and all revenues were placed in the hospital’s operating account. Purchasing was handled centrally, as were human resources responsibilities. Budgeting required hospital approval, and the physical therapy facility was covered by the hospital’s insurance policies.

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