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Wednesday, 27 July 2016 15:03

High stakes in hospital tax dispute

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Haywood Regional Medical Center and county officials  are locked in a dispute over how much the hospital should pay in property taxes.

Both sides made their cases last week during a formal property tax hearing, offering up vastly different opinions of how much the hospital and surrounding campus are worth. Pegging the hospital’s tax value is a high-stakes affair, with a lot of dough on the line come tax day.

“LifePoint doesn’t want to be a villain. They just want to be taxed fairly at what the market value of this hospital really is,” said Will Clark, a property tax consultant with the Altus Group representing Duke LifePoint in the appeal.

See also: No decision yet on Jackson hospital appeal

The hospital claims its property value — including the surrounding campus, fitness center and Homestead Hospice — is only $22 million, amounting to $124,000 in property taxes a year.

But the county claims it’s worth $43 million, amounting to $244,000 in property taxes a year.

The appeal last week went before the Board of Equalization and Review, a five-member panel of local citizens appointed by county commissioners for the sole purpose of hearing property tax appeals. 

The board made a swift decision, unanimously siding with the county. But it’s still early in the game. 

When the stakes are this high, the appeal at the local level is often just a pit stop in a drawn out process that eventually ends up being settled by the Property Tax Commission in Raleigh. 

 

Not worth all that

Duke LifePoint’s chief argument in the appeal was simply pointing out the hospital’s sale price two years ago when it was purchased from the county. What better way to determine the hospital’s worth than its sale price, Clark said.

Duke LifePoint bought Haywood Regional for $22.2 million, so that’s the value, Clark said.

The sale price of $22 million wasn’t arrived at lightly. It was the result of a year-long negotiation and based on detailed calculations of the hospital’s assets, market potential and finances, Clark said. 

While it sounds logical, the county disagreed. There was more to the sale price than meets the eye, explained Haywood County Tax Administrator David Francis.

“My opinion is the sale was under duress,” Francis said.

The hospital was struggling financially — a common plight for smaller, independent hospitals everywhere, ultimately forcing them to consolidate into the arms of larger systems.

At the time of the sale, the hospital owed $8.5 million on an emergency line of credit that it used to cover cash operational shortfalls. The clock was ticking to pay off the line of credit, but Haywood Regional never had enough left over at year end to make a dent on it. 

Profit from the sale would finally allow the hospital to get out from under the debt. And to Francis, the sense of urgency to find a buyer qualified its sale as a fire sale, and not a reflection of actual market value.

“A lot of the sale price was going to pay off debt, a lot of debt at that,” Francis said. 

Jimmy Flynn, a member of the Equalization and Review Board, agreed. He likened it to a homeowner being forced to sell at any price to avoid a foreclosure.

“If you have a home owner that is having to sell below market value to pay the loans off, then I don’t know if that is an arms-length transaction,” Flynn said. “It was more of a distress sale. To me, it was in economic trouble and to me that impacted the sale.”

“If it is economically distressed, then why appraise it so high?” Clark countered.

 

In rough shape?

Duke LifePoint also argued that the hospital has a litany of infrastructure problems and physical faults — which negatively impact the hospital’s worth. Haywood Regional had been losing money or barely breaking even for years leading up to the sale, and as a result, had failed to stay on top of maintenance and upkeep, Clark claimed.

“You have a struggling hospital both financially and physically,” Clark said. “They were economically in trouble and didn’t have money to pay for maintenance.”

Clark presented a report cataloging the hospital’s shortcomings, from outdated plumbing to obsolete electronic record systems. Duke LifePoint inherited a giant to-do list of infrastructure repairs and improvements that had been put off over the years because the money wasn’t there, Clark said.

Again, the county disagreed.

Francis said he didn’t think the condition of the hospital is as bad as Clark made it out to be.

“Duke LifePoint did not pay $22 million for an old decrepit hospital,” Francis countered. 

Flynn also questioned the characterization.

“I’d like some clarity — is that hospital that bad in condition?” Flynn asked.

Clark was between a rock and a hard place when it came to bashing the state of the hospital. While the image of a struggling hospital rife with outdated infrastructure would help the case for a lower property value, it’s not exactly the image Duke LifePoint wants to portray to the general public. 

To the contrary, Duke LifePoint has invested millions in infrastructure improvements and physical upgrades over the past two years and public confidence in the hospital has been restored.

Francis said he’s heard that the hospital is doing great.

“I think the census numbers are up, is that not correct?” Francis said. “The Duke LifePoint brand has had an impact on that, and the culture there has significantly turned around.”

Clark agreed, to a point.

“LifePoint has all the intentions of putting money into this hospital and turning it around. But currently the market value is $22 million, which is what they paid for it,” Clark said.

Clark conceded that the hospital’s value may one day be worth more, but not yet.

“Everyone would agree they are going to make some significant investments in this hospital, and at that point, fine, increase the value of the property,” Clark said.

Aside from the hospital’s general condition, Clark argued that the hospital was becoming functionally obsolete due to its age of 40 years old.

All hospitals depreciate in value over time due to technology advancements and changing industry standards. For example, Haywood Regional has 12-foot-high ceilings, while the industry standard today is 14.5 feet, Clark said.

But the county and Duke LifePoint disagree on the pace of depreciation.

The county claims the hospital is 30 percent depreciated.

“That’s wildly wrong,” Clark said. “The hospital should be 80 percent depreciated.”

Clark also played more subtly to the county’s good will, suggesting that the county should be appreciative that Duke LifePoint emerged as a savior for the struggling hospital in Haywood, as well as the hospitals in neighboring Jackson and Swain counties, which were bought in tandem with Haywood.

“Duke LifePoint came to this market with good intentions to try to turn these hospitals around,” Clark said. “This is not only an investment in the hospital, but an investment in the community. They just want to be treated fairly like anybody else would.”

Francis said they wouldn’t have bought Haywood Regional “if they didn’t think there was money to be made here.”

Duke LifePoint has been on an acquisition streak in North Carolina. Five years ago, it had no hospitals in the state, but it now has nine. LifePoint has a network of more than 60 hospitals and 30 outpatient centers in 20 states.

 

Battle of the lists

Meanwhile, a secondary tax appeal is playing out over the value of the hospital’s taxable equipment. Every scrap of equipment, from IV polls and desk chairs to MRI machines and computer systems, are subject to property tax.

The county has yet to get its hands on an accurate equipment list, however. The county keeps asking, but the list keeps changing.

“At one time they provided a list of historical costs to our auditor and now they don’t want to use that list and want to use a new list,” Francis said.

LifePoint’s Senior Tax Specialist Jack DaBell admitted the first list was wrong — it was one they had inherited when purchasing the hospital in 2014. The list had 5,000 assets, but some of those don’t exist anymore, he said.

“We had to find what was still there from that list and then after that put together an inventory of everything else that is there on site that maybe isn’t on the historic asset list or is unable to be matched back to an asset on the historic asset list,” DaBell said. “Our effort was to be very complete in the inventory.”

The county hasn’t found it to be very complete, however.

“I still feel like we are too far apart and I feel like we don’t have all the information we need,” Francis said.

An audit of the list was conducted based on county officials’ institutional knowledge of the hospital, coupled with the services of a consultant who specializes in business equipment tax audits.

They found several items missing from the equipment list and others vastly undervalued — calling into question the veracity of the list as a whole.

One source of contention was a suite of electronic medical records software purchased by the hospital for more than $8 million, yet listed by LifePoint as worth less than $400,000, Francis said.

That led to some debate over whether the computer software is in use anymore.

“They don’t know if they are still using it or not,” Francis said.

Another question surrounded a new back-up generator that didn’t appear on the equipment list from LifePoint. 

Members of the tax appeal board signaled their frustration over the shifting lists.

“It does concern me that we continue to have missing information on both sides. At some point we have to come to an end about the exchange of information,” said Mary Ann Enloe, a member of the Equalization and Review Board.

“Would it be fair to say we have demonstrated the original list is inaccurate?” LifePoint’s consultant Ken Fancolly asked.

“I don’t know that we can say that at this time. I don’t know we are there just yet,” Francis said.

Another challenge was last minute additions to the list before the hearing.

“We need to have all that information in time to study it,” said Evelyn Cooper, chair of the Equalization and Review Board.

In Vance County, Duke LifePoint has been at odds with the county over its hospital equipment list for three years. Vance County Tax Collector Portia Brooks said they, too, have struggled with shifting lists.

“They kept saying they didn’t have it, and we were like ‘We need the entire list,’” Brooks said.

Not wanting to wait as long as Vance has, the tax appeal board decided to cut off the back and forth and render a verdict after last week’s hearing. They voted once again to uphold the county’s position on the hospital’s equipment value.

The county claims the value of the equipment in the hospital is $16 million. LifePoint claims the equipment value is $10 million — but the two numbers aren’t apples to apples.

Duke LifePoint’s equipment value of $10 million includes the whole gamut of medical facilities under its umbrella — myriad doctors’ practices, two urgent care centers, an outpatient surgery center, the fitness center and hospice center.

The county’s estimate of $16 million is for the hospital alone, as it hasn’t yet dived in to the equipment list for the related medical offices and facilities.

 

What’s next

While the county and hospital showed no sign of compromise going into the hearing, there’s ample time for negotiations to play out before the appeal works its way up the chain to the state Property Tax Commission.

So far, Duke LifePoint hasn’t produced an independent, objective appraisal to counter the county’s value. Its case instead was more ethereal and anecdotal, citing functional obsolescence, economic challenges and deferred maintenance.

LifePoint may now cough up more tangible documentation. That would provide evidence the county has thus far been lacking to determine whether it’s too high. But as of the hearing last week, Duke LifePoint hadn’t been willing to show its hand with anything concrete, making the hearing more of a trial balloon on LifePoint’s part.

A property value assessment is supposed to be rooted in defensible and quantifiable calculations. It’s not like buying a car, where one side high-balls and the other low-balls, and they haggle their way to a meeting somewhere in the middle.

But in reality, both sides have to weigh the benefits of giving a little ground rather than going to the mat.

 

 

Why all the drama now?

Historically, Haywood Regional Medical Center was exempt from property taxes as non-profit. That changed following its acquisition in 2014 by Duke LifePoint, a for-profit hospital network.

The hospital is now obligated to pay county property taxes based on the market value of its land and buildings. Therein lies the rub: what’s the going price of a hospital these days? 

Haywood County and Duke LifePoint not only disagree on the property value, but also the value of its taxable equipment, from IV poles to MRI machines.

The difference of opinion adds to more than $150,000 on the hospital’s annual tax bill to the county.

The value determined now will not only impact this year’s payments, but also create a baseline for the hospital’s annual taxes from here on out — with more than a million dollars at stake over the next decade depending on who prevails in the property tax battle.

Calculating the value of the hospital and its campus for the first time was a herculean effort.

Given the complexity, the county tax office has brought in three outside consultants, each with specialized expertise: Stan Duncan, retired veteran property assessor from Hendersonville and former local government liaison for the state property tax division; Ron McCarthy, commercial property appraisal expert with RS&M Appraisal Services; and Phil Evans, independent business tax auditor with Evans & Associates in Charlotte.

LifePoint has its own share of heavy hitters in its corner, including: Will Clark, property tax dispute expert with the Altus Group; Jack DaBell, LifePoint’s in-house tax specialist; and Ken Fancolly with Avery Healthcare Appraisal out of Kansas.

 

Around the state

Duke LifePoint has formally disputed its property taxes in five of the seven counties where it has purchased a local hospital between 2011 and 2014. It purchased two more hospitals this year, making it too soon to tell whether an appeal may be forthcoming.

Person Memorial Hospital in Roxboro, 110 beds

• Year purchased by Duke LifePoint: 2011

• County’s appraised value: $17.3 million

• Duke LifePoint’s counter value: $11.8 million

• Status: An appeal was filed with the N.C. Property Tax Commission, but the parties settled on their own for a final value of $15.9 million.

Maria Parham Medical Center in Henderson, 102 beds

• Year purchased by Duke LifePoint: 2011 

• County’s appraised value: $66 million

• Duke LifePoint’s counter value: $29 million

• Status: An appeal was filed with the N.C. Property Tax Commission, but the parties settled last year on their own for a final value of $50 million.

Wilson Medical Center in Wilson, 294 beds

• Year purchased by Duke LifePoint: 2014

• County’s appraised value: $64 million

• Duke LifePoint’s counter value: $32 million

• Status: An appeal went all the way to the N.C. Property Tax Commission, which ruled summarily in Duke LifePoint’s favor, setting the value at $32 million. “It was a very disappointing decision,” said Randy Faircloth, tax administer in Wilson County.

Harris Regional Hospital in Sylva, 86 beds

• Year purchased by Duke LifePoint: 2014

• County’s appraised value: $48.9 million

• Duke LifePoint’s counter value: $13 million

• Status: An appeal process is underway. A hearing was held by the Jackson County Board of Equalization and Review last week, but a decision is still forthcoming. Duke LifePoint could still take its appeal to the Property Tax Commission if it disagrees with the local verdict. 

Swain Community Hospital in Bryson City, 48 beds

• Year purchased by Duke LifePoint: 2014

• County’s appraised value: $5.1 million

• Duke LifePoint’s counter value: Duke LifePoint did not appeal the county’s assessed value.

Rutherfordton Regional Health System in Rutherfordton, 143 beds

• Year purchased by Duke LifePoint: 2014

• Status: No appeal was filed over the county’s assessed property value. However, an appeal was filed over the value of a rehab center and group care home under the hospital’s umbrella.

Frye Regional Medical Center in Hickory, 355 beds

• Year purchased by Duke LifePoint: 2016

• Status: Too soon after the purchase to know whether Duke LifePoint will appeal the property value.

Central Carolina Hospital in Sanford, 137 beds

• Year purchased by Duke LifePoint: 2016

• Status: Too soon after the purchase to know whether Duke LifePoint will appeal the property value

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