In this case, the Commonwealth Court had ruled that Pottstown Hospital failed to satisfy the HUP test because it did not “operate entirely free from a private profit motive,” reversing the finding of the trial court.

On May 30, 2025, the Supreme Court of Pennsylvania issued an important ruling for nonprofit hospitals and health systems across the commonwealth. In a majority opinion authored by Chief Justice Debra Todd (joined by Justices Kevin Dougherty, David Wecht, Kevin Brobson and Daniel McCaffery), the court held that Pottstown Hospital is a “purely public charity” under Article VIII, Section 2(a)(v), of the Pennsylvania Constitution, entitling it to local property tax exemptions.

To qualify for tax-exempt status, an entity must satisfy the “HUP test,” articulated in Hospital Utilization Project v. Commonwealth, 487 A.2d 1306 (Pa. 1985) and the requirements of the Institutions of Purely Public Charity Act, Act. No. 55 of Nov. 26, 1997, P.L. 508, 10 P.S. § 371, et. seq. In this case, the Commonwealth Court had ruled that Pottstown Hospital failed to satisfy the HUP test because it did not “operate entirely free from a private profit motive,” reversing the finding of the trial court.

In considering whether Pottstown Hospital was operating entirely free of a private profit motive, the Supreme Court of Pennsylvania analyzed the relationship between Pottstown Hospital and its managing member, Tower Health LLC, as well as the hospital’s executive compensation structure. In considering these issues, the court made two important conclusions.

First, only the finances of the hospital, and not its affiliates, should normally be considered in determining tax-exempt status. The court held that “when a corporate entity seeking a charitable tax exemption under Article VIII, Section 2 is a subsidiary or affiliate of another corporation, it will ordinarily be regarded as its own separate entity … unless there is evidence establishing a reason to pierce its corporate veil.” The court recognized the modern reality that most hospitals “including tax exempt hospitals, are not wholly independent entities,” but operate as part of a broader hospital network that includes for-profit components.

Second, executive compensation structures that include incentives for financial performance do not automatically disqualify a hospital from tax exempt status. Instead, such compensation structures are one factor among others to consider when determining whether a hospital is a “purely public charity.” Here, too, the court recognized that “a modern hospital executive today is more likely to oversee a multifaceted healthcare delivery system, and his or her compensation has taken on aspects of the compensation provided to executives of for-profit corporations.”

The decision will be of great interest to the many nonprofit hospitals across Pennsylvania—in particular, those that operate as part of a broader hospital network.

Justice Sallie Updyke Mundy authored a dissenting opinion, joined by Justice Christine Donohue.

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