Issue Date: December 23, 2005
How corporate, how Catholic?
Tax-exempt hospitals face questions
over pay and uninsured care
By JOE FEUERHERD
Washington
Officials at the nonprofit Providence Health System, the largest hospital
system in Oregon and the state’s second largest employer, knew they had, at
a minimum, a public relations problem. Difficult questions were sure to be
raised about the $6.6 million in wages and retirement benefits received by
retired CEO Henry Walker and the high six-figure salaries paid to other top
management.
In a Nov. 15 e-mail to his managers, Russ Danielson, who heads
Providence’s Oregon operations, acknowledged as much. “I’m sending you this
information,” Danielson told his staff, “because there are organizations
whose work is intended to disrupt and divide.” Danielson noted that his 2004
compensation was $646,050 of which $97,366 was for deferred retirement.
“It’s important that you know what is being reported in the event you are
asked about it or hear about from the media,” wrote Danielson.
The compensation information, part of a routine financial disclosure
report to the IRS made by Providence last month, came at a particularly
inopportune time for the $4 billion health care giant, a jewel in the $66
billion, 600-hospital Catholic health system. Among the disrupters and
dividers alluded to by Danielson: the Internal Revenue Service, the
Government Accountability Office, the Congressional Budget Office, numerous
state attorneys general, local governments, health care watchdog groups,
politically connected trial attorneys who have shifted their attention from
tobacco companies to nonprofit hospitals, and the Service Employees
International Union.
Driving the scrutiny are two powerful Republican lawmakers, Senate
Finance Committee chairman Charles Grassley of Iowa and House Ways and Means
Committee chairman Bill Thomas of California. Executive compensation,
hospital billing practices toward the uninsured, and the amount of “charity
care” nonprofits provide are among the direct issues the committees are
investigating. The bigger question, in the context of corporate scandals at
Enron and WorldCom and nonprofit malfeasance at United Way and the American
Red Cross, is whether nonprofit hospitals function differently from their
for-profit counterparts. Nonprofit hospitals are required to provide a
“community benefit” in exchange for tax breaks. The question investigators
are asking is whether nonprofit hospitals provide sufficient “community
benefit” to warrant significant tax breaks.
The House’s blunt-spoken Thomas, at a hearing earlier this year, put it
this way: “What is the taxpayer getting in return for the tens of billions
of dollars per year in tax subsidy?”
“Tax-exempt status is a privilege,” Grassley said last May after
requesting that 10 of the largest nonprofit hospitals provide information to
his committee. “Unfortunately some charities abuse that privilege. By
gathering information from nonprofit hospitals, I hope to learn whether the
benefits they provide to the needy justify the tax breaks they receive.”
Similar demands for information have been made by the IRS and the GAO,
Congress’s watchdog agency.
“There are lots of problems and Grassley is very serious about it,” said
John Olinger, a Washington lobbyist whose clients include nonprofit
hospitals. The Senate Finance Committee chairman is expected to introduce
legislation early next year that may seek to repeal some tax breaks
nonprofits have enjoyed for generations. Further, noted Olinger, at a time
of ballooning federal deficits, the committees charged with overseeing
health care are also those responsible for raising revenue. “You start
making changes [to the nonprofit health care system] and you can bring in a
lot of money,” said Olinger.
“This is part of a big mosaic of trouble that the Catholic Health
Association and the American Hospital Association” -- the largest interest
groups advocating for nonprofit hospitals -- “have to some extent brought
upon themselves,” said James Unland, president of the Health Capital Group,
a consulting firm, and editor of the Journal of Health Care Finance.
Unland poses the questions provocatively. “Has it gotten to the point where
a nonprofit hospital is basically a front to allow doctors and
administrators to make money? Is their very existence fraudulent? These are
the questions being asked at all levels of government.”
Sr. Carol Keehan, president of the 2,000-plus member Catholic Health
Association, takes the inquiries presented by Congress, regulators and
interest groups seriously, but noted that nonprofit hospital providers have
seen such queries before. “Sure, sometimes we don’t like the way some of the
questions are asked,” said Keehan, a member of the Daughters of Charity, but
given the growth of the nonprofit health care sector, and the dramatic
though high-cost improvements in care, such scrutiny is to be expected.
Keehan said the oversight provides an opportunity to “take a look and make
sure that in every way we are being what we want to be for our communities.”
Compensation
Under IRS regulations, the nation’s nonprofit institutions -- not only
hospitals but universities, local charitable groups, and such national
players as United Way and the Salvation Army -- are prohibited from paying
“excessive” salaries. The problem: One person’s “excessive” is another’s
“comparable market rate.”
To comply with IRS regulations governing executive pay, nonprofit
hospitals typically bring in an outside consultant who reports to the board
on how much their competitors pay top management talent. The board uses that
information to set wages for its top executives. Such a procedure is thought
to provide a “safe harbor” and a “rebutable presumption” against IRS
sanctions.
It’s precisely the process followed by Providence Health Systems,
according to Susan Byington, human resources vice president. Providence sets
its management wage rates by targeting their pay scales to the median
salaries of executives at hospital systems with revenues considerably less
than Providence. That ensures, said Byington, that Providence complies with
the spirit and letter of IRS regulations and remains competitive in terms of
attracting the administrative talent needed to operate a four-state
35,000-employee health care system.
How is it that Providence, whose executive compensation packages fall
well within industry standards, paid what might be the largest lump sum ever
to a hospital system executive? In the case of former CEO Walker, said
Byington, the federal disclosure requirements tend to overstate the value of
his compensation package.
First, she noted, though the forms filed with the IRS note “annual
compensation” of over $1 million for 2004, Walker’s pay for that year was
set at an annualized rate (Walker resigned effective April 30, 2004) of
$725,000. Why the discrepancy? Walker’s 2003 bonus of $323,000 was paid in
2004, while other deferred income (such as $91,000 built-up in a flex
allowance plan and approximately $150,000 in Walker’s own contributions to a
defined-contribution retirement plan) was also paid in 2004, and reported as
“annual compensation,” because he was leaving Providence.
The $5.5 million in retirement benefits attributed to Walker on the IRS
form, said Byington, does not note that the benefits were fully taxable and
that Walker did not receive any severance pay. In negotiating with Walker,
Providence’s board “considered the value of what they would have to pay in
severance and delivered it another way as a retention strategy,” said
Byington.
Walker’s retirement benefit, Providence Health Systems board chair Kay
Stepp said in a Nov. 14 letter to employees, “was paid as a ‘lump sum’
rather than paid in the form of an annuity, over 25 to 30 years.”
Still, say critics, the compensation system is deeply flawed. Of the
consultants used to gauge executive nonprofit pay, Minnesota Attorney
General Mike Hatch told the Senate Finance Committee that “the market
comparisons relied on to justify health care executives’ compensation are
those of other overly paid health care executives. Then, because no board of
directors wants to hire a ‘below average’ executive, boards typically pay
their executives a compensation package that is ‘above average’ in the
market to reflect the board’s good judgment in hiring an above-average
executive. This leads to a ‘Lake Woebegone’ effect, in which all health care
executives are above average. The problem is magnified during succeeding
review periods.”
Health care finance consultant Unland put it more succinctly: “It’s a
racket.” Said Unland, “The industry is now going 90 mph in a 55 mph zone and
they justify it by saying ‘Everybody is doing it.’ ”
Another area getting some attention: compensation to board members. At
Providence, board chair Stepp receives $50,000 annually ($240 per hour) for
what the company reported to the IRS as four hours per week of work.
“That’s a crock,” says Pablo Eisenberg, a senior fellow at the Georgetown
University Public Policy Institute. Traditionally, noted Eisenberg,
nonprofit board members serve without compensation. “There’s absolutely no
reason to pay trustees,” said Eisenberg.
Providence’s Byington defended the practice, saying that as the hospital
system shifted governance from a Sisters of Providence-run board to a
lay-run board, “we were asking nonreligious men and women to assume a
significant accountability role for the governance of this very complex
organization.” Byington noted that board members do not set their own
compensation and that Stepp “gave up a very substantial … business” when she
became chair.
Meanwhile, in Olympia, Wash., Dennis Ganey, a social worker at
Providence’s hospice affiliate, just completed a stint as a union negotiator
for the approximately 150 nurses, nursing assistants, physical and
occupational therapists employed there. The union was successful, said
Ganey, in securing comparable pay with other Providence workers, but the
company would not budge on its health care package. Providence, said Ganey,
pays just 50 percent of the premiums for dependents of workers covered by
their health care plan. The result is that many hospice workers place their
children in the state-run, publicly subsidized insurance plan. Some of the
money paid to executives could be used to fund health care for the children
of Providence employees, said Ganey.
Providence recently provided each employee with a $25 holiday gift card
for use at Safeway, said Ganey. “People were sort of underwhelmed by that.”
Billing practices
Approximately three-dozen class action lawsuits have been filed against
hospital systems around the country, charging that those with the least
ability to pay for medical services -- the uninsured -- face higher fees and
intense harassment from bill collectors hired by hospitals. The practice is
particularly egregious, say critics, when nonprofit hospitals who are
supposed to provide “community benefits” and “charity care” engage in it.
Leading the charge for the plaintiffs bar is attorney Richard Scruggs,
brother-in-law of Sen. Trent Lott and former lead counsel in class action
suits against the tobacco industry.
Unlike insurance companies or government-sponsored Medicaid and Medicare
programs, the uninsured have little ability to negotiate rates with their
health care providers. The result is that the uninsured can receive hospital
bills (and ominous bill collector phone calls and notices) for much larger
amounts than the government or an insurance company would ever pay for the
same care.
“Rather than defending their congregation, the Catholic church continues
to let their nonprofit Catholic hospitals price gouge uninsured patients …
while making billions of dollars and paying their executives excessive
salaries,” Consejo de Latinos
Unidos, an activist group, charged in a report issued last month. Catholic
Health Association officials dismissed the group’s report (“beyond baseless
and misguided,” Keehan said in a statement issued following release of the
report), but acknowledge a problem they have worked to rectify.
“We didn’t as tightly control some of the behavior of [bill collecting]
agencies,” said Keehan. But over the last few years, she said, “Catholic
health systems have made huge efforts to make clear that we want to help
[the uninsured]. Everybody is much more sensitized to the situation and
trying very hard to create multiple ways to work with them. Is it perfect?
No. But it’s much, much better.”
How much better is one of the questions an administrative law judge with
the Illinois Department of Revenue will answer soon in a case pitting
Provena Covenant Medical Center of Urbana, Ill., a 270-bed Catholic
hospital, against the Champaign County Board of Review, which voted last
year to revoke the hospital’s property tax exemption.
Aggressive, harassing and potentially illegal bill collection methods
employed by the hospital were among the reasons cited by the Champaign tax
assessors for withdrawing the valuable tax exemption. “Our Board of Review
did not and does not believe these are the acts of a charitable
institution,” said chairman Stan Jenkins. Backing Provena, which argues that
removal of the property tax exemption amounts to a tax increase that would
be passed on to patients, are the Catholic Conference of Illinois, the
Illinois Hospital Association and the Illinois Catholic Health Association,
the Metropolitan Chicago Healthcare Council, the American Health
Association, and the Catholic Health Association.
Last month Providence Health Systems became the first nonprofit provider
to settle a suit charging unfair billing practices. Under the agreement,
uninsured patients will pay no more for care than insured patients, while
those without coverage who received care over the last several years will
see their bills substantially reduced. “I personally want to applaud
Providence,” plaintiffs’ attorney John Phillips told The Oregonian.
“From the moment we filed the suit, they have been willing to try to reach a
settlement.” In their report, Consejo
de Latinos Unidos, praised the Daughters of Charity, a California-based
Catholic health care system with five hospitals, for adopting a similar
policy.
Meanwhile, Providence Health System announced earlier this month that it
will merge with another Sisters of Providence-sponsored health care
nonprofit, Providence Services. The newly formed “Providence Health &
Services” will include 27 hospitals, physician clinics, a health plan, a
liberal arts university, 45,000 employees and numerous other health, housing
and education services.
Joe Feuerherd is NCR
Washington correspondent. His e-mail address is
jfeuerherd@natcath.org.
National Catholic Reporter, December 23,
2005
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