(Non)profit Hospitals: Charity Pays

Tickets started at $500. Food and beverages totaling $258 were budgeted for each person. A lucky reveler went home with a $125,000 Lexus Luxury Hybrid Sedan, donated for the occasion. It was the November 8, 2011, nonprofit Cedars-Sinai Medical Center’s annual Board of Governors Gala at the Beverly Hilton Hotel.

Of the hospital’s $2.8 billion total revenue that year, the lavish party netted the hospital $780,000—barely a quarter of the C.E.O.’s salary.

A 100Reporters survey of dozens of nonprofit hospital financial reports to the Internal Revenue Service suggests that not all of them need charity. In California alone, at least 100 executives at nonprofit hospitals earn more than $1 million a year. Eleven of them are at Cedars-Sinai.

Indeed, many large not-for-profit hospitals are throwing grand parties, collecting pricey art, paying their executives private-sector wages, making loans to high-ranking employees, sponsoring football teams, extending their global reach and stashing cash overseas – all factors in what economist Paul Krugman has called the nation’s No. 1 economic woe–high healthcare costs.

Tax breaks for nonprofit hospitals date to the 1940s, when a social contract developed between healthcare providers and government: Hospitals that tended to the poor would not have to pay taxes. When Medicare and Medicaid reduced the burden of uncompensated care, nonprofit hospitals were allowed to keep their tax exemptions by providing such “community benefits” as research, training and education. Today, few hospitals reveal how many patients receive charity care, stating that computing patient numbers is too complicated because some are inpatient, others are outpatient, some receive partial discounts, and others cost more than the government pays in reimbursement for their care.

According to a 2009 Internal Revenue Service study, nonprofit hospitals are generally not hurting. Some “79 percent of all hospitals reported excess revenues,” half of them amounting to more than five percent of total revenues.

How much excess revenue is too much? Nonprofit finance expert Woods Bowman, a professor at DePaul University, says the calculation must take into account both assets and mission, and that there is no single answer. But other experts find it a moral question, pointing to 500 percent markups on patient bills and the lack of institutional efforts to lower consumer costs and make healthcare more affordable.

The I.R.S. exercises scant oversight of the estimates hospitals put forward for the cost of charity care they provide, and there are few rules for calculating its value. One physician at a mid-size southern hospital, who asked not to be named, described a raft of possibilities for overstating the value of charity care.

“Let’s say a little girl has leukemia and the family is destitute,” the doctor wrote in an email. “The hospital says it’s going to treat her at no charge. So the care costs, let’s say, $100k. But then the administrator, seeing an opportunity, inflates the bill to $300k (what he would have received from his best private insurance payer) and claims $300k as charity care.  Is that correct, or should it be based on the actual cost, $100k?  This is the game.

“More than likely, though, the real scenario would be the little girl’s church has a fundraiser and the community raises $100k to provide the care for her leukemia.  The hospital agrees to accept this as payment.” But it values the treatment at full sticker price, with no discount for insurance, the physician continued.

“The bill is $600k (insanely inflated).  The cost of the care is completely covered by the $100k the community raised and the hospital generates $500k in ‘charity care.’ Nobody is auditing them. So then the question is, are they doing any real charity care at all?”

Nonprofit law, moreover, requires that excess revenues be plowed back into the organizations and their missions, which can include overbuilt infrastructure, remodeling and interior decoration. The Society for Arts in Healthcare estimates that more than half of U.S. hospitals now collect art.

High-Flying Salaries

Executive compensation catches the eye of lawmakers and regulators, University of Illinois tax law professor John Colombo told 100Reporters – so much so that the American Hospital Association cautions about media scrutiny six times in its suggestions to compensation committees for “Minimizing Regulatory and Reputational Risk.” (Nonetheless, the A.H.A., itself a nonprofit with total revenues of $113 million, paid its president Richard Umbdenstock $3.3 million in 2011, with benefits including first-class/charter travel, travel for a companion, a discretionary spending account and a housing allowance.)

It is not uncommon for hospital executives to post annual earnings in the millions.

At Milwaukee’s Froedtert Memorial Lutheran Hospital, which listed total revenues of $1.06 billion in its last IRS 990, C.E.O. William Petasnick received $6.57 million from hospital-related organizations. Froedtert spokesman Kathy Sieja said in an email, “The 990 reflects deferred compensation accumulated over many years, which Mr. Petasnick received upon his retirement as president and C.E.O.”

Prior to his retirement, Froedtert’s I.R.S. 990s reported that Petasnick received $2.03 million in 2010 and nearly $3 million in 2009.

At Cedars-Sinai, C.E.O. Thomas Prilesac earned $3.85 million in compensation, according to the hospital’s public I.R.S. return for 2012—the most recent one available. Its 11 highest paid executives took home $21.4 million in compensation that year.

The C.E.O.’s compensation for 2012, said a spokesperson, was “significantly higher than usual as it included several one-time, lump-sum amounts, such as retirement account contributions accrued over the C.E.O.’s more than 30 years of employment at Cedars-Sinai, as well as several years of deferred compensation.”

Cedars-Sinai reported Prilesac’s compensation as $2.8 million on its 2011 I.R.S. return and $3.9 million on its 2009 statement. A 2013 physician-led study from the Harvard School of Public Health found no relationship between C.E.O. pay and hospital quality.

Cynicism can result. In California, a ballot initiative supported by organized labor would limit nonprofit hospital executive compensation to the amount earned annually by the president of the United States.

C.E.O.s, one frustrated surgeon laments, “live like robber barons.

“Two underpaid dieticians are out, and you can’t deliver the services. But the C.E.O. is out of pocket for three months and no one notices,” said the surgeon, who spoke on condition of anonymity.

Rarely do hospitals report executive benefits with the candor displayed by Spectrum Health Hospitals in Grand Rapids, Michigan (total revenues $1.57 billion), which reported to the I.R.S. that executive perks were provided by “the taxpayer.”

In 2010 the chairman of the Cleveland Clinic Institute was paid more than $4 million, and the clinic’s president and C.E.O. took home $2.6 million. In total, seven executives and four former key employees each earned in excess of $1 million annually. Perks of their jobs included first-class travel or charter travel with a companion at the clinic’s expense, to such exotic destinations as Abu Dhabi, where the clinic opened a new hospital.

Millions for Football

Al Lerner, the former president of the Cleveland Clinic Foundation, made his fortune as chairman of credit card company MBNA and owner of the Cleveland Browns. As president, he donated $100 million to the clinic. After his death in 2002, his widow, Norma, continued his relationship with the clinic, serving as a director.

Their son, Randy, inherited the Browns, an N.F.L. team that in 2011 received $2.75 million from the clinic under a sponsorship agreement that began in 1976. Sports Illustrated has called such corporate sponsorships  “the N.F.L.’s money machine,” noting Pepsi’s $560 million payments over eight years, Gatorade’s $45 million annually and Nike’s $1 billion (the N.F.L. is also a nonprofit).

In December, the Cleveland Clinic announced its withdrawal from the Browns sponsorship (Lerner sold the team in 2012). Neither the clinic nor the team has explained why, but the clinic said in a statement that it is focused on “providing high-quality, accessible, and affordable care to our patients.” It mentioned “a responsibility to be good stewards of our resources and focus those on our employees and patients first.”

“Goodwill Justifies the Loss”

Sportscaster Bob Costas and N.F.L. legend Ahmad Rashad have made celebrity appearances at fundraisers sponsored by White Plains Hospital (total 2011 revenues $323 million). So have jazz saxophonist Brandon Marsalis and “The Voice” winner Javier Colón. The hospital’s fundraisers have cost $300 per ticket for a lavish buffet and concert, $250 per ticket for a country club dinner with live entertainment, and $200 per ticket for an Oscar de la Renta runway fashion show. White Plains spokeswoman Dawn French said in an email that such fundraisers are “highly successful.”

“In the past 15 years or so we have raised more than $125 million that has been invested to create our Dickstein Cancer Center, our state-of-the-art Emergency Department, our renowned Neonatology Center, and so much more. None of this would have been possible without the funds raised from individuals, family foundations and other sources through our ongoing fundraising activities.”

But Charles Rehberg, a former hospital C.F.O. who lives in Georgia, says in an email that charity gala revenues are “an insignificant source of revenue for the vast majority of hospitals.

“There are a few exceptions – St. Jude’s Children’s Hospital and Shriner’s burn centers come to mind.”

Most galas, he says, “are part of a carefully crafted strategy to promote their ‘charitable’ image in the community and engage the community leaders in their market. Look at the board of the foundation. It is generally the community business leaders, politicians and thought leaders in the community. It is very difficult to serve on such a board and also criticize the hospital for their high costs, charitable conduct, etc. By engaging these leaders in their ‘mission,’ they buy their support.”

Rehberg says, “Some of these high-profile charity events cost more to promote than they even generate in return. The belief is that the good will created in the community justifies the loss when this happens.”

Meanwhile, he says, well-meaning volunteers “donate their time and labor to a corporation that likely employs some of the highest-paid executives in the community and may have hundreds of millions of dollars in the bank.”

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Rita Healy

Rita Healy's first article for 100Reporters was published in October 2013 (http://100r.org/2013/10/the-63000-broken-leg-or-how-hospitals-make-money-off-charity-care/). The experience formed the basis for her interest in producing this series.

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