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 Hospital 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   corrected [01/13/2006]