UMMS rate re­quest ques­tioned

Anal­y­sis shows med­i­cal sys­tem, seeking to charge pa­tients more, earn­ing above-av­er­age prof­its

Baltimore Sun Sunday - - FRONT PAGE - By Mered­ith Cohn and Kevin Rec­tor

The University of Mary­land Med­i­cal Sys­tem, un­der fire for lu­cra­tive no-bid con­tracts with some of its board mem­bers, is earn­ing above-av­er­age prof­its even as it seeks state ap­proval to charge some pa­tients more, ac­cord­ing to an anal­y­sis by The Bal­ti­more Sun.

The sys­tem’s prof­itabil­ity raises questions among advocates and some reg­u­la­tors and law­mak­ers who won­der why it needs to make even more money — es­pe­cially con­sid­er­ing those in­sider deals and mil­lions in bonuses the state-sup­ported, non­profit health sys­tem has paid its ex­ec­u­tives in re­cent years.

“Af­ter UMMS has squan­dered many mil­lions of dol­lars on self-deal­ing and ex­ces­sive ex­ec­u­tive bonuses, it is ou­tra­geous that they now want to charge more money to pa­tients,” said Anna Palmisano, head of Mary­lan­ders for Patient Rights.

Del. Nic Kipke, the Repub­li­can leader of the Mary­land House of Del­e­gates, said state reg­u­la­tors should con­sider the sys­tem’s con­tracts with board mem­bers and the money it pays its lead­ers when they weigh its re­quest for a rate increase.

“Ex­ec­u­tive com­pen­sa­tion has trou­bled me for years within the med­i­cal sys­tem,” Kipke said. “It seems egre­gious to me that ex­ec­u­tives are mak­ing mil­lions in a non­profit set­ting.”

At is­sue is the nearly 5% rate increase UMMS is seeking for its flagship hos­pi­tal in Bal­ti­more, the University of Mary­land Med­i­cal Cen­ter. That’s the largest increase re­quested by any Mary­land hos­pi­tal in five years. The increase would gen­er­ate $75 mil­lion a year.

The med­i­cal cen­ter has much smaller prof­its than the sys­tem over­all, but crit­ics of the rate increase say the sys­tem’s prof­itabil­ity is rel­e­vant.

The 13-hos­pi­tal sys­tem earned about

$205 mil­lion on all op­er­a­tions in its 2018 fis­cal year, hos­pi­tal dis­clo­sures to the state show. That amounted to a 5.3% profit mar­gin — eas­ily ex­ceed­ing the 3.3% mar­gin earned by all Mary­land hos­pi­tals and put­ting UMMS in the top third of hos­pi­tal earn­ers na­tion­ally.

Many non­prof­its do make money. Profit is simply rev­enue mi­nus ex­penses, and most en­ti­ties want to bring in more than they spend so they can in­vest back into the busi­ness and main­tain a rainy day fund.

But for a publicly sub­si­dized non­profit with a health mis­sion, the ques­tion is how much is enough and what’s done with the profit.

In­come for hos­pi­tals within the sys­tem var­ied widely. For in­stance, its hos­pi­tal in Prince Ge­orge’s County lost money. The profit mar­gin was 1.4% for the flagship hos­pi­tal in Bal­ti­more, where pa­tients from across the sys­tem are sent for ad­vanced and ex­pen­sive care, such as cut­ting-edge can­cer treat­ment, com­plex surg­eries and transplant­s.

Profit mar­gins reached dou­ble dig­its at sev­eral com­mu­nity hos­pi­tals in the sys­tem in­clud­ing one in Ch­ester­town on the Eastern Shore, where pa­tients have been an­gered by cut­backs in staff and ser­vices while the lo­cal board chair col­lected hun­dreds of thou­sands of dol­lars in con­sult­ing fees from the sys­tem.

The over­all per­for­mance means the sys­tem is “do­ing a lit­tle bet­ter than what we might see na­tion­ally,” said Gary Young, direc­tor of North­east­ern University’s Cen­ter for Health Pol­icy and Health­care Re­search.

Typ­i­cally, a third of hos­pi­tals lose money, a third op­er­ate just above the line and a third make about what the med­i­cal sys­tem earns or more, he said.

Over the years, UMMS has ac­cu­mu­lated a sub­stan­tial fi­nan­cial cush­ion, end­ing its 2018 fis­cal year with about $1.3 bil­lion in cash and in­vest­ments, ac­cord­ing to au­dited fi­nan­cial state­ments included with its an­nual fed­eral tax fil­ing.

UMMS ex­ec­u­tives say con­sid­er­ing the sys­tem’s over­all prof­its is not an ap­pro­pri­ate way to judge the sys­tem. Each hos­pi­tal’s fi­nan­cial health and abil­ity to in­vest in its com­mu­nity must be con­sid­ered by state reg­u­la­tors, they say.

But the sys­tem now faces scru­tiny for its con­tracts with board mem­bers, in­clud­ing con­tracts for con­sult­ing and in­sur­ance and a $500,000 no-bid deal for for­mer Bal­ti­more Mayor Catherine Pugh’s self-pub­lished “Healthy Holly” chil­dren’s books. Pugh has re­signed as mayor and from the board.

Sev­eral other board mem­bers also re­signed or have taken leaves of ab­sence. All of them are re­quired to step down by the end of the year un­der leg­is­la­tion passed by the state leg­is­la­ture af­ter the con­tracts were re­vealed. The sys­tem hired an out­side firm to au­dit the con­tracts, and state au­di­tors also plan to look at the sys­tem’s books be­fore year’s end.

In ad­di­tion to the con­tracts with board mem­bers, the sys­tem has spent mil­lions on ex­ec­u­tive com­pen­sa­tion. In the last fis­cal year, the sys­tem and its af­fil­i­ates paid more than $10 mil­lion in bonuses to top ex­ec­u­tives and med­i­cal staff who met in­di­vid­ual and or­ga­ni­za­tional goals, ac­cord­ing to tax fil­ings.

For­mer CEO Robert Chren­cik, who also re­signed amid the con­tract con­tro­versy, earned $2.6 mil­lion last fis­cal year, in­clud­ing about $1 mil­lion in bonuses. He also could earn a large pay­out by leav­ing. Sys­tem of­fi­cials have not shared de­tails of his con­tract, but the last CEO, who also departed amid con­tro­versy a decade ago, was given $7.8 mil­lion in what then-Gov. Martin O’Malley crit­i­cized as a “golden para­chute.”

John Ashworth III, the sys­tem’s act­ing CEO, has frozen bonus pay for ex­ec­u­tives pend­ing the sys­tem’s in­ter­nal re­view of its con­tracts. Ashworth re­ceived nearly $130,000 in bonuses last year as UMMS se­nior vice pres­i­dent of net­work de­vel­op­ment.

Michelle Lee, who re­cently be­came the sys­tem’s chief fi­nan­cial of­fi­cer, said in an in­ter­view that the com­pen­sa­tion paid to hos­pi­tal ex­ec­u­tives was in line with other in­dus­try ex­ec­u­tives. She also de­fended the sys­tem’s profit mar­gin.

“We de­liver so much more than hos­pi­tal care,” she said, not­ing that the sys­tem op­er­ates pri­mary care and ur­gent care clin­ics in its com­mu­ni­ties.

North­east­ern’s Young said fed­eral rules for non­prof­its al­low them to spend as they see fit, in­clud­ing on salaries and bonuses that may ap­pear large, so long as they’re not out of whack with in­dus­try norms.

Where the hos­pi­tal sys­tem could run afoul of fed­eral rules, he said, would be with any con­tracts with board mem­bers that weren’t put out to bid and aren’t com­mer­cially rea­son­able. Young said money earned by non­profit hos­pi­tals can­not be distribute­d to ex­ec­u­tives, di­rec­tors or others as they can be with for-profit or­ga­ni­za­tions.

“What that means is if you have deals with board mem­bers or mem­bers of the med­i­cal staff that are not arm’s length and con­sis­tent with com­mer­cially rea­son­able terms, they can be con­strued as div­i­dends,” Young said.

“That’s a big no-no.”

In Mary­land, the Health Ser­vices Cost Re­view Com­mis­sion reg­u­lates hos­pi­tal in­come.

“There is no re­quire­ment as to what hos­pi­tals have to do with the prof­its that they make,” said Katie Wun­der­lich, the com­mis­sion’s ex­ec­u­tive direc­tor.

Still, the spend­ing on com­pen­sa­tion and con­tracts could be an is­sue for com­mis­sion­ers on that state panel when they set the rates each hos­pi­tal can charge for ev­ery­thing from de­liv­er­ing a baby to vis­it­ing the emer­gency room. Those de­ci­sions are made un­der a fed­er­ally sanc­tioned pro­gram aimed at con­trol­ling health care spend­ing in Mary­land.

The com­mis­sion is set to con­sider boost­ing the ex­ist­ing caps on hos­pi­tals’ patient rev­enue. And it will con­sider award­ing, for the se­cond year in a row, a spe­cial 1% increase in the caps for the University of Mary­land Med­i­cal Cen­ter and Johns Hop­kins Hos­pi­tal. The increase would be worth about $15 mil­lion for the med­i­cal cen­ter and about $25 mil­lion for Hop­kins.

The extra money is in­tended to fund ex­pen­sive treat­ments and other tech­ni­cal in­no­va­tions at the state’s two aca­demic med­i­cal in­sti­tu­tions. It would be in ad­di­tion to the nearly 5% rate increase the med­i­cal cen­ter is seeking.

Hop­kins is not seeking a rate increase this year af­ter re­ceiv­ing in­creases the past two years.

One com­mis­sioner, Jack Keane, ex­pressed con­cerns dur­ing a meet­ing in May about the pro­posed 1% hike for the med­i­cal cen­ter and Hop­kins.

He said he be­lieves the com­mis­sion should eval­u­ate all in­come and spend­ing, in­clud­ing all con­tracts and com­pen­sa­tion, for each sys­tem and not each hos­pi­tal when con­sid­er­ing rate in­creases

“I do be­lieve any re­view of an in­di­vid­ual hos­pi­tal that is part of a sys­tem should in­clude a look at the en­tire sys­tem’s ag­gre­gate re­sults and all of its ac­tiv­i­ties,” Keane said.

“This is all within the purview of the com­mis­sion, and that’s what we should do be­cause we bear a re­spon­si­bil­ity to pro­tect the pub­lic’s in­ter­est in en­sur­ing that hos­pi­tal spend­ing is fully and care­fully re­viewed.”

Health­care advocates said the University of Mary­land sys­tem de­serves extra re­view.

“Af­ter such a se­ri­ous breach of trust in the UMMS, upon which so many Mary­land res­i­dents rely for health care, ex­traor­di­nary scru­tiny must be ap­plied to any re­quest for rate in­creases,” Palmisano said.

UMMS has grown over the years, and of­fi­cials have cited the sys­tem’s abil­ity to share re­sources to boost ef­fi­ciency. The com­mis­sion, how­ever, has his­tor­i­cally eval­u­ated hos­pi­tals in­di­vid­u­ally and has not con­sid­ered con­tracts un­re­lated to med­i­cal care.

Lee, the UMMS CFO, and Joseph E. Hoff­man III, chief fi­nan­cial of­fi­cer for the med­i­cal cen­ter, argue it’s not ap­pro­pri­ate to con­sider the sys­tem-wide profit when con­sid­er­ing rate in­creases for in­di­vid­ual in­sti­tu­tions.

“Each hos­pi­tal needs to sit on its own bottom,” Hoff­man said. “We’re not tak­ing money from one hos­pi­tal to pay for an­other hos­pi­tal’s needs.”

They ac­knowl­edged that highly com­plex, and pricey, cases get sent to the med­i­cal cen­ter, such as can­cer pa­tients treated with a new ther­apy called CAR-T that uses cells made in a lab. But Hoff­man said it would be “un­fair” to ask the sys­tem’s com­mu­nity hos­pi­tals to kick in for such care be­cause they have their own physi­cian and cap­i­tal needs.

The med­i­cal cen­ter made about $19.8 mil­lion, or 1.4%, profit on all op­er­a­tions. Hop­kins, in con­trast, made $11.1 mil­lion from op­er­a­tions, or 0.46% profit.

Si­nai Hos­pi­tal, the flagship hos­pi­tal in the LifeBridge net­work and a ma­jor trauma cen­ter, earned $34.5 mil­lion, or 4.32%. Franklin Square Med­i­cal Cen­ter, the largest hos­pi­tal in the MedS­tar Health net­work, made $31.8 mil­lion, or 5.78%.

Amy Good­win, spokes­woman for the Mary­land Hos­pi­tal As­so­ci­a­tion, said the state’s hos­pi­tals are not pulling in ex­ces­sive prof­its. She said na­tion­ally, profit mar­gins from hos­pi­tal op­er­a­tions av­er­age over 5% and Mary­land hos­pi­tals over­all “track sig­nif­i­cantly un­der other states” at 3.35%, though the fig­ure has ticked up in re­cent years.

Barak Rich­man, pro­fes­sor of law and busi­ness ad­min­is­tra­tion at Duke University, said there is on­go­ing de­bate in Washington over how much that non­profit hos­pi­tals should spend of their earn­ings on those liv­ing nearby in ex­change for their tax­ex­empt sta­tus — the so-called com­mu­nity ben­e­fit.

“The ob­vi­ous ques­tion is, in­deed: What should they be do­ing with their sur­plus?” he said.

Since UMMS gets pub­lic money, law­mak­ers say they have a role in mak­ing sure they are be­ing good stew­ards. The sys­tem re­ported $31 mil­lion in rev­enue from gov­ern­ment grants in tax fil­ings last year, and the state included more than $65 mil­lion in bonds for UMMS in the most re­cent cap­i­tal bud­get.

Kipke said he’d like to see all non­profit hos­pi­tal sys­tems get more scru­tiny.

“See­ing the scan­dal un­fold at this hos­pi­tal sys­tem and the ob­vi­ous waste of money and greed that has gone on, I think it’s a good opportunit­y for not just the med­i­cal sys­tem but all non­prof­its in the state to un­der­stand that they are go­ing to be scru­ti­nized,” he said.

“It’s an opportunit­y for mean­ing­ful re­forms.”

SUN IN­VES­TI­GATES

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