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Harsh Medicine 

Taking on healthcare giants like UPMC requires swallowing a tough pill

When it comes to giant nonprofits like the University of Pittsburgh Medical Center, we're told, things aren't what they seem. A $618 million profit -- such as the one UPMC recently posted -- isn't really a profit: It's "excess revenue." Buying up Mercy Hospital, as UPMC hopes to do, isn't an attempt to build a monopoly: It's a "community investment."

And that Aug. 30 Senate Finance Committee hearing in Pittsburgh City Council chambers, the one about the state law governing tax-exempt institutions? It wasn't about Act 55 at all. It was about putting the squeeze on UPMC.

A bit of background: Before Act 55 was passed in 1997, local officials could challenge a nonprofit's tax exemption in court. That gave officials some leverage in wresting tax money from big nonprofits. But Act 55 took away that leverage by making such challenges almost impossible. As Pittsburgh's finance director, Scott Kunka, testified, the act "eliminated any incentive for [nonprofits] to share in the cost" of running a city. That's why UPMC pays the city a piddling sum -- a reported $1.5 million annually -- even though it has earnings that Heinz or US Steel might admire.

So not surprisingly, nonprofits love Act 55. The act, UPMC attorney Thomas Boyle testified, was "like pouring oil on troubled waters."

But there was Senate Finance Committee member Jim Ferlo (D-Bloomfield) setting the oil aflame, as if the "troubled waters" in question were the Cuyahoga River.

Of course big nonprofits were happy with the status quo, Ferlo said: "You won the battle." Ferlo, though, is still fighting the war, as you could see from the testimony of UPMC Chief Financial Officer Robert DeMichiei.

DeMichiei has a soothing, aw-shucks manner. "At face value," he said, UPMC's $618 million profit "sounds like a lot of money." But it doesn't really count, since $400 million of that was from investments. UPMC earned a humble $218 million from its medical practices, just "3 cents on the dollar."

While citing UPMC's mom-and-pop profit margins, DeMichiei modestly omitted the fact that the Fitch Ratings credit agency praised UPMC's "consistently improving operating profitability" and its "dominant and growing presence." But Ferlo wasn't having any.

"I'm sure you agree with me that there should be some source of funding" from nonprofits, Ferlo began.

"We recognize the problem," DeMichiei replied.

And would DeMichiei concede, Ferlo asked, that government has no leverage "other than some political pressure or PR pressure?"

"Political pressure," did Ferlo say? Funny he should mention it. Within minutes, Ferlo was suggesting that perhaps "the city should put some energy into a hunting expedition," rooting out taxable activities hidden inside nonprofit balance sheets.

The implication seemed clear: UPMC isn't the only one who can conduct a proctological exam. On the other hand, a couple thousand bucks a day could keep the auditors away.

For all Ferlo's spirited attacks on Act 55, some folks at the hearing suspected changing the law wasn't the panel's real objective. Ferlo, they grumbled, was playing the bad cop before Mayor Luke Ravenstahl -- who recently attended a charity golf outing on UPMC's dime -- could step in to make a deal. Thanks partly to Ferlo's pressure, Pittsburgh would get a few extra bucks. Ravenstahl would get to claim a political victory. UPMC would continue getting off cheap, relatively speaking.

Does this sound cynical? Maybe. But even in a hospital, there's a place for smoke-filled rooms.

Senate hearings have been held around the state, but Harrisburg isn't likely to cure this ailment no matter how skilled Ferlo's diagnosis. Consider, for example, that Gov. Ed Rendell's re-election party was largely paid for by Highmark and other tax-exempt health-care giants. A few years back, former Mayor Tom Murphy tried to bail out Pittsburgh with a payroll-preparation tax -- designed expressly to target nonprofits like everyone else. Thanks to Harrisburg, though, nonprofits are the only employers who don't pay it. If the past is any guide, Ferlo's agitprop will be the only legislative effort to prop the city up. In fact, DeMichiei testified that UPMC would continue to support the city "likely at a higher rate than in the past."

Which would be fine, except for two things.

First, if we have to handle this problem behind closed doors, it's even more important that Ravenstahl stop taking golf outings on UPMC's dime. But I'm not sure Ravenstahl understands that.

And second, don't you wish you could negotiate your medical bills the way hospitals handle their financial obligations?

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