The city's challenge of UPMC's nonprofit status was launched by former Mayor Luke Ravenstahl — long a Peduto rival — in the waning months of his administration.
The suit was filed after a 2012 state Supreme Court ruling which held that, to keep their tax-exempt status, nonprofits had to meet a more stringent standard than previously required by state law. The new standard requires an organization to: advance a charitable purpose; donate a substantial portion of its services; benefit people who legitimately need charity; relieve the government of some burden; and operate entirely free from a profit motive.
The city argued that UPMC's exemption saved it some $20 million in city property and payroll taxes. But experts are divided on the lawsuit's merits.
"The city had a reasonable case," says Nicholas Cafardi, dean emeritus and professor at Duquesne University's law school and an expert on charity law. As evidence, he cites the compensation given to top UPMC executives — roughly two dozen make in excess of $1 million a year — and the closing of community hospitals like UPMC Braddock. "Whenever you close underperforming hospitals in poor sections of the city, does that mean you're operating by profit — especially when the rest of the system isn't losing money?" Cafardi asks.
Cafardi says UPMC's counter-suit wasn't strong, and as a result, "UPMC is gaining something here by having that lawsuit go away."
Peggy Morrison Outon, executive director of the Bayer Center for Nonprofit Management at Robert Morris University, disagrees. "I have not assumed that they would not meet the nonprofit test" even though they don't always "seem like they are part of a charitable mission."
The city's legal position was complicated by a county judge's June 25 decision dismissing the case. Common Pleas Judge R. Stanton Wettick Jr. ruled that rather than try to collect payroll taxes from UPMC as an umbrella organization, the city had to go after subsidiary hospitals one by one.
"The original suit obviously was not filed properly," Peduto says, though he adds "that does not take away our ability to file it properly in the future."
It's not clear how much that ruling would complicate the city's case. Wettick wrote that it was "a narrow ruling that does not consider whether UPMC or any of its subsidiaries are charitable organizations." And City Controller Michael Lamb, for one, contends the matter was largely a "document issue and a filing issue" — problems that, had the city addressed them, "wouldn't have added significantly to the cost" of pursuing the lawsuit. (Lamb says the city, which has been represented by outside attorneys, has spent at least $148,000 on litigation against UPMC so far.)
Lamb adds that the city brought in about $3 million combined last year from nonprofits through payments in lieu of taxes. Most of that money came from Highmark and the University of Pittsburgh; Lamb says the city's initial goal for collecting money from nonprofits "should more than double that number." That doesn't include UPMC's contribution to the Pittsburgh Promise scholarship program, which Lamb says amounts to roughly $7 million a year.
Lamb says it's impossible to know whether the decision to drop the suit was a good one. "I've seen what we've given up," he says. "I haven't seen what they've given up."
Peduto says negotiations with UPMC now have the potential to go "much beyond" getting a "fair share" of money from the health-care giant. He says he hopes "the nonprofit community partners with us on initiatives like low-income housing, education, opportunities for workforce development and jobs and really becomes a partner in seeing the rebuilding of Pittsburgh's neighborhoods."
Peduto didn't offer details, saying they are "being negotiated as we speak." But his chief of staff, Kevin Acklin, first suggested the broad outlines of the approach to CP in March: The city, he said, wanted to "get away from the short-term tin-cup discussion" of seeking annual tax contributions. Instead, Acklin suggested, the city could allow nonprofits to earmark money for specific causes, "giv[ing] the nonprofit community an opportunity to help transform the city." At the time, a spokesperson for a nonprofit umbrella group told CP that the UPMC lawsuit was "still hanging out there" as a complicating factor in those efforts.
But others worry about letting mammoth organizations choose for themselves how to support the city.
"It really concerns me that nonprofits are having a say over what they contribute," says community activist Helen Gerhardt. "That's a non-democratic exertion of big-money power."
Also unclear: whether dropping the suit could have an impact on UPMC's longstanding battle with a local union.
Since 2012, a segment of UPMC's non-medical employees have been working to unionize with the Service Employees International Union. At the July 30 rally, UPMC workers continued their call for a base wage of $15 an hour and a union. SEIU says UPMC has used intimidation and fired employees to thwart unionization efforts in the health system's hospitals. The union has filed a number of complaints with the National Labor Relations Board; employees are still waiting for an administrative judge to rule on the latest round of complaints.
State Sen. Jay Costa (D-Monroeville) agrees that it makes sense to negotiate instead of going after UPMC's 39 subsidiary organizations. "It's a classic compromise situation in my view that leads to a revenue level that's appropriate." But dropping the lawsuit, Costa says, "probably harms SEIU's position."
The union's campaign so far, he says, is "to make [UPMC] look like they're this for-profit, insensitive, uncaring institution. If the city has an agreement with them, all of the sudden in the eyes of the public, maybe UPMC isn't this bad guy any longer."
Peduto says his future negotiations with nonprofits — not just UPMC — could include a wage "floor" that would allow workers to "join the middle class." Union activists are backing Peduto's move.
"I have no doubt that the mayor is bringing our concerns about low pay to his conversations with Mr. Romoff," says Christoria Hughes, a UPMC employee who has been a prominent figure in the SEIU campaign. Hughes says she asked Peduto about his approach to UPMC back when he was a city councilor. "What he told me then and what he's saying now is the same: that he's going to stand up for UPMC workers like me who are working to form our union."
Neal Bisno, president of SEIU Healthcare Pennsylvania, called Peduto "a champion for Pittsburgh's service workers" who "has made holding UPMC accountable ... a central priority of his administration."
Philip Dine, a labor expert in Washington, D.C., and author of the book The State of the Unions, said local politicians typically don't get directly involved in labor disputes. But he said support from local politicians can be integral to swaying public opinion.
"Everyone, even if they're not a public institution, cares about their public image, so it's good if you can sway public opinion," Dine says. It's not unusual, he says, for politicians to publically espouse the union cause as "a show of support for workers."
And some worry that dropping the suit may mute that message.
"His decision impacts a lot of people," said Charene Kindle, a member of the United Food and Commercial Workers Local 23. "There's a lot of things still going on with UPMC and we need someone to help."
The court battle over taxing nonprofits is not the only front on which UPMC has arguably scored a win this summer. In June, Gov. Tom Corbett and state Attorney General Kathleen Kane forged an agreement between UPMC and Highmark that largely severs the long-standing relationship between the region's biggest health-care provider and its larger insurer.
The agreement will allow patients with Highmark insurance to pay in-network rates for UPMC doctors and facilities only if they are undergoing current treatment, or have few alternatives. Otherwise, Highmark subscribers will have to pay higher out-of-network rates.
UPMC, which long sought to terminate the contract, issued a statement saying it was "grateful" for a "patient-focused transition plan that addresses the expiration of the Highmark-UPMC contracts" at the end of the year. But it remains to be seen how the transition will play out for patients with Highmark coverage, like Janice Nathan.
When Nathan moved to Pittsburgh in 2001, shortly after a kidney transplant, she developed a close relationship with a UPMC physician who helps her with chronic bladder infections.
"She knows me really really well," Nathan says. "She knows my whole history."
By contrast, she says, "I feel like UPMC could care less about their patients. ... I think laws are going to have to change to prevent this and to make UPMC stop."
Frankel, the state representative, decries such uncertainty. "Businesses who are negotiating now for their [insurance] contracts are going to have folks who are saying, 'Am I going to have access to my doctor or this hospital?' It's not clear." And UPMC, he adds, benefits from the confusion "because that would help take business from Highmark."
"I think the agreement still blocks access for a lot of people," says Erin Ninehouser, of advocacy group PA Health Access. "It's being hailed as this great solution, but it's putting a lot of people in a tight spot. I think the agreement cuts the legs out of real meaningful oversight."
But Ninehouser predicts the fight against UPMC will continue.
"I don't think the public is going to let them off the hook," Ninehouser says. "There's still a lot of scrutiny on UPMC and whether they're living up to their charitable mission."