The Lawsuit Challenging the Non-Profit Status of UPMC
Back in March, 2013, we discussed a lawsuit initiated by the then Mayor of Pittsburgh that challenged the tax-exempt, non-profit status of giant hospital system UPMC. The suit charged that UPMC functions more like a for-profit corporation based on its large surplus (recently $1 billion), larger reserves ($3 billion), minimal commitment to charitable care, and generous executive pay (recently $5.9 million to CEO Jeffrey Romoff, 19 executives paid more than $1 million, and ownership of a jet aircraft). By the way, Romoff's latest total compensation was said to be $6.1 million (look here), and UPMC just bought an even fancier corporate jet, a Bombardier Global Express worth $51 million (look here).
The Employees Vanish
The Pittsburgh Post-Gazette just described UPMC's remarkable response to the lawsuit.
For purposes of the city's payroll taxes, [an attorney representing UPMC] Mr. [William] Pietragallo explained, UPMC's subsidiaries -- like UPMC Shadyside and Western Psychiatric Institute and Clinic -- file separate forms. Employees work for those legal subsidiaries. But UPMC itself?
'We don't have employees,' Mr. Pietragallo said.
The question is central to the city's suit to strip UPMC of its status as a purely public charity. UPMC argues the city can't challenge its exemption from payroll taxes because it technically has no employees. It's a case where the legal reality may differ significantly from the one that UPMC, which on its website claims to have 55,000 employees, markets on a regular basis.
'You can't pay employment taxes unless you have employees,' Mr. Pietragallo said.
This is not the first time UPMC has made this claim in response to a legal action,
Earlier this year, when UPMC faced 80 complaints of unfair labor practices, it argued that it was only a holding company and did not technically employ those in the complaints. The complaints alleged, among other things, that UPMC employees were being punished for attempting to unionize. UPMC ultimately settled.
These claims of invisible employees appear to be contradicted by UPMC's own public relations,
UPMC touts it large workforce. Its 2012 annual report, for example: 'The economic impact of UPMC is more substantial than most people realize. The organization is the largest nongovernmental employer in the Commonwealth of Pennsylvania, and more than $6.2 billion in total labor income can be attributed directly or indirectly to UPMC.'
UPMC's website and media releases say the hospital giant employs in the range of 55,000 people. And when UPMC made the top rankings of U.S. News & World Report's Best Hospitals, it did so as a conglomeration of several facilities attorneys are now arguing are separate subsidiaries.
[An attorney representing the city of Pittsburgh, Ronald] Barber argued that even for tax purposes, UPMC has documented having employees. In a Form 990 filed for the 'UPMC Group,' the hospital network said it employed around 52,000 people.
A few days later, the Post-Gazette reported that the city responded to these UPMC claims in matter-of-fact way,
On its website, in its annual report and in some tax filings, UPMC purports to have employees -- sometimes tens of thousands of them, the city of Pittsburgh's attorneys said in a court filing.
The city also argued that those working for subsidiaries are UPMC employees as well, pointing to UPMC's 2012 Annual Report and website, which tout the hospital system as one of the state's largest employers. Attorneys also pointed to a lawsuit in which UPMC claimed to 'extend offers of employment.'
How Complexity Benefits Bureaucrats and Managers
It is Halloween coming up, not April Fool's Day, and the claims made on behalf of UPMC do not appear to be jokes. Instead, I believe they underline two serious problems with how large health care organizations are currently lead.
The first is that health care organizations often have exceedingly complex structures for reasons that have nothing to do with fulfilling their health care mission. One reason may be that the complexity creates options for plausible deniability. In particular, when such organizations are accused of bad behavior, as they now often are, subsidiaries may be set up to "take the rap." For example, we discussed how Pfizer Inc has been using the bankruptcy filing of its Quigley subsidiary made as if that subsidiary were independent to delay resolution of claims that the subsidiary sold hazardous asbestos products.
This tactic of having the subsidiary take the rap may be particularly useful when taking the rap may lead to a severe penalty for the organization, such as disbarring it from being paid by the government. A disbarred subsidiary may simply be dissolved and its work transferred to other parts of the organization. For example, in May, 2013 we discussed a settlement in which Baush and Lomb subsidiary Ista Pharmaceutical would be disbarred from participation in government programs. However, Baush and Lomb itself would not be disbarred, and would be able to "wind down" Ista's operations and transfer its products to other parts of the larger company.
The current example appears to be a more creative use of subsidiaries to claim deniability, although whether the arguments about disappearing employess above are even plausible is open to question.
Complex organizations also offer many opportunities to employ and enrich administrators, bureaucrats and managers, and to justify ever larger compensation for the top executives who purport to run the whole thing. That such proliferation of management and management compensation may detract from the mission does not appear to be a big concern of the sorts of people who now run health care.
Contempt for Truth
The second problem is that the leadership of large organizations seem to have little use for the truth. Instead, they may put lots of faith in their marketers, public relations people, and legal staff to obfuscate the truth in pursuit of ever more revenue and executive enrichment. As management becomes less and less reality-based, however, it may be less likely to be able to respond to the very reality-based needs of patients and the public.
I hope that the outlandish claims now being sanctioned by UPMC leadership may raise awareness of what is going wrong with the leadership of health care organizations in general. As we have been saying for years, health care leadership that puts its self-interest ahead of patients and the public, and which disregards the truth in service of self-interest may be the biggest cause for ever increasing health care costs, and ever declining access and regard for the health of patients and the public. True health care reform would encourage leadership that puts the mission ahead of self-interest, and values honesty more than personal profit. It would promote regulation that holds top leadership of organizations accountable for their organizations' actions and not allow the leadership to hide behind complex organizational structures.