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 percent 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. It 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 percent profit margin — easily exceeding the 3.3 percent 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 percent 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 percent 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 percent 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 percent 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 percent, profit on all operations. Hopkins, in contrast, made $11.1 million from operations, or 0.46 percent profit.
Sinai Hospital, the flagship hospital in the LifeBridge network and a major trauma center, earned $34.5 million, or 4.32 percent. Franklin Square Medical Center, the largest hospital in the MedStar Health network, made $31.8 million, or 5.78 percent.
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 percent and Maryland hospitals overall “track significantly under other states” at 3.35 percent, 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 nonprofit hospitals should spend of their earnings on those living nearby in exchange for their tax-exempt 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.
Del. Kipke said he’d like to see all nonprofit hospital systems get more scrutiny.