Elite Hospitals Have an Epidemic of Greed

How the University of Pittsburgh Medical Center and “charitable” hospital systems like it put making money ahead of service to the public.

In early March, public health officials issued warnings about what the spreading coronavirus could mean for the Pittsburgh region. Debra Bogen, director of the health department for surrounding Allegheny County, forecast that between 40 to 60 percent of the adults in western Pennsylvania could come down with COVID-19 unless strong mitigation measures were taken. The Harvard Global Health Institute predicted that Pittsburgh-area hospitals could need between 480 to 720 percent more beds than were currently available. Meanwhile, federal officials, ranging from the surgeon general of the United States to scientists at the Centers for Disease Control and Prevention, warned that hospitals would spread the contagion further if they continued performing non-urgent care. 

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Heeding this expert advice, Pennsylvania Governor Tom Wolf issued an executive order on March 19 requiring all the state’s hospitals and doctors to stop performing elective procedures. Such surgeries are highly lucrative. But hospitals understood the gravity of the situation, or at least recognized Wolf’s authority. Systems throughout the state quickly complied. 

Except one. 

In their headquarters atop the 64-story former U.S. Steel Tower in downtown Pittsburgh, executives of the University of Pittsburgh Medical Center (UPMC), a $21 billion hospital chain and health insurer, took a different course. Ignoring not only the governor’s order but also an open protest letter signed by 291 of their own doctors, UPMC decided on March 20 that the 40 hospitals they control would continue conducting elective surgeries. 

At a press conference, UPMC tried to justify its decision by asserting that there were only five known COVID-19 cases in the Pittsburgh area at the time, and that, despite insufficient numbers of tests, they were monitoring the situation closely. They also argued that they weren’t technically violating the governor’s order because the elective procedures weren’t really elective, at least as they used the term. “ ‘Elective’ commonly means scheduled cases, but scheduled does not mean unnecessary,” Donald Yealy, UPMC’s chair of emergency medicine, said. Bogen disputed those semantics. “We ask that UPMC, like all the other health care providers in our community, begin to address this request from the governor and from us,” she said. The Pittsburgh PostGazette, the city’s leading newspaper, lambasted UPMC for its decision. The hospital system, they wrote, was “endangering lives by continuing to perform elective surgeries despite pleas by state and local health officials to postpone them.” 

It wasn’t as if UPMC’s managers could not afford to do the right thing. Though chartered by the state of Pennsylvania as a nonprofit, charitable institution affiliated with the University of Pittsburgh’s medical school, UPMC has morphed over the past three decades into a money-making machine. According to its latest financial statement, the corporation commands reserves amounting to $5.5 billion in unrestricted cash and investments. Nor are UPMC’s executives hurting for money. In 2018, UPMC President and CEO Jeffrey Romoff, who has said he seeks to make UPMC “the Amazon of health care,” took home $8.54 million, while 33 other executives each earned more than $1 million. As the editors of the PostGazette wrote, “This cannot be a medical decision. It’s a greed decision.”

The tense relationship between UPMC and its surrounding communities has been building for years. A wide range of voices—from civil rights and labor leaders to local politicians and Pennsylvania’s attorney general—have long accused the corporation of shirking its civic responsibilities, jeopardizing access to health care for millions of local residents, stripping doctors of their independence, and leaving rank-and-file health care workers struggling to make a living wage. 

Pittsburgh, however, is not the only city with growing acrimony surrounding a nonprofit hospital. Most major metropolitan areas of the United States now feature large medical systems, typically affiliated with a local university, that wield extraordinary economic and political power. These institutions typically enjoy high margins because they face little competition, having spent the last several decades buying up, and often shutting down, rival hospitals. They are then able to charge monopoly prices for highly lucrative specialty treatments while downplaying medical services, like mental health and primary care, that don’t pay well. They advertise these high-end treatments to rich medical tourists from across the world, offering them deluxe accommodations, while ignoring the poor and working-class residents who live, quite literally, next door. 

Legally, however, these institutions are still considered charities. That’s despite not just negligent attitudes toward their communities, but also their bottom lines. Many major academic medical centers make big profits. According to a study published in Health Affairs, seven of the 10 most profitable hospitals in United States are officially “nonprofits.” An analysis by Axios of 31 prominent nonprofit hospital systems found that their margins are on par with some pharmaceutical corporations and medical device makers, and well beyond those of insurers and drug distributors.

These corporations have escaped intensive countrywide (if not local) scrutiny because they enjoy strong national reputations, based mostly on the specialized procedures they practice. UPMC’s flagship hospital, Presbyterian Shadyside, regularly appears on U.S. News & World Report’s “honor roll” of the top 20 hospitals in America and draws in well-heeled patients from around the world with procedures like angioplasties and pacemaker implants. But as a rule, these same institutions tend to do poorly on measures that people in their surrounding communities rightly consider part of the mission of charitable institutions. Presbyterian Shadyside, for example, treats a disproportionately large number of wealthy patients relative to the demographics of its surrounding community. Partly as a result, in the Washington Monthly and Lown Institute’s “Hospitals for America” rankings, which give weight not just to clinical excellence but also to public service (see page 14), UPMC’s Presbyterian Shadyside scores poorly. Out of 3,285 hospitals ranked nationwide, it places 3,138 for civic leadership and 2,424 overall. 

How did this happen, and what can we do about it? By examining the evolution of UPMC’s culture and business practices, we get a case study in the creeping corporatization of America’s “nonprofit” health care sector and the steps needed to once again make it serve the public interest. 

UPMC’s origins trace to the 1920s, when local industrialists and civic leaders looked for ways to help Pittsburgh overcome its image as a social and cultural backwater. Toward this end, they focused on creating a teaching hospital for the University of Pittsburgh’s medical school that they hoped would attract more talented doctors and students. Through heavy investment, they succeeded. By the early 1950s, Pitt’s medical center had attracted the right physicians and was becoming world famous. The most renowned member of its faculty was the virologist Jonas Salk, who along with his close colleagues pioneered the polio vaccine. 

The hospital continued to rise throughout the latter half of the 20th century, with broad benefits for Pittsburgh’s residents. The medical center created jobs both for high-paid professionals and for rank-and-file health care workers. That included a large share of African American women who, though grossly underpaid, found employment at the medical center as nurse’s aides, food service workers, and cleaning staff. During the late 1960s, the medical center partnered with local foundations and the federal government’s “Model Cities” initiative to create the highly successful Freedom House ambulance service, which focused on creating a career path for low-income black youths to become middle-class medical technicians. Moreover, many residents, including substantial numbers who lacked insurance, gained access to a modern, highly sophisticated hospital system.

But over time, UPMC’s relationship with the surrounding community became increasingly fraught. An early flash point came in 1970 when Coretta Scott King, widow of the slain civil rights leader Dr. Martin Luther King, came to the medical center to rally support for striking hospital workers, as she had previously done at Johns Hopkins Hospital in Baltimore. Before a large crowd she argued, “The truth is that the large majority of hospital workers are black, most of them women. Their campaign for a union is part and parcel of the struggle going on everywhere for dignity.” But even in a strong union town, her efforts were to no avail. The hospital broke the union. To this day, UPMC’s labor force remains un-unionized, and many of its workers still protest that they do not receive a living wage. “We’re understaffed, underpaid,” Nila Payton, an administrative aide, says. “We do not have affordable health care even though we work for the health system.” 

During the 1980s, the medical center’s power relative to other local institutions grew stronger and stronger. One reason was the collapse of the local steel industry. But another was the medical center’s own rapid expansion into lucrative lines of specialty medicine, particularly  leading-edge operations like liver transplants, that gave it huge financial leverage. 

UPMC President and CEO Jeffrey Romoff has said he seeks to make UPMC “the Amazon of health care.” In 2018 he took home $8.54 million, while 33 other executives each earned more than $1 million.

A key figure in that transformation was Thomas Detre, a psychiatrist who became a powerful hospital administrator. According to a corporate history of UPMC by Mary Brignano entitled “Beyond the Bounds,” Detre raised eyebrows when he arrived in Pittsburgh for his habit of “chain-smoking Marlboros through an ebony holder” and his tendency to wear a topcoat draped around his shoulders. Detre built his own fiefdom within the University of Pittsburgh based initially on his ability to raise large amounts of grant money from the National Institutes of Health, and later by forming a cancer center that brought in huge revenue streams. By controlling so much money, Detre was able to consolidate power from other parts of the university into a stand-alone corporation that came to be known as UPMC, with himself in charge. 

The other key figure was Jeffrey Romoff, UPMC’s current president. A brash and outspoken Bronx native, Romoff emerged as UPMC’s leader after Detre suffered a heart attack in 1992. In a lecture to the faculty of the University of Pittsburgh’s medical school in 1995, he set the tone for his administration by articulating his vision for the future of American health care. “At the heart of the matter is the conversion of health care from social good to a commodity,” he told the assembled doctors and professors.

To increase UPMC’s profits, Romoff moved aggressively to acquire free-standing outpatient facilities, such as surgery centers, particularly in Pittsburgh’s affluent suburbs. Then he started buying up local community hospitals and independent doctor’s practices, converting them into referral networks for UPMC’s main medical center. UPMC’s empire now stretches across Pennsylvania and even includes dozens of foreign ventures, from Ireland and Italy to Kazakhstan and China. 

At least some of UPMC’s acquisitions include hospitals that combine clinical excellence with strong community services. McKeesport Hospital, founded in 1894 in what was then a great hub of steel production, was acquired by UPMC in 1998. Unlike UPMC’s flagship hospital, Presbyterian Shadyside, this small community hospital scores exceptionally high in the Washington Monthly hospital rankings because it manages the rare feat of achieving strong medical outcomes while treating a local patient population deeply threatened by poverty and other adverse socioeconomic determinants of health. It’s proof that, when it wants to, UPMC can manage socially responsible hospitals.

But McKeesport is the exception. More typical is Braddock Hospital. Located in a predominantly low-income African American suburb of Pittsburgh, Braddock was acquired by UPMC in 1996. It served as the area’s only emergency room and largest source of employment until 2010, when UPMC shut it down. It’s not alone. Since 2008, UPMC has shuttered three additional previously acquired major hospitals. This March, just in time for the pandemic, UPMC closed UPMC Susquehanna Sunbury hospital, in central Pennsylvania. Meanwhile, UPMC is spending $2 billion to build three new specialty hospitals in Pittsburgh, closer to its flagship. 

Romoff has had no problem raising the capital UPMC needs to finance these expansions. Revenue has climbed by nearly $5 billion since 2017, a 30 percent increase. Not only does the corporation have abundant cash flow, but as a nonprofit hospital and technically “charitable” institution, it has access to the tax-exempt municipal bond market. UPMC can also finance its empire building, as well as its generous executive compensation packages, by soliciting tax-deductible donations from individuals, foundations, and corporations, as well as grants from governments. Between 2005 and 2017, the public and private grants received by UPMC totaled $1.27 billion.

Romoff’s business model for UPMC has also included moving it into the health insurance business. UPMC now boasts being the “largest health insurer in Western Pennsylvania” with more than 3.7 million members. Last year, its health insurance division took in roughly $800 million more in premiums and other enrollment revenues than it paid out in medical claims. Even better for UPMC’s bottom line, 40 percent of the medical claims its health care plan does pay out goes for health care performed in UPMC’s own medical facilities, meaning that UPMC is effectively paying itself. 

Romoff and his executives don’t have to justify their business plans and compensation packages to stockholders, because as a nonprofit corporation, UPMC has no stockholders. Its 24-member board, which includes representatives from local banks and businesses that work with UPMC, has theoretical control over policy direction, but has consistently been criticized for its passivity by local politicians, community activists, and Pennsylvania’s attorney general. 

UPMC’s financial power also derives in part from its ability, as a nonprofit institution, to escape paying taxes on its ever-expanding property holdings. The system, as the single largest private employer in the Pittsburgh area, accounts for a dominant share of the local economy. Its exemption from local property taxes costs Pittsburgh’s schools and local-area governments a total of some $40 million per year. For decades, local governments and UPMC sued and countersued and lobbied against each other in the state capital over the fiscal imbalance this creates. Over the last ten years, the battle has reached a fever pitch. It’s become a long-running conflict known in Pittsburgh simply as “the war.”

The war started in 2011 when UPMC demanded that Highmark Blue Cross Blue Shield, one of the biggest insurers in the country, pay it higher rates for care performed in its facilities. By this point, UPMC not only controlled most hospital beds in the greater Pittsburgh area but was also a major insurance company itself. In response, and to try to level the playing field, Highmark purchased a small network of local hospitals in the Pittsburgh area that were not yet under UPMC’s control. 

In retaliation, UPMC sent a certified letter to its patients with Highmark insurance telling them they would need to find a new doctor. Without access to any of UPMC’s pervasive facilities, millions of people throughout western Pennsylvania found their access to health care and choice of doctor deeply constrained. One patient in the middle of cancer treatments had to find a new oncologist. Another with a debilitating autoimmune disease said she was dismissed from UPMC’s Arthritic and Autoimmune Center. A breast cancer survivor had to give up the doctor who had treated her since she was first diagnosed five years before. 

In 2012, state officials managed to negotiate a five-year truce between UPMC and Highmark. But it didn’t last. UPMC continued violating parts of the agreement. When it expired, the system announced that all Highmark enrollees would again be denied access to its system. Indeed, UPMC went further. It decreed that going forward it would require out-of-network patients, including seniors on Highmark Medicare Advantage, to pay all estimated charges up front and in full before receiving treatment for non–emergency room services. 

An analysis of 31 prominent nonprofit hospital systems found that their margins are on par with some pharmaceutical corporations, and well beyond those of insurers and drug distributors.

The resulting public outrage prompted Pennsylvania State Attorney General Josh Shapiro to sue UPMC in February 2019, arguing that it “willfully engaged in unfair, fraudulent or deceptive acts or practices,” such as “excessive and unreasonable billing practices inconsistent with its status as a non-profit charity providing healthcare to the public.” UPMC countersued, but after a federal judge threw out its case, the corporation decided to resolve the attorney general’s suit out of court. It agreed to sign a contract with Highmark giving Highmark’s customers in-network access to UPMC doctors and hospitals for another decade. In exchange, UPMC got to keep its tax-exempt, nonprofit designation. 

For now, that may stabilize the situation. But in the wake of the coronavirus, it’s likely that UPMC’s monopoly power will grow still more. For many independent rural and community hospitals in Pennsylvania, which were already losing money or barely getting by, the blow from the pandemic will be mortal. At a media briefing in April, Andrew Carter, president and CEO of the Hospital and Healthsystem Association of Pennsylvania, told reporters that “it won’t take long for some hospitals to collapse.” But not UPMC. While the system’s revenues took a hit after the spreading contagion eventually forced it to postpone many lucrative elective procedures, the situation should prove quite manageable. A memo leaked to the Pittsburgh Post-Gazette dated April 15 showed that UPMC was by then already ramping up to do more elective surgeries. It has told its surgeons to reclassify these procedures with terms such as “urgent,” “cancer,” “unstable,” and “relief from suffering” in reports.

There was a time when America’s leading “nonprofit” hospitals were, in fact, nonprofits. When they were first established, institutions like UPMC, the Cleveland Clinic, and Johns Hopkins combined three public missions: They engaged in medical research; they educated the next generation of doctors; and, in the process, they cared for patients who often could not afford to pay. All of these missions were money losers. And because of that, these institutions were typically viewed, both in public opinion and under law, as charities. Governments supported these charities by granting them charters to operate as nonprofit corporations, and then offered deep direct and indirect subsidies, including sweeping tax exemptions. 

But today, the arguments that have historically justified the public’s mostly unqualified support for these institutions are virtually divorced from reality. Unlike when most of these hospitals were founded, the cost of medical research is now largely covered by government grants (23 percent) and private industry (65 percent). The cost of medical training is largely borne by grants from Medicare and other federal programs that more than reimburse hospitals for graduate medical education programs. Indeed, teaching hospitals make money on the medical services their residents provide.

Finally, the type of medicine now practiced by many elite academic medical centers isn’t focused on the broader health care needs of their surrounding communities. Instead, it’s care delivered almost exclusively to patients with public or private insurance. Indeed, at the largest and most famous academic medical centers, the focus is often on attracting VIPs from around the world who pay top dollar for specialized treatments in luxury surroundings, even as residents in the surrounding neighborhoods see their health care needs go unmet. 

The main campus of the Cleveland Clinic, for example, is surrounded by low-income neighborhoods that are federally designated as “medically underserved areas.” Most lack access even to adequate primary care. Yet the clinic focuses on its services to VIPs, including large contingents from Saudi Arabia’s royal family, who enjoy the privileges of being “Premier Executive Health patients.” These privileges, boasts the clinic’s website, include “personal attention and luxurious suite accommodations found on the exclusive Club Floor of the InterContinental Hotel on Cleveland Clinic’s campus.” Not to be outdone, Johns Hopkins’s main hospital, located in inner-city Baltimore, counters with its newly renovated Marburg Pavilion, which, according to its website, offers “deluxe rooms” with “original wood details,” “patios with view of the medical campus,” “special dining service,” “fine bed linens,” and “specialty bath products.” 

Johns Hopkins’s main hospital, located in inner-city Baltimore, offers “deluxe rooms” with “original wood details,” “patios with view of the medical campus,” “special dining service,” “fine bed linens,” and “specialty bath products.”

All these trends have come together to create a new thing in the world: the charitable nonprofit hospital that has morphed into a profit-driven, tax-exempt, publicly subsidized monopolistic corporation focused on lucrative luxury care for the well-to-do. 

What can be done to make these institutions once again serve the public? One powerful potential lever is threatening to take away their nonprofit status and all the gigantic subsidies, tax breaks, charitable contributions, and other privileges that go with it. Nonprofit hospitals, after all, operate under binding charters that require them to serve the public interest. According to the law, they can enjoy the protections of incorporation only so long as they serve some public purpose and not inure to the benefit of any private shareholder or individual. This means that it is well within the statutory powers of state attorneys general to put any nonprofit corporation operating within their states under new management if it fails to act in the public interest, or, alternatively, to strip it of its nonprofit status. It was just such a threat that enabled Josh Shapiro, Pennsylvania’s attorney general, to force UPMC to deal fairly with Highmark customers. 

Legislation sponsored by Dan L. Miller, the Pittsburgh-area state representative, would go further. It would cut off state funding for any nonprofit that failed to adhere to fair labor standards or failed to set aside at least 20 percent of the seats on its governing board to people elected by workers.

Similarly, if a nonprofit hospital acts uncharitably or otherwise fails to produce real community benefits, the federal government has ample statutory authority to yank its nonprofit status and force it to pay federal income taxes. Moreover, both the federal government and the states have all kinds of antitrust and other anti-monopoly laws that, if properly enforced, would put an end to the kind of predatory and anticompetitive business practices that now pervade the world of “nonprofit” corporate medicine. If UPMC or other nonprofit hospitals decided that they wanted to convert to for-profit corporations, they would still need a state license to practice medicine, meaning that governments would still have a lot of power to demand more responsible corporate citizenship. 

Of course, if health care providers like UPMC return to their historic mission, they will need a way to pay their bills. Quality health care and health promotion—the kind that actually improves public health through prevention and helping patients manage chronic conditions—is by its nature a public good. And that means it generally does not, cannot, and should not earn a profit. If we want nonprofit hospitals to operate truly in the public interest, we can’t put them in a position in which they either bend their practice of medicine to maximize revenues or else get eaten by predators who do. Public interest medicine needs public funding, and control. 

In the battle with COVID-19, we are learning how much we owe to the sacrifices of frontline doctors and other health care workers and how much public health depends on everyone having access to quality, affordable health care. But “Medicare for All” or other means of expanding health care coverage won’t get it done if our health care delivery system remains dominated by corporations that put self-enrichment before social mission.

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Phillip Longman and Udit Thakur

Phillip Longman is a senior editor at the Washington Monthly and policy director at the Open Markets Institute. Udit Thakur is a research associate at the Open Markets Institute.