SPECIAL REPORT — UPMC: FORGING A GIANT FOOTPRINT

UPMC land purchases may be legal, but experts say more oversight needed

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Although UPMC says it runs its healthcare operation like a business, paying so much for land, then losing money on its resale was not what was envisioned when the state and federal government carved out tax breaks for charities, said Nicholas Cafardi, dean emeritus and professor at Duquesne University's Law School and an expert on charity law.

"This is the oversight problem. If they were a business corporation, the shareholders would be filing dividend lawsuits saying you're wasting the assets of the corporation," he said. "But the charity boards tend to identify with the senior executives and they don't exercise proper oversight. That identifies why a nonprofit can buy high and sell low with no consequences."

Mr. Cafardi and other charity law experts said UPMC's strategy appears to be legal. That's mainly because state and federal laws are largely silent on transactions by charities with entities they have no relationship with, known as arm's-length agreements.

As to why it buys high and sells low, UPMC spokesman Paul Wood wrote in an email: "Real estate acquisitions are made at fair-market values for the sole purpose of serving UPMC's mission of good science, smart technology and accountable patient care. In the event property UPMC has purchased is determined to no longer meet those needs, it is then sold. Given the variability in the commercial real estate market, the price UPMC sells a particular piece of property for may sometime be significantly different than its purchase price."

Before it buys or sells, UPMC gets appraisals, Mr. Wood wrote, and the UPMC board approves all land transactions.

Fair market value

Land sales typically go through four stages, beginning with a request from a department or an individual hospital that needs space, said a UPMC source familiar with the organization's policies. The facilities department reviews the request, finds land that's suitable and then takes the proposed purchase to the individual hospital board. From there it goes through the UPMC board's finance committee before being brought to the full UPMC board.

Beyond Pennsylvania's requirement that land sales and purchases be approved by the hospital board -- making the state unique in the country -- charity laws at both the state and federal level are really concerned only that the sale or purchase of property that involves insiders be done at fair market value.

"If it's a third-party independent party, there's not a lot of oversight of that" in state or federal law, said Jack Owen, a Pittsburgh lawyer and an expert on charity law. "But if it's an insider, you'd better report it on your 990s [tax forms filed by nonprofits] and follow your conflict-of-interest laws."

Doctors and land buys

UPMC has bought and sold land to doctors over the years in about a dozen deals.

Two prominent transactions caught the public's attention, both times over land purchases that involved doctors they were attempting to bring into the UPMC fold.

The first occurred in 1996 when UPMC was establishing a foothold in Monroeville and trying to lure an independent surgical practice as an affiliate.

It was reported in the media then that UPMC was going to pay $20 million for the doctors' outpatient surgical center owned by Richard Raizman, Frank Costa and several other partners, including Denise Pampena, owner of Graziano Construction, a longtime building contractor that has built most of UPMC's senior community buildings over the years.

Doctors and officials at Forbes Regional Medical Center in Monroeville cried foul at the time, saying UPMC was overpaying and simply buying patients by offering so much money for the practice and building.

UPMC finally bought it and its 3.2 acres for $7.6 million in 2003, still much more than the $2.6 million the state estimated it cost when it was built in 1992. At the same time in 2003, UPMC also bought an adjacent, vacant, half-acre parcel from Dr. Costa for $395,000 -- land he paid $250,000 for less than two years earlier.

Today the building is known as UPMC Monroeville Medical Center and is directly across Mosside Boulevard from UPMC East hospital.

Though Dr. Costa was kept on by UPMC in 1996 as the Monroeville surgical center's medical director, he was fired from that post earlier this year because he had begun helping Highmark buy up land in the region for its planned medical mall and surgical center network when it formally acquires West Penn Allegheny Health System. Dr. Costa did not return phone calls seeking comment.

The second deal, in 1999, involved UPMC's recruitment from Allegheny General Hospital of noted neurosurgeon and concussion expert Joseph Maroon.

Dr. Maroon also was a prolific real estate investor and had bought about three dozen parcels on the North Side.

At the same time UPMC announced that Dr. Maroon was coming to work for the hospital, the surgeon sold UPMC a group of his properties for $5.2 million -- real estate which cost him a fraction of that to acquire.

UPMC still owns all but two of the parcels it bought from Dr. Maroon in the deal. But 13 years after UPMC completed the transaction, the property is valued about $1 million less than the purchase price.

In 1999, both UPMC and Dr. Maroon denied there was any tie between his move to UPMC and the purchase of the property.

Dr. Maroon did not return calls seeking comment for this story.


Sean D. Hamill: shamill@post-gazette.com or 412-263-2579.


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