When Pittsburgh Mayor Luke Ravenstahl announced Wednesday that he was going to challenge health care giant UPMC's nonprofit status, he did not plunge in without any legal ammunition.
Starting in January, staff at a longtime Pittsburgh law firm, Strassburger Mckenna Gutnick & Gefsky, researched whether UPMC met the "HUP test," a five-point test that the state Supreme Court reemphasized in a landmark ruling last year.
The conclusion, firm President E.J. Strassburger wrote in a 13-page letter to city solicitor Daniel D. Regan on March 5: "As we have discussed, waging a legal battle against a behemoth like UPMC will be neither quick nor easy. However, we believe that both challenges are well-justified, because ... UPMC appears to fail the constitutional test for qualifying" as an institution of purely public charity.
The legal review concluded that UPMC fails at least three parts of the Supreme Court's five-point test, and may fail all five.
Among other reasons, the review says UPMC fails to provide sufficient charity care, operates far-flung international operations that are losing money, and has closed operations in poor communities only to open or expand into richer ones.
But it also cites what it terms "excessive" benefits of UPMC executives, including CEO Jeffrey Romoff's $5.9 million salary; the fact that more than 20 employees are paid more than $1 million; UPMC's corporate jet; Mr. Romoff's "lavish" Downtown headquarters (which it claims includes a private chef, chauffeur and private dining room).
UPMC dismissed the review on Thursday in response to emailed questions. And though Mr. Ravenstahl signaled that he's happy to sit down and negotiate a deal, UPMC implied it is prepared to battle it out in court.
"We think the 13-page memo that a local law firm wrote for the City is very weak and reaches its conclusions entirely based on opinion, not fact," UPMC spokesman Paul Wood wrote. "Rather than responding to partisan politics and blatant union pandering by the Mayor, UPMC looks forward to demonstrating in a court of law that we meet all five prongs of the HUP test and that our hospitals easily qualify for the tax-exempt status they unquestionably deserve. Interestingly, by hiring an outside law firm the City is prepared to waste millions of dollars of taxpayer funds on an unsuccessful attempt to pursue this case."
The Supreme Court's 1985 ruling involving the Hospital Utilization Project (or HUP) set out a test that requires that a purely public charity must fulfill all five of the test's points that it: advances a charitable purpose; donates or renders gratuitously a substantial portion of its services; benefits a substantial and indefinite class of persons who are legitimate subjects of charity; relieves the government of some of its burden; and operates entirely free from private profit motive.
That ruling was reaffirmed by the Supreme Court in April in a case involving an Orthodox Jewish summer camp in Pike County that was found to not deserve its property tax exemption.
Mr. Strassburger wrote, first and most strongly, that "it seems virtually certain that UPMC would fail to carry its burden of proving that it satisfies the fifth prong of the HUP test by 'operating entirely free from profit motive.'"
He cited UPMC's nearly $1 billion surplus over the last two years and $3 billion in reserves as evidence of this, and that UPMC "is carefully structuring its operations to prioritize profits-generation over charity."
Mr. Wood wrote that "numerous people have tried to distort the meaning of that component to attain a political result."
"It does not mean a nonprofit shouldn't strive to have a positive operating margin -- organizations that don't do that go out of business," he added. "All you have to do is look at West Penn Allegheny as an example of an organization that consistently loses money and is on the verge [of being] bankrupt."
In addition, Mr. Strassburger wrote that UPMC does not "advance a charitable purpose" in part because UPMC "maintains an 'open admissions policy' in name only" and it does not make all of its health care available to everyone, regardless of ability to pay.
And, lastly, Mr. Strassburger wrote that UPMC does render "a substantial portion of its services" for free, though he acknowledges that it depends how you could define those services that are considered charitable care.
Mr. Strassburger cites UPMC's own documents and officials' statements that show that UPMC may be providing charity care of anywhere from $204 million, or 3.6 percent of net patient revenues, to $87.2 million, or under 1 percent.
Mr. Wood disagreed with those figures, citing the $238 million in charity care that UPMC claims on its IRS tax forms, and $622 million in total community benefits and other uncompensated care.
If you "compare it to other of the internationally known, highly regarded academic medical centers, it's clear that there isn't another that provides more to its region than UPMC provides to Pittsburgh," Mr. Wood wrote.
Nicholas Cafardi, dean emeritus and professor at Duquesne University's Law School, said he believes the argument that UPMC is not free from a private profit motive is the strongest one in Mr. Strassburger's review, in part because of how far-flung UPMC has become.
"The more they do that gets them away from their core purpose, the more they open themselves up to the argument that they aren't doing charity," he said.
In addition, Mr. Cafardi said, UPMC's extensive advertising campaign --sometimes directly against rival Highmark -- makes it look like the organization is operating for profit.
"A lot of things like that make them look like they're operating for a private profit," he said. "You advertise because you're in competition. That's the private profit motive."
Gary M. Grobman, former head of the nonprofit Pennsylvania Jewish Coalition and author of "The Pennsylvania Nonprofit Handbook," said UPMC would have a fight on its hands.
"Based on what [Mr. Strassburger] has written, which may or may not be true, it seems some staff at the hospital are paid quite well and some decisions are made based on achieving as much revenue as possible instead of providing as much charity as possible," he said. "And if all of that is true, they don't deserve their not-for-profit status."
Raymond Baum, a Pittsburgh attorney who works with charities, said the city may not be able to challenge UPMC as a whole and may be forced by the courts to challenge individual parcels and UPMC's subsidiaries.
"I think you have to deal with them one property at a time," he said.
Mr. Strassburger said in an interview Thursday that he thinks part of the benefit of his review is that even though "it was pretty well known on the street that there were a lot of people making a lot of money at UPMC," as well as other issues, "when you put it all together I supposed there's a startling magnitude to it."
Though he expected UPMC to dispute his findings and for some issues to be obscured for now by UPMC's size as a complicated, $10 billion corporation, once they get into court, "I think we're going to be able to peel away the layers and expose what's really going on."
Sean D. Hamill: firstname.lastname@example.org or 412-263-2579. Moriah Balingit contributed to this story. First Published March 22, 2013 4:00 AM