Fourth of five parts
Last year, state Rep. Dale Folwell took aim at a substantial tax benefit for North Carolina’s nonprofit hospitals – their refund on sales taxes, which averages about $200 million yearly.
Folwell proposed limiting refunds to nonprofits to 100 percent of the first $1 million and 25 percent of tax paid above $1 million. The cap would have affected 28 nonprofit hospitals, many of them very profitable, and six colleges and universities.
Folwell’s bill would have allowed state and local governments to keep more than $100 million. It was never even discussed in committee.
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“The reason this bill never got a hearing is because big money bottled it up,” said Folwell, a Winston-Salem Republican who’s running for lieutenant governor. The hospitals “came after me with cleats high.”
North Carolina hospitals are one of the most powerful and effective interest groups in state politics, deploying a squad of lobbyists at the General Assembly and giving generously to elected officials.
Their clout grows from many roots. Hospitals are the state’s third-biggest employer. They are economic engines for their communities, providing livelihoods for the families of doctors, nurses, janitors and executives. They give substantial amounts to charities.
Hospitals are run by boards of directors, invariably the movers and shakers in each community: legislators, developers, business owners, newspaper publishers.
The N.C. Hospital Association leverages these connections. The association’s political action committee has handed out more than $1 million to state candidates over the past decade, ranking in the top 10 PACs for political donations. The hospitals have given the most to those with the most power: former senators Tony Rand and Marc Basnight, Attorney General Roy Cooper and former House Speaker Jim Black, all Democrats.
Now, with Republicans in charge of the legislature, more money is going to the GOP: Sen. Pete Brunstetter, co-chair of the appropriations committee, Senate Republican leader Phil Berger and former speaker Harold Brubaker, for example.
The checks don’t come in the mail: A local hospital executive or board member hand-delivers the contributions to the politicians.
The lobbying goes on all year, not just in Raleigh, but in every community with a hospital. Hospital association staffers try to visit all hospitals every year.
“One of the questions to ask every time you are in a CEO’s office is, ‘When was the last time you visited with your legislator?’ ” said Don Dalton, a hospital association spokesman. “ ‘How is your relationship with your legislator? How can we facilitate building this relationship?’ ”
Politics of fear
Former Sen. David Hoyle knows that relationship from both sides. In the 1980s, he chaired the board at Gaston Memorial Hospital.
In 2009, as the state faced a $3.4 billion budget shortfall, Hoyle proposed capping sales tax refunds for nonprofits at $5 million. This was much more favorable to hospitals than the cap that Folwell would propose in 2011.
Hoyle’s proposal would have affected only a handful of the state’s biggest and most profitable hospitals. It would have raised about $15 million for the state.
Hoyle’s idea went nowhere. He said he believes hospital representatives talked to every member of the Senate Finance Committee, arguing that health insurance premiums would rise if the bill passed. It was an effective argument from persuasive people.
“They are the folks back home; they’re the people we go to church with and golf with,” he said. “It puts the fear in you. You don’t want to be the one blamed for health care costs being so high.”
According to Folwell, hospitals are among the largest users of tax-funded services such as ambulance, police and fire protection. Most of them pay no property taxes, so other taxpayers have to shoulder the burden.
Cash-strapped public schools do not get a sales tax refund, while wealthy hospitals do, and that’s not fair, Folwell said.
Hugh Tilson, lead lobbyist among the 10 who registered in 2011 for the N.C. Hospital Association, made no apologies for killing the sales tax bills.
“As nonprofits, any revenues that we forgo would diminish our ability to care for the public,” Tilson said.
Tilson agreed with Hoyle and Folwell that his members are the key to his success lobbying the General Assembly.
“Our success has little to do with what I do,” Tilson said. “It’s that local relationship between the community and its legislators. Most legislators want their hospitals to succeed.”
Many wins, few losses
Those local relationships are strong.
State Sen. Dan Blue of Raleigh, a former House speaker, sits on the board of Duke University Health System, as does Jim Goodmon, president and CEO of Capitol Broadcasting in Raleigh. At WakeMed, there’s a former Raleigh mayor, a Wells Fargo executive, the former head of Wake County Schools and a former state auditor. Orage Quarles III, president and publisher of The News & Observer, is a member of the board of Rex Hospital in Raleigh.
In Charlotte, the board of trustees of Presbyterian Healthcare includes Larry Stone, retired president of Lowe’s Home Improvement, and Jim Palermo, a retired Bank of America executive. Carolinas HealthCare System’s board members include NASCAR team owner and businessman Felix Sabates, former Wachovia CEO Ken Thompson, retired Wachovia executive Mac Everett and Ed Brown, a former Bank of America executive who’s now CEO of Hendrick Automotive.
The hospitals perpetuate their power by staying in the good graces of legislators. The hospital political action committee raises small amounts from thousands of donors across the state: Doctors, board members, lawyers, administrators, pharmacists and nurses give in amounts ranging from $15 to $2,800, with the majority of contributions $100 or less, records show.
The hospital association is well-funded, with $4.6 million in revenue during 2010, the most recent year available. It paid $3.2 million in salaries and benefits, including $869,169 to its president, Bill Pully.
The association has been so successful over the years that Dalton, the spokesman, struggled to name any setbacks suffered at the General Assembly. After a pause, he came up with one: The hospitals pushed a bill to cap damages in lawsuits, which foundered and didn’t become law at the time.
That was in 2003.
Tilson, the hospital lobbyist, pointed to a long-term frustration: The hospitals have long pushed for better care for the mentally ill, including more inpatient mental health care. The conditions for the mentally ill are no better than they were 10 years ago, Tilson said.
But such setbacks have been rare. More often, the hospitals get exactly what they want.
In 2011, they got the damage cap they’ve been seeking, though the big push came from doctors and the N.C. Chamber of Commerce. The law limits medical malpractice awards for non-economic damage – pain and suffering, emotional distress and less tangible injuries – to $500,000.
Reversing a loss
For years, the state Department of Correction has been trying to rein in skyrocketing costs for hospital care for inmates, which rose from $17.5 million in 1999 to $63.8 million in 2011.
Prison officials had a problem: Unlike insurance companies that represent regular patients and can negotiate hospital charges downward, they had no bargaining power and generally paid whatever the hospital demanded. Paying the list price is expensive, since North Carolina hospitals generally set their charges at three times their costs; an inmate hospital stay that cost the hospital $10,000, for example, could be billed at $30,000.
Paying the list price means a 200 percent profit for the hospital at the expense of taxpayers.
Many hospitals don’t like treating inmates.
“Inmates?” asked Kenneth Morris, chief financial officer at Duke University Health System. “We don’t want their business. It’s disruptive.”
So the Department of Correction turned to the General Assembly. Last year, prison officials thought they had finally fixed the problem. The state budget mandated that prisons would pay the lesser of 70 percent of charges or twice the rate that Medicaid will pay. Either would guarantee a profit for the hospital and a significant savings for taxpayers.
Under federal law, all hospitals must see anyone who shows up in the emergency room. The state budget law would have required hospitals to admit inmates, not just treat emergencies.
But the day after the budget passed, a senator slipped a bland sentence into a “technical corrections” bill at the request of the hospitals; the requirement that hospitals treat inmates for non-emergencies was quietly deleted. Those hospitals include big institutions such as WakeMed, Duke and Carolinas Medical Center.
Tilson, the hospital lobbyist, said he urged hospitals to call lawmakers if they didn’t want to be forced to admit murderers, rapists and child molesters.
Sen. Richard Stevens, a Cary Republican, submitted the amendment. Stevens had heard from officials at WakeMed, who complained that they have provided a disproportionate share of inmate care over the years.
Stevens also said legislative staff was troubled by the language of the law, which could revoke a hospital’s license if it didn’t treat inmates.
In the fall, the Department of Correction opened a new $155 million hospital at Central Prison in Raleigh that will diminish, but not eliminate, the need for inmates to be seen in outside hospitals.
Frank Rogers has been in charge of the prison’s push on inmate health care at the legislature, and he has seen the hospitals’ clout.
“I was disappointed,” Rogers said of the last-minute change. “But I was not surprised.”
A governor’s help
The hospitals’ influence extends beyond the legislature. They know how to get the ear of the governor.
As the General Assembly struggled with the state budget in 2010, lawmakers tentatively cut $519 million in case expected federal stimulus funds were not continued. If the federal funds did not come through, the state budget director was to make cuts from a prioritized list of the disaster relief fund, the state lottery, Medicaid, retirement system contributions, and other funds.
The Department of Health and Human Services planned to cut $26 million in Medicaid reimbursements, a 1.35 percent reduction for doctors, hospitals and other providers. Secretary Lanier Cansler announced the rate cuts would take effect Sept. 1.
The hospital association geared up. Pully wrote Gov. Bev Perdue, reminding her that hospitals and doctors lose money on Medicaid patients and that further cuts would strain the system.
A letter-writing campaign followed. Hospital CEOs copied Pully’s letter to their letterhead and sent it to Perdue. Doctors, clinics and other practices also wrote Perdue, urging her to not cut provider fees. They sent 104 letters in all, including 36 from hospitals.
The governor asked her staff to set up a meeting with Pully as well as leaders of the groups that lobby for doctors and long-term care facilities.
Perdue met with them at 10 a.m. Aug. 27 at her office in the Capitol.
At 12:30 p.m. that day, the chief financial officer for the state’s Medicaid office sent an email to staff: “Per Lanier’s direction from the Governor, she has reversed the rate reductions proposed for 9/1/10.”
Some stimulus funds had come in, so Perdue had to cut only $222 million. But the other programs did not fare so well; money was taken from the Disaster Relief Reserve, unclaimed lottery money, the state’s rainy day fund and others. In effect, Perdue’s budget director skipped over Medicaid, the fifth item on the list, and made cuts from the rainy day fund and another management fund.
Tilson said the governor recognized the dangers of cutting Medicaid.
“She understood the cuts would be detrimental to the state’s most vulnerable populations,” he said.
Perdue said she didn’t need any convincing. Keeping Medicaid funded as much as possible was her top priority for hospitals.
Before she ran for the state House in 1986, Perdue was an administrator at Craven Memorial Hospital. When she ran for office, she followed a campaign plan drafted by a lawyer for the hospital association: Bill Pully
She won. They have been allies ever since.
Workers’ comp charges
North Carolina hospitals long have received some of the most generous payments in the country for treating patients covered by workers’ compensation. That’s a charge absorbed by businesses that pay workers’ comp premiums.
It’s not a huge business for hospitals – about 1 percent, according to the hospital association. But it was very profitable: The policies paid hospitals 95 percent of charges for outpatients (an average markup of roughly three times costs), and 77 percent on inpatients (more than double the costs).
According to a study of 16 states by the Workers Compensation Research Institute, North Carolina had the highest payments to hospitals. Among non-hospital providers, such as doctors and physical therapists, North Carolina ranked among the lowest.
The N.C. Industrial Commission set up a committee to find ways to reduce the payments.
Hank Patterson, a Chapel Hill labor lawyer who led the committee, said the insurance companies wanted to tie reimbursement rates to Medicare. Insurance companies generally use Medicare rates as the starting point when negotiating with hospitals.
The hospital association objected, Patterson said, and the hospitals prevailed. Reimbursement remained tied to hospital charges, which is in the hospital’s financial interest.
Patterson said the reductions, to 79 percent for outpatients and 75 percent for inpatients, were progress. But he acknowledged that the hospitals could erase the cuts simply by raising their charges. Many hospitals raise their charges 5 percent or more each year.
“The hospitals are very politically powerful,” Patterson said. “If you are pragmatic, you tread carefully to make progress.”
Tomorrow: What can be done?
To read other stories in our "Prognosis: Profits" series, click here.