UPMC spends millions in deals linked to board

| Sunday, Feb. 8, 2009

In May 2003, the nonprofit health giant University of Pittsburgh Medical Center sold iGate a 90 percent interest in a wholly owned, for-profit drug testing subsidiary.

The $400,000 sale was announced in press releases that omitted an interesting detail: The chairman of iGate, Sunil Wadhwani, is a UPMC board member, but was not on the board at the time of the sale.

That transaction and the relationship were not disclosed in UPMC's tax returns for that year. Nor did UPMC acknowledge it is an iGate customer.

A review of court and other public records shows that UPMC engaged in hundreds of transactions valued in the millions of dollars with for-profit enterprises tied to its board members. The review shows that the health care conglomerate has not provided details of those business relationships because, UPMC officials say, and outside experts agree, it is not required.

All that is about to change under requirements the Internal Revenue Service put into effect this year for reporting by nonprofits. They are required, starting with filings for 2008, to provide detailed information on transactions with board members and their affiliates. Even more disclosure from health care nonprofits will be required next year.

The UPMC board includes partners in city law firms that regularly represent UPMC in lawsuits and regulatory matters, including the issuance of tax-free bonds.

The IRS rules, which the agency called a needed update, follow widespread criticism, especially from members of Congress, about lack of disclosure by nonprofits, particularly those in the health care field.

IRS Commissioner Don Shulman, in announcing the changes, said they "will give the IRS and the public a much better view of how exempt organizations operate."

The Downtown firm of Pietragallo, Gordon, Alfano, Bosick & Raspanti is representing UPMC in several pending lawsuits. William Pietragallo, who serves on the UPMC board, appeared in court during the recent case of a former Magee-Womens Hospital secretary who filed a whistleblower and wrongful-termination suit against Magee and its parent UPMC. The case was settled.

Pietragallo said there has been full "compliance" with the requirements of state and federal law and "full disclosure" to the board and the appropriate subcommittees.

"I have given 20 years of service to the institution, and I don't think we should be penalized as a result. I am a qualified attorney and so are the other members of the firm," he said, adding that similar relationships between nonprofits and their board members were common in other cities across the country.

In a suit recently filed by the family of an elderly woman who died on the roof of UPMC Montefiore, the hospital is represented by the Downtown firm of Dickie, McCamey and Chilcotte. David B. Fawcett, a senior partner with the firm, is a UPMC board member. The firm represents UPMC in several cases, records show. Fawcett could not be reached for comment.

UPMC officials say they disclose information beyond what is legally required. Still, the dealings with board members and their business interests have remained largely undisclosed, except for hints that appear in court filings. In 2005, UPMC's federal tax return did include a list of some business affiliations of board members.

"UPMC remains on the forefront of best-in-class corporate governance practices and transparency standards," the health giant states on its Web site introduction to the board of directors. UPMC spokeswoman Wendy Zellner wrote in an e-mail response to questions: "Indeed, we go above and beyond our legal requirements."

Still, the 2005 tax return provides no detail about which listed firms actually do business with UPMC and the amount paid to those firms. Instead, the return states that all such transactions "are entered into on an arms-length basis." Despite claims of full disclosure, UPMC denied the Tribune-Review's requests for details about fees it paid to the Pietragallo law firm, for example.

"For competitive reasons, we do not disclose the details of contracts with outside vendors, including those affiliated with board members," Zellner wrote in an e-mail.

She said UPMC has elaborate internal policies requiring disclosure of actual or potential conflicts of interest.

The new IRS forms require nonprofits to fill out a schedule detailing direct or indirect business relationships with entities in which board members have substantial interest. They require disclosure of such relationships with companies in which a family member of a board member or a key officer has a substantial interest.

Under old rules and forms, IRS disclosure requirements were more limited, applying to officers and directors who received compensation "from any other organizations, whether tax exempt or taxable, that are related to this organization through common supervision or common control."

The 2009 rule apparently will require disclosure of fees UPMC paid to Paradiso Group, a firm that alone earned millions of dollars for UPMC advertisements. Paradiso is owned by Doug Romoff, brother of UPMC President and CEO Jeffrey Romoff.

Some details on dealings with affiliates of board members were buried in massive filings accompanying paperwork dealing with bond issues to finance major UPMC projects, such as construction.

A prospectus on a $490.8 million bond issue last spring states:

"A shareholder in Buchanan (Ingersoll & Rooney) and a member of Eckert (Seaman Cherin and Mellot) are members of the board of directors of the corporation. Affiliates of Mellon Financial are each lenders to the corporation. An employee of an affiliate of Mellon is a member of the board of directors of the corporation. An affiliate of Mellon serves as bond trustee and master trustee."

Eckert Seaman Cherin and Mellot was paid $75,000 for legal work on that bond issue. John R. McGinley Jr. from the law firm is on the UPMC board. The firm has represented UPMC in several lawsuits. McGinley could not be reached for comment.

Buchanan Ingersoll & Rooney was paid $72,500 for legal work on two 2008 bond issues, records show. Ralph J. Cappy, a board member and retired state Supreme Court chief justice, is affiliated with the firm, according to the prospectus. Buchanan Ingersoll did legal work for one of the underwriters. Cappy could not be reached for comment.

UPMC did not disclose fees paid to Mellon Financial for its role as an underwriter of the bond issues. Retired Mellon Chairman and CEO Martin G. McGuinn is a UPMC board member. Steven G. Elliott, a Bank of New York Mellon executive, is on the UPMC board.

Without providing details, the bond documents disclose that UPMC invested in firms with which it does business.

In the 12 months ending June 30, 2007, UPMC paid $61 million to those entities, the documents state, and because its ownership interests in those entities gained revenue of $59 million in 2007 and $54 million in 2006.

Some details of UPMC's sale of its subsidiary to iGate were provided in iGate filings with the Securities and Exchange Commission.

The firm bought, for an undisclosed sum, the remaining 10 percent of the testing company from UPMC in the last quarter of 2004, according to a report filed with the SEC.

iGate, in a May 2006 press release, disclosed it provides computer consulting services to UPMC. In fact, iGate gave the hospital its "Supplier Diversity Client of the Quarter Award." The press release states the firm "is involved in numerous, varied IT projects within the UPMC network."

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