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UPMC defends tax-exempt status

| Wednesday, Sept. 19, 2012, 12:01 a.m.

UPMC is firing back at critics who have suggested the $10 billion hospital system doesn't deserve its tax-exempt status.

Western Pennsylvania's dominant network of hospitals and doctors has begun a marketing campaign explaining how it spends its money and showing a measure of its profit for last year that comes to $7 million, instead of the $220.7 million that it reported to its bond investors.

“When you think about UPMC's nonprofit status and our contributions to the community, look at the bottom line,” a brochure created for the effort states. “Do the math.”

UPMC has faced charges from lawmakers and others that its high-profile fight with insurance giant Highmark Inc. in the last year showed it cared more about its business success than its patients and nonprofit mission.

Local politicians and community groups have called for the health system to pay at least a portion of the property taxes it would owe, were it not a nonprofit, to help with Pittsburgh's budget problems. UPMC has refused to join a coalition of nonprofits that have pledged to give the city $2.6 million this year and next in lieu of taxes.

Robert DeMichiei, UPMC's chief financial officer, said critics misunderstand the health system's business and the importance of profitability in providing excellent medical care.

“In Pittsburgh, our patients would tell you that there's a wonderful patient experience, they love our facilities, they love our physicians, they love our nurses,” DeMichiei said. “What I think people don't appreciate, or maybe don't like, is the business side of UPMC.”

Some may complain that UPMC is too big, too successful, too profitable, DeMichiei said.

“There's absolutely a symbiotic relationship between those two things,” he said. “Without the profit and cash flow to reinvest, it's difficult to have clinical excellence.”

Pittsburgh Councilwoman Natalia Rudiak, who in June held a hearing on the problem of large nonprofits not paying property taxes, said UPMC will have a hard time convincing her that it can't provide at least some money to boost the city's budget.

“I think the idea that UPMC is going to spend thousands of dollars on a marketing campaign to say it can't afford to help our residents ... (is) a little ridiculous,” she said.

UPMC spokesman Paul Wood said the cost to develop and print the materials will be minor, and nowhere near what it might spend on a traditional marketing campaign that would include television, print and billboard advertising.

According to the brochure, UPMC breaks down its income statement in the following way to arrive at a profit of $7 million:

The health system brought in revenue of $9.6 billion in the 12 months ended June 30. It paid out $9.3 billion in expenses during that period, leaving it with about $351 million in profit from its operations.

It then adds back an allowance, or credit, of $395 million for previous investments that provide a benefit over many years. That gives UPMC $746 million that it says is available to reinvest in its operations. Of that total, UPMC spent $121 million paying interest on its debt and $618 million on investments in its facilities, technology and research and development, leaving $7 million in excess cash, or profit.

In the financial statements UPMC makes public for its bond investors, which are based on the generally accepted accounting principles used by publicly traded corporations, the $351 million in income from operations is adjusted for taxes, other charges and investment income, leaving the health system with $220.7 million in net income, or profit.

DeMichiei said net income doesn't provide a realistic measure of the money available to reinvest in the system's 19 hospitals and 400 offices and clinics. Investment income isn't used to fund the system's operations, and net income doesn't include its capital spending.

“Health care is a very capital intensive business,” he said.

Critics, such as nonprofit community group Pittsburgh United, said the math still doesn't add up.

“It's unclear what exactly they're spending their money on,” said Barney Oursler, Pittsburgh United's executive director, who reviewed the brochure.

“We know their reinvestment includes UPMC East, but wasn't built for the benefit of the community,” Oursler said. “We also know they didn't spend the money on paying their service workers a living wage.”

Pittsburgh United has been critical of UPMC's profitability, saying it could afford to pay property taxes. The group also has criticized UPMC's decision to close Braddock Hospital and open UPMC East in Monroeville, and its anti-union stance.

Some service workers in the spring tried to organize at a few of UPMC's hospitals but have so far not garnered enough worker support.

Oursler said he was pleased to see UPMC try to respond to the criticism of its business, but he called the brochure “just the first step” in what he hopes will be a wider discussion between the health system and the community.

“What does the community need and let the community have a say,” he said of UPMC's spending. “If they want to remain tax exempt then the community should have a direct say in how that's spent.”

UPMC is the largest tax-exempt property owner in Allegheny County, with holdings valued at $1.3 billion.

State Sen. Wayne Fontana, D-Brookline, sponsored legislation calling for the state's large nonprofit organizations to pay at least a portion of the property tax they would owe if they were a for-profit company.

In the case of UPMC and other large nonprofits, Fontana said the issue is very simple: If a nonprofit can afford to advertise and pay their executives millions of dollars, then they should be able to give back to their local community through property tax payments.

“If you walk into a stadium and see a big sign that says UPMC, they pay a lot of money for that,” he said. “How many truly nonprofit organizations that can afford to do that?”

Alex Nixon is a staff writer for Trib Total Media. He can be reached at 412-320-7928 or anixon@tribweb.com.

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