Moneybox

Hyper Tension

Is health care behemoth UPMC doing right by Pittsburgh?

Photo illustration: a Slate 90 modified bill with an image of a surgically masked woman in the center.
Photo illustration by Slate. Photos by Thinkstock and Spoon Graphics.

Last November, the University of Pittsburgh Medical Center, a sprawling health system that dominates much of western Pennsylvania’s health care market, announced that it would spend $2 billion to build a trio of new hospitals within its home city. One would focus on vision and rehab, a second on cancer, and the third on heart treatment and transplants—the sort of advanced high-priced specialties that can draw patients (and their insurance cards) from far off. Laying out his broader ambitions during a press conference, UPMC CEO Jeffrey Romoff said he believed UPMC (already No. 4 in the Slate 90’s Health ranking) could double its size in five years and that it was poised to become “the Amazon of health care.”

To an outsider, this all may sound like another happy chapter of Pittsburgh’s ongoing reinvention story, in which the once-ailing factory town has transformed into a hub for tech and medicine—less Carnegie Steel, more Uber. That is certainly how Pittsburgh Mayor Bill Peduto framed it. “Pittsburgh is back on the global stage,” he said at the announcement.

The Slate 90 health rankings for fiscal 2015.
Figures are 2015 revenue. Rankings by Slate and GuideStar.

To some locals, however, the hospital expansion signified something quite different: the latest example of a giant, voracious nonprofit expanding without paying its fair share back to the community. At an April meeting of the Pittsburgh Planning Commission, where UPMC formally presented its building proposals, more than 20 residents, activists, and hospital employees gave remarks criticizing the health system, savaging its labor practices, its controversial decision to cut ties with a major insurer, and its lack of emphasis on serving Pittsburgh’s lower-income residents. “We can’t make deals that bring high-end luxuries and innovations to our city at the expense of our working families and long-time residents,” Jennifer Rafanan Kennedy, director of Pittsburgh United, an organization that represents a coalition of labor unions as well as environmental, faith, and community groups, told the commission.

“[T]hey’re not holding up their end of the bargain with the community,” Kennedy told me later. “They’re using the taxpayers in Pennsylvania to subsidize their profits.” Her organization has urged the city to block UPMC’s new development unless UPMC allows its workers to organize “free of retaliation,” gives Pittsburgh residents access to care “regardless of what insurance card they carry,” and invests in efforts like affordable housing. (In a statement, UPMC told me, “Those that showed up at the recent planning commission meeting did not represent the ‘community’ but, rather, were ‘proxies’ for the SEIU Healthcare PA, which is frustrated having been unsuccessful in its years-long attempts to gain any traction with UPMC employees.”)

In recent years, UPMC has come to epitomize town vs. surgical-gown tension, partly because of Pittsburgh’s special political circumstances. Tax-exempt educational and medical institutions are largely responsible for the city’s economic revival. Whereas Detroit has the Big Three automakers, Pittsburgh is said to have its Big Four nonprofits: the University of Pittsburgh, Carnegie Mellon University, insurer Highmark Health, and UPMC. But while these institutions have been critical to Pittsburgh’s rebirth, they also own much of its land and employ much of its workforce, denying the region tens of millions worth of property and payroll taxes.

To get a sense of UPMC’s scale, consider these numbers. Last year, it generated $15.6 billion in revenue—a sum roughly equivalent to the revenues of the Gap, No. 178 on the Fortune 500. With approximately 80,000 employees, UPMC is the largest employer in the state outside of the government. With more than 30 hospitals operating under its capacious umbrella, it claims to control 41 percent of the medical-surgical market in western Pennsylvania and has been expanding aggressively. Last year alone, it snapped up seven hospitals in central Pennsylvania, closer to Harrisburg. Back in Pittsburgh, meanwhile, UPMC’s physical footprint is so large that if it weren’t a nonprofit, the system would reportedly owe an extra $20 million in annual taxes by itself. (To put that in perspective, all of Allegheny County was expected to collect around $360 million total property taxes in 2017.)

Arguably, nowhere is the distinction between for-profit and not-for-profit players more blurry than in the vast health care sector. While the IRS requires that tax-exempt hospitals offer “benefitsto their surrounding communities, the standard is vague and can be fulfilled by things that don’t directly benefit nearby residents, such as funding scientific research. Meanwhile, the sense of professionalism and civic obligation that once guided many nonprofit medical institutions has given way to a consultant-driven, corporate style of management focused on maximizing revenue. Of the 10 hospitals that made the most off patient care in 2013, for instance, seven were technically nonprofit entities, according to a study by professors Gerard F. Anderson and Ge Bai of Johns Hopkins University.

And on some levels, UPMC does seem to operate a bit like its for-profit counterparts. It pays executives seven-figure salaries. Critics argue that it’s unfriendly to unions and has a history of underpaying its hourly workers—some of whom have had to rely on food stamps. (After years of criticism, including from the governor, the hospital is in the process of raising its minimum wage to $15 an hour.) In 2010, it shuttered its money-losing hospital in the hard-luck town of Braddock—you may know it from this Levi’s ad—while building a new location eight miles east in the wealthier suburb of Monroeville.

Meanwhile, UPMC has been engaged in a nasty feud with rival nonprofit Highmark Health since 2011. Highmark, the region’s top insurer, bought the West Penn Allegheny Health System, UPMC’s troubled competitor. In response, UPMC announced it would no longer accept Highmark coverage. The conflict escalated to such a degree that the state stepped in and brokered an agreement that let some Highmark customers continue paying in-network rates at UPMC facilities. (The deal was set to expire in 2019, but regulators successfully urged the two sides to partially extend it through 2024.) The saga prompted Allegheny County Controller Chelsa Wagner to accuse UPMC of “placing its own growth over the health of the average citizen” in testimony submitted to the development board.

Wagner’s not alone in this perspective. In fact, even in 2013, in an unusually aggressive move, Pittsburgh sued to strip UPMC of its tax-exempt status under state law, arguing in short that it was operating too much like a commercial business. “They’re not a charity,” Mayor Luke Ravenstahl said at the time. After some legal wrangling, the city’s current mayor, Peduto, dropped the case in 2014, and UPMC ended a countersuit.

A hospital administrator might argue that expanding, restructuring, and keeping labor costs in check are necessary measures that all organizations—for-profit and nonprofit—must take in order to survive. Nonprofit hospitals have seen their finances deteriorate in the face of rising costs and stalling revenue, leading to a wave of credit downgrades. UPMC itself isn’t in any peril; the organization has more than $5 billion of reserves on hand. But while its revenues may be enormous, its margins tend to be “thin,” as the credit raters at S&P put it. Its $15.6 billion in revenue last year yielded just $245 million in operating income—a margin of 1.6 percent. When I asked Johns Hopkins’ Bai to run her data for me, she found that UPMC’s most profitable location, measured by its margins earned on patient care, ranked 695 in 2013 out of the roughly 3,000 U.S. hospitals in their data set. Its flagship, UPMC Presbyterian Shadyside, officially lost money on patient services; it ranked 1,667.

Even if UPMC isn’t earning monster profits for an organization its size, the hospital’s critics still see a wealthy hospital with billions in the bank, giving back less to its city than it could. They note that while the hospital likes to tout the nearly $1 billion it provides in IRS-defined community benefits, barely more than 3 percent of the system’s budget was actually spent on charity care and subsidized health services, according to its last IRS filing.

“When I hear they’re operating on a thin profit margin, I don’t feel bad, and it doesn’t change my analysis of the situation,” Pittsburgh United’s Kennedy told me. “They’re not addressing community health concerns,” she says. “They’re addressing high-dollar, out-of-town patients with an excellence institute that isn’t for Pittsburghers, but will be subsidized by Pittsburghers, in terms of our land and in terms of our resources.”

Read more about the Slate 90’s methodology.