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Posted: Tuesday, Apr. 24, 2012

Hospitals’ clout in capital built with money, contacts

By Joseph Neff, Ames Alexander and David Raynor
Published in: Prognosis: Profits
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    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 some of the state’s largest and most profitable hospitals, a move that would have provided state and local governments millions in additional tax revenue. It was never even discussed in committee.

    “The reason this bill never got a hearing is because big money bottled it up,” said Folwell, a Winston-Salem Republican. The hospitals “came after me with cleats high.”

    N.C. 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. Hospitals are run by boards of directors, invariably the movers and shakers in each community: legislators, developers and business owners.

    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 than Democrats: 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. The association expects and encourages hospital officials to forge relationships with local lawmakers.

    Association spokesman Don Dalton says staffers visit regularly with hospital CEOs, and are expected to ask, “When was the last time you visited with your legislator?”

    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.

    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.”

    Folwell’s bill went further: He proposed limiting sales tax 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.

    According to Folwell, hospitals are among the largest users of tax-funded services such as 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.”

    In Charlotte, Carolinas HealthCare makes local lawmakers aware of its needs and challenges at an annual breakfast meeting, said Sen. Charlie Dannelly, a Mecklenburg Democrat who’s not running for re-election.

    “I personally come away with the feeling that they’re saying they’re struggling. ‘Don’t do anything to hurt us,’ ” Dannelly said. “You’re not struggling when your CEO’s salary goes up every year, in my opinion,” Dannelly said, referring to Michael Tarwater, the system CEO who had total compensation of $4.2 million in 2011.

    Many wins, few losses

    Those local relationships are strong.

    In Charlotte, the Board of Trustees of Presbyterian Healthcare includes Larry Stone, retired president of Lowe’s, 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.

    State Sen. Dan Blue of Raleigh, a former House speaker, sits on the board of Duke University Health System. 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.

    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: doctors, hospital 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 organization itself is well-funded, with $4.6 million in revenue during 2010, the most recent year available. It paid out $3.2 million in salaries and benefits, including $869,169 to its president, Bill Pully.

    The hospital 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 more state money for the mentally ill, including more for 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’d been seeking, though the big push came from doctors and the N.C. Chamber of Commerce. The law limits medical malpractice awards for noneconomic damage – pain and suffering, emotional distress and less tangible injuries – to $500,000.

    Big 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 insurance. That’s a charge absorbed by businesses that pay the workers’ comp premiums.

    It’s not a huge business for hospitals – about 1 percent. 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 for 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.

    The N.C. Industrial Commission set up a committee to find ways to reduce the payments.

    Hank Patterson, a Chapel Hill labor lawyer who chaired 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 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.”

    A governor’s help

    The hospitals’ influence extends beyond the legislature. They also know how to get the ear of the governor.

    As the General Assembly struggled with the state budget in 2010, lawmakers made a tentative cut of $519 million to take effect if 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. Former Secretary Lanier Cansler announced the rate cuts would take place Sept. 1.

    The hospital association geared up. Bill Pully wrote Gov. Bev Perdue, reminding her that hospitals and doctors lose money treating Medicaid patients, and that further cuts would strain an overburdened 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 a gerontologist 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.

    Neff: 919-829-4516

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