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Lehigh Valley Hospital's revenues have soared in the last five years, its top executive salaries have doubled and its massive main campus at Cedar Crest Boulevard and Interstate 78 has been buzzing with construction.

In fact, the Lehigh Valley's largest hospital organization, also the area's biggest employer, is doing so well that in 2005, it posted a record surplus of $76 million.

Such boomtown prosperity at a nonprofit institution is allowed under the tax code as long as the hospital provides a substantial "community benefit" each year in exchange for an exemption from local, state and federal taxes.

In 2005, LVH reported it provided $84 million in community benefit.

But a closer look at what comprises that $84 million benefit reveals that most of it did not represent care for the needy or support for communities that forswore millions in taxes annually from the health care giant. Between 2001-2005, free medical care the hospital provided for the poor barely increased and LVH cut spending on its host communities and school districts.

Instead, much of what the hospital claimed as community benefit was what for-profit businesses would consider routine business costs: unpaid bills, employee orientation costs and some things that aren't expenses at all. And the biggest chunk was the gap between LVH's costs and what it received from Medicare, the omnibus federal health care program covering the elderly, whether they are rich or poor.

Another significant portion of its reported community benefit involved putting a price tag on the hospital's volunteers -- those men and women who donate their time to work in the gift shop, information desk or on the hospital floors serving patients and whose labor costs LVH nothing. The hospital claimed $17.57 per person per hour for their services in 2005.

All of these practices are legal because of the ambiguous tax standards guiding what an institution may claim as community benefit to maintain tax-exempt status.

LVH President and Chief Executive Officer Elliot J. Sussman said the hospital shouldn't be blamed for following a confusing, sometimes contradictory set of rules that it didn't write.

"We will comply with the law," he said.

However, as health care costs soar and more Americans struggle to pay them, hospitals' community benefit claims are coming under fire across the country. State and federal officials, consumer advocates and even segments of the nonprofit hospital industry are advocating reform or at least questioning why standards are so loose.

The issues have vast implications for health care in this country because most of the hospitals in the United States are nonprofit, including three of the four hospitals in the Lehigh Valley. Nationwide, more than 80 percent are nonprofit, and they serve 35 million patients per year compared with 4.6 million served by for-profit hospitals.

Spearheading reform is U.S. Sen. Charles E. Grassley, R-Iowa, the Senate Finance Committee chairman. He is conducting hearings on whether federal laws on charity, community benefit and excessive executive compensation need to be tightened.

The government needs to strengthen "rules of the road for nonprofit hospitals so that taxpayers … get the benefits commensurate with [hospitals'] generous tax breaks," Grassley said in an interview with The Morning Call.

Reform also is occurring in state capitals.

In several states, including Illinois and Ohio, state attorneys general are pushing for tougher definitions of community benefits that would prohibit claims using unpaid patient bills, Medicaid and Medicare shortfalls. Some reformers believe that hospitals should be made for-profit and should pay taxes.

Locally, the administrations of Allentown Mayor Ed Pawlowski and Lehigh County Executive Don Cunningham are negotiating with LVH for new or increased contributions to their budgets.

Another theme that runs through the reform efforts is a call for accountability. Nonprofit hospitals do not have to reveal anything to the public about how they claim they meet their community benefit obligations. In fact, LVH is the only Lehigh Valley nonprofit hospital to do so; St. Luke's and Sacred Heart hospitals do not. LVH provides a report each year to its constituents -- a practice community benefit experts recommend -- and posts it online at www.lvh.org/annualreport/.

Locally, LVH stands out because of its status as the Valley's largest provider of health care, its record surplus and impact on the economy.

If this controversy about hospitals, community benefits and taxes sounds familiar, it should. LVH and Lehigh County's other nonprofit hospitals defended challenges to their tax exemptions in a series of high-profile hearings from 1988 to 1990. The challenges were based on similar criticisms: too little community benefit and executive salaries that were deemed too high. Hospitals settled the cases by making payments or agreeing to provide services to communities in lieu of taxes. In at least one case, the agreement appears to have fallen by the wayside.

Now the issues have become part of a national debate: How can society better balance the costs of top-notch health care at nonprofit hospitals such as LVH and still ensure that consumers don't go broke in the process? Have those hospitals lived up to their mission as charities? Or have they just become huge enterprises that get a free pass on taxes?

Loose IRS standards

When volunteers give their time at LVH, they get the satisfaction that comes from making life a little bit easier for the sick.

And LVH gets to take credit for their hours. Under federal rules, a hospital can count the hours its volunteers worked and claim it as a benefit to the community. For the nearly 150,000 hours logged by its volunteers in 2005, LVH claimed a community benefit -- at the federally approved level of $17.57 per hour -- of about $2.6 million.

LVH also claims orientation for new nurses as a community benefit. In 2005, LVH said that cost was about $4 million in salaries and benefits.

And the health organization in 2005 attributed nearly $29 million to losses on Medicare. Some hospital finance experts say that isn't a community benefit and efficient hospitals should break even or make a small profit on Medicare.

LVH could claim these measures as community benefits because the Internal Revenue Service allows it. Responding to the creation of Medicare and Medicaid, the IRS in 1969 deemed that hospitals would be tax-exempt if they provided benefits to their region -- a deliberately vague standard that gave wide latitude to hospitals. Under the standard, hospitals could keep their tax exemption and not provide a penny of charity care if they met some other beneficial goal, such as providing health education.

LVH also counts "bad debt," the hospital term for unpaid patient bills, toward its community benefit. For 2005, LVH claimed nearly $12 million in bad debt, up from $6.1 million in 2001.

But Reatha Clark, a PricewaterhouseCoopers health care tax expert, said bad debt is not a community benefit because unpaid bills are a fact of business life for both for-profit and nonprofit operations.

She blames the federal government's murky rules.

"The fact is, the IRS has no reporting standard," she said. For each tax-exempt hospital, Clark said, its community benefit is "whatever management says it is."

Even other health care organizations don't agree on what should go into community benefit reports.

The Catholic Health Association, a leading national authority on community benefits, advises against hospitals claiming the cost of nurses' orientation, as LVH does.

It also advises against claiming the money lost on Medicare, because in many cases, Medicare pays more than other insurers, said Julie Trocchio, senior director of the association's Continuing Care Ministries. Claiming Medicare losses could send a signal that the institution is exaggerating how much it helps the region, she said.

"Many of our challengers say including it compromises the credibility of our reports," Trocchio said.

The Medicare Payment Advisory Commission, a quasi-governmental body, said in a report this year that about a third of all hospitals said they lost money every year between 2001-2004 on Medicare. "Hospitals with consistently negative Medicare margins have high costs," it said.

Gerard Anderson, a national expert on hospital finance at Johns Hopkins University in Baltimore, agrees. He said Pennsylvania hospitals aren't making ends meet on Medicare only because their charges are "whoppingly high."

"I think they are gaming the system," he said.

Then there is the issue of public disclosure. The IRS also doesn't require hospitals to report their community benefit, so many hospitals don't. LVH discloses its reported community benefit in its annual IRS filing and its annual report.

It is the only local tax-exempt hospital to do so even though community benefit experts universally recommend public and complete disclosure to promote accountability, even at the price of public criticism. LVH incurs that risk each year.

"There's good news and bad news about being transparent," said LVH Chief Operating Officer Louis L. Liebhaber.

Not only does LVH provide an annual community benefit report, but it also provides links to its hospitals' tax returns on its Web site.

Sussman said that's what an accountable hospital should do.

"This organization," he said, "is owned by the community."

Trent Stamp, president of Charity Navigator, a national independent charity watchdog organization in Mahwah, N.J., said nonprofits owe accountability to the tax-paying public.

"If you want to be a nonprofit, you should be beholden to everyone in your community," he said. "If you don't want to be transparent and accountable, you should be a for-profit. Then you only have to be accountable to your stakeholders."

For-profit hospitals pay taxes. The Valley's only for-profit hospital, Easton Hospital in Wilson, paid $2.3 million in property and sales taxes in 2005.

Competitors criticize LVH, even though they themselves do not report their community benefit.

LVH's claims of $84 million in community benefits amount to "image enhancement" and "organizational spin," said Susan Schantz, spokeswoman for St. Luke's, the Lehigh Valley's second-largest hospital company. "We would rather use our limited resources to provide health care to those in need than create reports … that generally are more 'spin' than substance."

St. Luke's, Schantz said, has no plans to create its own community benefit report.

Similarly, Sacred Heart for at least five years hasn't put any of its money into producing glossy reports such as LVH's, said Laurie Gombert, vice president of finance.

LVH is doing its best to be accountable, and LVH would like all hospitals to be held to one set of unambiguous rules with strict definitions, Liebhaber said.

"Uniformity would be helpful and we support it," he said.

In an interview, Sussman dismissed the criticism and said people deserve to know about the hospital's wide reach over the region's health. "It gets very frustrating when people say, 'Well, they don't do anything,' " he said.

While proud of the care that LVH provides, Sussman also said no one can meet all the needs of a region such as the Lehigh Valley -- and LVH isn't saying it can.

"No one here," he said, "thinks that we're perfect."

Little review of charity

It's difficult to tell how well hospitals are meeting the public's needs because of the lack of government oversight.

In testimony last year before the House Ways and Means Committee, IRS Commissioner Mark Everson said the agency audited only 375 nonprofit hospitals and health systems of about 7,000 in the past 10 years.

There's also little action on the state level. Pennsylvania hospitals are presumed exempt from the state corporate net income tax and capital stock tax if the IRS recognizes them as nonprofits. To be exempt from the state sales tax, hospitals must meet one of several financial tests.

But the state Revenue Department doesn't review the applications closely to see if the institutions meet the test. St. Luke's, for instance, uses its parent company to apply for its sales tax exemption. But the parent's functions are vastly different from its hospitals' activities, and the application reveals little about how St. Luke's hospitals meet the sales tax exemption tests. Nevertheless, a Revenue spokesman said the parent's application is sufficient.

Before the IRS's 1969 community benefit ruling, hospitals had to show they acted charitably to be tax-exempt. That meant providing charity care -- free care to low-income or uninsured patients -- with no expectation of payment.

The IRS no longer requires hospitals to give charity care in return for their tax exemption, but many hospitals, including LVH, do.

By LVH's own accounting, charity care in 2001 totaled $4.6 million. Four years later, it inched up to $4.8 million.

Even considering LVH's charity care and that a portion of its bad debt covered truly needy people, some were unimpressed.

Laurie Sobel, senior staff attorney for Consumers Union, which publishes Consumer Reports magazine, said the public should count on its hospitals to do more. Two percent or 3 percent in uncompensated care is not enough, she said. LVH's totaled 2.3 percent of expenses in 2005, slightly lower than the 2.4 percent in 2004.

Sobel declined to say what level of charity would be acceptable, saying each hospital community has its own needs. Unmet health issues, significant numbers of under- and uninsured people and the hospital's mission should drive charitable efforts, she said.

"We would really suggest having an open, public process," Sobel said. "Invite all the stakeholders and determine what the need is."

Hospitals also can serve the poor by caring for people covered by taxpayer-sponsored programs such as Medicaid, which pay only a part of hospitals' costs; issuing cash grants to organizations and municipalities; and providing free or subsidized health services in clinics, schools and other public places.

For LVH, those services in 2005 amounted to about $20 million.

High salaries, flat giving

While the hospital's free care remained relatively flat over five years, executive salaries did not. And hospitals' executive compensation is one reason Congress is now scrutinizing nonprofit hospitals.

LVH CEO Sussman's pay has more than doubled since 2001. According to LVH tax documents, Sussman in 2001 received a salary of $520,385 and another $188,559 for his retirement benefits. By 2005, his salary was $936,538 and benefits were $541,865 for a total income of $1.47 million, an increase of 108 percent.

Chief Operating Officer Liebhaber's salary increased by $200,000 in that time to $524,985, as his total financial package grew by 100 percent to $813,506.

Those packages are well above the median for hospital system executives, according to a survey at 855 institutions nationwide by Modern Healthcare magazine. The survey found the median 2005 salary for CEOs and COOs at similar-size hospitals were $471,000 and $322,000, respectively.

A doubling of executive compensation in five years is "significantly much higher than the norm," said Johns Hopkins' Anderson. He said it is "generally true" that where high CEO salaries exist, the salary structure will be higher across the board.

At LVH, Chief Medical Officer Ronald W. Swinfard's overall compensation shot up 83 percent from 2004 to 2005 to $478,020. For Chief Financial Officer Vaughn C. Gower, compensation rose 10.4 percent to $411,982.

LVH's compensation committee, in a statement in response to reporters' inquiries, said it sets executive salaries with assistance from an independent consultant. Committee members, led by outgoing PPL Corp. CEO William Hecht, are volunteers and have no financial interest in determining salaries, it said.

Executive pay is performance-based and in line with pay at similar institutions, said the statement. The committee also said Sussman's pay level was set high enough to scare off potential suitors.

"We must also consider the practices of even larger and more prestigious organizations who may entice him to leave [LVH]," the statement said.

Sussman earned such support, it said, because of the hospital's growth and outstanding financial performance during his tenure. Sussman, an Ivy League-trained internist, took the reins of LVH in 1993 and has led the organization through a merger and millions in construction at its three hospitals in Allentown, Bethlehem and at Cedar Crest and I-78 in Salisbury Township.

From 2001 to 2005, LVH's revenue grew 59 percent to nearly $900 million a year for its three hospitals and related tax-exempt enterprises, according to IRS reports.

While the public face of LVH is the three hospitals, underneath is a larger network of physicians' practices, insurance companies, real estate holding companies and other entities. LVH comprises 10 tax-exempt and 13 for-profit entities in all, according to its tax records.

In 2005, LVH had a record surplus of $76 million, built largely on a 9 percent jump in admissions. LVH says it put that money back into the network's capital and operating costs, as required of nonprofits.

Sussman and Liebhaber said in interviews that they are pleased that revenues for its nonprofit and for-profit entities exceeded spending by 8.4 percent in 2005, saying it represents wise management. "It is irresponsible to run an organization like this without a surplus," Liebhaber said.

Sussman said it is critical to look at the institution's performance over time. As recently as 2000, LVH ended the fiscal year in the red.

About a 5 percent surplus is the minimum needed by hospitals to afford price increases and stay modern, Sussman, Liebhaber and industry leaders agree. LVH failed to reach that goal between 2002 and 2004.

The extra money in the bank last year allowed LVH to qualify for attractive bond financing for its expansion.

LVH attorney Oldrich Foucek said that is one reason LVH built up a record surplus last year. With the extra cash, LVH went to the bond market in September to finance part of the $181 million expansion of its Cedar Crest campus. The heftier bank account helped reassure investors that the bonds were a safe venture.

"If you're going to have a big surplus, it should be the year you go to market," Foucek said.

As a nonprofit, LVH also can build its bottom line by soliciting donations. And even with its record surplus, it asked employees to contribute back to their own employer in an annual campaign.

A financially sound hospital brings jobs, benefits and top talent to the community, the LVH officials said, and money spent on education, research and advanced treatment can improve care. LVH made U.S. News & World Report's "America's Best Hospitals" list this year in eight specialties.

"We're exceedingly proud of what we've brought to this community," Liebhaber said. "We have every reason to want this community to feel good about what we are doing here, as we are."

Like LVH, the area's other nonprofit hospitals also reported flat or declining charity care accompanying overall financial growth.

Revenues from St. Luke's Hospital in Fountain Hill and its affiliated nonprofits rose 66 percent in five years to $608 million, according to its public tax records. The hospital finished 2005 with a $25 million surplus, a 4.1 percent margin over revenues.

St. Luke's President and CEO Richard Anderson's total compensation rose by about 50 percent since 2001 to $841,036. Charity care at St. Luke's in those five years rose slightly, from $3.4 million in 2001 to $3.5 million last year.

Sacred Heart Hospital in Allentown and its related tax-exempt operations reported a dramatic turnaround, from an $8 million deficit in 2001 to a $2.5 million surplus in 2004-05. But the surplus represented a margin of only 1.9 percent over revenues.

Charity care at Sacred Heart declined 30 percent to $976,493 between 2001 and 2005. Executive compensation remained relatively low and steady with former President and CEO James Seitzinger making about $212,000 in 2005 -- more than $85,000 less than his predecessor, Joseph Cimerola.

Care for Medicaid patients

One explanation the hospitals give for the flat or declining charity care is the burden they bear in serving more poor patients covered by Medicaid, which doesn't cover hospitals' costs.

LVH enrolled 55 percent more outpatients into Medicaid from 2002 to 2005. That contributed to Medicaid losses that nearly doubled to $9.2 million.

But inpatient Medicaid admissions declined 10 percent over the same time, and in total, Medicaid became a smaller part of LVH's revenues.

According to LVH's bond filings, Medicaid revenues at its Cedar Crest and Allentown hospitals dropped from 5.8 percent of total net revenues in 2000 to 3.9 percent in 2004. At its Muhlenberg campus in Bethlehem, Medicaid shrank from 2.8 percent to 1.3 percent of net revenues, the bond report said.

Sacred Heart's Gombert said the hospital more than covered its charity care declines with increases in Medicaid services. Since 2001, Sacred Heart's annual Medicaid losses grew 250 percent to $3.6 million.

Gombert said Sacred Heart, which has maintained thin surpluses on an average of 6 percent revenue growth in recent years, now has more than a third of its outpatients, and about 20 percent of its total caseload, covered by Medicaid.

St. Luke's declined to release its figures, saying losses on Medicare and Medicaid are not objective measures.

Contributions dropping

Twenty years ago, municipal budgets were under strain, and officials looked to tax-exempt hospitals for help.

Hospitals agreed to provide cash or free services if municipalities called off their tax challenges. Some agreements were informal; others were spelled out in legal documents.

Today, Lehigh County's three hospital organizations say their arrangements are a sign of their good faith to their host communities. However, LVH services or cash grants to host communities, including taxing authorities in each county, municipality and school district where its hospitals are located, have declined 49 percent since 2001.

That has to change, says Allentown Mayor Ed Pawlowski, who leads a city with a poverty rate of 18.5 percent and three consecutive years of multimillion-dollar deficits.

LVH, like other major nonprofits in the city -- including hospitals and colleges -- must step up its contributions to Allentown, he said. Last year, the city received from LVH a $35,000 grant and $34,474 in health services at clinics.

Pawlowski said he expects LVH and other major nonprofits to kick in at least $200,000 each per year, noting the hospital's 2005 surplus is 10 percent larger than the city budget. The administration and LVH officials are in discussions.

"A sick Allentown will negatively affect all these institutions, so it is in their best interest to work with the city," he said.

The city of Bethlehem received $6,235 in health services in 2005, LVH's tax return showed. Mayor John Callahan declined to comment.

Lehigh County hasn't gotten anything from LVH since 2002. It had gotten more than $44,000 in health services at the prison from LVH in 2001, but that agreement expired when the county privatized services at the prison.

Former County Executive Jane Ervin saw hospitals as relieving a burden otherwise borne by taxpayers, but said the county saved even more by privatizing the prison than the $44,000 in services LVH had provided.

She could not recall asking LVH to continue serving the county in another way. Ervin added, "You're grateful for [what you get] and thank them."

The county also no longer gets aid from St. Luke's, which in 2001 negotiated an agreement to provide at least $120,000 a year in services. Ervin said she did not recall the agreement or that St. Luke's contributions had stopped, even though her administration negotiated the deal. The county's multimillion-dollar deficit at the time was so much greater, she said, that losing the hospital's services "didn't rise to the top of our radar screen."

Thomas Muller, director of administration for the current administration, said LVH provides impressive services to Lehigh County residents, such as health care at its clinics, but none of that reduces county costs.

"I had to say to [LVH officials] candidly … it isn't there," said Muller, who leads the board of the for-profit Easton Hospital. "We ought to talk about other things to do."

County Executive Don Cunningham said he hoped LVH would be able to help provide space and support for coroner operations at the Cedar Crest campus. Cunningham, whose administration is in talks with all three tax-exempt hospitals about providing free health services, said he hopes agreements are in place by the end of the year. Those agreements, he said, could total about $250,000 a year in services.

LVH payments to the Salisbury Township School District dropped to $144,255 last year from $383,813 in 2001, when an agreement expired. District Business Administrator Susan H. Famularo declined to comment.

For Salisbury Township, the hospital pegged its payment to the township's real estate tax rate. As tax rates dropped in recent years, so did LVH's grant.

Township Manager Gabriel Khalife said Salisbury is satisfied with its arrangement, which in 2005 provided $38,307 and free meeting space. Five years ago, it got more than $40,000.

Liebhaber said LVH is open to requests from local governments and pointed to other plans being developed to benefit communities, such as a program giving employees incentives to buy homes in Allentown.

"I think it's fair to say that when called upon, by the city in particular, we've always been responsive," he said.

Liebhaber also said LVH's community benefit report does not capture all the free services the hospital provides to the community.

For example, LVH did not count the free primary care its employees provide at the Sixth Street Shelter and The Caring Place, an after-school program. LVH, which employs more than 6,300 people, promotes a culture of volunteerism that staff and management take seriously, he said.

"We are not beating our chests about those things," Liebhaber said, "but they are part of our engagement in the community."

LVH also doesn't account for services to Bethlehem Area School District employees, who are allowed three free visits for its employee assistance program. LVH was able to recover the cost of the service, so it didn't report it as a community benefit, spokesman Brian Downs said.

The health organization does count as community benefit two programs it funds primarily for the Allentown School District that are separate from its direct support to other local governments. In 2005, those programs, which include extensive health services at Central Elementary School, amounted to $262,102.

Aside from that, LVH last year spent about $337,000 in grants or services to local governments.

Not having to pay property taxes to local municipalities and schools saves LVH more than $5.6 million a year.

History repeating?

Executive salaries, surpluses and charity care came under fire in the 1980s during a showdown between the hospitals and the communities challenging their tax status.

In an extraordinary series of court hearings that took years to complete and led some hospitals to lose their tax exemptions temporarily, then-Lehigh County Judge Robert K. Young reviewed the activities of each of the county's hospitals.

As a result, Young devised a revenue-based formula for the hospitals' charity care, a method that LVH says it followed until a 1997 state law pre-empted it.

During his review of LVH, Young in 1990 came down hard on hospital management and trustees. The hospital, he said, was "too powerful and controlling." Run at the time by a holding company called HealthEast, LVH was distracted from its charitable mission by its pursuit of new business and its desire to expand, Young said then.

In his reviews, Young criticized hospitals' practice of claiming a benefit from their volunteers.

"The volunteers, bless them, should properly get the credit for their effort, not the hospital," he wrote in the case involving a challenge to the tax-exempt status of St. Luke's. "St. Luke's didn't do anything; it was the means by which generous people could work for others in need."

Similarly, a hospital should not take credit for training medical personnel, Young wrote. The "real beneficiaries," he said, "are the men and women who are receiving the training."

Fueling Young's review were The Morning Call's reports of LVH's $17 million surplus and the $175,000 salary of then-President David Buchmueller in 1986.

Today, Young is retired and Buchmueller left long ago. But the issues remain.

The retired judge in March issued an "Unsolicited Opinion" criticizing LVH trustees and management who "crossed the line," turning a charity into something that looks and operates like a for-profit business.

Young distributed hundreds of copies of his 11-page unsolicited opinion to Lehigh Valley business and political leaders. He also took out a half-page advertisement in The Morning Call on Aug. 1, criticizing the hospital's costly expansion projects and calling for its board meetings to be open to the public.

Young's earlier review was a major factor in the enactment of Act 55, the state law meant to ensure that nonprofit institutions did something tangible to earn their tax exemption.

A crystal paperweight sits on the desk of state Sen. Pat Browne, R-Lehigh, as a reminder of the 10 years it took the House Finance Committee to craft that state law. The paperweight was a gift from the committee chairman.

Then a state representative, Browne and other committee members wrote a bill that created a multipoint test for hospitals seeking tax exemption. Among them is a mandate to provide uncompensated care of at least 3 percent of operating expenses.

But critics say the law is weak and insulates hospitals from the kinds of challenges that Lehigh County witnessed 18 years ago.

For example, hospitals can apply bad debt toward their uncompensated care. They then can value it at the hospital's highest charge rate, which almost no one pays.

Former Allegheny County solicitor Ira Weiss, an attorney who has represented school districts in tax cases with nonprofits, said Act 55 is a gift to hospitals.

"It was written to fit large nonprofits," he said. "They wrote it so they would qualify [for tax exemptions]."

According to Weiss, the law all but eliminates taxing authorities' ability to challenge hospitals' tax-exempt status. "Act 55 put a bulletproof vest around them," Weiss said.

Allentown is a case in point. Since Act 55 became law, city officials have not asked LVH or other hospitals for much more, fearing the contributions might get cut completely.

"I don't want to piss them off," Allentown Health Director Barbara Stader said.

High cost of healing

That health care is expensive and getting more expensive every year is well-known to anyone who has paid a hospital bill or health insurance premium.

What role did LVH play in driving those ever-rising local costs? Liebhaber said the answer is beyond the hospital's control.

"That's an issue, a question of getting providers, businesses, government, insurers to find a way to completely revamp the health care system in this country," he said.

Health care costs locally spiraled up 11.2 percent last year -- close to three times faster than the national rate -- and were driven in part by a 27 percent increase in the cost of hospital goods and services.

For years, LVH's charges have been the highest in the Valley for a majority of the most commonly performed and expensive procedures and conditions released by the Pennsylvania Health Care Cost Containment Council, an independent data collection agency in Harrisburg. In the case of a diabetic amputation, for example, LVH-Muhlenberg charged $65,936, or more than 31/2 times the lowest charge in the region of $17,865 at Sacred Heart.

The only Valley hospital in recent years that charged more for some procedures was Easton Hospital, a for-profit business operated by Community Health Systems of Brentwood, Tenn.

LVH executives say their costs and charges compare favorably with 75 percent of hospitals of similar size and service across the country. Also, records show, their rates run below state averages in many categories.

LVH's average cost of treating a patient in fiscal 2004 was $6,177. That's nearly 40 percent more than the $4,438 spent at St. Luke's and 23 percent greater than the $5,021 median benchmark for hospitals of similar size and scope to LVH the same year.

LVH's costs played a role five years ago when it decided to stop accepting patients covered by Aetna health insurance. Aetna's low reimbursements, LVH officials said at the time, resulted in the loss of $30 million over four years.

About 100,000 patients across the region had to choose among switching insurers, going elsewhere for care or paying the full fare out of pocket for anything but life-threatening emergencies.

Aetna customer Catherine Schlener lives close to LVH-Muhlenberg, but she and her late husband had to drive to a hospital farther away 11 times in the past year because LVH would not accept their Aetna coverage. The couple could not afford to pay LVH's full charges out of pocket.

LVH "claimed they were losing money on Aetna," Schlener said. "But they're not losing money now. And yet all the other hospitals can live with" Aetna's payments.

When LVH dropped the insurer, Sussman said Aetna's payments would have to increase 45 percent to cover costs. Aetna called the request unreasonable, saying that would have made LVH the highest-paid hospital in southeast and central Pennsylvania.

Even though LVH's financial picture has brightened in recent years, Sussman maintains that it's unreasonable to ask LVH employees to "subsidize" Aetna.

"We are not negotiating at this time," he said.

Community needs

Since the court settlements of the 1990s, the Valley's needs for health and social services have grown with the population. Drug abuse, especially heroin addiction, has escalated; young, unwed mothers continue to deliver sick and premature babies at alarming rates; and homes and caretakers increasingly are needed for the mentally ill deemed capable of living in the community instead of institutions.

The burden of these unmet needs, local health care experts say, could be lightened by hospital systems flush with cash.

Nearly every day, local drug and alcohol program employees tell an addict he must wait days to get in a detoxification program 50 or more miles away. Lehigh and Northampton counties have been without a detox center since 1996, when St. Luke's closed the area's only hospital inpatient unit, at its Allentown campus. Last year, the two counties placed 425 adults in detox programs in places such as Altoona, Valley Forge and Philadelphia. The closest was in Sellersville.

LVH officials don't see the need to open a center, saying the standard of care for detoxification has changed from 10 or 20 years ago, when most addicts were admitted to hospitals for withdrawal. Now, only about 10 percent require admission, they said, because of other medical conditions, such as traumatic injuries or bipolar illness. The remaining 90 percent are better served in community centers that also provide rehabilitation services, said Michael W. Kaufmann, LVH's chief of psychiatry.

But some physicians still believe a hospital detox unit is preferable. "There has been a resurgence in some of the old models," said Frank Sparandero, an internist and Sacred Heart Hospital's new chief executive officer.

Another long-standing need is for programs to help stem the high rates of Allentown babies born sick or premature or who die before their first birthdays, city Health Director Stader said.

Since 1997, the average death rate for infants in Allentown was 11.1 per 1,000 live births compared with the state average of 7.3. Between 1999 and 2003, the most recent five-year period on record, 91 city babies died. That's about 18 a year, or 10.7 per 1,000 live births.

In Bethlehem, state statistics show that 28 babies died before their first birthdays over the same five years, for a death rate of 6.9 per 1,000 live births. In Easton, the 13 deaths represent an infant mortality of 6.7 per 1,000 live births.

Various factors contribute to the deaths, Stader said, including high rates of infants born to unwed teens who smoke, don't eat right and fail to see a doctor much before their babies are born.

Health bureaus, schools and community organizations are trying to help but are strapped for money and staff.

Stader said she had to "piece together" state and county funding to keep a third nurse for the city's Nurse Family Partnership, a national program started in Allentown in 2001 with four nurses visiting at-risk mothers at home.

At a June board of health meeting, Stader asked LVH and other hospital representatives to support the partnership and other preventive health programs.

LVH helps through its own program for at-risk mothers, Liebhaber said. LVH has two staffers who go into the community to find pregnant women in need of prenatal services, he said, and offer them incentives, such as transportation or vouchers for items such as car seats and strollers.

Another major unmet need is for community homes and counselors for the mentally ill. State mental hospitals and private psychiatric units continue to close or downsize under the theory that living in a hospital is too expensive and restrictive for most.

That's why LVH opened a 10-bed Transitional Care Unit on South Mountain for people who need medical supervision around the clock, as well as 38 apartments at Riverbend Apartments in Allentown for those who need less help, Kaufmann said. LVH is the Valley's only nonprofit hospital to provide these services.

County and private mental health advocates appreciate the help they get but fear the need is outpacing resources.

Bob Hintze, whose Step by Step program serves more than 1,100 mentally ill and retarded clients in a dozen counties, including Lehigh and Northampton, said a big part of the problem is the disparity in the money allotted to community programs versus hospitals.

Since 1994, hospitals received a 32 percent budget increase and community mental health programs, 19 percent. On average, community counselors with the same education and training make $16,824 a year compared with the $38,000 state employees are paid, he said.

Kaufmann said there's always a waiting list for housing for the mentally ill and a staff shortage, but LVH is doing more than most general hospitals.

"Look around Pennsylvania," he said. "How many hospitals support such a program? If a little over 1 percent, that's a lot."

Liebhaber said LVH is only one player in the community's health services.

"We are doing everything we know how to do to reach out to those who need care … economics is not a barrier," he said. "Are we doing everything that needs to be done? Nobody is."

Before the hospital moved and consolidated its inpatient psychiatric beds to the LVH-Muhlenberg campus in 2000, it had 91 adult and adolescent beds. Today, it has 65.

Increasing scrutiny

Tougher regulations for nonprofit hospitals may be on the way.

Ongoing hearings led by Sen. Grassley are focused on whether to tighten federal laws on charity, community benefits, joint ventures with for-profit entities and excessive executive compensation.

In the interview, Grassley said the hospital examination arose after his committee learned of abuses in other parts of the tax-exempt sector. He said the committee found that hospitals' efforts were not meeting the traditional understanding of charity.

"When we did get into hospitals' saying they were devoting these millions of dollars to people who couldn't afford care, you find out a lot was just written off as bad debt," he said. "It was not necessarily for those down and out."

He stopped short of advocating a mandatory level of spending on charity care, but said he has no doubt that the IRS needs "better definitions of charity [and] uncompensated care."

Hospital associations across the country have opposed mandated charity, arguing that it would put some hospitals out of business. Sussman and Liebhaber said they want consistent rules for all players and that LVH would abide by the law, whatever it is.

Recognizing it had fallen behind in its oversight of the exploding nonprofit sector, the IRS in the past two years ramped up spending on its exempt organizations departments and added 139 people to its compliance and examinations functions, said Everson, the IRS commissioner.

The IRS and the U.S. Government Accountability Office also are conducting inquiries into hospitals' executive compensation and community benefits. LVH is one of 600 hospitals nationwide to receive a detailed questionnaire from the IRS, which is still collecting the surveys.

The accounting industry also is working to standardize rules for the hospital industry. Mike Glynn of the American Institute of Certified Public Accountants' health care standards committee said the organization is hoping to have a set of rules that would apply to all hospitals next year.

Hospitals have "a lot of leeway" in accounting for charity care and community benefits, which makes comparisons virtually impossible, he said.

"It's comparing apples and oranges in many cases," he said.

Officials in several states also are taking notice.

Two bills circulating in the Pennsylvania House would mandate more charity care. One would require hospitals to cut charges for residents forced to pay in full out of pocket. The other would require hospitals with an "excess surplus" to put the money in the state's Adult Basic health insurance program, which has a waiting list of about 100,000 low-income people.

If the bills become law, most beneficiaries would be people who work but don't get health coverage, said Rep. Robert Freeman, D-Northampton, a co-sponsor of both bills.

"As the health care industry has become big business, people of lesser means are finding it more difficult to get access," he said. "Health care has become more profit-oriented instead of community-based."

Browne also thinks it's time to wrestle again with Act 55, even though he's not eager to do it and no one has stepped forward to start the process.

"It's prudent to look at it on a continuous basis, and the act is 10 years old. … Given the fact there are concerns about costs, and operating margins are going up, it would be prudent for us to look at it," said Browne, whose 16th Senate District covers Lehigh, Monroe and Northampton counties.

At the time Act 55 was drafted, Browne said, 3 percent of expenses seemed appropriate, given hospitals' small surpluses. The surpluses now are running at 4 percent to 5 percent, he said, and health care costs are a much bigger part of the economy.

In Minnesota, Attorney General Mike Hatch last year negotiated a plan that would keep hospitals from excess billing of families making up to $125,000 a year.

Illinois Attorney General Lisa Madigan's plan to mandate hospitals to spend at least 8 percent of expenses on charity care failed earlier this year, but she intends to revive it.

In Ohio, Attorney General Jim Petro's office in July proposed a Charity Advisory Council for advice on creating new rules to make charities more financially accountable. Authorities there hope public exposure and scrutiny will increase confidence in the best-run institutions.

"We think transparency is really the best way to get results," said Deputy Attorney General Brian Cook.

Attorneys general in Wisconsin, Kansas and New York also are investigating or recently settled cases involving hospital billing and collection practices.

Reports of heavy-handed legal maneuvers by hospitals also have attracted national attention. When reports became more common a few years ago, hospitals' biggest legal challenger stepped in.

Mississippi attorney Richard Scruggs, famed for successful class actions against the asbestos and tobacco industries, led law firms in suing hospitals for overbilling uninsured patients. Federal courts rejected the suits, but they are moving forward in state courts.

"These guys have gone virtually unregulated," said Archie Lamb, whose Birmingham, Ala., law firm joined the Scruggs firm in some complaints. "Getting them used to the idea that they are going to be accountable is really difficult.''

Providence Health System in Oregon last November was the first to settle cases brought by Scruggs and others. The settlements included refunds to uninsured patients and an expansion of discounts on charges for patients based on their income.

Lamb said hospitals in Pennsylvania and New Jersey are "on the radar screen" because of their generally high charges. However, he said the law firms are concentrating on states with strong consumer protection laws, unlike Pennsylvania.

Hospitals have taken notice and have begun to shape up to avoid landing in court, Lamb said.

"I think that the mere exposure of this conduct has changed practices in many ways," Lamb said. "The most egregious practices have changed already."

T.J. Sullivan, a Washington, D.C., attorney who advises nonprofit hospitals on community benefits, said hospitals have responded by updating their charity care policies. According to Sullivan, 70 percent of nonprofit hospitals have done so in the past year.

LVH, not known to use hardball tactics to collect unpaid bills, was one of them. Not only can the poor receive free care, but individuals and families with incomes up to four times the federal poverty level can qualify for discounts up to 99 percent of the total cost -- an increase from two times the poverty level -- a generous standard compared to many hospitals.

While some reformers are focusing on IRS rules and tactics used to collect bills, others support more sweeping changes.

University of Illinois law professor John Colombo, a national expert on nonprofit hospitals and their finances, thinks the federal government ought to scrap the community benefit standard and force hospitals to go for-profit.

The standard is "an unmitigated disaster," he testified last year to the House Ways and Means Committee in a hearing about tax-exempt hospitals.

It's "patently ridiculous" that hospitals can claim benefits based on their charges, and not costs, Colombo said in an interview. Why, he continued, should hospitals claim tax-exempt status when no other part of the health care system can?

"I think a lot of what hospitals report as community benefits," Colombo said, "are nothing more than what for-profit businesses do every day."

LVH, meanwhile, wrapped up its latest fiscal year earlier this summer.

Sussman anticipates that when they finish crunching the numbers, LVH will end up with a $74 million surplus.

tim.darragh@mcall.com

610-778-2259

ann.wlazelek@mcall.com

610-820-6745

Copyright © 2014, Los Angeles Times
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