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Sutter's Giant Sucking Sound 

Sutter Health, which owns one of California's largest hospital empires, is a nonprofit, tax-exempt charity. Critics wonder why Sutter dispenses so little charity, and vacuums so much profit, from the hospitals it acquires.

Wednesday, Jan 21 1998
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On a chilly December morning in the bowels of the California State Capitol in Sacramento, an unusually large crowd files into a hearing that promises to be about as entertaining as reading the federal tax code.

The stated purpose of the gathering -- a meeting of the Assembly Committee on Revenue and Tax -- is to explore the tax status of health care systems, using Sutter Health as a case study. This apparently boring premise, however, masks the hearing's real intent.

Sutter, a tax-exempt nonprofit business that owns several for-profit health care firms, has capitalized on its tax status to grow like wildfire through California. Along the way, Sutter has made quite a few enemies, chiefly in labor, and the Service Employees International Union Local 250, the area's largest representative of health care workers, has made fighting Sutter -- an organization with a strong anti-union reputation -- a top priority.

On this day, the union has persuaded the revenue and tax committee to put Sutter under a microscope, at least for a few hours.

Officials from the Attorney General's Office, the Franchise Tax Board, and the Department of Corporations brief the committee on their rules on nonprofit health organizations. SEIU leaders argue that Sutter's nonprofit status should really be changed into a hybrid, mixed-tax status.

Sutter executives tell the committee how happy they are to comply with the law, and to be a part of this very important hearing. They answer questions about their health maintenance organization, which is organized as a for-profit venture. ("We would just as soon run it as a nonprofit, but it has to do with certain agreements be-tween us and [Sutter's minority partner in the deal]," insists Sutter Vice President Gary Loveridge.)

The executives explain how changes in the insurance industry have made it necessary for organizations like Sutter to become financial monoliths, just to survive. As usual, the Sutter representatives also castigate the federal government for not paying enough for the treatment of Medicare patients.

In the end, nothing is decided, an outcome that virtually everyone in the room suspected would result. But this event represented more than a few Democratic politicians courting favor with labor. It was part, albeit a small part, of a new movement to place more scrutiny on the hyperacquisitive financial dealings of nonprofit health care giants.

There are plenty of reasons to examine and question the activities of Sutter Health. Like its competitors in the nonprofit health arena, Sutter is merging, leasing, and acquiring hospitals, clinics, doctor groups, and health insurance companies at an astounding rate. The organization virtually owns health care in several communities in Northern California and the Central Valley.

Because Sutter Health has applied for and been granted nonprofit, tax-exempt status, Sutter and the majority of its subsidiaries don't pay income or property taxes, and may borrow money through tax-free revenue bonds. In exchange for these tax breaks, an exempt organization is expected to provide some public good -- that is, to have a public service mission. In the eyes of the IRS, however, the simple act of owning and operating a hospital is enough to qualify for nonprofit, tax-exempt status.

Sutter is a prime example of a new kind of nonprofit health care provider. Over the years, it has grown to become a multibillion-dollar corporation, with layers upon layers of subsidiaries, partnerships, and joint ventures -- many of them organized as for-profit businesses.

Clearly, Sutter is not alone in its method of operation. Its competitors, which include Catholic Healthcare West and Kaiser Permanente, have grown through and benefited from nonprofit, tax-exempt status. Sutter Health, however, is nothing if not aggressive.

The hospital's umbrella includes offshore investments, real estate, insurance companies (including one located in the Cayman Islands, home of bank and corporate secrecy), and an array of stand-alone clinics and nursing homes. Its executives make hundreds of thousands of dollars per year at Sutter, the nonprofit, even as they have business ties to for-profit subsidiaries that contract with Sutter hospitals -- a situation that virtually defines the terms "self-dealing" and "conflict of interest." Sutter is a "nonprofit" corporation that pumps as much as $500,000 a year into political campaigns.

In short, Sutter Health is beginning to act a lot like its for-profit health care competitors -- with an advantage. Sutter and other "nonprofit" health care giants could not grow and operate in the ways they have without the benefit of the public assets and trust.

And Sutter has abused those assets and that trust to the point that the public is beginning to get angry about it.

Two Bay Area health care districts have filed lawsuits, seeking to remove their hospitals from Sutter's control. Doctors have staged a very public fight with the nonprofit health giant over emergency room staffing and compensation. Labor unions are waging an equally intense war against Sutter and other charity hospitals. And government regulators are starting to examine the value of charity, and to question when tax exemptions improve health care -- and when they give nonprofit health care providers the means to engage in lavish excess.

Sutter's roots date to the 1920s, when it was merely Sutter Hospital in downtown Sacramento. It was joined by a maternity hospital (now Sutter Memorial Hospital) about 15 years later. The organization owning these facilities became known as Sutter Community Hospitals, and for several decades remained, for the most part, a local hospital operator.

Then, between 1984 and 1990, Sutter purchased or leased 11 hospitals, clinics, and nursing homes. The pace of acquisition grew to a crescendo in 1996, when the Sacramento nonprofit merged with San Francisco-based California Health System, the parent firm for the California Pacific Medical Center and Alta Bates, Marin General Health Systems, and Mills-Peninsula Health Services. The deal nearly doubled Sutter's size and made it a serious player in the health care battleground that is Northern California.

As Sutter was buying up and merging with other health care entities, managed care was reshaping the medical industry, especially in HMO-heavy California. For-profit giants like Columbia/HCA and Tenet California Health System were becoming big players in an industry that had traditionally been a nonprofit game. In short, Wall Street discovered health care, and charity hospitals, fearing they would go bankrupt if they stayed small in scale, began to behave like their merger-happy, for-profit competitors.

About The Author

Lisa Davis

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