So I’ve been hearing a lot lately about our porous tax codes and how they permit all manner of corporate skullduggery by way of which the wealthiest concerns slip and writhe around the letter of the law and end up paying a fraction of what we impecunious peons believe they should pay. Boy howdy, spend a little time researching what the biggest corporations in this country actually pay the IRS and it’ll piss you plenty off! Don’t say I didn’t warn you, but here’s a look-see if you’re up for it. Those greedy, manipulative sos-and-sos. How can we let them get out of paying their fair share while the plutocrats running the show pocket such obscene profits?
That, I reckon, is a question for the ages, but here’s a question I haven’t heard asked yet: Forget the for-profits who pay a fraction of what they should, how about the nonprofits who pay nothing at all while looking and acting in every way just like a for-profit?
I’m not talking about the downtown rescue mission or the corner church or Brownie Troop 11 or the local P.T.A. I’m talking about the great big nonprofit monsters that pay their executives seven-figure salaries, post staggering end-of-year surpluses and fly their board members first-class to junkets in all the nice places.
Take Kaiser Foundation Health Plan, Inc., (please).
Right up front I should concede two biases:
1) I have worked nearly exclusively in the nonprofit world for going on two decades and it is my concerted believe that it takes money to do good work, whether you’re serving soup or mentoring kids or caring for the sick. I get that. A solid nonprofit should not run out of money every week and then pray for more. Even nonprofit management is management and doing it well entails good stewardship and building a reserve to guard against the volatility of public policy and resulting fiscal shortfalls.
2) I am currently contemplating litigation against Kaiser based on my belief that the health insurance contract I maintain with them entitles me to a prosthetic leg to replace (sort of) the one they cut off me last November to get rid of a nasty bone cancer that was going through my tibia like Grant took Richmond. I believe they owe me a fake leg. They believe with great tenacity they don’t. I’m an average middle-class guy. They’re a multi-state empire with a vast staff of in-house counsel. I’m probably screwed.
Given the foregoing I’m at once pained and eager to draw negative scrutiny to the truth of nonprofit finance, pained that a reader might think what’s true of behemoths like Kaiser is true of Sister Lucy’s House of Hope, and eager because if there’s anything a lowly blogger can do to embarrass the ogres at Kaiser Central Command, by golly I’m happy to do it.
This is all public record y’all. Nobody bribed anyone, leaked anything, told any stories out of school or committed any acts untoward to obtain the facts that, one hopes, will pique the ire of at least a few readers. I know the following piqued me up a storm when I learned of it, but then I was sitting at my desk with a misshapen stump where my leg used to be, so I was probably itching for some pique. Anyhow . . .
Kaiser Foundation Health Plan, Inc., (Kaiser) is a 501(c)(3) nonprofit corporation. Those numbers and letters refer to a section of Internal Revenue Code that sets the rules for companies of Kaiser’s ilk and qualifies them as tax-exempt. That section refers to: “Corporations . . . organized and operated exclusively for . . . charitable purposes . . . no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation . . . and which does not participate in, or intervene in . . . any political campaign on behalf of (or in opposition to) any candidate for public office."
Kaiser has dozens of affiliated organizations – Kaiser Foundation Hospitals, Kaiser Hospital Management, Kaiser Family Foundation, Kaiser Permanente Advisory Services, etc. – incorporated in many states throughout the country. Of them all, only the health plan, the Big Kaiser, could be considered the father of the Kaiser family. That Kaiser, the big one, boasts 8.9 million members, making it far and away the largest managed healthcare corporation in the United States and probably in the world. One of Kaiser’s primary business relationships is with the many independent, for-profit Permanente Medical Groups comprising the physicians and other providers operating in specific Kaiser regions. That relationship is one of customer to vendor, with Kaiser reimbursing the medical groups for services provided to its subscribed members. In Southern California alone, the two headed, nonprofit/for-profit jabberwocky that is Kaiser/Permanente covers 3.3 million members at 13 medical centers and 145 medical offices.
Insofar as the Permanente Medical Groups are for-profit corporations they make it a point not to publish their financials. We have, therefore, no way of knowing how profitable it is for those corporations to sole-source their services to a nonprofit giant that in turn reimburses them at agreed upon rates. Surely some regional groups are more profitable than others owing to scale, area demography and other variables. But since that data is private, I’ll not speculate about it.
As for what’s public, there’s no reason to speculate about that since it’s right out there for even a crippled yahoo like me to find.
On Wikipedia one finds the claim that, “In its most recently reported year . . . Kaiser Foundation Health Plan and Kaiser Foundation Hospitals entities reported a combined $1.6 billion in net income on $47.9 billion in operating revenues.” That claim comes from an article in the San Francisco Business Times that also reported Kaiser’s revenue increased by 8.3 percent from 2010 to 2011. I have no reason to doubt the veracity of those figures, but I have not seen Kaiser’s 2011 tax returns.
What I have seen are Kaiser’s 2008, 2009 and 2010 tax returns. I have not looked at the returns for any Kaiser affiliates but I have read through the returns from those years for the Big Kaiser, Kaiser Foundation Health Plan. I found Kaiser’s returns on Guidestar. They’re free to view if you’re a numbers geek like me.
In 2008 the Big Kaiser’s total revenue was $31.7 billion. Its total expenses that year were $31.3 billion with a resultant net income of $371 million. That’s not bad but it keeps getting better. In 2009 Kaiser took in $33.2 billion in revenue with $32.9 billion in expenses for a net income of $288 million. And then in 2010 Kaiser’s total revenues reached $34.9 billion against expenses of $34.3 billion, leaving a net income of $635 million. One could say that represents nearly $1.3 billion in profit over three years, but then Kaiser’s a nonprofit, so “net income” will have to do.
Thinking of a nonprofit organization with a net income of $1.3 billion over three years reminds me of the story of a young Jesuit on a visit to Rome who, when asked by a Cardinal, “Brother, what do think of the Vatican?” replied, “Your Eminence, if this is poverty, bring on chastity!”
To put it into perspective, at $34.9 billion Kaiser’s total revenue in 2010 was almost ten times greater than the total revenue of the American Cancer Society, American Heart Association, American Kidney fund, American Diabetes Association, Alzheimer’s Association, Chronic Disease Fund, Cystic Fibrosis Foundation, Leukemia and Lymphoma Society, March of Dimes Fund and Muscular Dystrophy Association combined. If all charities are created equal, some are more equal than others.
You may ask, “If they’re nonprofit, what happens to all that money?” Well, a whole ton of it gets spent on affiliates. In 2010, for example, Kaiser did more than $116 billion in business with Kaiser Foundation Hospitals. That’s a total that includes bilateral transactions, that is, money incoming and money outgoing. After all, $116 billion is nearly three times Kaiser’s total revenue for the year. But that’s how much business it did with just one of its related organizations. In the same year, it posted transactions with 16 other related organizations.
Of course there’s also the money that changes hands between Kaiser and the various Permanente Medical Groups, but technically those are stand-alone, for-profit corporations and as such, they aren’t really “related” to Kaiser in any legal sense. Therefore, whatever Kaiser spends on them doesn’t appear on its tax return as transactions with related organizations and that means that Kaiser can take premium payments from nearly nine million people, three percent of all Americans, spend that untaxed nonprofit revenue as it wants on for-profit corporations with whom it contracts exclusively and nobody can know how much actual money got spent or how much profit got generated on the back end.
But no matter what, when it’s through spending money on itself, its affiliates and its sole-source contactors, Kaiser posts some bodacious year-end figures, $1.3 billion in three years, and that just gets added to assets. In 2008 Kaiser had $9.9 billion in total assets. In 2009 that figure increased to $11 billion and by 2010, Kaiser had total assets of $13 billion. That’s a gross figure. Sadly, in 2010 Kaiser had total liabilities of $11.2 billion leaving it with net assets of a paltry $1.8 billion, the poor dears.
Now, when you’re talking about the kinds of money that would make an ordinary person swoon, obviously an organization has to bring some heavy hitters on board to manage it all. According to its tax return, in 2010 Kaiser paid total compensation of $1 million or more to no fewer than 16 individuals. That excludes any personnel employed by the outlying Baby Kaisers. We’re just talking about Papa Kaiser here, the health plan, a nonprofit organization that pays seven-figure salaries to 16 different people. Of those, Kaiser’s most highly compensated staffer was, naturally, its Chairman and C.E.O., one George C. Halvorson, who took home that year a whopping $7,743,427 in total compensation.
I tracked Halvorson’s compensation back to 2007 when he made a comparatively modest $3.38 million. In 2008 he banked $5.86 million, a one-year raise of nearly 74 percent. The following year he made $6.67 million, an increase of 13.2 percent and from there he reached the aforementioned figure of $7.74 million, a 16 percent increase over the prior year. In those four combined years, his total compensation more than doubled.
There is no federal rule that limits C.E.O. compensation for employees of nonprofits. Large nonprofit corporations, including Kaiser, generally do validate their executive compensation packages through comparison to organizations of similar size within their own industry and other analyses. Compensation review committees appointed by boards of directors sign off on such pay packages, which helps such organizations to pass their annual audits without too much huffing from the auditors.
But come on, seven-point-seven million?!
That’s not all salary, mind you. Halvorson’s base compensation for 2010 was only $1.18 million. He also earned $1.33 million in other compensation, $62,481 in deferred compensation and $13,611 in nontaxable benefits. To get to $7.74 million, Halvorson received bonus compensation of $5,155, 125. His bonus pay was nearly four times higher than his base pay and if you’re like me, you’re wondering what a nonprofit organization is doing paying bonuses at all.
Kaiser addresses that question exactly in its tax returns. In the 2008 return, for instance, one reads that:
“The organization provided non-fixed payments to some . . . persons . . . Payments were made under incentive plans, based on attainment of organizational performance goals and individual performance . . . The plans’ organizational goals included . . . operating income . . .”
Doesn’t one of the rules for nonprofit organizations say that no portion of their proceeds can inure to the benefit of an individual? Not precisely. Section 501(c)(3) of the Internal Revenue Code states that, “no part of the net earnings of [a nonprofit may inure] to the benefit of any private shareholder or individual.” The key term there is “net earnings.” Kaiser’s plans offer bonuses linked to operating income, not net earnings. Say A – B = C. Kaiser rewards it executives based upon A, not C. It sure pays to keep a shrewd tax lawyer or two around.
I shouldn’t pick on Halvorson exclusively. Following are the bonuses paid to the other 15 Kaiser big wigs with total 2010 compensations in excess of a $1 million:
Raymond J. Baxter $446,825
David C. Cates $175,000
Alide L. Chase $129,957
Benjamin K. Chu $392,166
Robert M. Crane $413,814
Philip Fasano $246,034
Jerry C. Fleming $371,774
Daniel P. Garcia $335,117
Kathryn Lancaster $606,732
Louise Liang $599,468
Laurence O’Neil $1,227,017
Arthur M. Southam $883,545
Mary Ann Thode $506,837
Bernard J. Tyson $786,911
Steven R. Zatkin $558,242
Kaiser paid $12,834,564 in bonuses alone to its 16 highest-paid executives in a single year, bonuses linked in part to an increase in the organization’s revenue. If that’s not profit, it’ll do until the profit gets here.
And that’s not actually all Mr. Halvorson et al took from Kaiser that year. In Schedule J of its 2010 return Kaiser reports that it provides the following to its directors and executive staff; first-class or charter air travel, travel for companions, tax indemnification and gross-up payments, housing allowances or residences for personal use, and personal services (e.g. maids, chauffeurs, chefs). I wonder if they also get those cool key chains with the little lights built in.
You might recall that the language of Section 501(c)(3) bars nonprofit organizations from lobbying, that is, “carrying on propaganda, or otherwise attempting to influence legislation,” to any substantial degree.
Sources within Kaiser tell me the organization is already heavily involved in positioning itself to expand its reach greatly upon implementation of federal healthcare reform and I’m willing to bet there’s not a meeting in Sacramento to discuss the forthcoming impact of that reform on California healthcare that doesn’t include a representative from Kaiser.
Halvorson himself serves on the American Hospital Association’s Advisory Committee on Health Reform and the New America Foundation Leadership Council. The latter claims on its website that “New America invests in outstanding individuals whose ability to communicate to wide and influential audiences can change the country’s policy discourse in critical areas, bringing promising new ideas and debates to the fore.” Halvorson’s most recent book is entitled Health Care Will Not Reform Itself: A User's Guide to Refocusing and Reforming American Health Care. All that sounds like influencing legislation to me, but then I guess he could be doing those things in his free time, when he’s off the clock, not earning $7.74 million a year from a nonprofit organization.
Kaiser also donates regularly to government departments, which might not be lobbying, but it’s something of the sort. In 2008 Kaiser gave a total of $73,329 in three grants to the City of Downey, Sonoma County and the League of California Cities. It also gave $12,500 that year to the California Legislative Black Caucus, not technically a government entity but close enough for government work. In 2009 it ceased giving money to government departments and agencies, unless one counts the University of Hawaii, which one might not. But in 2010 it gave $20,000 to the State of Hawaii Department of Community Services and one ought to count that for sure. It also gave $10,000 that year to the Riverside County Department of Mental Health. Not surprisingly, Kaiser has employee healthcare contracts with the City of Downey, Sonoma County, member cities in the League of California Cities, the State of Hawaii and Riverside County.
When it comes to shaping opinion and influencing policy makers, I guess every American voice counts, but I doubt my voice counts quite as much as the voice of a company that passes on tens of thousands of dollars of its tax-exempt proceeds to its government customers in need of some budgetary shoring up.
Unlike all other types of insurance company in the State of California, health insurance companies like Kaiser are not regulated or overseen by the Department of Insurance. Instead, they’re overseen by the Department of Managed Health Care. That means they are not answerable to California’s Insurance Commissioner, an elected official chosen every four years in a statewide election. Health insurance companies in California are answerable, ultimately, to a director appointed by the governor. If you can name the director of the Department of Managed Health Care without looking him up, I’ll buy you a cup of coffee. Kaiser is answerable most directly to a department most Californians have never heard of headed by a director no Californian ever voted for and that, to me, is wrong.
But Kaiser Permanente is a California chartered corporation, based in Oakland, and that means it’s also answerable to the California Franchise Tax Board. In its Statement of Principles of Tax Administation, the F.T.B. asserts, “Administration should be both reasonable and vigorous. It should be conducted with as little delay as possible and with great courtesy and considerateness. It should never try to overreach, and should be reasonable within the bounds of law and sound administration. It should, however, be vigorous in requiring compliance with law and it should be relentless in its attack on unreal tax devices and fraud.”
When it comes to issues of noncompliance with tax code, the F.T.B. is California’s Republican Guard. The Board has sweeping authority to enforce tax law and to investigate violations of corporate charters by for-profit and nonprofit corporations alike. It can revoke such charters in the most grievous cases or it can exercise other powers to preserve corporations while bringing them into compliance.
The F.T.B. could, for instance, remove a rubber-stamp board of directors and replace it with appointed members to oversee the real activities of a given nonprofit organization. It could insist upon revision of executive compensation plans. It could instruct a corporation to cease giving gifts to government departments with which it contracts. It could examine a corporation’s perks for its officers and directors and find them impermissible. It could insist that a company’s executives not sit on boards and councils intended to sway public policy or shape legislation.
The F.T.B. could do all these things and more, but I know it’s short-staffed at the moment like every other department in the state. So as a dutiful Californian I’ll offer this to the F.T.B.; If y’all decide Kaiser Foundation Health Plan is worth looking into, I’ll happily help you look.