Nonprofit Hospitals' Business Relationships Can Present Conflicts

Dignity Health California Hospital Medical Center in downtown Los Angeles. Nathan Dean, son of Dignity CEO Lloyd Dean, landed a multimillion-dollar marketing contract in 2011 to create an online market for Dignity’s branded goods and to produce those items. ENLARGE
Dignity Health California Hospital Medical Center in downtown Los Angeles. Nathan Dean, son of Dignity CEO Lloyd Dean, landed a multimillion-dollar marketing contract in 2011 to create an online market for Dignity’s branded goods and to produce those items. Photo: Ringo Chiu/Zuma Press

Nonprofit hospitals have extensive business ties that can pose conflicts of interests for their administrators and board members, a Wall Street Journal analysis of newly released Internal Revenue Service data shows.

While having relationships with companies doing business with a nonprofit hospital isn’t necessarily improper—as long as the deals are disclosed and at market rate—administrators and board members sometimes may be forced to choose between what’s best for the hospital and what’s best for their private interests.

“Just because something is legal doesn’t mean that it’s appropriate,” said James Orlikoff, a Chicago-based hospital governance consultant. “You run the real risk of violating the public trust.”

Hospitals rank among the largest nonprofits in the country. Because they often are big employers and have complex business arrangements, they face these dilemmas far more often than most other kinds of nonprofits.

In 2014, 46% of more than 2,300 nonprofit hospitals had at least one trustee or officer with business ties to the hospital—either directly or through a relative. That is compared with 7% of all nonprofits in the Journal’s analysis of tax-return data compiled by the IRS.

At more than 270 nonprofit hospitals, the arrangements topped $ 1 million each. Many of the largest transactions involve hospitals and medical companies that have common board members. But in other instances, hospitals have multimillion-dollar contracts with companies owned by trustees in areas such as advertising and construction.

Avera McKennan Hospital & University Health Center in Sioux Falls, S.D., had one of the largest contracts with a company that had ties to a director in 2014. The $ 20.9 million construction deal with the subsidiary of Avera Health, which includes a 545-bed hospital, five rural hospitals and dozens of clinics, followed years of similarly large payouts to the same company.

Between 2010 and 2014, Avera McKennan paid $ 91.2 million to Journey Group, the construction company where hospital trustee David Fleck is board chairman. Mr. Fleck sold his stake in Journey Group in 2012, but declined to say if the company currently pays him. Journey Group and Avera Health’s general counsel didn’t respond to questions about Mr. Fleck’s compensation.

An Avera spokeswoman declined to say whether Journey Group competitively won its contracts or offered the lowest prices. She said the hospital typically awards contracts to the lowest bidder but may consider other factors. Avera’s conflict-of-interest policies are in line with state and federal laws, and Avera hasn’t received complaints regarding Journey Group’s contracts, she added.

Mr. Fleck said hospital trustees disclose conflicts at each board meeting, and he didn’t discuss or vote on Journey Group contracts. Mr. Fleck, like most board members at nonprofits, isn’t paid for serving.

In addition to deals with board members, nonprofit hospitals are required to disclose transactions with families of officers and directors. At California-based Dignity Health, the chief executive’s son has a multimillion-dollar marketing contract.

Nathan Dean, son of Dignity CEO Lloyd Dean, landed a contract in 2011 to create an online market for Dignity’s branded goods and to produce those items, including lapel pins and badge clips.

The 39-hospital chain paid $ 3.8 million during two years to eLead Resources, Inc., and the contract was renewed in 2014. The younger Mr. Dean owns 51% of the company, said an attorney for Dignity.

The elder Mr. Dean said the hospital behaved ethically, and he avoided internal conversations about his son’s contracts. He didn’t balk at eLead’s bid for the business because his son’s company is qualified to compete for the work and Dignity has policies to prevent conflicts of interest, Lloyd Dean said. “eLead met the criteria for the open-bidding process,” he said.

Nathan Dean didn’t respond to interview requests.

Dignity Health solicited competitive bids for the marketing job, and said eLead’s bids were “fair and reasonable” and “market competitive.” Dignity declined to say if eLead was the lowest bidder.

Unlike government entities that solicit contracts, nonprofits aren’t required to disclose their bidders.

Dignity’s board reviewed eLead’s bids and performance annually, said Peter Hanelt, who chairs the committee tasked with the reviews.

“The conflict is not inherently wrong,” Mr. Hanelt said. “You simply want to disclose it and vet it and make sure it’s fair.”

Hospitals in small towns may face a particular dilemma when it comes to managing conflicts, said Michael Peregrine, a Chicago-based lawyer and governance consultant. They may think that because “governance gurus are telling us we’ve got to get the best and brightest people,” their only choice is to turn to the local business leaders known by the hospitals.

Frank Kinder, co-owner of a Cape Girardeau, Mo.-based advertising firm, joined the board of his local hospital in 2009. Shortly after, the then-chief executive of SoutheastHEALTH approached him about a small branding project, he said. “It was just kind of a natural development of me being present in the boardroom at that time,” Mr. Kinder said.

That work ballooned. The hospital paid his firm, Red Letter Communications, Inc., $ 8.3 million between 2010 and 2014, tax records show. Mr. Kinder said the hospital was his company’s second-largest client.

He said he recused himself from board meetings where advertising budgets were discussed, and eventually decided to eschew regular marketing meetings after his staff said he made the marketing team “uncomfortable.”

Mr. Kinder said his staff told him: “The fact that you’re a board member is intimidating.” He

Mr. Kinder remains on the board and stopped doing business with the hospital in 2015, concerned that his dual role was problematic.

Kenneth Bateman, chief executive at SoutheastHEALTH since 2014, said the hospital is now more cautious about entering contracts with board members. “Pretty much if there’s a significant conflict, board members have stepped away,” he said.

Rob Montagnese, chief executive of Licking Memorial Health Systems in Newark, Ohio, said his hospital banned business contracts with board members in the early 2000s. The hospital, he said, wanted to make sure “our community had confidence that our board members were truly here as volunteers.”

Mr. Montagnese said it hasn’t been a problem to find qualified board members under the ban, even in a small community.

At the time, Mr. Montagnese said, there were three trustees with hospital business—a bank leader, a local attorney, and a real-estate developer—who faced giving up either their board seats or their hospital business.

All three resigned the board.

Write to Andrea Fuller at [email protected] and Melanie Evans at Mel[email protected] US Business

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