No Health, No Wealth | The Nation


No Health, No Wealth

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Research support provided by the Investigative Fund of the Nation Institute.

Arlington's Foundation Fiasco

About the Author

Rosemary Metzler Lavan
Rosemary Metzler Lavan, a CPA, was a business writer for the New York Daily News who covered New York's health...
Annette Fuentes
Annette Fuentes is a New York journalist who writes on education and healthcare.

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Arlington Hospital Foundation wasn't around for very long, but it left its mark. Its board of trustees presided over a rapid decline in healthcare for the poor and attempted questionable grant-making for its for-profit partner. In just three years, the foundation was forced to dissolve under Internal Revenue scrutiny of its joint venture with for-profit Columbia-HCA.

In 1996 Columbia-HCA courted and won Arlington Hospital, a 374-bed nonprofit in northern Virginia, to gain a foothold near Washington, DC. Led by Arlington Hospital board chairman Patrick Healy, hospital trustees consummated a deal to create Columbia-Arlington Healthcare System, a limited-liability corporation (LLC) owned jointly by Columbia and the new Arlington Hospital Foundation (AHF). Healy headed both the new foundation board and new LLC. The AHF was endowed with $140 million at the end of the year.

The exact terms of the merger remain a mystery to this day. Virginia law required no approval from then-Attorney General Jim Gilmore (now governor), and dealmakers on both sides brushed off requests for information from the press and community members. Dean Montgomery, head of the state Health Systems Agency of Northern Virginia, feared the for-profit venture would hurt healthcare in the area, and he was right. His agency issued a report in September 1998 that noted: "In 1995...Arlington Hospital had the highest charity care rate in Northern Virginia: 4.3 percent of total charges. Two years later...the charity care rate was 32 percent lower at 2.9 percent of charges." Meanwhile, charges at Arlington Hospital were 27 percent higher than its competitor hospital in Alexandria; two years before the for-profit venture, Arlington's charges had been 9 percent lower. Fewer Medicaid patients were admitted as well, the report found. Says Montgomery, "They were making money hand over fist."

Half of all profits from the joint venture were funneled to the new foundation. In 1998 the AHF proposed to make its biggest grant yet--$25 million to the for-profit Columbia-Arlington Healthcare System--to build a new for-profit hospital in Springfield, Virginia. Montgomery wrote a scathing report against the plan, maintaining that Columbia-Arlington Healthcare System was "using AHF funds as a venture capital pool." In October 1999 the Columbia-Arlington merger dissolved under the threat that the IRS would start taxing the foundation's profits from its for-profit partnership.

Some observers might judge the conversion and its foundation as a failure by any yardstick. In three years, the AHF made just 140 grants, worth $7.5 million, out of total assets of $408 million in 1999. Yet Philip Peck, who was chief financial officer of Arlington Hospital and the foundation, calls the venture "successful." He disputes Montgomery's data on decreased charity and Medicaid services, and he says he is proud of the grants made to improve community health. The only mistake made, Peck says, was not gaining IRS approval for the joint venture before the deal was done. The AHF no longer exists as an operating foundation, its millions having reverted to the original nonprofit hospital association that ran Arlington Hospital. But the three-year experiment was hardly a wash, says Montgomery. "The winners are the people who handled the transaction and those who were put into a philanthropic role to give out grants," he says. "Losers are the communities who end up paying for all this. They squandered community assets built up over years with the dubious argument that nonprofits can't operate without changing."

One Man's Grab for Glory

The story of the Health Foundation of Southern Florida is that of one man's grab for power and glory and a board of trustees that watched passively as he spent extravagantly and ruled tyrannically. The foundation, with assets currently valued at $130 million, was created in 1993 after Columbia-HCA corporation bought nearly half of nonprofit Cedars Medical Center in Miami. Seemingly without a hitch, John O'Neil ran the health foundation and its two subsidiaries as chairman of the board and/or chief executive officer for most of its seven years, paying himself a hefty six-figure salary. The foundation got tremendously positive press, doling out millions to local causes. But in 1999 O'Neil and his board of directors became mired in controversy after they began suing each other for control of the foundation.

The insurgents were shocked at O'Neil's expenditures for the foundation's posh headquarters in the gated Courvoisier Center on Brickell Key. They questioned the need for board retreats with spouses to tropical destinations like Cancun and Puerto Rico, the fact that he hired family and friends to do foundation work and his decision to invest more than $200,000 of foundation funds with his brother-in-law without consulting the rest of the board. When the board called a special meeting to discuss his free-spending ways, he retaliated by suing them to stop. The board critics "were concerned that as fiduciaries of this public trust, we were not exercising the control as a board that we should have," board member Sheldon Dagen told a local newspaper. After hundreds of thousands of foundation dollars were spent on litigation, the lawsuits were settled and O'Neil was ousted.

Florida's attorney general provides no oversight of hospital conversions, much less the foundations they spawn. According to assistant AG Cecile Dykas, they'd like to but they just don't have the resources. "There is no one really reviewing whether these enormous foundations are carrying out their duties to their communities," said Dykas.

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