Central Kentucky's state-backed provider of mental health care is enjoying remarkable prosperity even as budget cuts erode public funding for many social services.
The non-profit Bluegrass Regional Mental Health-Mental Retardation Board, which is based in Lexington and serves 17 counties, saw its annual revenue double over the past six years to $176 million as it expanded and won more state contracts.
In 2011, it reported having $33.7 million in cash reserves and similar assets — more money than 10 of the state's 13 other regional mental health boards had in their entire budgets. Simultaneously, it reduced its charity care spending from $7.7 million in 2004 to $4.5 million last year, which it attributed to more Kentuckians becoming eligible for Medicaid.
Bluegrass is lauded by mental health advocates for its work, especially in improving care at long-troubled state facilities, but critics say the agency is not sufficiently transparent about its finances.
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It spends plentifully on executive pay, political lobbying and real estate. For example:
■ Four top Bluegrass executives collected a total of nearly $2 million in 2010 from all forms of compensation, including one-time deferred compensation payments that totaled $1.1 million.
■ Since 2008, Bluegrass has spent at least $486,156 to retain four lobbyists at the state Capitol.
■ In 2006, it purchased a $295,000 home near Lake Cumberland for its "senior management team" to use while working in Somerset.
■ In 2009, it opened a three-story, $3.4 million client services and pharmacy building — one of five buildings on its 26-acre Lexington campus.
After the Lexington Herald-Leader began researching Bluegrass's spending this spring, state Auditor Adam Edelen's office started getting public inquiries about the agency.
"We have received some concerns regarding the Bluegrass board in the last few days, and we're going to be looking into those," auditor spokeswoman Stephenie Steitzer said. She declined to comment further.
Scott Gould, chairman of the 25-member Bluegrass board of directors, defended the agency's expenditures in several statements emailed to the Herald-Leader.
"There has been no inappropriate practice or action taken by any board member, CEO or staff member," Gould wrote in one email.
Soup beans and steak
Bluegrass employees are dedicated to their clients, but the agency does not spend as generously at the bottom, said Eleisha Kiefer, a licensed clinical social worker at Bluegrass from 1999 to 2007. (Kiefer said she left for higher pay at the Lexington Veterans Affairs Medical Center.)
Some Bluegrass front-line workers made less than $30,000 a year during the 2000s and lost their annual pay raises because the agency said it was financially struggling, Kiefer said in an interview. Gould, in his own interview, confirmed that annual pay raises were put on hold in recent years due to budget cuts and the recession, although he said employees were eligible for performance-based incentive bonuses.
At a therapeutic rehabilitation program for about 20 mentally handicapped adults in Harrison County, Bluegrass limited the weekly lunch budget to $100, Kiefer said.
"The money was closely watched," she said. "It should have been twice what it was. But if you spent more than $100, you heard about it. We had a lot of soup beans and corn bread — and maybe cheap chicken breasts if we could find those and grill those."
Gould disputed Kiefer's account, writing: "Absolutely never, ever, has there been a weekly budget limit placed on client meals in any program anywhere. The social worker received no such direction from regional leadership on anything remotely related to this."
Four years after she joined Bluegrass, Kiefer said, a supervisor invited her as a guest to the Bluegrass board of directors' annual dinner at the Griffin Gate Marriott Resort & Spa. The formal party featured entertainment, an open bar and a choice of steak or chicken dinners, she said.
"It was swank," Kiefer said. "But when you compare it to what we were spending to feed the clients, it's shameful. We were supposed to be a non-profit!"
Not every social service agency is flush. Kentucky's spending on services for the mentally ill fell 0.1 percent from 2009 to 2012, remaining essentially flat while demand rose, according to the National Alliance on Mental Illness.
At the state-backed non-profit New Beginnings Bluegrass, which provides housing for the mentally ill in Lexington, public support see-sawed from $962,985 in 2007 down to $775,319 in 2008. It had crept back to $955,905 by 2011.
"We're ready to make sacrifices. I'm working feverishly on a Plan B and a Plan C if we need them," said Virginia Vicini, executive director at New Beginnings.
Bluegrass Regional Mental Health-Mental Retardation Board is chiefly funded by the Kentucky Health and Family Services Cabinet, which last year paid it $126.2 million, plus $32.5 million in Medicaid. It gets smaller sums from the federal and local governments.
Bluegrass provides psychiatric care, addiction treatment and counseling for people regardless of their ability to pay. It also manages two of the cabinet's largest mental health facilities — Eastern State Hospital in Lexington and Bluegrass Oakwood in Somerset — and private community homes for the mentally disabled.
Mental health advocates praise its work.
"I'd have to put them high up on the star chart in terms of what they provide their consumers and their family members," said Sheila Schuster, executive director of the Kentucky Mental Health Coalition. "It's one thing to deliver quality care, but I feel that Bluegrass goes the extra mile."
'A corporate model'
Despite its public support, Bluegrass considers itself part of the competitive private sector, as its executive pay reflects.
In 2010, Bluegrass's current and previous chief executive officers — who are married to each other — took home more than $1 million between them in total compensation, including $377,637 in base salary, according to the agency's most recently available tax returns.
Shannon Ware has been CEO since 2008. Her 2010 salary of $250,016, not counting her $25,002 bonus, was considerably higher than the average publicly reported salary for CEOs at the state's other regional mental health boards ($154,629) and the secretary of the Health and Family Services Cabinet ($137,865).
Howard Bracco, recently retired as CEO of Seven Counties Services, the mental health board in Louisville, made $179,868 toward the end of his run. Seven Counties reported about half the revenue that Bluegrass did.
"We had different cultures," Bracco said. "They operate on a business model, a corporate model, versus the social model. I think, frankly, they were better business people than many of us. They lobbied hard to win contracts, they fulfilled those contracts, and they've been very successful. Seven Counties, while I was there, was more of a mission-based organization. Now, did that make us better? I don't know."
Ware's husband, Joseph Toy, is her retired predecessor. Toy remains at Bluegrass as a consultant and runs its for-profit subsidiary. (Bluegrass's newest on-campus building, the Joseph A. Toy Center, was named to recognize Toy's two decades leading the agency.)
In 2010, Toy collected much more than Ware — $876,777 — because of a one-time payment of $665,399 from a deferred compensation plan created as a benefit for him and a few other Bluegrass executives. Toy's base pay at the for-profit subsidiary was $127,621. Since 1999, he also has collected a state pension from the Kentucky Retirement Systems, which he identified as $96,395 a year during his 2007 divorce.
Toy gets a state pension because Bluegrass participates in the publicly subsidized KRS. However, Bluegrass sued KRS in March to end state pension coverage for some of its Somerset workers, in part by creating a new non-profit corporation that would employ them without joining KRS. The pension system is counter-suing to keep Bluegrass fully enrolled.
Toy and Ware together own homes in Lexington's Hartland subdivision and on Longboat Key, Fla., each valued at about $600,000.
In 2010, Bluegrass chief financial officer Tambara Nalle made $154,066 in base pay, $5,392 in bonus pay and $255,666 in one-time payments from the deferred compensation plan. Tricia Salyer, chief administrative officer, made $154,066 in base pay, $5,392 in bonus pay and $264,878 in one-time payments from the deferred compensation plan.
Gould, the Bluegrass board chairman, said it's unfair to include the deferred compensation plan when examining executive pay at Bluegrass. The one-time payments are not the same thing as a recurring salary, he said.
"It has to be clear that Ms. Ware and Mr. Toy in no way had $1.15 million of combined salary in 2010," Gould wrote in one email. "In fact, the majority of this taxable income amount was paid out to Mr. Toy via a non-qualified at-risk deferred compensation plan established under section 457(f) of the IRS code containing many years of his personal deferrals of salary."
Ware, Toy, Nalle, Salyer and other Bluegrass executives declined to be interviewed for this article. Ware later released a four-page statement defending her agency's strong finances.
"If the largest medical non-profits in our state are lauded for expansion, research, innovation and financial stability, why then should the largest behavioral non-profit in our state not be afforded the same? Should a non-profit sacrifice top talent to the private corporations and struggle to keep its doors open with marginal leadership and less-than-competitive wages?" Ware wrote.
"I believe there is general public misperception that non-profits should not be successful and that excess revenues should never be achieved on the bottom line," she wrote.
Ware referred questions to Gould, the board chairman. (The board nominates and approves its own members; some began serving in the early 1980s.)
Over a span of two months, Gould agreed to one 30-minute interview to discuss Bluegrass with the Herald-Leader, attending with Jonathan Copley, a Bluegrass attorney. He asked that all other questions about Bluegrass be submitted to him by email, and he responded likewise.
"Bluegrass is a complex organization and has many facets, so I know it can be confusing, particularly to anyone who has not had experience running a business or organization like Bluegrass," he wrote in one email. "Our board understands this reality and recruits and retains professionals with expertise in each of their respective fields to make sure we are following all regulatory laws and accounting principles and sound management practices."
Gould said executive pay at Bluegrass is fair compared to the private sector. Ware and her senior staff have "executive responsibilities" for 2,300 employees serving nearly 30,000 "vulnerable citizens," and a budget of about $180 million spread across more than a dozen separately registered corporations, he said.
Major divisions under Ware in Bluegrass come with their own executive ranks making six-figure paychecks. For example, for 2010, Bluegrass Oakwood reported on tax returns paying its facility director $152,957, its medical director $306,495 and its psychology director $138,380.
By law, the Health and Family Services Cabinet gets copies of Bluegrass's budgets and internal audits, as it does with the other regional mental health boards. On individual expenses, the cabinet defers to Bluegrass's board of directors, cabinet spokeswoman Jill Midkiff said.
Bluegrass's growth is largely due to the state not wanting to run its own mental health facilities.
In 1995, the cabinet declared that it would be "more efficient" to privatize management of the 251-bed Eastern State Hospital. Bluegrass won the contract, worth $37.6 million in 2011.
In 2006, the cabinet handed Bluegrass the keys to Oakwood, a long-troubled home for — at the time — 255 mentally disabled adults. The Oakwood contract was worth $64.6 million in 2011. Gould said the budgeted figure for this fiscal year, which ends June 30, is $54.5 million.
When Bluegrass stepped in, Oakwood was about to lose its Medicaid funding because of patient abuse and neglect. Nearly everyone agrees that Oakwood is better now. Medicaid funding was restored, and the U.S. Justice Department has stopped monitoring patient safety. Gould said Bluegrass has saved the state several million dollars a year by operating Oakwood efficiently and under budget.
But Oakwood still has problems. In February, it received a Type A citation from the state after a mentally disabled resident who was supposed to be closely supervised escaped and dashed through traffic on a nearby highway.
"The state approached us to run Oakwood," Gould said in his interview. "It's outside of our 17-county region. We weren't looking to go run Oakwood. The state came to us and said, 'Look, we've got a problem. Can you help us fix it?' And I'm proud of that."
Deep pockets allow Bluegrass to buy big-ticket items that make life easier.
Days after it won the Oakwood contract in Somerset, Bluegrass went house-hunting in the area. It spent $295,000 on a new 2,508-square-foot home less than a half-mile from Lake Cumberland.
"This was our solution (and frankly much more cost-effective than hotel stays and gasoline) for an immediate exodus of our senior management team who were required to be on grounds every day and weekends to complete the miracle of saving that facility," Gould wrote.
The house is seldom used now that new management has been installed at Oakwood, but Bluegrass doesn't want to sell it until local real estate prices rebound from the recession, Gould said.
Elsewhere around Somerset, Bluegrass has spent $1.32 million since 2009 to buy 10 smaller, simpler ranch houses that it converted into private community homes for the mentally disabled. This is in response to the state shrinking Oakwood's population and Bluegrass's contract, emphasizing community care over institutionalization. By opening community homes, Bluegrass is pivoting so it can provide that service, too.
"Again, another example of reinvesting in our clients," Gould said.
Lexington and state officials say Bluegrass aggressively pursues what it wants.
Early this year, the Lexington-Fayette Urban County Government denied Bluegrass a $200,000 grant it sought. City Social Services Commissioner Beth Mills said Bluegrass refused to comply with a new policy requiring it to register on a public Web site and disclose its spending, including executive pay.
Bluegrass lobbied Mayor Jim Gray to make an exception, Mills said. Gray said no. Bluegrass then suggested the money could pass through a partner, the Lexington chapter of the National Alliance on Mental Illness, and NAMI could disclose its spending instead. The city rejected that, too.
"There was a lot of back-and-forth and arguing and 'We provide good services,'" Mills said. "That may be true. But this was not about services. This was about transparency and making a fair and open decision about funding. They just didn't meet our criteria."
Told that Ware and Toy together collected more than $1 million in 2010, Mills said that sum "would have jumped out at me" when reviewing Bluegrass's application.
"That certainly looks like a lot of money for people running a non-profit organization in this field," Mills said.
Bluegrass disputes the city's account of the lost grant. Gould said Bluegrass always intended for NAMI to get the grant, but the city told it that NAMI missed a required meeting and so was ineligible.
"We were disappointed but respected the decision. There has been no further dialogue about the decision at all," Gould said.
However, Geoff Reed, then a mayoral aide to Gray, supported Mills' account. Bluegrass wanted the grant, but "they didn't want us looking at Bluegrass," Reed said.
"They reacted in a very hostile, aggressive way," said Reed, now an aide to U.S. Rep. Ben Chandler, D-Versailles. "We got unusual pushback on something that I couldn't figure out why it was such a big deal."
Bluegrass also flexes political muscle in Frankfort. Since 2008, it has spent at least $486,156 on lobbyists, including David Whitehouse and Mark Riddle, who have ties to the state's top Democrats. Bluegrass reports lobbying for more public funding for its services, and for monitoring the state's switch to private Medicaid management.
In this year's state budget bill, Bluegrass arranged to have two paragraphs inserted. The text praised Bluegrass's work and awarded it the right to manage Eastern State Hospital's replacement, currently under construction next to Bluegrass's own campus on Newtown Pike.
As amended, the bill would have let Bluegrass avoid open bidding, which could attract competitors at lower prices, unless the secretary of the Health and Family Services Cabinet objected in writing. State Sen. Vernie McGaha, R-Russell Springs, who said he added the language at Bluegrass's request, said it would benefit Eastern State "to have continuity of service" in the new hospital.
"I would hate to take the risk of seeing totally new management there when we move into a new facility," McGaha said. "I think Bluegrass has done a good job with it."
Gov. Steve Beshear vetoed the change, protesting that it would "eliminate the efficiency, transparency and accountability provided through the model procurement code."
The veto notwithstanding, Bluegrass is the rare non-profit that can get legislation rewritten for itself, said state Rep. Jimmie Lee, D-Elizabethtown, chairman of the House spending committee on social services.
Several past state budgets included similar language directing the cabinet to keep Eastern State under Bluegrass. Beshear didn't veto it before because the new hospital isn't scheduled to open until this budget cycle, so the matter "is just now becoming ripe," spokeswoman Kerri Richardson said.
"They're a very aggressive agency," Lee said. "There's no doubt their phone calls get taken seriously, which is how you end up with restrictive language in the budget guaranteeing them the contracts they want."
Gould said it's appropriate for the agency to spend more than $100,000 a year lobbying Frankfort. However, in January, Bluegrass shifted the expense of all its lobbying to its for-profit subsidiary. Gould said the agency was trying to address ethical concerns raised by a 2010 state audit of Passport, a private Medicaid manager in Louisville criticized for using public money to lobby for more public money.
"Lobbying efforts on behalf of Bluegrass and all its corporations directly impacts services to the public and those most vulnerable in Kentucky," Gould wrote. "Successful lobbying efforts enhance the Kentucky safety net by seeking to secure adequate funding models for social programs, by meeting the expanded needs and by educating the policy leaders on the many needs of our communities."