The non-profit Hospice of the Bluegrass has spent more than $1.82 million since 2005 on business deals with several of its board members and the spouses of its executives.
Ethics experts say such insider deals are legal, but because they create potential conflicts of interest, they should be handled carefully, if done at all.
"My view is that if you can avoid it, you should," said Assistant Attorney General David Spenard, who represents the state of Kentucky in supervising non-profits and charitable trusts. "I don't think it's per se wrong, but it's something you should try to navigate around."
The Lexington-based Hospice provides care for hundreds of terminally ill patients and their families in a 32-county region. Its 2010 income of $66.6 million came from public and private sources, including Medicare and charitable donations.
On its tax returns from 2005 to 2010, Hospice reported paying at least:
■ $540,178 for political lobbying and legal representation to the law firm of McBrayer, McGinnis, Leslie & Kirkland. One of the firm's partners and co-owners, Lisa English Hinkle, was a Hospice board member and a former board chairwoman. Hinkle rotated off the board at the end of 2011. She was preceded on the board by another partner in the firm, James Frazier.
■ $837,999 for insurance to the firm of Powell-Walton-Milward, whose managing director, John Milward, is a Hospice board member. His brother Greg Milward, who also works at the insurance firm, previously was on the Hospice board and was board chairman in 2007.
■ $392,042 for printing to Pat Byrne Printing, owned by the husband of Deede Byrne, Hospice's chief clinical officer.
■ $22,506 for heating and air conditioning to Gary Merckle, husband of Carol Ruggles, Hospice's chief financial officer.
■ $28,577 for advertising to the Lexington Herald-Leader while then-editor Marilyn Thompson sat on the board.
The Internal Revenue Service refers to such arrangements at non-profits as "self-dealing" or "insider transactions." They're sometimes controversial — Congress and several states have considered restricting the practice — and they remain loosely regulated.
Before a non-profit enters an insider transaction, ethics experts say, it should disclose the conflicts of interest at a board meeting; use open and competitive bidding to win the best possible deal; and require the insiders to abstain from involvement while in their official posts. Board members selling professional services to the non-profit, for example, should not get to vote on their own contracts.
Non-profits rely on public trust, said Danielle Clore, founding director of the Non-profit Leadership Initiative at the University of Kentucky.
"You want to be completely transparent," Clore said. "It's a perception issue as much as anything, and a lot of the time, as we all know, the perception of a situation can prove more problematic than the situation itself."
Speaking through an attorney, C. Timothy Cone, Hospice said its board of directors approved all of the insider transactions. Cone said the services were necessary and the prices paid were reasonable.
"Interested-party transactions are not illegal or improper as long as certain rules are followed and, in every case, Hospice has followed those rules," Cone wrote in an email to the Herald-Leader on Friday.
In a brief interview on June 7, three Hospice executives — Ruggles, the chief financial officer; controller Holly Hodge; and vice president for development Susan Ware — said Hospice practiced full disclosure and competitive bidding in at least some instances before awarding deals to insiders. They said they needed a few days to produce documents, such as board meeting minutes and bids, that would confirm how insider transactions were handled.
However, no documents were produced. On June 13, Cone wrote the Herald-Leader to say that Hospice and its board members and employees would not provide documents or further interviews regarding insider transactions.
"As a private entity, Hospice of the Bluegrass and its directors and employees are not required to be subjected to the improper scrutiny you seek to focus on the organization or the distractions from serving hospice patients your inquiries create," Cone wrote. "Hospice of the Bluegrass and its 700 employees and 1,000 volunteers are disappointed the Herald-Leader would undertake to undermine the invaluable services performed by Hospice of the Bluegrass and the men and women who labor for and with Hospice of the Bluegrass to further its goals."
In his follow-up email on Friday, Cone said Hospice "compared broker prices" before selecting Powell-Walton-Milward as "the best deal" to sell it medical malpractice, property, liability and general casualty insurance. John and Greg Milward did not return calls at their insurance company seeking comment.
Cone said lawyers from McBrayer, McGinnis, Leslie & Kirkland were needed for several tasks, such as securing certificates of need from the state and property acquisition.
Public records show that the firm also provides political lobbyists to represent Hospice in Frankfort and Washington. Terry McBrayer, the firm's senior partner and a former chairman of the Kentucky Democratic Party, is one of Hospice's seven lobbyists at the state Capitol, where the non-profit sought public funding in recent years to build a hospice center in Hazard.
Hinkle and McBrayer did not return calls regarding their law firm's work for Hospice.
Another Hospice board member, Dr. Oscar Mendiondo, owned United Radiation Oncology, which did business with Hospice in 2005 and 2006, Cone said. During those two years, Hospice paid the company $6,343 for radiation treatment for cancer patients. Simultaneously, the company paid Hospice $75,600 for social work that it provided to the company's medical practice, Cone said. Mendiondo since has left the board.
Regarding Pat Byrne, who sells his printing services to Hospice, Cone said those sales began in the 1980s, long before he married a Hospice executive. Pat Byrne hung up the phone when asked about his work for Hospice, and he did not return subsequent calls.
'We all knew'
Hospice's conflict-of-interest policy, as reported to the IRS, says the non-profit's chief executive officer decides how to handle conflicts involving employees. Board members are supposed to report their conflicts to the full board, which will decide whether to proceed with the deal in question and whether the conflicted board member may vote on it.
Hospice officials who did not return phone calls for this story include board chairman Woodford Webb and CEO Gretchen Marcum Brown, whose 2010 compensation was $238,650 in base pay, $10,570 in bonus pay and $84,978 in other reportable compensation. The other compensation included Hospice's payment into Brown's deferred-compensation account, from which she can draw in the future.
Hospice also paid for a membership in Brown's name at The Club at Spindletop Hall, which offers swimming, tennis and dining.
Brown's base and bonus pay appears to be standard when compared to those for CEOs at a half-dozen other non-profit hospices with annual revenues between $40 million and $95 million, from Tampa to Detroit.
Julie Young, who served two stints on the Hospice board in the 1990s and 2000s, said it was common knowledge that Hospice did business with its own officials.
"We all knew it," said Young, no longer a board member. "I don't remember that being a concern."
In 2007, Young sold $242 in note cards to Hospice through her own business, The Paperweight, for invitations to a Hospice event.
"I may have volunteered to do that," she said. "I said 'I'll just charge you cost.' They didn't pay retail."
Non-profit boards often include civic leaders with a wide range of business interests, said Spenard, the assistant attorney general.
"One reason people are selected for boards is their professional expertise, such as a lawyer or an accountant," Spenard said. "There's a notion that your expertise is what you bring to the table as a board member. Where it becomes troublesome is if you're no longer just bringing your expertise to the table, but you're now also selling your services to the entity."
Several years ago, the IRS required non-profits to start disclosing more information on their tax returns about insider deals. But a transaction generally doesn't have to be reported unless it exceeds a certain sum for that tax year — from $10,000 to $100,000, depending on the individual circumstances. For example, Hospice said it employed board member Hinkle's law firm in 2009, but the amount paid was not enough to require the deal to be disclosed on that year's tax return.
Kentucky law allows what it calls "conflict-of-interest transactions" at non-profits as long as they are "fair" and the conflict is disclosed to the non-profit's board. Kentucky's attorney general has not prosecuted a violation of the law in recent memory, a spokeswoman said.
Non-profit ethics experts advise caution.
"The purchase of goods or services by non-proﬁts from board members or their companies raises special concerns about who such transactions really benefit," the Urban Institute's Center on Non-profits and Philanthropy wrote in a 2007 report on non-profit governance.
Most non-profits avoid the practice, but it isn't unheard of. In a survey of more than 5,100 non-profits that was included in the Urban Institute report, 21 percent said they had done business with a board member in the previous two years.
It might be less common in Lexington.
There are 40 non-profits in the city with annual revenues above $10 million that are listed on the Web site GuideStar, which publishes non-profits' tax returns. Last year, other than Hospice, only two reported a business deal with an insider.
Kentucky Blood Center paid $49,145 to political lobbyist Pamela Jenkins, wife of board member Edgar McGee. Continuing Care Hospital paid $34,650 to Lexington Infectious Disease Consultants, whose president, Dr. Mark Dougherty, is a board member.
Jenkins did not return a call seeking comment. David Stevens, chairman of the Blood Center board, said Jenkins' lobbying contract first was awarded by the non-profit's executives in 2006 without the board's involvement. Competitive bids were not requested, Stevens said.
"I don't think I've ever encountered a situation where bids were taken for a lobbyist," Stevens said.
Dougherty said his firm, Lexington Infectious Disease Consultants, has provided epidemiologists for every hospital in Lexington, including Continuing Care Hospital before he was asked to join its board. Dougherty said he leaves the room at board meetings when his firm's contract is discussed. No other local firm offers a similar service, he said.
"There's really nobody else to offer competitive bids on it," Dougherty said. "We're the only group in town that does it."