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How the secretive arm of UK HealthCare spends $200 million a year

How UK HealthCare’s secretive foundation spends money

Herald-Leader Reporter Linda Blackford explains how the secretive Kentucky Medical Services Foundation spends its money.
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Herald-Leader Reporter Linda Blackford explains how the secretive Kentucky Medical Services Foundation spends its money.

Many people in Lexington who see doctors at University of Kentucky HealthCare write checks to the Kentucky Medical Services Foundation.

But few know much more about the foundation, which takes in more than $200 million a year from patient billings, and owns $96 million in real estate and equipment. Although its board is made up almost entirely of UK doctors, UK contends the foundation is a separate, private entity that does not have to make its records available for public inspection.

UK administrators have also used the foundation’s coffers to pay for a private airplane, construction of a daycare center, and millions of dollars in contracts with consultants and lawyers that aren’t subject to state procurement rules and don’t have to go through a bidding process. It even pays for the Keeneland membership of UK Executive Vice President for Health Affairs Michael Karpf, and supports aging foxhounds at the Iroquois Hunt Club.

Most recently, the foundation paid $1 million to a Washington, D.C. lawyer to clean up billing problems with the federal government by a cardiology practice that the foundation acquired in 2014. The foundation also paid part of the $4 million refund to the federal government.

The foundation was created in 1978 to help the university pay doctors competitive salaries and support its academic and service missions, but its former director says the foundation has “gone beyond its scope.”

Darrell Griffith cited several examples of the foundation’s creeping mission in an affidavit filed in a lawsuit against UK by a former surgeon. For example, Griffith questioned the foundation’s decision to hire consultants to help a failing business at UK’s Coldstream Research Park, rent a private airplane for top-level UK HealthCare officials, become a landlord, and build a daycare on UK property and subsidize its day-to-day operations.

The foundation’s board is made up largely of College of Medicine department chairs whose salaries and bonuses are paid by UK with foundation revenue. The foundation also pays about $1 million a year for scholarships for the children of medical faculty, wherever they go to college.

“KMSF business activities were outside the purview of the UK Board of Trustees by design, and by design, outside the Commonwealth of Kentucky Model Procurement Laws,” Griffiths’ affidavit says.

All the things we’ve done were entered into to support the activities and missions of the University of Kentucky.

Dr. Marcus Randall, president of KMSF Board of Directors

The affidavit is part of a whistleblower lawsuit by former UK surgeon Paul Kearney, who was stripped of clinical privileges last year for profane language and abusive behavior on the job, an unprecedented step in the history of the College of Medicine. The award-winning surgeon said he received glowing annual evaluations for decades at UK, until he started asking questions about the Kentucky Medical Services Foundation and how it made rules and spent money.

Marcus Randall, the KMSF board president who is also chairman of the UK radiation department, said everything the foundation does aligns with the two basic missions outlined in the foundation’s charter: help UK pay doctors competitive rates, and serve as a charitable organization to support the education, research, service and patient care missions of UK and UK HealthCare.

“Since KMSF was formed, its stated charitable purpose as recognized and approved by the IRS was to support the University of Kentucky,” Randall said. “All the things we’ve done were entered into to support the activities and missions of the University of Kentucky.”

UK declined to make Karpf, the chief of UK HealthCare, available for an interview, but Mark Birdwhistell, UK HealthCare Vice President for Administration and External Affairs, said in a written statement that the foundation’s success is “inarguable.”

“Hundreds of jobs have been saved and created for our community,” he said. “Millions more have been invested in our faculty and the expansion of specialty care across the commonwealth.”

He also said it’s clear that those operating the foundation “have endeavored to be open and transparent.”

But some Kentucky lawmakers say enough questions have been raised about the foundation that UK needs to be more transparent about its affiliated entities.

“One of the problems we have is that universities have become their own little or big fiefdoms,” said Rep. Jim Wayne, D-Louisville, who sees UK frequently in his work on the Capital Projects and Bond Oversight Committee. “They believe they can set their own rules. Apart from their responsibility to the public, the reality is that these foundations should be transparent in everything they do.”

If the Board of Trustees is not being briefed on it when it’s basically a slush fund that UK is dipping into, well, all I can say is sunlight is the best disinfectant.

State Sen. Chris Girdler, R-Somerset

Sen. Chris Girdler, R-Somerset, said the public deserves to know more about UK’s $200 million foundation.

“If the Board of Trustees is not being briefed on it when it’s basically a slush fund that UK is dipping into, well, all I can say is sunlight is the best disinfectant,” Girdler said. “We applaud a lot of successes they’ve had, but there is a continuous blockage of information that is very troubling to me.”

State Rep. Kelly Flood, a Lexington Democrat whose district includes UK, said she is “curious and eager to know more about why these records can’t be shared with the public.”

“My personal bias is transparency in how public dollars are spent,” Flood said. “The public does have a right to know.”

Sticking with secrecy

The foundation was formed nearly 40 years ago when officials at the relatively new UK College of Medicine realized they couldn’t pay doctors the same rates as professors and expect to keep them in a competitive medical market.

Like many other academic medical centers around the country, they set up a non-profit to help pay doctors more using hospital revenue. In the subsequent decades, the foundation has grown into a behemoth about which little is known by the public.

UK calls it an affiliated corporation, but insists it is a separate entity that is not subject to the state’s Open Records Act.

Late last year, the foundation lost an open records appeal made by a private citizen, former UK medical student Lachin Hatemi. The attorney general’s office ruled that because KMSF was created by UK, is led by UK employees and remains under its control, it should be considered a public entity that is subject to the state’s Open Records Act.

KMSF appealed that decision in Fayette Circuit Court, where the case is pending. At the time, Randall said foundation officials worried that patient information might be made public, although most of Hatemi’s requests have been for financial information. Meanwhile, the foundation has turned down Hatemi’s subsequent requests for documents.

The foundation has complied with some requests for documents from the Herald-Leader, always with the statement that it’s not required to do so. The organization says it wishes to be transparent, noting that its most recent financial statements and tax filings are online, but it also withholds any documents it deems as violating attorney-client privilege, such as its agreements with private companies.

$15 million The amount provided by the Kentucky Medical Services Foundation to something called the College of Medicine’s Dean’s Fund for Academic Enrichment in 2015. The fund, which is spent at the discretion of the dean, made up close to 3 percent of the college’s budget.

Documents provided by the foundation, court records and the organization’s tax filings show that KMSF’s influence and reach has steadily grown in recent years. In addition to paying for salaries, many operating expenses and the hospital’s malpractice fund, KMSF provides something called the College of Medicine’s Dean’s Fund for Academic Enrichment.

The fund has become a key part of the College of Medicine’s budget in recent years, growing from $7.1 million in 2006 to $15 million, or close to 3 percent of the college’s budget, in 2015.

At the dean’s discretion, the fund pays for everything from replacement ID badges to medical school scholarships ($1.2 million in 2015) and consultants who work on Medicaid issues. It pays for recruitment dinners, coffee machines and memberships to medical associations. It pays $45,000 for UK HealthCare’s suite at Commonwealth Stadium, and the $125 flower arrangements that decorate it. It also pays $900 for a Keeneland membership for Karpf and his wife.

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The fund also bankrolls numerous UK HealthCare sponsorships around the state, some more altruistic than others. For example, in 2014, it funded UK HealthCare’s $55,000 sponsorship of the Ronald McDonald House, where families of UK patients can stay close to campus. For several years, it paid $35,000 for a sponsorship at the Kentucky Speedway, which included a UK HealthCare billboard on the track, signage around the stands and UK HealthCare first-aid tents, where health information was provided, said UK spokesman Jay Blanton.

The fund spent about $4,000 over several years at fundraising dinners for the Hound Welfare Fund of the Iroquois Hunt Club, which helps aging foxhounds after they are too old to hunt. Blanton said the dinners were important “in terms of partnerships and potential affiliations,” because at one dinner, UK officials entertained Bill Sisson, the chief executive of Baptist Health, and Mark Neff, the head of Morehead’s St. Claire Medical Center, and their wives.

UK has used KMSF and the dean’s fund numerous times when it needed contracts or services quickly, without going through a bidding process or being subject to state procurement rules. It’s not clear why one entity pays for some things and not for others.

For example, when state legislators handed Eastern State Hospital, a state psychiatric facility, over to UK’s management in 2013, the dean’s fund paid roughly $700,000 for “planning and organizational costs,” including lawyers and consultants. KMSF paid an additional $90,000.

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In 2007, Good Samaritan Hospital, a community hospital bordering UK’s campus, faced bankruptcy and closure. Blanton said UK was able to quickly get $7 million from KMSF for the lease, plus legal and consulting costs, to close the $35 million deal. All the money was paid back.

“Without KMSF standing behind UK’s initial lease of the property, it is likely the deal would not have been accomplished,” Blanton said in a statement. “Today, UK HealthCare’s Good Samaritan Hospital, with more than 763 full-time equivalent staff positions, provides important services ranging from orthopedic surgery and joint replacement to emergency room and psychiatric care.”

In some cases, it’s not clear how much the foundation spends on a deal.

Last year, UK agreed to sell one of its spinoff companies — a pharmaceutical company named Coldstream Laboratories Inc. — to an Indian company for $30 million. The UK Research Foundation and UK HealthCare had invested $46 million in the company over the years, meaning the sale created a substantial loss for UK.

KMSF helped pay for legal, financial and real estate consulting fees connected to the sale, though exactly how much was spent remains a point of contention.

When the Herald-Leader filed an open records request for KMSF’s documents related to the sale, the foundation released records showing it had paid $67,000 in fees, but in his affidavit, former foundation director Griffith said the foundation had loaned a pharmaceutical company $400,000.

When asked about the discrepancy, Randall denied that any loan had been made. However, UK spokesman Blanton later said the foundation had failed to provide the Herald-Leader with all its records regarding the sale, citing an oversight. In fact, KMSF paid out $687,000, which UK has since paid back, Blanton said.

In an affidavit responding to UK surgeon Paul Kearney’s whistleblower lawsuit, Harry Dadds, a former UK attorney who now represents KMSF for Stoll Kennon Ogden, wrote that KMSF entered into service contracts on behalf of Coldstream Laboratories Inc. to “improve its marketability.”

“KMSF supported the research mission of the University of Kentucky and UK HealthCare by entering into these agreements with service providers quickly and confidentially, which protected the value of CLI,” Dadds wrote.

Flying around

In 2014, the KMSF board approved a request by UK HealthCare to lease an airplane and pilot for top executives to use. Since then, according to documents provided by the foundation, KMSF has spent $136,800 to lease a Beechcraft King Air from Hazard coal baron L.D. Gorman.

“Such activities support the patient care mission of UK HealthCare, including building affiliate networks to improve care in rural Kentucky and minimizing the time away from clinical practice for business and productive University of Kentucky physicians,” the foundation lawyer’s affidavit explains.

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Most of the flights are within Kentucky, taken by Karpf and top officials such as Mark Birdwhistell and Jay Zwischenberger, UK surgery chairman, to towns like Pikeville, Owensboro or Henderson for meetings with other health care institutions.

Karpf and other top executives took at least five flights to Hazard in 2014 and 2015, where UK had acquired a cardiology practice called the Appalachian Heart Center. In 2014, an audit of the clinic raised red flags about billing documentation and whether Medicaid and Medicare were being charged too much for procedures. To see if there were problems, UK asked the foundation to hire outside counsel and specialized consultants. After three years, the partnership with Appalachian Heart Center was dissolved.

In the end, UK and the foundation repaid $4.1 million to the federal government and KMSF paid $1 million to a Washington, D.C. lawyer. The UK Board of Trustees was briefed on the issue but minutes of the discussion were not kept, as the attorney general says was required by law.

On one trip to Hazard in August 2014, Karpf was accompanied by Central Bank CEO Luther Deaton and Alliance Resources CEO Joe Craft, both of whom are UK boosters. They were billed as “guests of UK.”

A foundation as landlord

KMSF has also heavily invested in real estate and equipment, about $96 million in total, according to its financial statements. It takes in about $3 million a year in rent, much of it from UK, and leases space, such as the old Turfland Mall, which now houses significant UK HealthCare departments. The foundation also will lease space from Shriners’ Hospital in the Shriners’ building now under construction on South Limestone across from the UK medical complex.

Randall said KMSF can move more quickly in signing rental leases, without the layers of approval and bureaucracy required at UK.

The foundation also subsidized the construction and the ongoing operations of the Child Development Center of the Bluegrass, which built a new daycare on UK property off Alumni Drive. In 2010, the UK Board of Trustees approved a 50-year lease for $1 in rent annually. What trustees were not told officially is that KMSF gave $2.7 million of the $5 million construction cost. Unlike most other state construction projects, the center did not follow prevailing wage laws, which generally sets higher wage rates for public works projects.

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The dean’s fund also provides about $150,000 a year in operational subsidies for the center. UK officials say the subsidies are a perfect use of foundation money because the center serves the children of many UK employees. About 66 percent of the 164 children at the center have parents who work at UK.

Although UK has its own childcare center, the UK Early Childhood Laboratory, it often fills up.

Randall acknowledged that the foundation board was “under-informed” about the extent of operational subsidies the Child Development Center of the Bluegrass would need, though he defends the expenditure.

“It is important to note, though, that the dean’s fund investment was not made as an economic decision,” Randall said. “It was made in the best interests of our UK faculty and staff, whose children comprise roughly two-thirds of the spots at the center. We are proud of that investment and know that it is serving the community and university extremely well.”

Lawsuits that might bring more transparency to the foundation could drag on for months or even years, but at least one UK Board of Trustees member would like to know more now.

“I think the board should be as fully informed about KMSF as it is about other things,” said trustee David Hawpe. “It’s a significant part of the university operation.”

Linda Blackford: 859-231-1359, @lbblackford

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