Numerous red flags in University of Maryland Medical System contracting with board members’ firms

In this first installment of a two-part series, contributor Charlie Hayward, a career government auditor, describes the numerous red flags uncovered to date at the University of Maryland Medical System.

In the second installment, he will cover:

(1) why the proposed emergency legislation is unlikely to be fully responsive to these red flags;

(2) why American Hospital Association guidance and best practices will not be the best benchmarks for assessing UMMS’ conflict  of interest and related policies;

(3) some of the objectives that must be met for designing a credible audit.

By Charlie Hayward

For MarylandReporter.com

Several board members of the University of Maryland Medical System have, in the words of Del. Ric Metzger at a hearing Friday, been caught with their hands in the cookie jar.

Indeed, revelations over possible conflicts-of-interest (COI), self-dealing, and potential ethics violations involving the University of Maryland Medical System (UMMS) and at least nine board members raise numerous red flags from an auditor’s perspective.

Taken together, these red flags indicate board members aren’t the only parties caught with their hands in the cookie jar because the potential exists for violations of laws or regulations (or even fraud) perpetrated both by board members and/or UMMS management.

While no such allegations have been made to date, three UMMS board members have resigned; as many as four others have taken leaves of absence; and the board has asked UMMS’ President and CEO Robert Chrencik to take a leave of absence effective March 25. These resignations and leaves of absence, however, don’t necessarily signify wrongdoing.

Possibly the most explosive allegation involves UMMS payments of $500,000 to board member Catherine Pugh, formerly in the state legislature and now mayor of Baltimore for 100,000 self-published children’s books. Pugh claimed to have refunded $100,000 to UMMS last week.

Other board members with large contracts include:

•   At least $30 million paid since 2010 to a large health insurance business owned by the family of Frank Kelly Jr., a former state senator and current board member on a voluntary leave of absence; and
•   Approximately $7.4 million paid since 2017 for services provided by M&T Bank associated with August J. Chiasera, an executive at M&T Bank, and current board member on a voluntary leave of absence.

Shortcomings of plain vanilla audit  

The hospital system management, Gov. Larry Hogan and legislative leaders this week unanimously went on record to condemn awards to board members, as well as support an audit to find out, in Comptroller Peter Franchot’s words “Who knew what when about this …”

Such an audit, however, could easily translate into a piecemeal scope and lead to a mismatch between the audit results and the actual problems or, worse, a whitewash.

Moreover, many of the same persons calling for an audit of UMMS are themselves affiliated with UMMS and therefore might best recuse themselves because of the appearance of a conflict of interest. This includes House Speaker Michael Busch.

He’s both the sponsor of proposed emergency legislation, HB 1428, “University of Maryland Medical System Corporation – Board of Directors, Ethics, and Performance Audit,” and a member of the hospital system’s board.

Red flags in general

(1) Lack of transparency between the at-large board and certain board members or committees.

Board members were, according to Speaker Busch, not privy to information about contract awards with fellow board members—indicating that “secret information” existed whereby certain individuals controlled undisclosed sensitive information, contrary to “Ten Best Practices for Measuring the Effectiveness of Nonprofit Healthcare Boards,”  cited in guidance for Nonprofit Hospital boards promulgated by the Maryland Health Services Cost Review Commission (HSCRC).

(2) Conflicting statements by Busch and CEO Chrencik about transparency of contracts with board members.

Busch asserted “[outrage] at the University of Maryland Medical board [who] had individuals on it who were greasing their whole palms by getting contracts with the medical [system]. It was never, ever brought up in a meeting that there were these contracts.”

Meanwhile, Chrencik claimed: “These contracts passed through our audit and compliance committee and then [were] reviewed in aggregate at one of our full board meetings.”

(3) UMMS contracted with board members under unusually favorable terms, including sole-source awards; lack of written contracts; and payments in advance of delivery of goods or services.

(4) Missing or defective conflict-of-interest disclosures weren’t detected by UMMS.

Earlier this month Pugh amended financial disclosure statements she previously filed in her role as a legislator during calendar years 2010-2016. Further, Pugh (after her election as mayor) filed “disclosure reports… with Baltimore’s Board of Ethics covering 2016 and 2017 [that] make no mention of the [UMMS] director seat she has held since 2001.”

However, the city solicitor says technically no disclosures were required for those years, not until 2018.

(5) State law limits service on the UMMS board to no more than two consecutive five-year terms. Pugh reportedly had been a sitting board member almost two decades (2001-2019). What motivated deviations from state law and how and why were they permitted?

(6) Tone at the top is incompatible with maintaining a board whose members are suitably independent.

Favoring board members with lucrative contracts is evidence the CEO and executive management may be currying favor with certain board members. This tone is evident from Chrencik’s defenses to questionable contract awards.

For example, Chrencik told reporters last week “… the system is happy to award work to qualified trustees. Where there’s expertise, we’re happy to try to leverage it .”

Chrencik also was quoted to say “… he believes board members would resign if they had to give up their business deals with the system.”

HSCRC’s guidance report cites multiple scholarly studies about “tone at the top, and the importance of maintaining an independent board.”

(7) Lack of aggressive implementation of voluntary Sarbanes-Oxley compliance. See HSCRC report, page 33-34. This federal law, named after Maryland’s longest-serving U.S. senator, applies only to for-profit corporation boards, but health care boards in Maryland and elsewhere have been urged to follow its standards for transparency, financial oversight and auditing.

(8) Irregularity with UMMS’ IRS Form 990 reporting “the University of Maryland Medical System did not disclose on its federal tax form for the year ending June 30, 2017, that it had purchased books from Pugh.”

(9) UMMS’ COI policy addresses how to “manage” conflicts of interest, but lacks disabling guidelines—there are no criteria for “…when a director’s material conflict is so great that the director should no longer serve on the board.”

(10) Conflict-of-interest policy lacks criteria for prohibiting service on certain board committees involving sensitive matters. This includes committees that would govern the review of financial statements and internal controls, the nomination of board members, and setting compensation and benefits packages for the CEO, executive personnel and senior managers.

(11) UMMS conflict-of-interest policy lacks clarity including examples and guidance on what circumstances may constitute material conflict of interest.

Red flags—UMMS’ purchase of children’s books

(12) UMMS “didn’t feel the need to inspect the donation of the books” and evidently didn’t have much interest about order fulfillment and distribution of its book purchases. All such controls seem to have been delegated to the contractor,  Healthy Holly LLC, and Pugh.

(13) School districts did not ask for donations of books bought by UMMS, and none of the books were useful in formalized student instruction.

(14) Books for kids don’t appear to be a necessary expense of UMMS. Were they part of a larger system initiative or a one-off idea?

(15) Nobody can find the books (reported by the New York Times and multiple local media.)

(16) UMMS ordered 100,000 books, about double the entire population of children who Pugh claims might read them.

(17) Of the books that can be found, approximately 8,700 were never used.

(18) Baltimore school official’s recollections of when they received books (2011 – 13) don’t match the time periods that UMMS paid for publishing and distributing books (2011, 2013, 2015, 2017 and 2018.)

Editor’s note: Most self-published books these days are available online at Amazon, Barnes & Noble, and others. Pugh’s Healthy Holly cannot be found on these sites.

Charlie Hayward spent more than 30 years performing Government Accountability Office audits and served as a partner in two accounting firms. He retired in 2007 from Cotton & Company LLP, where he was a partner and principal financial auditor of the firm’s audit practice group. Since retiring, he has been a contributing writer for MarylandReporter.com and Bloomberg BNA.