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When  the Kosair Charities suit against Norton Healthcare became public last Thursday, our first calls to insiders surprised us.

“This,” they said, “isn’t quite as represented.”

Indeed, a 2012 document given to IL seems to indicate Kosair executives’ chief concern was controlling how Norton raises money in Kosair’s name, and where that money goes.

In essence, the dispute is over who has the right to be the main hospital charity raising money for Louisville’s children.

In the 30-page complaint filed May 8 in Jefferson Circuit Court, Kosair officials and attorney Don Cox, with Louisville-based firm Lynch, Cox, Gilman & Goodman, charge Norton executives essentially place Kosair donations – about $6 million per year – in a general fund, treating Kosair Children’s Hospital as just another part of its hospital system.

“That support, coupled with $4 million given to KCH by the Children’s Foundation, should ensure KCH is a world class institution if KCH is structured properly and the donations are expended for improvement at KCH,” the Kosair suit states. It’s not, according to the suit.

Picture 3Our sources picked up on those amounts immediately.

Ten million dollars is a tiny percentage of Norton’s total annual budget, which was $1.6 billion for 2012, the last year we could find financials.

Norton is in good financial shape, according to Fitch Ratings, though it was briefly in the red after investing about $63 million during 2012 and 2013 in IT and in digitizing medical records.

As of June last year, the five-hospital system had 152 days of cash on hand and more than adequate cash-to-debt ratios, according to Fitch.

Our sources tell us the Kosair/Norton contretemps is about money, just not the way we were trying to make it all fit together.

Picture 4Norton, according to Kosair, is playing fast and loose with both Kosair’s donations and the Kosair brand.

Norton, according to the suit:

• co-mingled Kosair with its own system revenue. “With all accounts and expenditures of (Kosair Children’s Hospital) lumped together with those of Norton’s other hospitals, it is not possible for Norton to demonstrate that it has in fact expended any of Kosair’s donations to benefit KCH. (Emphasis theirs.)

• overcharged Kosair for procedures, then kept the difference.

• started using the Kosair name far beyond the parameters of a 2006 affiliation agreement. The agreement allows Norton to use the Kosair name at the downtown Kosair Children’s Hospital and at Norton Kosair Children’s Medical Center in Brownsboro Crossings, but not at other facilities including pediatric practices, outpatient facilities and clinics, according to the suit.

The suit indicates Kosair started complaining to Norton of material contract breaches starting in July, 2013, alleging that through the Children’s Hospital Foundation, Norton was using the Kosair name “in a manner that is confusing to the public and is competitive with Kosair …..”

And that’s the crux of the argument.

As we reported in today’s Monday Business Briefing, the email to Robert Azar, Norton system vice president and chief legal officer, from Norbert Arrington, Kosair Charities’ attorney, states that Kosair believes Norton raised money improperly in the name of Kosair Children’s Hospital Foundation.

Arrington demands an audit of all Norton fundraising.

A source told IL it’s “worth noting” that the audit did take place and Norton’s fundraising reporting was accurate in the way it raised and accounted for all incoming donations.

From the accountants report:

Our procedures and findings are as follows:

1 Mountjoy Chilton Medley LLP MCM obtained the listing of bequests to Norton Healthcare from January 1 2007 through August 31 2012. To verify that we had the complete listings MCM tied the total bequests per calendar year to the total bequests per the audited financial statements for the years ended December 31 2007 – 2011. Since 2012 has not been audited as of the date of our report we tied the year to date 2012 bequests to the internal financial statements. MCM noted no exceptions in our testing. Exhibit 1

2 For each bequest made to Norton Healthcare from January 1 2007 through August 31 2012 MCM obtained the will and copy of the check from Norton Healthcare Inc. files. We compared the beneficiary per the will and check to the terms stated in the Second Restated Agreement of Affiliation auditing tool dated December 5 2006 between Norton Healthcare and Kosair Charities Committee KCC and noted the findings on the attached spreadsheet Exhibit 2.

In summary the bequests made to Norton Healthcare from January 1 2007 through August 31 2012 Exhibit 2 were either properly retained by Norton Healthcare or redirected to KCC.

When a parallel audit was requested of Kosair Charities, we’re told the audit was never finished. Norton officials declined to comment. Kosair’s spokesman did not respond to an email query.

At the same time as Kosair requested the audit, Arrington also suggested the two non-profits simply split all money raised since a 2006 affiliation agreement was signed, through 2026.

“This would avoid all the needed discovery in the audit process and save a large amount of time in the future,” Arrington writes.

The email ends with Arrington stating Kosair executives are open to ending the affiliation agreement.

If that indeed happens, it’s not clear what the impact would be on Kosair Children’s Hospital, one of only two in Kentucky.