Gaul, Inquirer Staff Writer, PHILADELPHIA INQUIRER; Wed. September 27, 1989
When the American Association of the Red Cross was formed by Clara Barton on May 21, 1881, it was with a clear mission.
A charter later approved by Congress spelled out its purpose as a voluntary relief agency providing medical aid to victims of wars and other great "national calamities," including pestilence, famine, fire and floods.
That is still the image the Red Cross portrays in its advertising and solicitations. "When people are in trouble, the American Red Cross gets down to business - the emergency-services business. It's what we do best," the Red Cross said in its 1986 annual report.
But tax records and financial statements show that, a century after its founding, the Red Cross' main business is no longer disaster relief.
Its main business is selling blood.
Consider these facts:
* Fifty-nine cents out of every dollar that the Red Cross spent in the fiscal year ended June 30, 1988, went to operate its blood program. Less than a dime out of every dollar went to disaster services.
* The majority of the Red Cross' revenues - nearly 53 percent - now comes from blood, up from 19 percent in 1971.
* From 1980 through 1987, the blood program generated average operating profits of $38 million a year. Last year, profits fell to $4 million as a result of safety problems that increased costs. The blood program's total profits, which the Red Cross calls "excesses over expenses," were nearly $307 million for the 1980-88 period.
* From 1980 through 1988, the blood program's net worth grew 161 percent, to $188 million. Overall, the Red Cross had a net worth of nearly $1 billion in 1988, with cash and investments of $559 million listed on its balance sheets. (Net worth is the amount by which an organization's assets exceed its liabilities.)
In short, the Red Cross has undergone a major transformation in the last 15 years - from predominantly a relief agency to a giant in the blood business.
Today, the Red Cross controls at least half of all the blood collected and sold to hospitals in the United States.
The Red Cross' blood operations are so big that if the blood program alone were a public company, its 1988 revenues of $535.5 million would have ranked 477th on the Fortune 500, just ahead of Affiliated Publications Inc., owner of the Boston Globe.
And the Red Cross' total 1988 revenues of $985 million from all sources would have ranked 339th on the Fortune 500, ahead of Bausch & Lomb Inc., the lens and eye-care company.
Before its financial problems last year, the Red Cross' profit margin would have been the envy of many companies. Its overall 8.7 percent profit margin in 1987, for instance, would have ranked 98th on the Fortune 500, ahead of such giants as General Electric Co., Mobil Corp. and Chrysler Corp.
Another advantage those corporations could only wish for: the services of nearly 1.4 million volunteers, who donate their time for Red Cross blood drives, First Aid classes and disaster aid. That's in addition to the organization's 23,357 paid workers.
Over the years, the Red Cross has built a vast network that now includes 56 regional blood centers, a Washington headquarters, 2,817 Red Cross chapters, a multimillion-dollar research lab, a closed-circuit television network and production studio, and its own offshore insurance company Boardman Indemnity Ltd. in Bermuda - to cover losses from AIDS lawsuits and other claims.
And as a nonprofit charitable organization, the Red Cross benefits from $90 million worth of free television, radio and print advertising a year, at least one-third of which is devoted to its blood program.
In recent years the Red Cross has become a major player in the largely commercial plasma business, where the Red Cross now has about a 15 percent share of the U. S. market, with sales of about $75 million a year.
The Red Cross' rise to dominance of the blood business has not been without controversy. Officials of other nonprofit blood banks criticize it for aggressive tactics and say the Red Cross is trying to take over the blood business. And its commercial competitors contend that the Red Cross has an unfair competitive advantage because of its tax-exempt status, which they say the blood portion of its operations does not deserve. "Red Cross is in business - both in the blood business and in the finished plasma business - and building up a Taj Mahal," said Thomas Hecht, chairman of Continental Pharma Cryosan Inc., a plasma business in Montreal.
"The American Red Cross is perceived by the public as a benevolent group of volunteers, who make the donation of blood as painless and socially significant as possible," H. Edward Matveld of Alpha Therapeutics Inc., said in testimony in June 1987 before a U. S. House subcommittee that was examining the question of taxing nonprofit groups. "The public is not generally aware of . . . its incredible wealth.
" . . . The plasma services division (of the Red Cross) has grown disproportionately so that its revenues are not substantially related to the performance of the original tax-exempt purpose," Matveld said. "It therefore appears appropriate for Congress to review the American Red Cross charter and mission as they pertain to competitive, for-profit activities."
Red Cross officials have fended off suggestions the organization should pay taxes on its blood business, arguing that no one benefits personally from its profits, which are used to further the organization's work. Red Cross officials also say they act as stewards of the blood they collect from unpaid donors.
"We have no stockholders," Dr. Lewellys F. Barker, the Red Cross' senior vice president for blood services, said in an interview. "To me, that's probably the most fundamental difference between nonprofit and commercial entities. We both need to have substantial finances to be able to provide our services.
"Our objective is to meet patients' needs," Barker said. "I think it's pretty traditional in this country for business objectives to make a profit. I don't object to that. That's their primary purpose, as I see it. But that's not our primary purpose."
In earlier testimony before the congressional subcommittee examining non-profit, Barker said: "We operate (the blood services) on a cost-recovery basis. That is to say, obviously, the total revenue with an excess that we require for working capital and equipment and buildings and so forth basically balances the total expenses. It is a wash."
Its critics contend that the Red Cross has used its "excesses" - profits - over the years to build an ever-expanding empire, paying executive salaries of $150,000 or more and amassing larger-than-necessary financial reserves.
In the interview with The Inquirer, Barker was asked about a 15 percent profit margin budgeted for the Red Cross' plasma business this year. He said that the Red Cross needs to maintain adequate reserves. "This is a service which has some cycles, ups and downs, for which we need (financial) reserves."
It is Red Cross policy that each of its 56 blood centers should maintain financial reserves sufficient to cover a minimum of 45 days' worth of operations, and up to a maximum of 180 days. However, an internal Red Cross financial document obtained by The Inquirer notes that "some regions have liquidity levels above what can reasonably be considered necessary to operate their blood centers.
"In a few cases, liquidity levels exceed one year. As a nonprofit organization, it is difficult for the Red Cross to explain the need for excessive amounts of liquidity," the Feb. 17, 1989, internal report said.
While the blood business has been a major revenue source for the Red Cross, profits from blood are not used to pay for disaster relief. The two programs are operated separately.
The blood program is self-supporting; other Red Cross services, such as disaster relief and water-safety programs, are financed through contributions from the public - $315 million in 1988. Most of those contributions come through the United Way.
One reason the Red Cross is sensitive about its profits from blood sales is fear that public knowledge about them might affect charitable contributions, some industry officials say.
"Red Cross doesn't want the American public to know it is a big blood business," said James Holland, former president of Blood Centers of America Inc., which represents eight nonprofit blood banks. Holland said that the Red Cross promotes its disaster-relief activities and plays down its blood program "to keep the (charitable) donations coming in."
In Philadelphia, the Southeastern Pennsylvania Chapter of Red Cross received 52 percent - or $3,173,506 - of its funding in 1988 from United Way contributions. The chapter had total revenues of $6.1 million last year and spent $885,036 on disaster services. Its largest expenditures were nearly $1.6 million contributed to national headquarters in Washington and $1.1 million for management and chapter activities.
In 1971, contributions from all sources accounted for 78 percent of the national organization's total revenues of $174 million. By 1988, contributions had tumbled to 32 percent of revenues - $315 million out of nearly $985 million.
That trend has caused concern. The Philadelphia chapter lists as one of its current management goals: "To stabilize United Way funding relationship while expanding supplemental fund-raising efforts."
When the Red Cross was formed in 1881, the charter spelling out its mission contained no references to collecting or selling blood. It still doesn't.
The organization began distributing blood during World War II, at the request of the U. S. government. The Red Cross and a group called the National Resource Council supplied the armed forces with 13 million pints throughout the war.
After the war, Red Cross officials wrestled for two years with the question of whether to resume collecting blood, according to two official histories of the organization.
In 1947, they decided to embark on a nationwide blood program to supply hospitals, in order to keep the Red Cross' name before the public and to generate new revenue, according to the histories.
"The new program marked a major departure for Red Cross - away from the strictures of its traditional and Charter-mandated activities and into the realm of civilian medical service," says a background paper written by Norman R. Kear, administrator of the Red Cross' blood center in Los Angeles.
Kear's paper lists five general purposes for the 1947 decision, one of which was "to develop an activity that would be constant and thus keep the American Red Cross continuously in the midst of the people on whom it depends for support."
Although it had the backing of several national groups, the Red Cross' initial efforts ran into opposition from other blood suppliers, including hospitals and community blood banks. These two groups formed the American Association of Blood Banks to act as a counterforce to the Red Cross.
It was not until the 1970s that the Red Cross' blood program really began to mushroom. From a loss of $15 million in 1971, the program turned in a profit of more than $9 million by 1977. And between 1980 and 1987, the program's operating profits never dropped below $20 million a year, reaching as high as $56.6 million in 1983.
The Red Cross benefited from a federal policy, developed in 1972, that encouraged the formation of large regional blood centers to ensure an adequate national blood supply.
The transformation of the Red Cross may be seen in two sets of figures: Between 1971 and 1987, spending on disaster relief rose from $25.5 million to $89.4 million, an increase of 250 percent. Spending on the blood program went from $48 million to $488.2 million, an increase of 917 percent.
By the early 1980s, the Red Cross controlled half of all blood collections and was a serious competitor in the plasma business. More recently, the Red Cross has expanded into the growing market in bone and bone marrow for transplant, operating a nationwide network of bone banks. It is now the largest supplier in the United States of bones and tissue for transplant.
In the blood business, the Red Cross now accounts for slightly more than half the estimated 13.5 million pints of blood collected each year. From that blood, it makes nearly 10 million separate blood products and sells them to 3,300 hospitals.
For its supply, the Red Cross depends on volunteers to donate blood each year at thousands of businesses, churches and other sites. An estimated 4.3 million people donated blood last year.
According to Red Cross statements, the blood program is operated on the premise that "healthy members of the community have a responsibility to donate adequate amounts of blood to meet the needs of their sick and injured neighbors."
"Someone you love needs life-giving blood," says the Red Cross' 1988 annual report.
The Red Cross does not pay donors for their blood. In 1976, Red Cross president George M. Elsey wrote that paying for blood was "medically and morally unjustifiable.
"We of the American National Red Cross have never paid any donor at any time for her or his blood and most certainly never shall," Elsey wrote to Elmer B. Staats, then-comptroller general of the United States.
Red Cross officials also say they do not charge hospitals for the blood they purchase. Rather, hospitals are billed a "processing fee" that covers the cost of collection and production, the Red Cross says.
That distinction has worn a little thin on some operators of other blood banks.
"It drives me crazy when the Red Cross says it doesn't sell blood. That's like the supermarket saying they're only charging you for the carton, not the milk," said Richard D. Crowley, executive director of the Central Illinois Blood Bank in Springfield. "What else do you call it? We're in the blood-selling business."
The "processing fees" are the prices that hospitals are charged by Red Cross blood centers. And those prices vary dramatically from region to region.
In its plasma business, some Red Cross blood centers are instructed by national headquarters to mark up their products by fixed amounts, known inside the organization as "overrides." In other cases, the centers are free to charge hospitals whatever the local market will bear, internal Red Cross documents show.
And, while the Red Cross doesn't pay donors for their blood, it does use money as an incentive for the collection of more blood.
In 1988, the Red Cross began a pilot project in which blood centers were paid a $15-a-pint bonus for collecting more blood than they need - blood to be sold to other centers. Known as National Premium Contracts, the bonus program yielded an extra 26,000 pints last year, according to a Red Cross planning document.
Red Cross officials hope to collect up to 104,000 extra pints annually, according to the document. At $15 a pint, that would mean a payout of $1,560,000 in bonuses to blood banks.
Some Red Cross blood centers also offer cash bonuses to workers who solicit blood donors by telephone. The workers earn the bonuses, tacked onto their salaries, by exceeding goals set by the blood centers.
Telephone solicitors for the Red Cross blood program in Philadelphia can earn bonuses of $80 to $200 a year by exceeding recruitment goals.
To earn a $200 bonus, a solicitor must average three donor appointments per hour during the year, according to spokeswoman Christie Phillips. Recruiters are required to make at least 1.75 donor appointments an hour, Phillips said.
Supervisors also are eligible for bonuses - up to $600 a year - based on the performance of the recruiters they oversee, Phillips said.
Barker said the practice of offering financial incentives to tele-recruiters was consistent with the volunteer philosophy the Red Cross always has espoused.
"We draw a very clear line between paying donors and paying fees . . . whether they are a cost-plus incentive or whatever. We see those as totally different issues. At least I do."
In the last 18 months, problems in the Red Cross' blood program have shaken the organization and had a severe impact on finances.
Nearly two-thirds of the 56 regional blood centers were identified as having deficiencies following the discovery in March 1988 of problems at blood centers in Washington and Nashville.
Most of the safety problems involved inadequate testing of blood before it was released or failures involving the computerized records systems used to log results of blood tests and to keep track of dangerous donors.
Between March 1988 and March 1989, the Red Cross recalled 5,700 units of blood and blood components that had not been properly tested for AIDS and hepatitis. (The Philadelphia blood bank was not among those with safety problems.) And the Red Cross had to shut down its $75 million-a-year plasma business for six months because of concerns about blood safety.
In late February, the Red Cross' board of directors named a special committee to examine the operation of its blood program. The committee was expected to report its findings in October.
The problems led to a shakeup of top management at national headquarters in Washington and in the field. President Richard F. Schubert and three other senior staff members, including the head of computer operations, announced their resignations in April. Several top administrators of regional blood centers were demoted or replaced, and top blood-program staff at national headquarters has been reorganized.
A Red Cross internal investigation and FDA inspection reports traced the release of some suspect blood to vaguely worded instructions from national headquarters on testing for AIDS - with different blood centers interpreting the test instructions in various ways.
"This was the single biggest cause of erroneous releases (of suspect blood). . . . Thus our own (directives) were the principal cause of our current plasma financial crisis and the attendant media attention about erroneous releases," the November 1988 internal report said.
Another internal report was highly critical of the computerized system for recording results of AIDS and other tests on blood and for keeping track of dangerous donors.
"Efforts in automation are dismal failures; poor system design has contributed to (the) erroneous release problem; FDA and independent consultants indicate that systems do not comply with (federal) requirements," the report said.
The problems also affected morale and exacerbated tensions between the regional blood centers and national Red Cross officials at headquarters in Washington. The relationship between national headquarters and the regions was characterized as one of "intensely mutual lack of trust" in a Dec. 7, 1988, analysis prepared by directors of a number of regional blood centers.
"NHQ staff are not accountable. . . . Lack of stable knowledgeable staff. . . . Organization is slow to change in a rapidly changing environment . . . and is inwardly focused. . . . Too much time spent doing business within the organization," were some of the criticisms made in the analysis.
In a national teleconference in February to introduce members of the newly appointed study commission and to calm employees' concerns, Schubert, then president, noted that the Red Cross was suffering from "unfortunate divisiveness and hostility."
Dr. Fred Katz, a vice president of the Red Cross, said during the teleconference that the safety problems had resulted "in decreased confidence in our ability to release only safe products. The public and our customers had opportunity to question our claims of safety." And because of the quarantine of Red Cross plasma, and of the cost of dealing with the safety problems, "Red Cross was financially damaged," Katz said.
"We have just got to operate in such a way . . . we don't have a repetition of what has happened over this last year," Schubert said during the two-hour teleconference. The Inquirer obtained a videotape of the meeting.
As a result of the shutdown of the plasma program and other problems, operating profits for fiscal year 1988 dropped to about $4 million from nearly $34 million the previous year. The Red Cross borrowed $20.7 million from the blood program's reserves of $209 million for capital improvements.
Barker said that most of the problems were compliance issues, which did not directly affect public safety.
Since January, the FDA has released most of the quarantined plasma medicines and Red Cross officials have launched a wide-ranging offensive to get their $75 million plasma program back on track. Regional blood centers have been instructed by national headquarters to collect as much plasma as possible, internal documents show.
"Red Cross ability to maintain or increase our market share . . . is a key organizational goal," a Feb. 17 budget-planning document states. It also noted that the Red Cross anticipated recovering a "substantial increase" in revenues from the blood-clotting medicine it sells to hospitals and hemophiliacs.
In another step aimed at shoring up the Red Cross' overall financial position, chairman George Moody late last year informed 5,700 retirees of the board of governors' plans to terminate the Red Cross' $730 million pension plan and to replace it with a different system.
Contending that the pension plan was overfunded, the board proposed to tap $100 million of an estimated $400 million surplus for operating expenses.
The plan angered many Red Cross retirees. Moody defended the action in a letter to one retiree who had objected. As a nonprofit organization, he wrote, "we believe that a portion of the excess funds . . . should be used to meet humanitarian and organizational needs."
In an interview, pensioner James B. Foley described the plan as a "ripoff" and said that the average Red Cross pensioner receives a monthly check of $422 - about $5,000 a year.
Virginia Mankin, manager and secretary of the retirement fund, said the number of pensioners receiving benefits as of July 26 was 5,757. The average monthly check was $436 - or $5,232 a year.
She said that pensions are based on the number of years a person worked at Red Cross - the more years, the higher the pension. "There's quite a few people who would leave at age 65 with very low service," she said. "It also covers part-time and per diem people."
As the blood portion of its operations has grown, officials of the Red Cross in Washington have become increasingly secretive, apparently for competitive reasons, regional Red Cross managers and others say.
The organization used to publish annually a report on its operations that contained information about each of its 56 blood centers, with data ranging from amount of blood collected to prices charged.
"Now you practically have to go underground to get one," said Nancy R. Holland, former executive director of the American Blood Commission, an organization that once helped shape public policies on blood.
Many reports containing routine data on Red Cross operations are now stamped "confidential," "secret" or "For Internal Use Only." Key officials within the Red Cross' regional blood banks are required to sign confidentiality statements, promising not to disclose financial and operational data.
"There is a genuine fear of outsiders, which is unfortunate because it makes it appear we have something to hide," said Kear, administrator of the Red Cross blood center in Los Angeles.
Most Red Cross officials are truly interested in doing a good job, Kear said. But he said the organization has become "unnecessarily bureaucratic" and "paranoid."
Others use even stronger language.
"They actually have a mind-set that on the day of creation, when the Earth was just one big steaming molten mass and hot sulfur clouds were churning around, the hand of God reached through with a bag of blood and handed it to them and said, 'Here, take this exclusively and spread it among all mankind,' " said Thomas M. Asher, chairman of a publicly traded company in Sherman Oaks, Calif., that competes with the Red Cross.
"The Red Cross in my mind is the evil empire," said Leslie Vogt, president of a nonprofit blood bank in Richmond, Va., that is not affiliated with the Red Cross. "They want to be the only blood supplier nationally. It's run like a big business. And it's more political than most people think."
For nearly a decade, between 1977 and 1987, the Richmond center bought several thousand pints of blood a year from the Red Cross' regional blood program in Roanoke, 165 miles away. Vogt needed the blood to cover shortages in her city.
"It was a good, friendly relationship. They had a surplus of blood and we needed blood," Vogt said.
Then, in 1986, she was told by Roanoke officials that she would have to buy blood through the Red Cross' new national clearinghouse. That meant paying more for the blood and Vogt said she was afraid Richmond would be cut off if there was a shortage in the Red Cross system somewhere.
"They took a relationship that worked for 10 years and wrecked it," Vogt said.
Vogt opted to buy her blood from several other blood banks.
"It's crazy. You have two blood banks 165 miles apart that can't share blood, while the blood drawn in Roanoke is probably being shipped all over the country," Vogt said.
Read on to Part 5 - America: The OPEC of The Global Plasma Industry
|PHOTO (1), 1. Seeking to collect extra blood to be sold, some Red Cross centers offer bonuses to solicitors who exceed recruitment goals. (The Philadelphia Inquirer / REBECCA BARGER), CHART (2), 1. Revenues and expenses, 1988 (SOURCE: American Red Cross; The Philadelphia Inquirer / KIRK MONTGOMERY), 2. Spending on blood vs. disaster relief (SOURCE: Red Cross, tax returns, financial statements; The Philadelphia Inquirer)|
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