Some Call it "Tyranny" - Top Leaders of University of California (Including Leaders of Academic Medicine) Demand Bigger Pensions for Themselves

The state of California, and its flagship university system, the University of California, have been under extreme financial pressure lately. 

The 36 Executives' Demands

However, that apparently has not decreased the University's hired managers' and executives' sense of entitlement.  They are threatening to sue if their pensions are not increased.  As reported by the San Francisco Chronicle,

Three dozen of the University of California's highest-paid executives are threatening to sue unless UC agrees to spend tens of millions of dollars to dramatically increase retirement benefits for employees earning more than $245,000.

'We believe it is the University's legal, moral and ethical obligation' to increase the benefits, the executives wrote the Board of Regents in a Dec. 9 letter and position paper obtained by The Chronicle.

'Failure to do so will likely result in a costly and unsuccessful legal confrontation,' they wrote, using capital letters to emphasize that they were writing 'URGENTLY.'

Their demand comes as UC is trying to eliminate a vast, $21.6 billion unfunded pension obligation by reducing benefits for future employees, raising the retirement age, requiring employees to pay more into UC's pension fund and boosting tuition.

The fatter executive retirement benefits the employees are seeking would add $5.5 million a year to the pension liability, UC has estimated, plus $51 million more to make the changes retroactive to 2007, as the executives are demanding.

The executives fashioned their demand as a direct challenge to UC President Mark Yudof, who opposes the increase.

'Forcing resolution in the courts will put 200 of the University's most senior, most visible current and former executives and faculty leaders in public contention with the President and the Board,' they wrote.

Background to the Case
Here is the relevant background:

The roots of the pension dispute go back to 1999, five years after the IRS limited how much compensation could be included in retirement package calculations. But even after the IRS granted UC's waiver in 2007, nothing changed.

University executives were having troubles of their own that year.

President Robert Dynes resigned in 2007 after it was discovered that UC was awarding secret bonuses, perks and extra pay to executives. State auditors also found that UC's compensation practices were riddled with errors and policy violations.

UC officials also had become aware of another big problem: UC's pension obligations were about to outstrip its ability to pay retirees. Neither UC nor its employees had paid into the fund since 1990.

It took until this year for UC to act. In September, a retirement task force offered Yudof several options for closing the $21.6 billion gap - and one to widen it: increasing executive pensions.

Health Care Executives Included

Note that in addition to a bunch of finance officers and portfolio and asset managers, the demanding executives included quite a few leaders of the medical schools, and academic medical centers, including:

UC System's Central Office
Dr. Jack Stobo, senior vice president, health services and affairs

UCSF
Dr. Sam Hawgood, vice chancellor and dean, School of Medicine
Ken Jones, chief operating officer, medical center
Mark Laret, CEO, medical center
Larry Lotenero chief information officer, medical center
John Plotts, senior vice chancellor

UC Davis
William McGowan, CFO, health system
Dr. Claire Pomeroy, CEO health system, vice chancellor/dean, School of Medicine
Ann Madden Rice, CEO Medical Center

UCLA
Dr. David Feinberg, CEO of the hospital system; associate vice chancellor
Dr. Gerald Levey, dean emeritus
Virginia McFerran, chief information officer of the health system
Amir Dan Rubin, chief operating officer of the hospital system
Dr. J. Thomas Rosenthal, chief medical officer of the hospital system; associate vice chancellor
Paul Staton, chief financial officer of the hospital system

UC San Diego
Dr. David Brenner, vice chancellor for health sciences; dean of the School of Medicine
Tom Jackiewicz, CEO, associate vice chancellor of the health system
Dr. Thomas McAfee, dean for clinical affairs

UC Irvine
Terry Belmont, CEO, Medical Center

The Outraged Reaction
The executives' demands sparked anger on campus.

Dissenting members of the task force said it would be unseemly' to expand executive pensions. Tuition had just been increased by 32 percent this fall, and the regents were poised to raise it another 8 percent for fall 2011. They also voted to shift more money into the retirement fund from employees' pockets, as low-wage workers worried about retiring into poverty.

'I think it's pretty outrageous that this group of highly compensated administrators of a public university are challenging the president and the chair of the Board of Regents, said Daniel Simmons, chairman of UC's Academic Senate and a law professor at UC Davis.

'What outrages me the most is that these 36 people are blind to the fact that this is a public entity in dire straits,' said Simmons, who also served on the retirement task force and opposed the higher pensions.

The demands prompted outrage from politicians and editorialists. A few choice samples:

- The executives are "tarnishing the university's name with greed," editorial (UCLA) Daily Bruin.

- "Very out of touch," by Governor Elect Jerry Brown; "truly living in an ivory tower...." while "people are suffering in the rest of the state and losing their homes," by Assemblyman Jerry Hill, D- San Mateo (per the San Francisco Chronicle)

- "Uncaring and divisive," "undercuts public support for one of California's most treasured institutions," "sending out its own special-interest message: what's in it for me," - editorial, San Francisco Chronicle.

- "despicable threat," the California Regents (UC board of trustees) should not "claim that lavish pension may be needed to recruit good people to UC. Good people don't threaten lawsuits against a cash-strapped sate to enrich themselves." editorial, Sacramento Bee.

- Governor-Elect B4rown should issue an executive order "to eliminate any position in the University of California system paying $245,000 a year or more," (thus effectively firing all the 36 complaining executives); "free taxpayers and students alike from the tyranny of those whose main objective during any time - tough or otherwise - is to keep milking the state for every penny the can squeeze out," editorial, Manteca Bulletin.

Summary

We have posted frequently about hired managers and executives of health care organizations receiving compensation and benefits out of all proportion to their apparent performance. The case of the demanding University of California executives is just one of many. However, what is really remarkable about this case is the reaction to it. We are hearing top leaders, including many of the top leaders of the state's medical schools and academic medical centers, called uncaring, greedy, and despicable by well-known politicians and in newspaper editorials, and we are hearing calls that they be fired, en masse.

Maybe we are at a tipping point.

Of course, hired health care managers and executives are not entitled to line their own pockets while patients and their other constituencies suffer during the great recession. They are not entitled to continually drive health care costs up while they enrich themselves.

However, apathy, learned helplessness, and the anechoic effect have let them promote themselves into a de facto new aristocracy (just like the hired managers and executives of some other non-profit organizations, for-profit corporations, and especially financial service corporations have turned themselves into the rest of that aristocracy.)

If we do not reclaim health care from these new oligarchs, we will all end up not just with expensive, difficult to access, mediocre health care, but under their tyranny.

Post-Script

This is just the latest example of the sense of entitlement displayed by the hired managers and executives of the University of California. Outrageous pay and benefits unjustified by any measure of performance for University of California's hired managers and executives has been grist for the Health Care Renewal mill since 2005.  A few samples:
-  The ranks of those paid more than $200 K rose much faster than those paid less, while lower paid employees endured a pay freeze, and the university cut its budget.  Managers got bonuses for extra work, while faculty did not.  Managers got housing allowances, and other perks.  (November, 2005) 
- UC-Irvine managers were paid lavishly while presiding over debacles involving transplant services  (liver transplants, November, 2005; bone marrow transplants, January, 2006; kidney transplants, January, 2006)
- UC - San Diego Chancellor was paid $359 K plus a bonus of $248 K for supposed full time work while serving on ten for-profit corporate and non-profit boards, including directorships of for-profit health care corporations that were conflicts of interest with her role overseeing the medical school and medical center.  This was the first case of what we later called the "new species of conflicts of interest" posted on the blog.  (January, 2006)
- UC - Irvine managers got bonuses while its medical center failed an inspection (January, 2010), as did managers at other UC campuses (January, 2010).

Maybe if these older stories produced more outraged, the current situation would not have occurred.

You heard it first on Health Care Renewal

Hat tip to Prof Margaret Soltan on the University Diaries blog.

Hackensack University Medical Center CEO's $5 Million Golden Parachute: "the Public Will Perceive the Institution as a Kind of Insider's Group"

Last year was an embarassing one for Hackensack University Medical Center (HUMC), a large academic medical center affiliated with the University of Medicine and Dentistry of New Jersey.  In April, former state senator Joseph Coniglio was convicted of fraud (against the public) and extortion for a scheme that involved him being paid $5000 a month for undefined consulting work for HUMC while he promoted the hospital's interests in the state legislature (see post here).  A subsequent investigative report revealed widespread self-dealing on the part of the HUMC board (see post here).  Soon after, the HUMC CEO, John Ferguson, announced his retirement, per the Newark Star-Ledger.

Scandal Leads to Apparent Reforms

So when I read an article from last week on NorthJersey.com entitled "Hackensack University Medical Center works to revamp reputation hurt by trial" I hoped that these travails lead to some real improvements in the leadership and governance of the institution.  Hope springs eternal, and the article did describe some apparent progress.

The medical center's board of trustees was streamlined:

the hospital's board of governors — once a 57-member behemoth run by a core group of powerful and politically connected members — was whittled to less than half its former size and is now overseen by what the hospital is calling a 'reinvigorated' parent company, Hillcrest Health Service System Inc.

Conflicts of interest and self-dealing were apparently banned

Members of the two boards may no longer do business directly with the hospital — a significant change because some of them own or work for companies that have been paid millions of dollars by Hackensack. In 2009 alone, these companies were paid $13.2 million by the hospital, according to its federal tax filings. They were paid $17.4 million in 2008.

The Devil in the Details
Although the board was reduced in size, it gained almost no new members, and the politically-connected members who previously were accused of self-dealing remained:

Serving as chairman of the board of governors is Joseph M. Sanzari, a construction magnate, multimillion-dollar donor and longtime board member. His company, a joint venture with former board Chairman J. Fletcher Creamer Jr., has been one of the highest-paid independent contractors at the medical center.

Also,

There were no new board members until Tuesday, when two were appointed. Many who held influential positions on the board of governors — including Sanzari, Creamer and Joseph Simunovich — are still in key roles.

Furthermore, there was a big loop-hole in the apparent ban on conflicts of interest and self-dealing:

members of both the board of governors and Hillcrest can still do business with the hospital as long as they work as subcontractors or move to the foundation board or a newly created advisory panel that doesn't have voting or fiduciary powers.

Also,

Members of the board of governors and Hillcrest still can be hired as subcontractors.

The ban on doing business with the hospital also doesn't cover members of the advisory panel or the board that oversees the foundation. About a dozen members of these two groups are affiliated with companies that have made money — millions, in some cases – in work with the hospital.

As one outside expert noted,

'They may have changed the structure, but if you don't change the people, you don't change the culture,' said Jamie Orlikoff, a governance expert who advises the National Hospital Association.

Furthermore,

'People who had influence and clout when they were members of a fiduciary board will still have influence and clout even if they are moved to an advisory board,' Orlikoff said.

So,

'The concern is that the public will perceive the institution as a kind of insider's group and things are being done to benefit them,' said Daniel Borochoff, president of the American Institute of Philanthropy.

The CEO's Golden Parachute

Hope spring eternal, but is too often crushed.  However, at least the former CEO is gone. But it turns out he got quite a going away present. As described in a companion article,

John P. Ferguson received a severance package of more than $5 million when he was forced out as president of Hackensack University Medical Center last year, bringing his total compensation for 2009 to $7.7 million, according to recent federal tax filings.

The other executives who presided over HUMC in 2009, the year that its former consultant was convicted, also did very well for themselves,

His senior vice president for operations, Doreen Santora, received $2.6 million — including more than $1.5 million in severance — when she left in the executive reshuffling that followed, the documents show.

In all, seven top executives at the non-profit hospital each received more than $1 million in total compensation in 2009, up from five the year before.

This extremely generous compensation could not be related to the financial success of the hospital at the time:

The compensation packages came in a year in which tax filings show the 775-bed medical center employed 317 fewer staff and Moody's Investors Service downgraded its credit rating to Baa1, leading to higher interest payments when new debt is issued.

If this was pay for performance, by what measure these executives' performance was measured was not clear. Actually, who even decided to award them such sumptuous pay was unclear:

only a handful of board members were aware of the millions of dollars in pay and perks that had been handed out to executives over the last few years. Several employees saw their overall compensation double or triple.

Board members expressed 'sticker shock' when they first learned of the compensation numbers at a fall 2009 meeting, said J. Fletcher Creamer Jr., who completed his term as chairman of the board of governors in March.

'We went through every single executive' whose salaries must be disclosed on the IRS form for non-profit institutions, Creamer said in an interview earlier this year. 'It's the first time they actually saw it. … We always made the numbers available if they wanted to come see it, but not everyone looked.'

Keep in mind that per the first NorthJersey.com article, Mr Creamer will still be in a "key role" at HUMC, his failure to think that top executives' compensation was something his fellow board members needed to consider notwithstanding.

Summary

Is this any way to run a hospital "which has a national reputation for quality care?" The hospital leadership did and still appears to be an "insider's group" which works to promote its own self-interest.

As we have said before, far too often the leaders of not-for-profit health care institutions seem more interested in padding their own bottom lines than upholding the institutions' missions. They often seem entirely unaware of their duty to put those missions ahead of their own self-interest. Like the financial services sector in the era of "greed is good," health care too often seems run by "insiders hijacking established institutions for their personal benefit." True health care reform would encourage leadership of health care who understand health care and care about its mission, rather than those who see a quick way to make a small fortune.

Prominent Health Care Policy Advice from People Sans Health Care Expertise

It is two days after the US Thanksgiving holiday, and one thing I am thankful for is the continued hilarity generated by health care corporate CEOs who pretend to be health care experts.  Of course this all really is not so funny, because the bogus expertise appears not in MAD Magazine, but in the most respected media outlets with the most influence over health care policy.

 This week's example comes from the Wall Street Journal's vaunted CEO Council.  A summary of its health care panel appeared early this week in that newspaper.

The panel included Angela Braly President and CEO, Wellpoint Inc., William A. Hawkins Chairman and CEO, Medtronic Inc., and Klaus Kleinfeld Chairman and CEO, Alcoa.  Angela Braly, a lawyer with no obvious record of direct experience in health care or related fields (see her bio here), received total compensation from WellPoint of more than $13 million in 2009, while presiding over various snafus and ethical missteps (most recently here, and with a further catalog here.)   William Hawkins, who has an undergraduate degree in engineering, and an MBA, received total compensation from Medtronic of over $9 million in fiscal 2010.  His direct involvement in health care or related fields apparently ended after his undergraduate years, when he was said to have done research in pathology (see his bio here).   He presided over Medtronic's settlement of thousands of patients' lawsuits that alleged injuries due to a faulty lead on one model of a Medtronic implantable cardiac defibrillator for over $200 million.  The company's other recent questionable activities may be found here.  Dr Kleinfeld's doctorate is in strategic management, but he has no obvious health care background (see his bio here.)   (The panel apparently had a "subject expert," Dr Risa Lavizzo-Mourey, a physician who is now CEO of the Robert Wood Johnson Foundation, but she was not quoted directly in the WSJ edited transcript.)

So what could we expect from a panel on health care that included no one with direct experience or expertise in health care, but two CEOs who managed to become extremely wealthy courtesy their employment by health care companies? 

Here is Ms Braly on changing incentives:

This really gets to the fact that right now we have a fee-for-service payment system, so we pay for quantity rather than quality. And very importantly, we think we need to redesign the way in which we reimburse for health care.

So,

Reimbursement could come in the form of accountable care organizations or patient-centered medical homes or pay-for-performance or risk sharing. There are a number of ways—and we didn't want to be completely prescriptive in terms of what that reimbursement formula would be.

The issue is not quantity versus quality, but cognitive, including primary care vs procedures. Ms Braly completely ignores how the government takes only the advice of the RUC to set physician payments, and how her company just apes that example (see posts here). Ms Braly also completely ignored how her company could actually try to change reimbursement on its own. There is no law that says it must follow the example set by Medicare.

So what she said about changing "delivery incentives" is just nonsense, to use a polite term.

Then we have Dr Kleinfeld ostensibly on transparency, but really on thinking about health care as if it were done on a production line:

Let me first talk about the transparency aspect. It was very informative to hear from those that are in the industry how big a variation you have in practices across the board.

If I were to look at a set of factories that make the same thing, and one does it in five days and the other one in 10 days, and the one that does it in five days is cheaper than the one that does it in 10 days, why would I not bring everybody down to the five days?

So the question is, what hinders the health-care industry from applying the same mechanics? There was agreement that today for every important disease category there are also quality indicators that are accepted that you could use to see what is the quality delivered.

Once you control the process, once you bring the quality up, the costs go down.

Dr Kleinfeld does not seem to realize that health care involves taking care of unique patients. Even when patients have common problems, they have unique mixtures of other medical problems and personal characteristics. The physician's most basic pledge is to do what is best for each individual patient. Treating them as if they were identical widgets on a production line makes absolutely no sense.  One cannot apply the "same mechanics" that apply on a production line, because actually taking care of patients is not done, and does not at all resemble what happens on a production line. It goes without saying that Dr Kleinfeld seems to have no idea how complex and fraught with error the process of measuring quality in health care actually is.

His remarks again, to put it politely, were nonsense.

Finally, there was Mr Hawkins in a similar vein:

Contrary to popular belief, we actually have very good medical care in this country, and with the proliferation of evidence-based medicine, we have determined that there are best practices for how we can treat hypertension or some of the neurodegenerative diseases or diabetes. And the reality is, as you look across different systems, there's a lot of variability in what people are doing.

We talked about the importance of publishing or being very clear about what are the best practices for dealing with hypertension, and then making sure that we have the means by which people will be held accountable moving forward in that area.

Maybe we should acknowledge that at least Mr Hawkins tried to concentrate on hypertension, which may have a slightly more secure evidence base than some other conditions. But the implication still is that there are "best practices" when the complexity of real patients in a real health care context makes figuring out what really is best for individual patients very challenging. Maybe that is why we used to try to leave such decisions up to doctors, other health professionals, and their patients.

However, it seems that the CEOs of big health care corporations seem to feel the need to justify their ridiculous total compensation by opining on health care topics that are completely beyond their experience, training, and expertise. The real problem is that probably because of the assumption that those huge salaries must correlate with huge expertise and intelligence, their opinions are taken seriously. The quotes above did not come from MAD Magazine. They came from a highly respected and prestigious conference sponsored by and whose results were published by the Wall Street Journal.

To truly reform health care, we need to stop pretending that general business or law training makes someone a health care expert, and that being paid a lot of money by a health care corporation makes one a bigger health care expert.   We need to go back to developing health care policy with the help of people who actually know something about health care, and who are not paid by particular health care corporation to support their vested interests. 

ACO = Arrogant Clinical or Aggressive Care Oligopoly?

In the 1970s, it was managed care organizations.  In the 1990s, it was vertically integrated health care systems.  In the 2010s, the fashionable concept for improving health care, apparently beloved by left-wing policy wonks and right-wing health care executives is the "accountable care organization." (ACO).  Development of the ACO is funded by the recently passed US health care reform legislation.  The official definition of ACO from the US Center for Medicare and Medicaid Services is: 

An Accountable Care Organization, also called an 'ACO' for short, is an organization of health care providers that agrees to be accountable for the quality, cost, and overall care of Medicare beneficiaries who are enrolled in the traditional fee-for-service program who are assigned to it.

Oddly enough, that seems like it could also describe a 1970s managed care organization, or a 1990s vertically integrated health care system. The only real difference is the idea that the ACO would be paid fees for service. All these similar concepts embody the notion that health care needs to be highly organized into big, bureaucratic organizations to improve quality and access while controlling costs.

Back in August, we warned:

There seems to be a strange and increasing alliance between politically- correct academic theorists and proponents of raw economic power. The theorists' notion of "accountable care organizations" seems to have become a great foil for would-be monopolists, yet the theorists have done nothing to show how their creation would really bring "power to the people." Meanwhile, maybe 'ACO' should stand for 'aggressive care oligopoly.' Meanwhile, be extremely skeptical of the latest health care fad, especially when it is supported both by academics and CEOs.

I am not sure you really heard it here first, but you did hear it here early. Now, three months later, our doubts have become main-stream.

Revisiting Sutter Health

n California, National Public Radio continued to document the increasing market dominance of the Sutter Health system (which we discussed in August here) as it marches toward becoming an ACO:

Through new construction and expanding its doctors' groups, Sutter Health is enhancing its position as one of the most dominant hospital systems in California. In addition, Sutter is further ahead of many competitors in fashioning itself into a so-called accountable care organization, responsible for coordinating care between hospitals, specialists and primary doctors.

A companion article gave examples of how this emerging ACO is becoming increasingly oligoplistic:

Hospital prices in the Sacramento region are among the highest in California, driven in large part by the negotiating clout of the hospital chain Sutter Health.

Over the last decade and a half, Sutter has gradually accumulated hospitals and amassed a roster of doctors who contract exclusively with the company. Sutter is now one of the largest hospital chains in California with 24 acute care hospitals.

'In this Roseville market, which is a big suburban area, the hospital is Sutter,' says John Murray, a veteran insurance broker. 'It's a lock right now. Because Sutter dominates the market, major insurance companies, like Blue Cross and Aetna, can't sell policies that exclude Sutter hospitals and doctors. That dependence means the hospital chain can dictate high prices.'

Concerns about Sutter's market dominance are also increasing:

'As Sutter gets bigger,' says Anthony Wright, executive director of Health Access California, a nonprofit advocacy group based in Sacramento, 'it can dictate higher prices and is less accountable for ensuring good quality because it has a lock on certain markets.'

Doubts in the New York Times

In the New York Times, Robert Pear reported:

When Congress passed the health care law, it envisioned doctors and hospitals joining forces, coordinating care and holding down costs, with the prospect of earning government bonuses for controlling costs.

Now, eight months into the new law there is a growing frenzy of mergers involving hospitals, clinics and doctor groups eager to share costs and savings, and cash in on the incentives. They, in turn, have deployed a small army of lawyers and lobbyists trying to persuade the Obama administration to relax or waive a body of older laws intended to thwart health care monopolies, and to protect against shoddy care and fraudulent billing of patients or Medicare.

Consumer advocates fear that the health care law could worsen some of the very problems it was meant to solve — by reducing competition, driving up costs and creating incentives for doctors and hospitals to stint on care, in order to retain their cost-saving bonuses.

'The new law is already encouraging a wave of mergers, joint ventures and alliances in the health care industry,' said Prof. Thomas L. Greaney, an expert on health and antitrust law at St. Louis University. 'The risk that dominant providers and dominant insurers may exercise their market power, individually or jointly, has never been greater.'

Skeptical Liberals and Libertarians
Amazingly, while ACOs seem to be supported by many left-wing policy wonks and right-wing health care executives, they have also rapidly engendered skepticism from both liberals on the left and libertarians on the right, and from within government and the private sector. For example, at the end of the NY Times article we find:

Dr. Donald M. Berwick, the administrator of the Centers for Medicare and Medicaid Services, hails the benefits of 'integrated care.' But, Dr. Berwick said, “we need to assure both patients and society at large that destructive, exploitative and costly forms of collusion and monopolistic behaviors do not emerge and thrive, disguised as cooperation.”

Dr Berwick is a well-known advocate of innovative approaches to improve the quality of care, but was tarred as a raving left-winger when he was nominated to his current position.

On the other hand, in the New York Post was an op-ed by Dr Scott Gottlieb:

I warned that the creation of 'accountable care organizations,' which put hospitals in control of all the doctors in their outlying areas, would lead to concentrated power over the provision of medical care -- turning physicians into salaried employees and reducing consumer choices.

Furthermore, he wrote:

Since the ACOs will have local monopolies, they'll also have little incentive to compete for more patients in an open marketplace. Yet this is the only incentive that would spur an ACO to truly innovate and improve its delivery of medical care and offer better services.

Private health plans vie to contract with the best doctors and hospitals, creating market prices for services and competition to improve outcomes. If the ACOs squeeze out this competition, the result will be a de facto 'single payer': Every market will be controlled by a single ACO,....

Dr Gottlieb writes frequently about health care and policy issues, and is a "resident fellow at the American Enterprise Institute."

Missing the Main Point: Doctors vs Business Executives as Leaders
At least it did not take long this time for the fundamental flaws in the latest fashionable health care reform effort to get attention. It is really striking that this time around, skepticism is coming from both liberals and libertarians.  Maybe we all have learned something from the failures of managed care and of vertically integrated hospital systems.

A Washington Post op-ed by Steven Pearlstein hinted at one fundamental problem with the ACO concept.

Most reformers believe ...that the best way to deliver affordable quality care is through organizations such as the Mayo Clinic, which coordinate physician and hospital services under one roof and are paid not on the basis of how many procedures they do but on the quality of the care they provide. These organizations tend to rely on salaried doctors, make extensive use of electronic medical records and evidence-based 'best practices,' and, in effect, take on much of the risk traditionally borne by insurers. Several provisions of the new health-care reform law encourage the formation of such 'accountable care organizations.'

Somehow, however, the supposed health care reformers seemed to have overlooked a crucial fact about the Mayo Clinic they are using as a model. The Mayo Clinic traditionally was basically a large physician group practice. It was run by physicians. Even now, the Mayo Clinic's CEO is a physician (Dr John H. Noseworthy) who had a substantial clinical and academic career. The CAO is a nurse, and the three top Vice Presidents are physicians.  I submit the fact that the organization was run by physicians, physicians who once swore to put their patients' clinical care ahead of all other considerations, was crucial to the Clinic's success in taking care of patients as well as maintaining its finances.

However, nearly all of the would-be ACOs we hear about now are centered on big hospital systems, run by business executives who have never taken care of patients, and never swore to put patient care ahead of anything. For example, the most advanced degree possessed by the CEO of Sutter Health is a Master's in Health Administration (see here). Sutter Health does not make biographical information about its top executives particularly easy to find, but according to the most recent (2008) 990 form posted on Guidestar, of its 19 top executives, only 2 had MD degrees. As we have seen time and again on Health Care Renewal, such executives have become extremely good at becoming rich in their jobs. (For example, according to the 2008 990 form, of those 19 executives, all had total compensation greater than $200,000, 16 had compensation greater than $500,000, and 9 had compensation greater than $1 million.) When things go wrong, these royally paid executives may take their golden parachutes and open the exit door, and jump on the slide.

The advent of ACOs reminds me of the advent of managed care. The original managed care organizations, exemplified by Kaiser - Permanante, were also not-for-profit large group practices run by physicians. However, the "managed care organizations" that evolved out of the 1970s law, favored by our glorious former President Nixon, were for-profit corporations run by business executives. Somehow, when legislators seek to promote better health care, the legislation they right often get the crucial details wrong.

The one good thing about ACOs seems to be that they have galvanized liberals and libertarians alike to worry about big, collective, bureaucratic health care organizations run by executives with no clear commitment to putting care of individual patients first.

ADDENDUM (26 November, 2010) - See also comments by David Williams on the Health Business Blog.

"Living High Life on Money to Treat the Poor"

Here is another story that has developed over the last week about questionable goings on at a not-for-profit health care organization.  The organization in question this time was the not-for-profit, but state government supported Medicaid managed care organization/ health insurer for the Louisville, Kentucky region.  The details came from a Louisville (Kentucky) Courier-Journal article about a state auditor's report on the Passport Health Plan:

The organization providing Medicaid services in Jefferson and surrounding counties has spent lavishly on such things as travel, meals, salaries, bonuses and lobbying in recent years, the state auditor’s office said in a report released Tuesday.

The scathing report, which Gov. Steve Beshear described as 'disheartening,' said two Passport Health Plan officials — Executive Vice President Shannon Turner and Associate Vice President Nici Gaines — were paid well, ate well and traveled extensively.

'Lodgings were often luxury spas and resorts,' the report said. 'The executives used limousine services and dined at expensive restaurants. While these types of expenditures may be routine for many private, for-profit companies, they should not be typical in nonprofit, health care organizations.'

The report also said Passport made extraordinary efforts to burnish its public image and gain political support by spending $1 million since 2007 on lobbying and public relations, as well as $423,000 in donations and sponsorships.

Many of the donations had no connection with health care, the report said — including $600 to sponsor a reception for the Senate Republican majority in 2009, $10,000 to sponsor an 'inflatable character' for the Kentucky Derby Festival's Pegasus Parade, and contributions to the Boy Scouts, Kentucky Opera, Volunteers of America and others.

Here are some more specifics about amounts spent:

Travel: Passport spent $106,722 on more than 36 trips including trips to conferences at resorts in New Orleans, Key West, Las Vegas, Seattle, Philadelphia, Tucson, Washington and Coeur d'Alene, Idaho.
Meals: Spent $72,994 on 753 meals for groups large and small. These were mostly at Louisville restaurants but included tabs at some famous restaurants outside Kentucky, such as Emeril's and Commander's Palace in New Orleans.
Limo services: Five uses of limos totaling $3,996.
Lobbying and public relations: Spent $1 million.
Donations and sponsorships: Spent $423,000, some with no connection to health care, including $10,000 to be an “Inflatable Character Sponsor” for the Kentucky Derby Festival.
Gifts: Spent $9,311 for 95 gifts, which included flowers and Christmas gifts.
Salaries: Paid salary and bonuses of $303,750 to Executive Vice President Shannon Turner and $156, 000 to Associate Vice President Nici Gaines in most recent year.

Here are more specifics about conflicts of interest:

Conflicts of interest: Both Turner and Gaines received additional compensation in contracts with subcontractor they were overseeing, AmeriHealth Mercy. Also, Larry Cook, Passport's chairman and CEO, had divided loyalties because he serves as an executive vice president of U of L. He also was reimbursed $1,717 by AmeriHealth for expenses for a trip to Ireland in 2007.
Grants: Many grants were made by Passport to groups with ties to staff and/or board members

The organization also was charged with distributing additional funds to area health providers based on their initial investment in the not-for-profit managed care organization, but not on the amount of care they were providing to Medicaid patients:

[State Senator Tim] Shaughnessy was particularly concerned about distributions of $10 million in excess funds in late 2008 and again in and 2009 to the large Jefferson County health-care providers that formed Passport.

These distributions were reported to the Kentucky Department of Insurance as grants to cover indigent care costs incurred by Passport's provider partners — University Medical Center, University Physician Associates, Norton Healthcare, Jewish Hospital and St. Mary's Healthcare, and the Louisville/Jefferson County Primary Care Association.

But the auditor’s report said the money was distributed based on the percentage of the providers' initial investments to create Passport — not the amount of indigent care they provided. And the report said this money was placed in the general funds of these providers 'rather than specifically set aside for uncompensated indigent care.'

Finally, it appears that Passport tried to block disclosure of important information, including the compensation of its executives, even though it is a not-for-profit organization entirely funded by the government:

Early this year The Courier-Journal filed a request under the state open records law seeking Passport records on compensation of its executives and minutes of its board meetings. But Passport refused to release them, claiming that the law did not apply.

The attorney general's office disagreed, saying that Passport is 100 percent publicly funded and must release the records. But Passport again refused and took the matter to Jefferson Circuit Court, where it is pending.

So again we have the same tiresome features of leaders who apparently regard their organization as their own personal sandbox: lavish compensation, given the context, luxuries supplied the leadership out of organizational funds, conflicts of interest that apparently increased further the leaders' personal gains, and attempts to keep the whole thing secret. As a Lexington (Kentucky) Herald-Leader editorial ("Living High Life on Money to Treat the Poor") noted, given the mission of the organization, this sort of sleaze is particularly unfortunate:

In one way, though, Passport's profligacy deserves special condemnation. Every dollar Passport executives spent on their own pleasurable pursuits, on lobbying to insure tax money kept flowing their way, on buying goodwill in the Louisville area or on any other unnecessary expense was a dollar taken away from providing Medicaid services to the most vulnerable, needy members of society.

This case resembles one we discussed previously, that of the non-profit community health agency in Florida whose leaders again seemed to regard their job as an opportunity for personal enrichment.  It seems that even leaders of non-profit organizations whose mission is to help the needy may seem to put their own needs before those of their disadvantaged constituents.  Of course, given they may have seen leaders of not-for-profit universities and hospital systems making millions, and leaders of for-profit pharmaceutical, device, and especially managed care organizations/ health insurers making tens of millions, and conclude that their six-figure salaries and occasional luxuries were barely adequate compensation.

As we have noted before, the "executives take all" mentality of an era economically dominated by financiers as aristocrats seems to have infected health care.  Somehow we have to restore the idea that executives and managers  like doctors and nurses, should regard their work as calling meant to put the needs of patients and public health first, rather than a quick way to get rich. 

About to be Bought-Out Non-Profit Hospital System Tries to Hide Executives' Golden Parachutes

A report from FloridaToday (in Brevard County) about the sale of a not-for-profit Florida hospital system to a for-profit corporation raises some interesting questions. The background is that the non-profit Wuesthoff Health System was bought by for-profit Health Management Associates (HMA):

HMA, a for-profit hospital management company in Naples, bought the not-for-profit Wuesthoff Oct. 1 for $145 million. Wuesthoff lawyer William Kopit has said it was forced to sell because the hospital system lacked the capital to compete.

The question is about the conditions of the sale:

A foundation formed to manage the proceeds of the sale and continue providing indigent health care has refused to disclose the executive packages to the state, claiming it constitutes a trade-secret exemption under Florida law.

This was despite the state Attorney General's authority to oversee sales of charitable non-profit organizations to for-profit entities:

Under its statutory obligation to oversee charities registered in the state, the Attorney General's Office requested the executive pay information from Wuesthoff, Wiggins said. Wuesthoff's lawyers submitted 40 pages of heavily redacted material. Negotiations led to Wuesthoff agreeing to redact only the names and compensation details of the executives.

The materials submitted suggested a lot of executives getting golden parachutes, but not the amounts or conditions involved:

The unredacted portions show as many as eight former executives receiving three years of salary paid out over 12 months, a pay-to-stay retention bonus for continuing to work for the company during sale discussions, a senior executive retirement package and regular retirement pay and extended health benefits. Based on Wuesthoff's tax returns, those payouts will be in the millions.

So, legal action will ensue:

'Therefore we will look to the court for guidance and abide by any judicial ruling on the public record and trade secret issues,' said Ryan Wiggins, communications director for the attorney general.

The notion that how much a for-profit corporation will pay in golden parachutes to former executives of a not-for-profit hospital system is a "trade secret" just boggles the mind.  What could a competitor possibly gain from this information that could lead to specific action that would disadvantage Wuesthoff?

On the other hand, it might be that the size of these golden parachutes, if revealed, would lead to some raised eyebrows, or worse.  Consider first the contrast between payments made and to be made to fortunate executives and the performance of the health care system. 

Note that what is available on the public record (via the hospital system's latest available, that is, 2008 form 990 disclosures to the US Internal Revenue Service) suggests that in the past, Wuesthoff executives were already quite well-paid. On that form we found the following total compensation reported:
Emil Miller, President: $927,543 ($523,069. compensation; $342,130, benefits; $62,344, benefits)
Brian Bodi, Controller: $184,789
George Fayer, CFO: $439,580
Johnette Gindling, Senior Vice President: $236,975
Marchita Marino, Senior Vice President: $264,529

Nearly a million dollars was a lot of compensation for the CEO of a small, non-profit hospital system in 2007.  Although there is no easily publicly available information about executive compensation since 2007 (the year covered by the 2008 report noted above), these high rates of compensation were paid by a hospital system that now apparently has so little capital that it no longer can "compete" without being bought by a for-profit corporation.   Now the executives who could not amass a competitive amount of capital will amass quite a sizable amount of personal riches.

Consider second the contrast between the extraordinary assertion that these golden parachutes should remain secret, and the hospital system's stated interest in "transparency," or its stated devotion to "five core values that drive our hospital and its mission: integrity, courtesy, compassion, competence and stewardship." It seems that preventing embarrassment about executive enrichment may trump transparency and integrity.

Health care, probably infected by the finance industry that brought us the global financial collapse, aka "great recession," seems to have been overcome by "compensation madness."  A central value of many health care organizations seems to be enriching their top leaders/ managers/ executives, no matter what the financial condition of the organization, or the performance of the leaders in terms of fulfilling the organization's mission.  From these perverse incentives, the perverse incentives favoring short-term financial performance over patient care seem to have sprung.  As Prof Mintzberg wrote, "All this compensation madness is not about markets or talents or incentives, but rather about insiders hijacking established institutions for their personal benefit."

If we truly want health reform that addresses spiraling costs, declining access, and threatened quality of care, we need to give health care practitioners and leaders positive incentives for being caring, competent, well-informed, and honest, not for clever financial manipulation and short-term profits, or just for managing to show up for work.

ADDENDUM (2 December, 2010) - 4 days after the above post, Florida Today reported that details about the golden parachutes were released:

[Emil] Miller, who ran Wuesthoff for more than a decade, received $6.25 million total. Of that, $2.2 million was severance pay and $3.2 million was retirement pay. The balance was the cost of his employee benefits.

Former CFO George Fayer has the next highest exit pay at $973,000, which includes a $171,000 for staying through the sale and transition. Fayer is a consultant to the foundation, Gindling said.

Chantal LeConte, who ran the Rockledge hospital, received the third highest payout, $553,000. LeConte's package included about $138,000 for staying through the transition.

Given that the health system was merged out of existence because it supposedly no longer had enough capital to "compete," now we see why system leaders were so reluctant to reveal the amounts.

Pay for What? - Redux: Surrealistic Pay for Health Care Corporate CEOs

Pay-for-performance has been a persistently fashionable mantra for health care business leaders and policy advocates, particularly as applied to physicians to control costs and perhaps even improve quality.  We have been highly critical of current methods proposed to measure performance and tie pay to it (e.g., here), and other bloggers, notably Dr Robert Centor at DB's Medical Rants, have vigorously pursued this issue (e.g., here).

It is beyond ironic that meanwhile, the pay of health care organizations' leaders seems less and less related to their performance.  For example, in a recent series on local executive pay in the Boston Globe there were these examples:

Hologic

Hologic Inc. gave its chief executive, John W. Cumming, a $1.5 million “retention payment’’ as part of his $10.5 million pay package last year. He was promised the payment in mid-2006 if he remained with the company through the end of 2008. At the same time, the Bedford women’s health care products company posted a $2.2 billion loss, largely resulting from a big write-down related to the 2007 purchase of Cytic Corp. Cumming has since stepped down as chief executive, but remains chairman. Hologic declined to comment.

Charles River Laboratories

Charles River Laboratories International Inc. chief executive James C. Foster received $1.3 million in deferred compensation in a year when the company disclosed plans to cut 300 workers, or 3 percent of its workforce. Charles River declined to comment.

Note that a Charles River board member was one of the authors of an Institute of Medicine report advocating P4P for physicians, as we posted here. Ah, the irony.

Boston Scientific

New Boston Scientific Corp. CEO J. Raymond Elliott started midyear and received a $1.5 million bonus. Boston Scientific posted a $1 billion loss last year.

Elliott got a lot more than that, as reported in a companion Boston Globe article:

Elliott, whose experience includes running another medical device company, Zimmer Holdings Inc., was paid a performance bonus of nearly $608,000 last year, in addition to a $1.5 million signing bonus and $29.4 million in stock awards and options.

Meanwhile, the company's losses continue to mount:

And in February, Boston Scientific agreed to pay $1.7 billion to settle patent infringement charges from rival Johnson & Johnson, making it likely the company will post another loss this year.

Note that Boston Scientific has had its ethical as well as financial failings, especially involving the case of the faulty implantable cardiac defibrillators, which resulted in settlements of civil lawsuits alleging that it hid data about the defects, and two guilty pleas by a company subsidiary to charges that it did not notify the FDA about these problems (see post here).

Vertex Pharmaceuticals Inc

At Vertex Pharmaceuticals Inc., chief Matthew W. Emmens, who took over five months into the year, received $2.8 million performance award last year, a year in which the company lost $642 million.

He actually got a lot more than that, too, as per the second Globe article:

His pay package included more than $15 million in restricted stock and options.

Cephalon

At the same time, an op-ed by Michael Hiltzik in the Los Angeles Times noted that a health care company had the most unfairly paid CEO, according to "veteran compensation consultant Fraef Crystal,"

Cephalon Inc., ... CEO, Frank Baldino, Crystal identifies as the most overpaid chief executive in his database. (Baldino's $11.1 million pay last year is 832% of what would be fair, Crystal calculated.)

Note that Cephalon settled charges of off-label promotion of narcotics for over $400 million in 2008 (see post here).

Summary

So the general rule seem to be that top executives of health care organizations make large, sometimes enormous amounts of money, and that occurs regardless of company or personal performance. The riches keep flowing even if the company loses millions or billions, or lays off significant chunks of its workforce.

Hiltzik identified corporate executive pay as:

the No. 1 scandal of American business — executive pay that bears scant relationship to what these people are worth.

The CEO pay curve has been galloping out of control for so long that it has achieved the status of a cliche. In 1965 the average U.S. CEO earned 24 times the pay of the average worker. Four decades later the ratio was 411 to 1..

Furthermore,

The dismal reality of CEO pay is that it comprises two problems, not one. Top executive pay generally is too lavish in the U.S. no matter what performance standard you apply. Good performance or bad, the pay disparity between the CEO and the rank and file is larger than in any other country, contributing to rising income inequality and to its consequent social pathologies.

It's also based on several flawed assumptions, argue Jay Lorsch and Rakesh Khurana of Harvard Business School in a recent article for Harvard Magazine. One is that money is the only motivating factor behind executive performance.

Another is that shareholders are the only stakeholders in corporate performance whose interests matter. This is a relatively recent paradigm, they observe; as late as 1990 business groups recognized the importance of a corporation's responsibility to stakeholders such as employees, customers, suppliers and the community.

The flaw in the latter assumption is that it ties CEO pay to stock prices, which they can't influence on their own. But the picture of the CEO as virtually the sole auteur of a corporation's fate permeates American society. Listen to a Meg Whitman campaign ad talking about 'the EBay Meg created.' If you pay attention you may catch a reference to the 15,000 employees who were there when she left, at least a few of whom must have had something to do with the company's success.

A further problem is that the pay of top corporate leaders is generally set not by the share-holders, that is, the owners of the company, but by boards of their cronies, many of whom are also members of the CEO club.  As Hiltzik noted,

although most corporate boards make a show of placing pay decisions in the hands of a committee of 'independent' directors, the members are almost always current or former top executives themselves, members of a tight club.

By the way, as we posted here, a member of both the Hologic and Vertex boards was a former hospital CEO who got a generous retirement package despite its financial straits.

So while their policy flacks continue to push pay-for-performance for physicians, maybe health care corporate leaders should set an example by embracing real pay for performance themselves.

To repeat, again, again, again,.... Until they do, top executives remain really different from you and me.  If we do not hold health care leaders accountable, if we do not provide them with incentives that are proportional to their actual performance, why should we expect health care organizations to do any more than satisfy their leaders' self-interest?

More Tales of Hospital Executive Compensation: Pay for What?

I have collected another series of stories from the wild and wacky world of health care executive compensation.  These are from three different hospitals/ hospital systems, ordered from smallest to largest.

Jefferson Healthcare

This story, from Jefferson County, Washington state, came from the Peninsula Daily News:

When Mike Glenn takes over the Jefferson Healthcare CEO office Oct. 4, he will be receiving $225,000 annually to run the 25-bed publicly funded hospital.

And he will become the highest-paid public official in Jefferson County.

Jefferson Healthcare's budget is $65 million, and it employs 360 full-time workers and about 550 part-timers.

Note that the amount above is apparently salary, not total compensation, which could well be higher.

Lakeland Regional Medical Center

This story, from Lakeland, Florida, came from the Lakeland Ledger.

The latest IRS report available on Lakeland Regional Medical Center shows, for the first time, how much LRMC officials receive in base pay and how much in 'bonus and incentive compensation' based on meeting goals assigned them.

Not-for-profit hospitals are required to release their IRS reports. Previously, those reports combined salary and bonuses, which may or may not be awarded in a given year.

Jack Stephens, president and chief executive, was paid $856,514. Of that, $644,034 was his base pay and $212,480 was bonuses.

Second-highest paid was Paul Powers, vice president and chief financial officer. He earned a total $435,581, of which $352,661 was base pay and $82,920 in bonuses.

Third was Dr. William Sadowski, psychiatrist, earning $430,117, of which $149,226 was base pay and $280,891 bonuses.

Others listed as highest compensated:

Dr. Edward Sammer, chief medical officer, $404,789 ($327,607 base pay, $77,182 bonus).

Dr. Olumide O. Sobowale, who heads trauma services, $306,792 ($227,692 base pay, $79,100 bonus).

Janet Fansler, vice president/cardiac and specialty care, $266,672 ($215,954 base, $50,718 bonus).

Mary Ford, chief information officer, $264,283 ($213,978 base, $50,305 bonus).

Carole Philipson, vice president support services and facilities, $246,530 ($199,474 base, $47,056 bonus).

Hugh Autry, vice president acute/surgical care, $245,216 ($198,408 base, $46,808 bonus).

Jeffery Payne, vice president human resources, $229,304 ($185,696 base, $43,608 bonus).

John Schliesser, vice president planning and external relations, $226,571 ($183,363 base, $43,208 bonus).

Dr. Michael A. Campanelli, neurosurgeon, $197,887, not divided into base/bonus.

Ken Menefee, executive director LRMC Foundation, $181,045 ($151,142 base, $29,953 bonus).

Dr. Joy L. Jackson, physician adviser, $164,923, not divided into base/bonus.

Dr. Rajan K. Raj, trauma surgeon, $141,344, not divided into base/bonus.

Note that LRMC is a bigger institution that Jefferson Healthcare, with operating revenue just under $650 million. However, it is now having financial woes, as reported in a separate story in the Ledger.

Lakeland Regional Medical Center's rates will increase an average 10 percent, for the third year in a row, in the fiscal year starting Friday.

These continual increases reflect the financial pressures affecting hospitals, patients and the health care system nationwide.

Costs are increasing for almost everything LRMC pays for - drugs, bad debts, charity care, write-offs to managed-care and government insurance plans, insurance and utilities among them.

The number of hospitalized patients is expected go up very little, an increase of slightly less than 2 percent, according to Vice President and Chief Financial Officer Paul Powers.

UCLA Medical Center

Our last story, from the Los Angeles Times, is about a large, prestigious academic medical center.

First, the board [of regents] approved $3.1 million in bonuses for medical center executives that are linked to efficiencies and improvements in patient health. That money, which comes from hospital revenues, will be distributed among 37 UC hospital leaders across the state.

As part of that group, Feinberg, UCLA's hospital system chief executive officer, will receive a $210,000 bonus. But in a more divisive matter, UCLA officials also received the regents' approval to give Feinberg an extra raise of about $410,000, boosting his total compensation to more than $1.3 million.

Why was this divisive? It turns out that the University of California system is in deep financial trouble.

The University of California regents took steps Thursday to shore up the university's badly underfunded retirement plans by raising the amounts employees and the university will be expected to contribute to them.

In particular,

Meeting at UC San Francisco, the regents unanimously approved a plan that will raise contributions to the pension and retirement health plans over two years to 5% from the current 2% of employees' paychecks, and to 10% from 4% of payroll for the university. The change will take effect quickly for about half of UC's 115,000 employees, including its faculty, but must be negotiated with its unionized employees.

More tough choices are ahead as UC tries to fill an estimated $21-billion liability gap in its retirement plans. Until this spring, neither the university nor its employees had made any contributions to the plans for 20 years.

In December, the regents are expected to review proposals for even more extensive changes, including one that would create a less generous program for employees hired after 2013 and boost the minimum retirement age to 55 from 50.

So in times of such financial stress, why increase the compensation of the UCLA medical center CEO so much?

UCLA Chancellor Gene Block said Feinberg was doing an excellent job and was being wooed by other employers. 'Keeping this team together is essential,' he said.

Summary

So to summarize, the CEO of a tiny hospital gets $225,000 in salary, presumably more in total compensation. The CEO of a mid-size medical center with stagnant revenues and rising costs got over $850,000 in total compensation, while 11 other executives, mostly non-physicians, all got more than $180,000. The CEO of a large medical center, within a university system with a seriously underfunded pension plan which is increasing deductions from all employees' pay, and contemplating reduced retirement programs for new hires, got a $210,000 bonus and a $410,000 raise for total compensation of more than $1.3 million.

So once again we see that even in tiny, public hospitals, the CEOs are paid well, and in bigger hospitals, even those in the midst of financial problems, the CEOs are paid very well. 

There does seem to be a rough correlation with hospital size.  Executives, and their boosters like to imply that the bigger the institution, the harder the job.  Keep in mind, however, that most hospitals, like most modern corporations, are highly pyramidal.  The CEO hardly manages each and every worker.  Rather, the CEO manages a few top executives, who in turn manage a few middle-managers, etc, etc.  For example, a Bloomberg report noted that only 11 top executive report to the CEO of the huge Bank Of America. 

Another claim by CEOs and their defenders is that it is all about pay for performance.  As noted above, and in other posts about executive compensation, the criteria for performance are rarely stated, and hardly explicit.   Anecdotally, there are many examples, including one above, of financially stressed institutions cutting back in other areas, but paying top executives more.  As in the last case above, nearly every CEO seems to be doing a wonderful job, at least according to the boards of directors or trustees to whom he or she is supposed to be accountable. 

In fact, the real lesson seems to be that top managers almost always do well financially, regardless of performance, regardless of financial pressures on their organizations, and do better and better the longer they hold their jobs.  Top executives are really different from you and me.

I say again, if we do not hold health care leaders accountable, if we do not provide them with incentives that are proportional to their actual performance, why should we expect health care organizations to do any more than satisfy their leaders' self-interest?

More Than $1 Million to Run a Public Health Agency

After a well-publicized story that managers of small town in California were paid in the high six-figures, reporters in California have gotten interested in the pay of public officials.

Thus the San Diego Union-Tribune reported on the compensation received by CEOs of local public health agencies, called public health care districts, two of which run hospitals. One in particular received generous compensation:

The top official at Palomar Pomerado Health, a public agency serving health-care needs in Poway and Escondido, receives in excess of $1 million in compensation per year.


Michael Covert, who has run the North County hospital district since 2003, receives a base salary of $736,000 a year. Retirement, bonuses and other benefits push Covert’s total pay past $1.1 million.

One other public health CEO, also responsible for a hospital, made somewhat less:

Tri-City chief executive Larry Anderson collects a base salary of $480,000 and benefits that drive his total compensation past $625,000 a year. He also received a $50,000 relocation benefit when he arrived last year.

Two CEOs of health districts that did not run hospitals, having leased them out, made less still:

Grossmont chief executive Barry Jantz makes about $183,000 a year in base pay and benefits that increase his total compensation to just under $250,000 a year.

Fallbrook administrator Vi Dupre, ... is paid a base salary of $61,000 a year and benefits that raise her compensation to just over $69,000,....

Why is Mr Covert paid so much?

Bruce Krider, the health-care district chairman, said Covert does an excellent job managing a complex enterprise that includes two major hospitals. Covert juggles the interests of staff, physicians, patients, volunteers, board members and other stakeholders, he said.

'A million dollars sounds pretty good to anybody, but my view is, pay a lot and expect a lot,' said Krider, a management consultant who also is a former hospital executive. 'You can’t have some mediocre public servant. You need somebody that has got vision, that can see the issues that are most important and put it all together.'

So now even the managers of public health agencies have become million dollar babies. And of course, according to the boards of trustees who are supposed to supervise them, they all do excellent work and therefore are underpaid even then. As we have noted before, it seems that every board supervising every health care executive thinks their executives are above average, if not stellar. Note, though, that the chair of the board overseeing Mr Covert is himself a retired hospital administrator. So, as we have noted before, it seems that the boards of such organizations often have a preponderance of members who are not inclined to be critical of their hired executives, much less limit their pay.

So the rules for top leaders of health care organizations seem to be different from those for you and me.  All these managers seem to be entitled to be above average.  (The only ones who are eventually deemed below average seem to be those up to no good in ways that do not financially benefit their organizations, e.g., see this.)

In my humble opinion, it is unseemly for the leader of a government run public health organization to make so much. 

True health care reform would decrease perverse incentives throughout the systems, spread the power in organizations more broadly, and make leaders accountable.

Small Hospital System Loses $61 Million Betting on Financial Derivatives, But Pays CEO Nearly a Million Dollars

As we have quoted many times, sunlight is the best disinfectant.  New US Internal Revenue Service requirements for reporting by not-for-profit organizations has resulted in more transparency about the finances of many health care organizations, and this transparency has shown that the culture of perverse incentives and management privilege has spread far and wide.

How far and wide?  Consider this story in the (Harford County, Maryland) Aegis:

Harford County’s Upper Chesapeake Health lost $70 million because of bad bets in the derivatives markets two years ago, but still paid its chief executive more than $900,000 in annual salary and bonuses.

According to figures from their latest tax returns and from the state agency that regulates hospital rates, Upper Chesapeake Medical Center in Bel Air and Harford Memorial Hospital in Havre de Grace, hospitals owned and operated by nonprofit Upper Chesapeake Health Inc., posted huge losses in their fiscal year ending December 2008.

The losses were the result of an increase in non-operating expenses, according to the Maryland Health Services Cost Review Commission.

The hospitals had combined revenue of $254 million for the year, but posted a combined net loss of $61 million.

The two hospitals also paid out some of the highest salaries in Harford County, led by their CEO, Lyle Sheldon, who made more than $900,000 in 2009, a figure which was first reported by The Baltimore Sun on Aug. 29.

Including Sheldon, the hospitals’ top administrators and top medical staff, who are hospital employees, received a combined $5 million in salary, bonuses and other compensation in 2009.

So how did the hospital's management explain the huge loss?

'That was the year the stock market fell, in fiscal year 2008,' Dean Kaster, Upper Chesapeake’s senior vice president of corporate strategy and business development, said Tuesday in explaining the 2008 loss.

'We saw a significant change in terms of how some of the instruments we used in managing our debt service were valued and during that time period what these dollar changes reflected was an accounting loss directly related to the decline in the overall market in 2008,' he said.

Kaster said Upper Chesapeake, like many hospitals, has investment instruments it uses, called derivatives and hedges, to manage its long-term debt. He said the value of those instruments changed in fiscal year 2008.

In simpler terms, like many corporate, institutional and individual investors, Upper Chesapeake got burned by taking risks that backfired when the economy tanked.

Since those markets have come back, Kaster said, Upper Chesapeake has recovered two-thirds, or about $46.7 million, of the $70 million it lost from investments.

Of course, 2008 was the year of the great recession/ global financial collapse, or whatever we may end up calling it, happened. The value of many investments, and many peoples' homes, imploded. The best current  explanation of the collapse had to do with the bets financial institutions made on risky derivatives which their managers often did not understand. In hindsight, these bets seem somewhere between unnecessarily risky and stupid.

Many smaller businesses and organizations were fortunate to be financially conservative enough not to have bet on derivatives. But little Upper Chesapeake Health apparently bet a large chunk of its money on them, and lost badly. Although VP Kaster belabored the obvious in noting that 2008 was the year of the collapse, he did not explain what the stewards of a not-for-profit health care institution were doing when they were betting on risky derivatives.

One thing they were doing was making a lot of money themselves.

At UCH, the highest compensated employee is President and CEO Lyle Sheldon.

Sheldon’s annual compensation for the hospital’s fiscal year 2009, the most recent information available, was $918,957, according to the Form 990 submitted to the IRS.

Sheldon’s base salary for the year was $535,000 and his bonus and incentive compensation was $224,007.

Sheldon’s compensation is nearly $500,000 more than the next highest paid employee for UCH.

Other executives did well too:

Second to Sheldon, the next highest paid employee in UCH’s upper management is Joseph Hoffman III, the senior vice president and CFO, who was paid $420,355 in the hospital’s fiscal year 2009. His base salary was $272,210 and his bonus and incentive compensation was $91,439.

Senior Vice President and COO Kenneth Kozel was paid $352,538, according to Upper Chesapeake’s Form 990. Kozel received additional nontaxable benefits and deferred compensation on Harford Memorial’s form, bringing his total compensation to $396,039.

Kaster, the senior VP for strategy and business development, was paid $281,142, according to Upper Chesapeake’s form. He also has additional nontaxable benefits and deferred compensation on Harford Memorial’s form, bringing his total to $330,598.

Vice President of Human Resources Toni Shivery’s Upper Chesapeake compensation was $204,531, with an additional $33,895 from Harford Memorial, bringing the total to $238,426.

Note that the CFO of this small hospital system, the person who ought to be most directly responsible for the decision to "invest" in derivatives, made over $420,000, and the vice president for strategy and business development, responsible for the simplistic discussion of derivatives above, made over $330,000.

Providing such perverse incentives seems to contradict the hospital system's high-minded statements of values, which includes:

Responsibility: We take responsibility for our actions and hold ourselves accountable for the results and outcomes.

A CEO who truly accepted responsibility for a $61 million loss from risky bets on opaque derivatives would not accept total compensation of over $900,000. A CFO who truly accepted responsibility for these bets would not accept over $400,000.

So in summary, we see that now CEOs of even the smallest community hospital systems seem entitled to make nearly a million dollars a year. We see that even CEOs whose institutions lose millions due to risky investments still receive such compensation. We see that the executives who seem directly responsible for making such money losing investments still earn hundreds of thousands of dollars.

This is an extreme illustration of how perverse incentives permeate health care, how CEOs command pay beyond the dreams of ordinary people, even when their leadership is financially calamitous, and how little health care leaders support their organizations' idealistic values.

Are leaders who are not held accountable for easily measured financial performance likely to be good stewards of clinical performance, which is much harder to measure?

If we do not hold health care leaders accountable, if we do not provide them with incentives that are proportional to their actual performance, why should we expect health care organizations to do any more than satisfy their leaders' self-interest?

A Golden Parachute for Captain Outrageous

A year ago, I posted about leadership and governance problems at Northeast Health Systems, a small hospital system located in neighboring Massachusetts.  The colorful story included leaders who solicited money from the community but concealed what they were doing from the same community, an adolescent pregnancy pact after the hospital system refused to provide confidential birth control information at the high school clinic it ran, a hospital vice-president accused of art theft, various cuts, some concealed, of medical services, accusations of conflicts of interest affecting the board of trustees, and no-confidence votes by nurses and physicians. Finally, Stephen Laverty, the CEO held responsible for much of the mess, resigned and things quieted down a bit.  However, he left a system in deficit, leading to further lay-offs, (e.g., see this story in the Boston Globe).  And the vice-president accused of art theft was also "arraigned on bribery and larceny charges" (also per the Boston Globe.)

Yet, Mr Laverty collected a tidy sum just to leave, as the Salem News just reported:

Former Northeast Health System President and CEO Stephen Laverty collected more than $1 million from the nonprofit hospital chain after he resigned under fire in the fall of 2008, newly released financial records show.

The earnings, $1.08 million in total, include a settlement package of more than a year's salary plus pay for the one month the controversial Laverty was at the helm of Northeast, which owns Beverly Hospital, as well as Gloucester's Addison Gilbert Hospital.

The documents provide the first details of how much Northeast, now laying off workers and cutting costs, was willing to pay to part ways with its CEO who had just endured no-confidence votes from nurses and doctors, plus the arrest of one of his top managers.

Neither the hospital system nor its former CEO was exactly forthcoming about the rationale for this payment:

As part of Laverty's resignation, both sides agreed not to discuss the settlement or any of the details that led them to part ways.

'I have no understanding of what you are talking about,' Laverty said yesterday afternoon from his home in Concord, when asked about his settlement package. He then hung up the phone.

A spokeswoman for Northeast Health System said she could not comment on Laverty or the terms of any agreements between the company and past employees.

So even the hired manager of a small community hospital system is entitled to a million dollar plus golden parachute when resigning in disgrace. This is another great example of the current perversity of the incentives given to hired health care managers. Even small community hospitals, the backbone of real community health care throughout the country, seem to feel obligated to make millionaires out of their managers, no matter how bad their performance.

As we said before, the problem is not just the money wasted paying for bad performance. These perverse incentives are likely to encourage worse performance.  They send the message to even the worst executives that they are wonderful people, they can do no wrong, and should stand for no criticism, all further diverting them from what they really are supposed to be doing: upholding the mission.

As an editorial in the Gloucester Times noted, although the nexus is perverse incentives given to paid managers, it is not only the paid managers who are to blame for this situation.

The other party to his contract was the Northeast Board of Trustees.

So,

Those who want to serve as trustees of Northeast need to get the notion out of their heads that their board seats are not just resume builders — with high-profile community roles and a few corporate dinners thrown in. These are positions of community leadership and responsibility that comes with a measure of accountability.

New Northeast CEO Ken Hanover has indeed seemingly ushered in a new era of relative openness in dealing with the community. But the same cannot be said for the Board of Trustees.

If Laverty's shameful buyout deal and these types of contracts are examples of their 'leadership' and responsibility, each and every one of them should step down now.

As we have said many times before, true health care reform would encourage leaders of health care who understand health care and care about its mission, rather than those who just see a quick road to riches or social respectability.

Logical Fallacies in Defense of Million Dollar Babies

We recently posted about the latest example of generously paid health care leaders, million dollar plus hospital CEOs in the Baltimore area (here).  Such stories are appearing more often in the media, and increasingly generating skeptical, anguished, or angry responses. 

Defending Millionaire Hospital CEOs

So it should be no surprise that the defenders of rich hospital CEOs are starting to rally.  The Baltimore Sun published two letters defending the million dollar plus compensation received by many local hospital CEOs.  But what arguments they made.

First, let us examine in detail  the arguments made by Carmela Coyle, "president and CEO of the Maryland Hospital Association."  She opened with this description of hospitals as organizations:

Famed management expert Peter Drucker said that health care is the most difficult, chaotic, and complex industry to manage today, and that the hospital is "altogether the most complex human organization ever devised."

Indeed, hospitals are not your typical business. Hospitals are places where lives are saved. They ease pain and suffering. Hospitals are open every minute of every day, driven by a mission of caring and rooted in their communities. Hospitals do not close up and move on when economic times get tough. This requires extraordinary dedication, commitment, talent, and leadership. And hospitals are governed by trustees--independent leaders from the communities hospitals serve.

She then briefly described her version of how hospital CEO compensation is set:

The compensation for hospital executives is determined by those boards and compensation committees who follow nationally recommended practices for setting contract terms, evaluating CEO performance, reviewing salary comparability data, setting and approving compensation, and ensuring the process is free from conflict of interest.

Then she provided this extraordinary description of what hospital CEOs do:

Perhaps the more important look is at what these hospital leaders do day in and day out for Marylanders:

•Provide more than 88,000 Maryland jobs; most hospitals are the largest employers in their communities and they employ your friends and neighbors;

•Make health care available 24 hours a day, every day of the year, regardless of a recession, blizzards, physician and nurse shortages, or other obstacles;

•Bring you the latest technology and facilities so you, your family, and your neighbors can get the care they need, when they need it;

•Manage the uncertainties and vast change that health care reform will bring;

•Preserve your local hospital as the cornerstone of care in your community.

Hospitals are unique places, and it takes unique people to run them. Maryland is fortunate to have such leaders.

.

"Famed management expert Peter Drucker said...." - Appeal to Authority

Mr Drucker may be a management expert, but what expertise does he have in health care, medicine, or the health care environment?  I actually agree that the hospital environment is "difficult, chaotic, and complex" in many senses, but would assert that it is the health care professionals in hospitals (doctors, nurses, other clinicians, therapists, technicians, etc) who are most expert at and primarily tasked with responding to these complexities (see below).  I submit that the opening citation of Drucker is an example of an appeal to authority (chosen not because of his specific expertise in the relevant context.)

"Hospitals are places where lives are saved...." - Appeal to Emotion

Of course they are, and the general description of the hospital is true.  However, who is it who (rarely) save lives, (hopefully often) relieve pain and suffering, and provide continuous service "every minute of every day?" 

It is, glaringly obviously, the health care professionals listed above, admittedly assisted by a variety of staff who keep the lights on, make the food, clean the operating rooms, etc, etc.  The most removed from the actual clinical care are the managers.  The higher the managers are in the food chain, the less likely they are to have any contact with actual clinical care.  I submit that most CEOs deal mainly with C-level officers and vice presidents, and interact mainly with them, spread sheets, PowerPoints, and emails.  Given that hospitals do al these wonderful things, should not the support, credit, and frankly, pay go to those who actually do wonderful things, not sit in meetings and play with spread sheets?

I believe that this wonderful description of the hospital mission is mainly an appeal to emotion, designed to generate warm and fuzzy opinions about hospitals that make paying their detached top managers much more than the people who actually provide patient care more emotionally, but not logically palatable.

"And hospitals are governed by trustees...."
"The compensation for hospital executives is determined by those boards...."
- Begging the Questions and an Appeal to Common Practice

The description of how CEO pay is set merely describes a process, but does not explain why this process is likely to come up with the right result.  It begs questions about hospital leadership and governance that we have discussed often, including whether boards populated by people with little understanding of health care, sometimes including leaders of financial firms who helped usher in the great recession, and sometimes including individuals with obvious conflicts of interest are likely to make decisions about executive compensation that ultimately support the hospitals' missions.  It begs questions about the standards to which executive pay is compared, especially the phenomenon that all executives are above average (see this post).  The implication that because a process is in place that follows the usual practice, the outcome must be good amounts to an appeal to common practice. 

"what these hospital leaders do day in and day out...." -Appeal to Emotion and the Questionable Cause Fallacy

In one sense, this is just a more extreme version of the appeal to emotion used above.  Furthermore, the bullet points are really about what hospitals and their health care professionals and support staff, not what their leaders do.  It is the hospitals as organizations that provide jobs.  It is the professionals and support staff who make the health care available every hour of every day.  (Have you ever seen the CEO of a hospital caring for an acute patient at 2 AM?  LOL.)  It is the hospital that provides the technology and facilities.  It is largely the health care professionals who manage uncertainties. 

Suggesting that the few CEOs, sitting in their meetings and reading their spread-sheets, rarely directly interacting with health professionals, and virtually never actually involved in patient care, should get most of the credit for these good works insults the thousands of health care professionals who actually do the health care.  It also amounts to an example of the questionable cause fallacy: the fallacy is that because the managers are somehow associated with actual health care, they cause the health care to happen.  (Think how long a hospital could provide services if the health care professionals and support staff were to vanish.  Think how long a hospital could provide services if the managers vanished.)

The second letter to the Baltimore Sun was by the chairman and CEO of Yaffe & Company, Inc, apparently a firm that consults on executive pay.  This letter was even less to the point than that above.  I invite our readers to discover its logical fallacies.

Summary

For a while we have been writing an informal series of posts about how logical fallacies may be deployed to advocate questionable health policy arguments, usually in a highly self-serving manner.  Our most recent example was here.  Most of the examples seemed to involve defenses of financial relationships among doctors and medical academics and drug and device companies, often written by people who themselves have financial relationships with such companies. 

The question of huge compensation given to leaders of health care organizations, and related questions about the effects of their perverse incentives, impunity from negative consequences of their actions, status as a new aristocracy, etc on health care dysfunction are getting more attention in the media.  So it should be no surprise that the defenders of the pay and power of these leaders are appearing.  It probably, but regrettably should also be no surprise that the defenses are mostly illogical, and made by people with financial interests in continuing excess compensation for health care leaders.

Physicians, other health care professionals, those interested in health policy, and the public at large need to be continuously skeptical about health policy advocacy appearing in the media, especially by those who stand to personally gain from the results of the advocacy.

My just slightly tongue-in-cheek suggestion for a policy position that could address this issue would be mandatory training in logical and evidence-based thinking, specifically to include recognition of logical fallacies, beginning at least at the middle-school level for all Americans (and around the globe), reinforced for those in health care.  (See the Nizkor Project site for a useful catalog of logical fallacies.)