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.

A Confidentiality Clause or an Oath of Fealty?

The advancement of modern scientific medicine depends on the search for and dissemination of truth. Academic medicine, like the rest of academia, ought to be based on openness, transparency, and academic freedom. The 1940 American Association of University Professors (AAUP) Statement of Principles on Academic Freedom and Tenure opened with:

The common good depends upon the free search for truth and its free exposition.

Yet we have written about dark clouds of secrecy spreading over medicine and health care. The increasingly powerful leaders of health care increasingly use opacity and secrecy to keep what they are doing out of the public eye. We have frequently discussed the anechoic effect, how it is just not done to discuss certain topics, particularly those related to the adverse effects of bad (ill-informed, incompetent, self-interested, conflicted, or corrupt) leadership and bad (opaque, unaccountable, mission-hostile, unethical) governance of health care organizations.  People may feel it is unseemly to speak badly of renowned institutions such as hospitals and universities.  People with conflicts of interest may not be inclined to criticize those who pay them.  Now people employed by contemporary health care organizations may have to pledge theri silence to keep their jobs.

The latest story in this regard comes from Virginia Commonwealth University (VCU), which includes VCU Health Systems, and MCV Hospital and Physicians.  (Full disclosure: I was a VCU full-time faculty member from 1987-1994, and still am on the adjunct faculty.)  In 2008, the VCU President resigned after the university's secret research contract with a tobacco company, and the President's own position on the board of directors of another tobacco company were revealed (see blog post here and others here).

Michael Rao, the President since 2008, is now under outside review after it was revealed that he required his staff to sign a secrecy pledge.  The story appeared in the Richmond Times-Dispatch:

Virginia Commonwealth University President Michael Rao asks employees who work in his office to sign an unusual confidentiality agreement that bars them from talking about what they observe about him or his family.

The prohibition goes beyond the standard agreement that university employees sign acknowledging that they can't disclose personal or proprietary information.

The agreement, a copy of which was obtained by the Richmond Times-Dispatch, covers interactions at Rao's office and at his residence. It bars disclosure not just to the news media, family or friends, but also to colleagues, 'clergy and attorneys, or to any other person not otherwise identified.'

'I agree that any such disclosure in violation of this nondisclosure agreement could result in irreparable damage and harm to VCU, President Rao, and/or his family'" the agreement states. 'Any such violation or anticipated violation' would entitle Rao to seek 'injunctive relief' in Richmond or Henrico County circuit courts.

VCU spokeswoman Pam Lepley said she could not comment immediately yesterday.

Several current or former employees of the president's office confirmed that they had been asked to sign the agreement, including Kimberley Busch, Rao's former scheduler.

She described it as a 'what happens in the president's office stays in the president's office' agreement.

The newly uncovered confidentiality clause provoked strong criticism:

Raymond D. Cotton, a Washington attorney who specializes in higher-education governance, said such a confidentiality agreement is highly unusual and goes against the culture of openness and transparency in higher education.

'There is this concept of academic freedom that is broader than the First Amendment,' he said.

In fact, since Virginia Commonwealth University is a state-supported institution, the confidentiality clause may be unconstitutional, as reported by WTVR:

Kent Willis with the Virginia American Civil Liberties Union said the agreement doesn't pass constitutional muster.

'A public employee, no matter where they are in the government, has a right to speak out on matters of public concern,' Willis said. 'That's a U.S. Supreme Court case, it's guaranteed to every public employee by the First Amendment to the Constitution.'

Willis said there are numerous legal issues raised by the contract. But, he said, the bottom line problem with the contract 'is the attitude. This is a contract that says 'I'm not transparent. I don't want you to know what is going on. I'm running a closed shop.''

Times-Dispatch columnist Michael Paul Williams wrote:

VCU, we have a problem. This confidentiality agreement does not inspire confidence. The lack of transparency only gives the appearance that someone's hiding something.

He also further quoted Kent Willis:

Rao's contract 'fails to address this whistle-blower right and could create conflicts for employees, who are silenced by the employment contract,' yet have a constitutional right to speak out on some matters, Willis said.

And as Willis points out, even if a person's constitutional right trumps the contract, how many employees are willing to take that risk?

'Particularly disturbing is the prohibition against talking to an attorney,' he said. 'If an employee believes something illegal is going on at work, an attorney is precisely the person he or she should be talking with.'

We just posted about how a pharmaceutical company included a confidentiality clause in a consulting contract, suggesting the deliberate creation of a conflict of interest in order to prevent criticism of the company's products or practices. 

However, in several ways, the present example is more insidious.  First, it involves a university, whose mission is to discover and disseminate the truth.  Thus, as noted above, the confidentiality agreement subverts the university's core mission.  Second, it was required of full-time employees who wanted to keep  their jobs, making choose between secrecy and unemployment.  Third, it was particularly harsh, addressing incipient as well as actual disclosure, and including injunctive relief as well as the threat of  termination.  Fourth, it protected not just the organization and its products, but personally protected the organization's leader and his family.  It was not just a contract, but an oath of fealty, as if the CEO were nobility, or even royalty.

The good news is that this confidentiality agreement now sits in the glare of sunlight.  One does wonder, however, how many other such agreements are already in force so that the would be nobility who now run too much of health care to avoid any embarassing revelations about what their leadership really is about.

We are a long way from the transparency that true health care reform requires. 

A Great Investment Opportunity? - Biotechnology Company Run by an Ex-Convict

A sad commentary on the current morality of the health care "business," as provided by the New York Times. Sam Waksal is back in the biotechnology business:

Mr. Waksal says his new venture, Kadmon Pharmaceuticals, will be 'a fully integrated biopharmaceutical company from the get-go,' replete with everything, including its own research and products on the market or in clinical trials that it acquires from others.

'You’ll see a company that next year will be doing significant revenues in a growth area, with earnings, probably five Phase 3 programs and a couple of Phase 2 products,' Mr. Waksal said Sunday in a telephone interview. Phase 3 and Phase 2 are the late and middle stages, respectively, of clinical trials.

Several of Mr. Waksal’s former colleagues from ImClone have joined him at Kadmon, a name from kabbalah, the Jewish mystical movement. He even looked into leasing the Lower Manhattan headquarters ImClone is vacating.

Kadmon, which will focus on cancer, infections and autoimmune diseases, has started to make deals. On Monday it is expected to announce it has licensed an experimental hepatitis C drug from Valeant Pharmaceuticals International, a person close to the transaction said. That follows the disclosure last week that it had acquired Three Rivers Pharmaceuticals, a Pennsylvania company specializing in hepatitis drugs.

Kadmon circulated a private placement memorandum in February to raise $50 million to $175 million. As of July, it had raised $10.8 million from 26 investors, a filing with the Securities and Exchange Commission said.

But David Pitts, a spokesman for Kadmon, said that other debt and equity offerings had raised more than $200 million, with the biggest investor being SBI Holdings of Japan.

Is there a catch? It might be Mr Waksal's record, criminal record. Mr Waksal's previous company was ImClone:

That started to come undone in December 2001, when Mr. Waksal got word that the Food and Drug Administration was not going to approve Erbitux. Before the company announced the news, Mr. Waksal alerted relatives to sell their ImClone stock and tried to sell some of his. Martha Stewart sold her ImClone shares and was given a five-month prison sentence and five months of home confinement for lying to federal investigators about it.

Mr. Waksal pleaded guilty to securities fraud, bank fraud, perjury, obstruction of justice and conspiracy. He is prohibited by a settlement with the S.E.C. from serving as an officer or director in a publicly traded company.

Presumably, Kadmon is not publicly traded, so the SEC ban does not apply to his leadership of that company. Yet despite the ban and his criminal record, investors seem to be ready to throw money at him. 
Maybe it has more to do with emotion than reason, much less morality,

One investor in Kadmon, who also sits on its board, said Mr. Waksal’s energy and his acumen in spotting promising drugs far outweigh his past problems.

'He is irrepressible,' said this investor, who spoke on the condition that she not be named because her company has a policy against being quoted in the media. 'I don’t think what happened to Sam in the past is going to have a negative effect on my investment in this business.'  [Being convicted of 'securities fraud, bank fraud, perjury, obstruction of justice, conspiracy' is a good background for a company CEO? - Ed]

Furthermore,

prospective investors say his trademark exuberance and penchant for hyperbole remains.

'He hadn’t changed,' said a prospective investor who met with Mr. Waksal and spoke on the condition of anonymity to retain relations with him. 'He was spinning big stories about big money, big deals'

Another prospective investor said Mr. Waksal had told him that Carl C. Icahn, the billionaire who is a friend of Mr. Waksal and had invested in ImClone, had committed $30 million to Kadmon. Marc Weitzen, a lawyer for the investor, said Mr. Icahn had evaluated Kadmon but 'decided to pass.'  [It sounds like Mr Waksal has not developed any new affinity for the truth - Ed.]

The private placement memorandum circulated in February said Kadmon had 'a simple yet revolutionary plan for creating the pre-eminent 21st century biopharmaceutical company.'

To make it even more explicit:

Mr. Waksal, who earned a doctorate in immunology, is charming to the point of being seductive. He was a fixture in New York social circles, befriending celebrities and dating many women, including Alexis Stewart, daughter of his friend Martha Stewart. He lived in a spacious SoHo loft with millions of dollars in art, where he hosted extravagant parties and intellectual salons attended by leading lights in literature, art and science.

In my humble opinion, an investor who throws money at an ex-con, apparently because he seems exuberant, irrepressible, even seductive, needs a brain transplant.  (But maybe some investors should read Snakes in Suits, see post here.)

But this blog is not about giving advice to investors. If Mr Waksal invested in basically harmless products that had nothing to do with patients' health and safety, the foolishness of investment decisions about his company would have nothing to do with me.

However, Mr Waksal is proposing to develop drugs to be given to patients:

In its first big deal, Kadmon announced last Monday that it had acquired privately held Three Rivers for more than $100 million.

Three Rivers, whose main products are drugs for hepatitis C, is meant to be the commercial base of Kadmon, its revenues helping to defray the cost of developing new drugs.

The deal, an investor familiar with the structure said, is highly leveraged, to the extent that Three Rivers’ earnings might not be sufficient to cover the debt. But Mr. Waksal is betting that sales will soar because new pills being developed by other companies will make treatment more effective, enticing more people with hepatitis C to be treated.

'The hep C market is going to undergo a real sea change next year,' Mr. Waksal said. Three Rivers has a proprietary form of the drug ribavirin that requires two pills a day, instead of the standard six to eight. Even with new drugs coming, ribavirin will remain a mainstay of treatment.

In fact, Mr. Waksal is increasing that bet. On Monday, Kadmon is expected to announce that it has obtained exclusive worldwide rights to taribavirin, a form of ribavirin that may have fewer side effects. Kadmon is paying $5 million initially, with other payments possible later, to Valeant Pharmaceuticals, which has been testing the drug in clinical trials, according to the person close the transaction. Valeant will pay $7.5 million for rights to sell Kadmon’s ribavirin in Eastern Europe.

Kadmon has bought a tiny company started by Princeton professors that has a way to measure cell metabolism. Influencing a cell’s use of nutrients is emerging as a novel way to treat cancer and infectious diseases.

So, we are not talking about merely foolish investment decisions, but amoral ones. The amorality of this brave new business world becomes relevant.

For many investors, 'there are few judgments beyond whether you made me money,' said Samuel D. Isaly, managing partner at OrbiMed Advisors, a big investor in biotech companies that was not asked to invest in Kadmon. 'Sam Waksal made a lot of people a lot of money with ImClone.'

There, in a nutshell seems to be the problem with running health care organizations not just in a business-like manner, but as businesses, businesses in a completely laissez faire environment, businesses in a new world run by new robber barons.

Would you trust a company run by an ex-convict to product safe, effective, and unadulterated drugs? (After all, some very respected companies run by people who are certainly not ex-cons have proven to be unable to keep all of their products pure and unadulterated.)

This case vividly illustrates the need for assuring that the leaders of all health care organizations, including but not limited to pharmaceutical and biotechnology companies, have some knowledge of the health care context, some sympathy for the values of health care professionals, including putting patients' health and welfare first, and are externally accountable. But at a minimum, health care organizations should not be run by former felons. However, in our extremely laissez faire environment, in a country now increasingly dominated by new robber barons, ex-convicts can run biotechnology companies.

BLOGSCAN: Florida Doctors Endorse Ex- Columbia/ HCA CEO for Governor

Rick Scott was the CEO of for-profit hospital chain Columbia/ HCA.  The company ended up settling civil and criminal charges for $1.7 billion.  Like many other examples in the march of legal settlements about which we have often posted, no individual who authorized, directed, or implemented the relevant bad behavior suffered any sort of negative consequence or paid any penalty.  Rick Scott left the company, but with a golden parachute.  Now he his running for Governor of Florida, using a substantial amount of his own money (but money that probably mostly came from Columbia / HCA). (See post here.)  He may be in the lead.  And the Florida Medical Association has just endorsed him.  In the Health Beat blog, Maggie Mahar is all over this story.  Read it and weep.  Remember another good reason for the people who lead health care organizations to be truly accountable for their actions.

Synthes and its Subsidiary Plead Guilty, Boss Remains Billionaire.

In December, 2009, we updated the story of Swiss-based medical device company Synthes and the marketing by its Norian division of a bone cement.  At that time, US authorities charged the company with use of an unapproved product in about 200 patients, three of whom suffered untimely deaths.  At that point, four US based Synthes executives had pleaded guilty to charges related to this affair. 

Last week, another shoe dropped.  As reported by the Associated Press,

A medical devices company will admit criminality and pay the maximum $23 million fine for illegally testing bone cement on about 200 spinal patients, three of whom died in surgery, U.S. prosecutors said Monday.

Norian Corp. trained surgeons to conduct unapproved clinical tests of its bone cement from 2002 to 2004, subverting U.S. Food and Drug Administration safeguards, prosecutors said. The trials were stopped after the third patient death, they said.

The cement, which is used to fill in bone defects, is approved for use in the arm but not the load-bearing spine, authorities said. The surgeries often involved older patients with compression fractures, they said.

The results are:

Norian will plead guilty to conspiracy to impede FDA functions, a felony, and 110 misdemeanor counts of interstate shipping of misbranded Norian XR. Synthes will plead guilty to the same misdemeanor shipping count.

As part of the agreement, Norian will be sold to an outside buyer, the parent company said.

Imposing divestiture of the offending subsidiary was unusual, according to the Philadelphia Inquirer:

Forcing a divestiture of a business unit in a plea agreement was precedent-setting for the U.S. Attorney General's Office in the Philadelphia area, spokeswoman Patricia Hartman said Monday.

Officials with the Office of the Inspector General in DHHS said the divestiture should send a message to other health-care companies that Synthes' behavior had grave consequences.

'Criminal conduct can result in a company getting rid of part of their business,' Greg Demske, a top official with the Inspector General, said Monday. 'This is an egregious case, and it made us firm in our belief that we should draw a line here,' he said.

If it remained a subsidiary of Synthes, Norian would be excluded from participating in Medicare and other government-funded health care programs, which would be potentially devastating to its business. According to a divestiture agreement released Monday by the U.S. Attorney in Philadelphia, Synthes has to sell Norian by May 24.

The assets of Norian would not be allowed to be transferred to another part of the Synthes 'corporate family' as part of the divestiture, Demske said.

Synthes will update the government monthly on its plans to divest Norian, and if it fails to sell the company by the May deadline, it can be fined $10,000 a day.

So does this case signal a new toughness by US authorities in cases of bad behavior by health care corporations?

According to the Wall Street Journal, Synthes officials were not exactly quaking in their boots because of these penalties, as their spokesperson said Synthes "does not expect this settlement to have any significant financial impact." Synthes would only be liable for fines of "about $24.3 million in total." That pales in comparison to the "company['s] posted total sales of $3.4 billion last year." As for the divestiture of Norian, the WSJ reported, "a spokesman said Monday that the Norian unit is mostly active in product development and isn't actively selling products. That business has fewer than 100 employees,...."

In fact, company leadership did not seem to realize that they did anything wrong, despite the company and four executives pleading guilty to crimes, actions involving the death of three patients,

'Synthes remains committed to operating in accordance with the highest legal and ethical standards, and bringing closure to this matter will permit the company to focus on its mission to improve patient care,' the company said.

Furthermore, while this is one of the few cases in which some company executives actually may have to pay penalties (after pleading guilty to at least misdemeanors), the big fish appeared to get away. As we discussed last year, an unindicted "person no. 7" was alleged to have set up the scheme to "test" the bone cement in a clinical series. Person No. 7 was at that time identified as the company CEO. That CEO, according to the Philadelphia Inquirer last year, was one Mr Hansjorg Wyss, noted to have a fortune estimated at $5.7 billion, making him the richest man in Philadelphia, and the 83rd richest man in the world, according to Forbes magazine.  (See this post.)   The settlement of this case would apparently have no impact on his immense wealth.

So although this case has some unusual wrinkles, and may yet yield some negative consequences for some of the people involved in the direction and implementation of the wrong-doing, it would appear to leave unscathed the person who has personally profited the most from the company, and its actions, including its less savory actions.  There is progress here, but only a little.

Once again, it appears that in the eyes of the law, top corporate leaders are different from you and me.  They appear immune from the penalties that lesser individuals may suffer.  They have impunity to continue to amass wealth even wealth that results from actions that were deemed illegal.   Real health care reform needs to make health care leaders accountable, and especially accountable for the bad behavior that helped make them rich.

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?

Health Care Leaders in Maine Fail to Learn from Past Experience

From down east Maine comes a telling story about the problems of contemporary health care leadership.  I assembled this case from three articles by Meg Haskell in the Bangor Daily News, links are below. (1-3)

Complaints About the CEO's Clinical Policies

The story begins with complaints about clinical policies instituted by the CEO of Acadia Hospital.

[Acadia CEO David] Proffitt has come under fire in recent weeks from current and former Acadia Hospital employees who say the incidence and severity of staff injuries have risen since he initiated a policy that essentially eliminates the use of mechanical and physical restraints with mentally ill patients who become violent. (2)

The concerns were raised with government agencies:

Since the end of July, the federal Occupational Safety and Health Administration has been conducting an on-site investigation into employee complaints of unsafe working conditions at Acadia. The state Department of Health and Human Services also recently has investigated conditions at Acadia, with a report due later this month. (2)

Furthermore,

The OSHA investigation was triggered earlier this summer by a complaint filed with the agency alleging an increase in patient assaults on staff after Proffitt implemented stricter standards against the use of mechanical and physical restraints, even when patients turn violent.(3)

Loss of Experienced Clinicians

There were also concerns that Mr Proffitt presided over the loss of experienced clinicians who were replaced by those with less experience

Employees also have alleged that Proffitt has fired or pushed out a number of clinical leaders at Acadia, including former Vice President for Medical Affairs Dr. Paul Tisher and former Chief Nursing Officer April Giard. They have criticized his replacements as lacking expertise in psychiatric care.(3)

Lack of Clinical Experience or Training, Questionable Educational Credentials

Given his direct involvement in clinical decision making, it surprising that Mr Proffitt has no clinical training or experience:

Proffitt’s academic qualifications also have been questioned.

Proffitt’s education includes a 1984 bachelor’s degree in therapeutic recreation from the University of Nebraska at Omaha, a 1989 master’s degree in recreational administration from Arizona State University, and a 2007 doctoral degree in health administration from Warren National University, now a defunct, unaccredited on-line program. His academic career has been criticized as being inadequate to prepare him for the top-level positions he has held at both Riverview and Acadia, although neither position requires a doctoral degree.(2)

Repeating the Past

It turns out that similar concerns were raised about Proffitt's performance in his previous position:

Psychiatrists formerly employed at Riverview said this week that both patient care and employee morale eroded under Proffitt’s leadership there.

'Over the course of David Proffitt’s tenure at Riverview, a significant number of long-standing and experienced staff left and were replaced with less experienced or temporary people,' said Dr. Bryan Woods, who was employed at Riverview from 2003 to 2006 and now practices in Portland. “\'In my opinion, this resulted in a decrease in the quality of patient care.'

Woods said Proffitt’s management style was often in conflict with the collaborative 'treatment team' approach commonly used in acute-care psychiatric settings.

'Ultimately, I left, because I simply could not work with him,' Woods said.

Woods’ colleague Dr. Dan Filene, who also worked at Riverview under Proffitt, said direct-care staff at the state hospital were placed at increased risk by a stringent policy that all but eliminated the use of any kind of restraints.

'The staff at Riverview are heroic,' he said. 'It’s not just dangerous; it is emotionally challenging, fatiguing, low-paying work. When they are actively being injured, it can’t help but affect patient care.' Filene stressed that most people with mental illness are not dangerous or violent.

Sen. Stanley Gerzofsky, D-Brunswick, is chairman of the Legislature’s Criminal Justice Committee. The committee oversees the locked forensic unit at Riverview, where criminals with severe mental illness are housed and treated. Proffitt’s policy of doing away with restraints for even the most dangerous patients prompted a number of complaints, he said.

'We heard concerns that staff members were being injured [by patients],' Gerzofsky said in an interview this week. 'Staff were complaining that [Proffitt] didn’t have the right credentials and that he didn’t take the violence very seriously. We had him in front of our committee several times.'

Gerzofsky’s colleague on the committee, Sen. John Nutting, D-Leeds, said he heard from several Riverview patient families and staff members.

'Legislators were called to see if he could be replaced,' he said. 'There was really just one single reason — he was telling doctors how to treat their patients. He was trying to get between the patients and their doctors.

Nutting said parents of patients were especially concerned.

'They wanted their loved ones to get the care their doctors wanted them to receive, not the CEO of the hospital,' he said.(2)

Proffitt's credentials were also questioned before:

Proffitt’s degrees in recreational therapy and his online doctorate, Nutting observed, did little to reassure worried families.(2)

Proffitt's Defenders

The allegations made against Proffitt, which appear to be from clinical professionals and patients' relatives, were countered by support from, perhaps not surprisingly, managers and executives:

Michelle Hood, CEO of the hospital’s corporate parent Eastern Maine Healthcare Systems, says that under Proffitt, Acadia is 'moving in the right direction.' She lauded the progress he has made toward de-stigmatizing mental illness and ramping up Acadia’s outpatient and community services.

Note that Michelle Hood, although she has considerable health care management experience, appears not to have any clinical experience of expertise, from her official biography:

Before arriving at EMHS, Michelle was president and CEO of the Sisters of Charity of Leavenworth Health System, Montana Region, as well as president and CEO of its flagship hospital, St. Vincent Healthcare. She received her Bachelor of Science in 1978 at Purdue University and her Master of Health Care Administration at Georgia State University in 1981. Her early career included roles of associate hospital director at Emory University Hospital in Atlanta Georgia, executive vice president and chief operating officer of St. Vincent’s Hospital (of now Ascension Health) in Birmingham, Alabama and chief administrative officer of Norton Hospital in Louisville, Kentucky.

Somehow, the process that hired Mr Proffitt, presided over by Ms Hood, did not seem to consider his previous work at Riverview:

At EMHS, Michelle Hood said Proffitt’s troubles at Riverview 'did not come up' during his interviews for the position of CEO at Acadia.

One of 16 applicants in a nationwide search to replace outgoing CEO Dorothy Hill, he had appropriate letters of reference from former employers, she said.(2)

By the way, the process involved checking whether his educational credentials were accurate, but apparently was unconcerned with the meaning of an on-line degree from an unaccredited institution (subsequently closed down by state authorities, see here.)

His educational credentials checked out.... (2)

Hood dismissed concerns about losses of experienced staff:

Asked about the loss of key clinical administrators at Acadia, including Vice President for Medical Affairs Dr. Paul Tisher and Chief Nursing Officer April Giard, Hood said 'turnover is normal' with a new administration and that Proffitt has successfully recruited new talent and promoted qualified staff from within the organization.

The board of trustees of Acadia Hospital also supported their CEO

At the end of last week, John Bragg, chairman of the hospital’s board of directors, said the board supports embattled CEO David Proffitt, despite a deluge of concerns raised by current and former employees and unflattering revelations about Proffitt’s educational credentials and his leadership at his previous post.

At its regular meeting last Wednesday, the board went into executive session to discuss the situation, Bragg said Friday.

'We came out supporting Dr. Proffitt and the changes that are in place and the team he has put together,' he said.

As best as I can tell, Mr Bragg is the President of a local industrial firm, N H Bragg.

By the way, here is what George Eaton, chairman of the board of Eastern Maine Healthcare Systems, the parent not-for-profit corporation for Acadia Hospital, said about the executives that are accountable to him:

By making critical decisions, engaging in aggressive fundraising and other activities, 'exceptional senior executives can and should add many multiples of what they cost to the value of the institution,' he said. Eaton said CEO compensation packages within EMHS are determined using information from comparable institutions nationwide.(1)

Also,

The job of the CEO is 'incredibly complex,' working in 'the most regulated environment in any industry,' Eaton said.

'The prudent thing to do is to get the best people you can,' he said, 'and pay them what you need to in order to retain them — so long as they are achieving the performance goals set by their board.'

Note that Mr Eaton appears to be an attorney, according to the EMHS site, "George F. Eaton II, Esq.; Bangor; attorney, Rudman & Winchell."
Summary

This case illustrates much of what has gone wrong with leadership and governance of health care organizations.

We see health care organizations lead by people who have no experience or training in actually giving health care. Yet people who are not doctors, nurses, or therapists make clinical policies and control clinical care, even against the advice of experienced clinicians. In fact, some such leaders seem to regard clinicians as interchangeable widget-makers making interchangeable widgets. The ill-informed leaders of health care organizations often seem sensitive about their lack of knowledge and experience, and hence may be quick to punish any health care professional who protests their ill-informed decisions.  Moreover, the ill-informed leaders of health care seem to band together to support each other, even in the face of criticism from people with real expertise in health care, or from patients and relatives directly affected by health care and how it is delivered.  Higher level executives who are supposed to supervise lower level executives, and boards of directors which are supposed to exercise stewardship and support institutional values may seem more concerned with protecting the prerogatives of all executives rather than than the patient care mission.

As we have said again, again, again, health care desperately needs leadership that understand the context, and believes in the values.  It needs leaders that puts patients first, ahead of the pay and prerogatives of the executive and managerial class, our would-be new aristocracy.

References


1.  Haskell M. Maine's hospitals: big jobs, big pay. Bangor Daily News, March 6, 2009.  Link.


2.  Haskell M. Acadia CEO criticized at previous post.  Bangor Daily News, September 10, 2010.  Link.


3.  Haskell M. Acadia board supports CEO despite claims.  Bangor Daily News, September 20, 2010.  Link. 

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.)

More Hospital CEOs Join the Millionaire's Club, This Time in Baltimore

As we predicted, more stringent requirements by the US Internal Revenue Service for financial reporting by not-for-profit organizations, including hospitals and hospital systems, have produced an enlarging parade of revelations of obese pay packages for hospital leaders.  The latest report came out courtesy the Baltimore Sun:

Baltimore-area hospital CEOs and presidents boast seven-figure salaries, club and gym memberships, and paid financial planning and tax services as part of compensation packages from their nonprofit employers.

According to a survey of Baltimore-area hospitals, the highest-ranking executives were often the recipients of financial payouts and perquisites that many private-sector companies have abandoned in the face of intense public debate about excessive CEO pay. The heads of hospital systems, which oversee many facilities, tended to make the biggest salaries and incentives. Eight top executives made more than $1 million, and the largest CEO pay package totaled $7.8 million.

The article described some of the more corpulent compensation packages.

St Joseph Medical Center

One was from St Joseph Medical Center, already under fire for for the lavish use of cardiac procedures by one of its staff doctors:

St. Joseph Medical Center, a member of Catholic Health Initiatives, said in a statement that it offers a level of compensation that allows it to compete for talent. The hospital paid former CEO John K. Tolmie $846,128 in salary, bonus and other pay, the latest IRS filing shows.

'Hospital CEOs have one of the most demanding, high-pressure jobs in the nation, dealing on a daily basis with everything from ever-changing regulations to workforce shortages and lower reimbursement for services,' the hospital statement said.

Tolmie resigned in May 2009 after being on administrative leave to avoid a conflict of interest during a federal investigation. Since then, one of the hospital's cardiologists, Dr. Mark G. Midei, has been accused of performing hundreds of unnecessary heart procedures. 

Mercy Medical Center:

Mercy Medical Center head Thomas Mullen made $1.08 million in compensation during fiscal 2009. The hospital said in a statement that it 'believes this compensation to be appropriate given the responsibilities of serving as a president and CEO of a $520 million health system.'

Johns Hopkins
One might expect the CEO of the Johns Hopkins hospital system to be paid well, but he was paid particularly well since he also seemed to have the full-time, separately paid position of dean of the medical school:

Edward Miller, CEO of Johns Hopkins Medicine, made $729,297. He also gets paid separately for his position as dean of the School of Medicine at Johns Hopkins University. The fiscal 2009 filing for the medical school was not yet available. But Miller collected $1.4 million for that job the year before.

Summary


A chart of the compensation of all CEOs is here. As noted in the article, eight CEOs got more than $1 million, and another three got over $900,000.

A Baltimore Sun commentator noted that not only did the CEOs get large salaries, but:

Close to a dozen had personal dues for 'social clubs' financed by your charitable donations, tax dollars and health insurance premiums. Many enjoy lavish and opaque executive retirement plans that also put upward pressure on the medical costs that threaten government budgets and the economy.

As we have noted before, he pointed out that it is unseemly for not-for-profit hospitals, which are supposed to be devoted to the mission of caring for patients, usually explicitly including poor patients, and which are funded to a great extent by government programs and the income from donations, to make millionaires out of their top hired executives:

Hospitals aren't Goldman Sachs. They're not Stanley Black & Decker or Microsoft, either. They're nonprofits, getting charitable donations and huge government subsidies beyond all the loot they rake in from Medicare and Medicaid. If the newly required disclosures on the IRS 'Form 990' put pressure on hospital boards and CEOs to tone it down, it's about time.

People who donate to hospitals, thinking they are doing so to provide better health care, or to help out the less fortunate, may be surprised to hear about the hospital CEO as millionaire:

For some hospital donors, the revelations are transparently shocking.

'Donors are completely outraged,' says Ken Berger, president of Charity Navigator, an organization that helps people make smart giving choices. 'Donors tell us more than anything that they're just blown away by the fact that an organization that is a charity basically is creating millionaires in its leadership.'

'The most common remark we get is this: 'I've been giving to this organization for years, and I can't believe what the CEO is making, and I will never support this organization again.' '

I am glad that newspaper commentators are getting even more wound up on this issue than I have:

Why any hospital executive should need a company-paid club membership is a deep mystery. It can't be to woo potential donors. No donor with half a brain wants to endow an institution so employees can play golf with her money.

It shouldn't be to wine and dine business prospects. A hospital's business is collecting revenue for medical care. To be frank, there's too much of that going on already for the good of the country's wallet. Hospitals are far too focused on sales and marketing and not enough on delivering quality, efficient care.

Hospital trustees on any compensation committee can deliver a windy treatise about how pay for senior executives is ethical, carefully considered and worth every penny.

It's all a crock. The 'independent' compensation consultants that boards rely on are often referred by the CEO himself. The consultants know they can't make waves, or they won't get hired to rubber-stamp executive pay at other hospitals. To justify high pay, boards and consultants often use unrealistic comparisons from much bigger institutions or from the for-profit sector.

It doesn't take $1 million to get a great boss.

But it gets worse. People who love to play golf on company money, and feel entitled to make a million or more are not the right people to lead organizations that are supposed to focus first on health care, including health care for the less fortunate. Moreover, people who get used to the pay and perks are likely to focus on keeping them coming, rather than the mission, even if they started out with some devotion to the mission.  Furthermore, the excessive pay and perks are perverse incentives, telling the CEOs 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 we have said many times before, 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.

Can a $1 Billion Group of Babies Provide Fair Value in Health Care?

The issue of executive compensation in health care seems to be attracting more media attention.

A St Louis Post-Dispatch editorial noted how executive compensation for for-profit health insurance CEOs has grown. It started with a quote from Steven Hemsley, the CEO of UnitedHealth:

Today the American people are questioning whether or not we receive fair value for the $2.6 trillion we, as a society, are expecting to spend this year on our health care system. The vast majority, including those of us at UnitedHealth Group, believe the answer is, 'No.'

Here is a summary of the compensation information:

Modern Healthcare, a leading health industry trade journal, published its annual executive compensation survey this week. Topping the list is Stephen Hemsley, quoted above, who gave a speech to the Detroit Economic Club last year questioning the value Americans receive for all that health spending. [Note: We discussed Hemsley's compensation here.]

His take for 2009: $106 million — $7.5 million in salary and benefits and $98.5 million in stock options.

Mr. Hemsley is not alone. The CEOs at insurance giants Cigna, Humana, Aetna, Coventry Health Systems and WellPoint all took home between $10 million and about $18 million. Many of those companies already have announced double-digit premium increases for next year.

In all, the CEOs of America’s 10 largest health insurance companies made $228.1 million in salary and stock options during 2009, according to the liberal advocacy group Health Care For America Now. (That's enough to buy health insurance for at least 47,284 people, based on figured cited in this Kaiser Family Foundation survey on average premiums.)

Since 2000, those CEOs have received slightly less than $1 billion in compensation, the group said.

As an aside, the article noted how the compensation received by CEOs of the larger US health care corporations of all types, not just health insurance companies, has grown:

Researchers analyzed pay and benefits for 342 CEOs of corporations in the Standard & Poor’s 500 index.

They found that health care CEOs received an average compensation of $10.5 million last year. That’s 40 percent more than the average for all S&P 500 companies — 77 percent higher than chief executives at financial services companies.

Even the CEOs of not-for-profit hospital systems have become million dollar babies:

Last year, the average compensation for hospital system CEOs was $1 million. That’s enough to hire five new primary care doctors.

However, the editorial was a bit vague about why paying CEOs of health care organizations so much was a bad idea, although it did imply that it was unseemly given that much of health care is funded by government programs, and not-for-profit health care organizations receive tax breaks that give "the public an even larger stake in their efficient operation"

In my humble opinion, there are other big problems with the massive compensation that hired managers of health care organizations now command.

Paying them so much instantly vaults them into the upper class, and the CEOs of larger health care corporations now live a life style more reminiscent of aristocracy than of that of the patients who depend on them. Such riches isolate those who receive them in their own bubbles. Can one really expect a million, or ten million, or hundred million dollar CEO to really care about the health of individual patients?

Furthermore, paying them so much, usually regardless of their performance, their companies' performance, or the health effects of their products and services gives them perverse incentives to maintain their position at any cost, even at the cost of the patients they are supposed to serve.

So, we do not receive "fair value for the $2.6 trillion we, as a society, are expecting to spend on our health care system." But we cannot really expect a billion dollar group of babies to fix that.

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

Being a Health Insurance Executive Means Never Being Able to Say You Are Sorry

WellPoint, the largest US for-profit health care insurance company, has provided a steady stream of examples of poor management and bad behavior for the edification of Health Care Renewal readers.  Most recently, a company whose core functions include reliably and confidentially managing electronic data on policy-holders allowed what should have been private data from nearly half a million people to appear on-line (see post here.  For other examples, look here.)

This week, the Los Angeles Times recounted what happened to a highly placed WellPoint executive who tried to improve the company's behavior. 

Leslie Margolin was the public face of Anthem this year when it sought to raise individual insurance rates as much as 39%. The move triggered a backlash in Washington and Sacramento, where lawmakers accused Margolin and her corporate bosses at insurance giant WellPoint Inc. of trying to gouge unknowing policyholders.

Margolin, 55, generated headlines statewide when she was called to testify before angry lawmakers in the state capital. With television cameras rolling, the hearing's chairman stared her down and asked bluntly: 'Have you no shame?'

Now, speaking publicly for the first time since her departure, Margolin says she had been chagrined over the rate hikes for the last year and had worked internally to get Indianapolis-based WellPoint to rescind them or scale them back, and to apologize.

'I thought the rates were too high,' she said. 'I thought the impact on our membership was too significant.'

Margolin did not object to the rates in her Sacramento testimony this February. But in the months that followed, she repeatedly voiced her objections to WellPoint and in appearances outside the company, remarks that went largely unnoticed by the public.

In a March talk at Pepperdine University's business school, for instance, she told a gathering of students and business leaders that she wasn't responsible for rate increases she believed were ill-timed and ill-advised.

'We have impacted individual consumers in ways that were so significant for those individuals,' she said. 'And for that, I personally feel very, very sorry.'

As she made the Pepperdine appearance and others, Margolin said, she privately pressed WellPoint to abandon the company's get-tough approach to longtime adversaries — doctors and hospitals — and instead collaborate as part of a new 'healthcare transformation strategy' to cut costs and improve patient safety and the quality of care.

So what happened to Ms Margolin? Did she get a big raise and an award for doing the right thing? Is the moon made of green cheese?

In fact, here is what happens to a health insurance executive who says she is sorry for excessively high insurance rates:

Last month, WellPoint replaced her. At the time, Margolin said her departure was a mutual decision. Interviews with company insiders, insurance industry leaders and others familiar with the situation now make clear that she was pushed out.

'Her undoing was that she rocked the boat and wanted to do things a different way,' said one person familiar with the events who declined to be identified for fear of retribution. 'She wasn't a good corporate soldier.'

Margolin herself spoke cautiously about her resignation, but said: 'There is no question I needed to leave.'

In fact, her exit was quite inglorious:

Margolin vividly recalls her last day. Even though her Anthem team was exceeding its financial goals and membership numbers, she said, she was ushered from the doors of Anthem's Woodland Hills headquarters. She didn't have a chance to send a farewell message to her 400 employees.

So it seems that being a top health insurance corporate executive means never admitting a mistake, and never, ever saying you are sorry.

In contrast, in the 2009 WellPoint Annual Report, CEO Angela Braly boasted:

As you can see throughout this report, we’re focused on making health benefits more affordable, improving access to care, and simplifying interactions with the delivery system. We believe that we have to favorably impact the value equation in health care while improving the experience of members, doctors, and employers.

So presumably at WellPoint, "making health benefits more affordable" means raising premiums 39%.  As we mentioned earlier this year, for this and other bits of legerdemain, Angela Braly's 2009 compensation increased 51 percent to $13.1 million. This seems more like pay for propaganda than pay for performance.

In a post in the Dismounting Our Tiger blog, Edwin Lee addressed the origins of the BP oil spill by noting how most big corporations have come to promote leaders distinguished mainly for their careerism, tribal attitude, and disinclination to question received wisdom.  He wrote that the result was promoting "mediocre, short term thinkers with similar work experiences, outlooks, temperaments and personal incentives. Disaster response, creative thinking and fundamental changes are outside their limited range of interests or competencies."  Thus we can expect that at some point, WellPoint, and many similarly lead health care organizations, will create their own disasters.  We can only hope that our health care system survives them.

Meanwhile, kudos to Ms Margolin for trying to put the interests of policy-holders and the public ahead of following the company line.  If only more such people were able to lead health care organizations rather than being unceremoniously fired, we might have a fighting chance to have health care that really is high quality, affordable, and accessible.   

PS - For those old enough to have been forced to watch Love Story, the original quote was "love means never having to say you're sorry."

A Golden Parachute for Making Contaminated Drugs?

In late 2009, we posted about problems at a Genzyme plant that manufactured some fabulously expensive drugs, e.g. Cerezyme whose cost to patients approximated $160,000 a year. We thought then that for a drug costing that much, the company ought to have figured out a conservative process to provide pure and unadulterated product. In a later post we also why a company that could afford to make its CEO very rich could not afford to adequately maintain its manufacturing facilities.  In May, 2010, we posted about a legal settlement of charges related to its manufacturing problems requiring Genzyme to pay a $175 million fine and function under US government supervision.

Recent news articles suggest that the fix of the company's inabilities to manufacture pure, unadulterated drug remained remote.  Reuters reported that it had to discard "additional inventories of drugs ... for failure to the meet the company's quality control standards."  Bloomberg reported that it "may take three to four years to complete changes requested by U.S regulators after plant contamination."

Meanwhile, however, the company continues to talk to Sanofi-Aventis about being bought out, and the Boston Globe reported just how much Genzyme CEO Henri A Termeer would stand to make if the buyout takes place:

Under the 'hange of control' agreement currently worth $23 million, Termeer would receive several payments. He would receive a lump sum of $11 million, a figure representing three times his base salary plus a bonus. He would also get $356,000 in benefits, including health, life, accident, and disability insurance, outplacement and relocation services, and legal fees. And he could cash out 175,137 shares through accelerated equity awards. Those shares are now worth $11.9 million, but almost certainly would be worth more if the company is acquired at a premium.

Furthermore,

Apart from the golden parachute, Termeer could reap huge stock gains if the company is sold. The 4.1 million Genzyme shares he owns represented about 1.5 percent of its stock as of April 9, the most recent regulatory filing. At the current share price, Termeer’s stake is worth more than $275 million.

So riddle me this: over the last 5 years, Genzyme stock-holders have seen their investment lose 5.7% of its value (according to Google Finance),  while patients have paid outlandish prices for contaminated medicine, or have had to reduce their medication dosages after the defective manufacturing plant was shut down.  So why should the CEO who presided over all this, whose has already become rich as a hired employee of Genzyme, get even richer? 

Once again we demonstrate how massively perverse incentives stupendously reward the top brass of health care organizations for mediocre, or worse leadership and bad results for both patients/ clients/ customers and stock-holders alike.  As long as being a health care CEO is effectively a license to loot the company, is it any wonder that health care organizations continue to be badly lead, and health care costs soar while quality and access suffer? 

Once more with feeling: real health care reform would require us to make health care executives truly accountable for their actions, and penalize them for those that are ill-informed, contemptuous of health care values, self-interested, or corrupt.