Should the President of the University of Michigan be Held Accountable for Johnson and Johnson's Adulterated Drugs and Defective Devices?

We first started to discuss the intense conflicts of interest generated when leaders of academic medicine are also members of boards of directors of for-profit health care corporations in 2006.

The issue really made the big time in 2010 when the New York Times published a front page article in its Sunday Business section about whether university presidents who also were corporate directors were part of an "academic-industrial complex."

University of Michigan President Mary Sue Coleman as a Director of Johnson and Johnson

One such director we discussed this year is Mary Sue Coleman, President of the University of Michigan, and hence leader of a prestigious medical school and academic medical center, who is also Director of the large health care conglomerate, Johnson and Johnson. This relationship became locally controversial when President Coleman supported a smoking ban on campus, and critics pointed out that Johnson and Johnson is a prominent maker of smoking cessation products.

Now President Coleman's role on the Johnson and Johnson board made it into the national media, as the topic of an editorial in the Detroit News:

Should public officials moonlight as corporate operatives? This is a question being raised at the University of Michigan in the wake of the administration's decision to ban smoking on campus.

While some students have criticized the ban, many take issue with the priorities of the administrators who backed it: Specifically, U-M President Mary Sue Coleman, whose decision-making may have been influenced by her membership on the board of Johnson & Johnson, a private company. The right thing for Coleman to do would be to resign from her corporate position, or, at the very least, refuse to accept payment.

(Not to toot my own horn, but I thank the editorial writer for quoting me as a "high-profile" ethicist.)
The issue in this editorial, and in the earlier discussion of President Coleman's responsibilities for Johnson and Johnson, was whether the latter could influence specific decisions made in the former role.

However, events since our original posts on this case should create a new set of concerns.

Johnson and Johnson's Recall of Over-the-Counter Childrens' Medications

Johnson and Johnson has been dealing with a series of crises generated by revelations of problems in how it manufactures many of its marquee drugs and devices.

We posted here about problems in the manufacture of well known over-the-counter childrens' medications, such as childrens' Tylenol (acetaminophen) and Motrin (ibuprofen), by Johnson and Johnson's McNeil Consumer Healthcare subsidiary. Medications were found to be contaminated, and the plant making them was shut down.

Stringent Cost Cutting, Merger Mania, and Executives Who Don't Understand their Company's Business

Since then, investigative reporting by Fortune suggested that quality control problems were the result of that tactic popular among corporate executives to boost profits and hence their own over-stuffed pay checks, stringent cost cutting:

McNeil's quality-control department thrived for a few years. Then, not long after Larsen retired in 2002, it began to slowly weaken. The culprit was a familiar one -- cost cutting -- but in a subtler form. There were no wholesale layoffs in quality control. Instead experienced staffers were repeatedly laid off and replaced with newbies who mostly lacked technical pharmaceutical experience. By 2008 the analytical laboratory, formerly staffed almost entirely by full-time scientists, was half-full of contract workers, according to a former manager there.

Once stricter than a schoolmarm, the department grew lax. The team that tested the production lines was dubbed the 'EZ Pass system,' according to a former quality-control employee.

Quality problems also appeared to be products of another familiar tactic that "brilliant" CEOs use to quickly boost the bottom line, mergers and acquisitions:

At the end of 2006, J&J, on the hunt for growth amid slowing sales and profits, completed the $16.6 billion acquisition of Pfizer's (PFE, Fortune 500) consumer health care division....

The merger dramatically altered McNeil's position. It had previously been part of the pharma unit, but after the deal it was folded, along with the Pfizer group, into J&J's consumer sector, headed by Colleen Goggins. According to former executives, the difference between divisions was both cultural and financial. 'The people who ran pharma understood the requirements associated with [regulatory] compliance and the investments required to keep that up,' says a former executive. Consumer relied more on marketing, or 'smoke and mirrors,' as an ex-McNeil director scoffs. Perhaps the most striking difference was in profit margins. Companies in the consumer group typically had margins around 10%; McNeil generated more than twice that.

So,

Their new consumer bosses were now in charge of reducing McNeil's spending so that the company could meet the merger targets. Goggins looked to squeeze every cost, former employees say, and her team leaned heavily on McNeil, with its juicy margins, to absorb the cutbacks. 'I was given savings goals that were mind-boggling, unheard-of,' says one former executive.

And the merger brought out another common feature of contemporary management, executives with plenty of power, but almost no knowledge about or experience in the sort of work done by their subordinates:

Because the consumer executives lacked pharmaceutical experience, former McNeil employees say, they demanded ill-advised operational reductions. One VP remembers arguing with one of Goggins's

A Growing List of Recalls and Mistakes

While we learned about how Johnson and Johnson executives pursued all the currently fashionable management techniques to make more money, but likely to the detriment of the quality and safety of their products, we also learned that the problems at the company were not limited to a single factory, the specific products listed above, or a single unit of the company.

The company also recalled some contact lenses made by Johnson and Johnson Vision Care, as reported by the Associated Press,

Health giant Johnson & Johnson has issued its ninth recall of a consumer health product in a year, this time covering millions of 1 Day Acuvue contact lenses sold in Japan and two dozen other countries in Asia and Europe.

The affected contact lenses were mostly sold in Japan and none were sold in the U.S. or Canada, the company said.

Johnson & Johnson said Monday it had received a limited number of complaints from customers in Japan that they experienced an unusual stinging or pain when inserting the Acuvue TruEye Brand contact lenses.

Then it recalled prosthetic hips made by its DePuy orthopedic unit, as reported by Medscape,

An orthopaedic unit of Johnson & Johnson (J&J) is voluntarily withdrawing 2 implant systems for hip replacement after learning that roughly 1 of 8 patients in England and Wales who received the implants needed a second hip replacement operation.

The 2 devices under recall are the ASR XL Acetabular System, a metal cup fitted into the pelvis and the corresponding metal ball that replaces the femoral head, and the ASR Hip Resurfacing System, which is similar except that a metal cap is fastened to the femoral head. Both devices are manufactured by DePuy Orthopaedics of J&J.

Then the US Food and Drug Administration (FDA) warned Johson and Johnson's DePuy unit about its marketing of some different joint replacement products, as reported by the Wall Street Journal,

A Johnson & Johnson (JNJ) unit is marketing joint-replacement products without the required approval from federal regulators, the U.S. Food and Drug Administration said in a warning letter recently made public.

In the letter, the FDA said J&J unit DePuy Orthopaedics Inc. is illegally marketing its TruMatch Personalized Solutions system because it hasn't received appropriate clearance to sell the product. Additionally, the FDA found that DePuy is promoting another system--its Corail Hip System--for uses that haven't yet been approved.

'A review of our records reveals that you have not obtained marketing approval or clearance before you began offering the TruMatch Personalized Solutions System for sale, which is a violation of the law,' the FDA said in the letter.

The FDA added that the Corail Hip System has been misbranded and asked DePuy to immediately stop marketing the Corail system for unapproved uses.

And a few days ago, the now embattled head of the Johnson and Johnson consumer products unit, which was central to some of the earlier recalls, but not to some of the later problems, announced her resignation, as reported by Natasha Singer and Reed Abelson writing for the New York Times,

A longtime senior executive at Johnson & Johnson in charge of the consumer products division is leaving the company early next year, signaling a shake-up after a troubling series of recalls, including of children’s Tylenol, tarnished the company’s reputation in the last year.

The company said Thursday that the executive, Colleen A. Goggins, who testified this spring before a Congressional committee investigating the recalls, would retire in March. Ms. Goggins, 56, has worked at Johnson & Johnson since 1981 and was a member of the company’s senior leadership.

Who Will Be Accountable for a Company in Disarray?

Johnson and Johnson was one of the most trusted names in health care for a long time, perhaps partially because of its forthright response to the apparently external contamination of its Tylenol products in the 1980s. Now it appears to be a company in disarray, battered by numerous recalls of apparently contaminated, adulterated, or defective products, both drugs and devices, allegations that its conventional management wisdom lead to these quality and safety problems, and now with at least one key senior manager leaving.

All that went wrong is not exactly clear yet. Clearly, however, top managers, and the board of directors to whom they report ought to be accountable.

Here is where we return to the case of University of Michigan President Mary Sue Coleman. She is, after all, well-paid to be a director of Johnson and Johnson. Therefore, she ought to be accountable for the type of people hired as top managers, and the general direction of their management. She ought to be accountable for letting Johnson and Johnson CEO William Weldon and consumer products head Colleen Goggins continue in office, and receive outsized compensation, ($19,847,026 and $5,345,737  total compensation respectively last year, see here). She also ought to be accountable for the general thrust of their management, including excess cost-cutting, seeking mergers without clear plans for assimilating them, and putting people who did not understand pharmaceuticals in charge of pharmaceutical production.

The original controversy about President Coleman's role on the Johnson and Johnson board focused on whether her decision to promote a smoke free campus resulted from her conflict of interest.  Then, one defense mounted by President Coleman's spokesperson was:

'It's essential that U-M have a voice and interact with the business world,' said Rick Fitzgerald, a U-M spokesman. 'She thinks it's her duty to understand what the commercial world is doing.'

Now President Coleman has had a chance to have a voice and interact with Johnson and Johnson, and understand what it is doing by assuming a position that gives her ultimate responsibility for the company's top leadership and the direction they took. Now it appears the leadership may have been faulty, and their direction ill-advised.

Will President Coleman take responsibility for that? Maybe some enterprising student journalists at the university should ask her.

Meanwhile, this case now illustrates another important facet of the problems created when leaders of academic medicine serve on boards of directors of health care corporations. The mission of the University of Michigan's medical school and academic medical center includes taking the best possible care of individual patients. Taking the best possible care of individual patients cannot be done when the drugs physicians recommend or prescribe in good faith turn out to be adulterated, or when the devices they employ in good faith turn out to be faulty.

President Coleman's primary interests and entrusted responsibilities include upholding the best possible care for individual patients. Presiding over a company whose sloppy and ill-informed leadership, and misplaced priorities lead to the production of adulterated medicines and defective devices seems to conflict with this primary interest and entrusted responsibility.

Maybe all those academic leaders who accepted apparently cushy jobs on corporate boards will reconsider their decisions when they start being held responsible for their companies' poor leadership and poor decisions leading to poor health care outcomes of the use of their companies' products. They may really start to reconsider when journalists learn that academic leaders are more accessible than the current and ex-CEOs who also populate corporate boards.

Meanwhile, academic medicine ought to really rethink whether continuing to defend the "new species of conflicts of interest" will soon become counter-productive.

Kindler's List: Pfizer-Wyeth Microsurgery, or Witch Doctor Medicine?

("Kindler's list" metaphorically representing the list of people at Pfizer/Wyeth who will lose their jobs in mass layoffs, and perhaps much more, the stress of losing a job being like the stress of a death in the family or a divorce. These layoffs come at a time of the most severe economic downturn since perhaps 1929, due to merger mania itself necessitated by mismanagement. This is as opposed to Schindler's list, a list of people who were saved by someone actually willing to give them jobs.)

At "Pfizer/Wyeth Merger And Sacrificing The Future: Laying Off Scientific Staff All Over The Place" I commented on the futility of a large pharma merger led by two pharma leaders lacking biomedical experience and credentials. My reasoning was on the basis of the merger being unlikely to repair the organic problem in the industry, mismanagement of R&D by generic managers. I opined that:

Management in the absence of domain expertise in this industry is, in fact, mismanagement.

In my local paper today I discover the former top lawyer for McDonald's has become a surgeon:

Posted on Sat, Feb. 7, 2009

Pfizer says the time is right for Wyeth deal

The CEO said his team had made changes for a careful integration. Still, analysts are split on its success.

By Linda A. Johnson
Associated Press

TRENTON - Eager to dispel doubts on executing Pfizer Inc.'s $68 billion tie-up with Wyeth, Pfizer's chief executive officer said it would be done more like microsurgery than just stitching two huge corporations together.

Jeffrey Kindler has spent two years transforming Pfizer into smaller, entrepreneurial research and marketing business units, making the companies easier to combine, he said in his first in-depth interview since the deal was unveiled Jan. 26.

"Microsurgery?"

And, just how does a fast food company lawyer with no biomedical domain expertise "transform" a multinational pharmaceutical organization into anything but ... ground meat?

With regard to "analysis", such a term sounds more like the rhetoric of a Bernard Madoff or other Wall Street Master of the Universe than from someone running an incredibly complex, intricate pharmaceutical company, one of the world's largest.

In a typically excellent post at Corante: In The Pipeline entitled "Opportunity Costs", medicinal chemist and blogger Derek Lowe points out just a few of the complexities of such a merger:

... I’d imagine that things have slowed down a great deal. No one knows what the future will be like, what parts of the company will stay, and which people will be asked to stay with them. How do you make plans under those conditions? For many people, the project they’re working on is now very much a secondary consideration.

Even outside the personal level, there are a lot of paralyzing influences. The same uncertainties about individual jobs apply to development projects. Some of what Wyeth is working on surely overlaps with what Pfizer’s already doing. So which project goes forward? Not both of a matched set, that’s for sure. There are some projects at both companies that are dead in the water, but no one can be sure which ones, and no one will know for some time to come.

That’s because you can’t really start ironing out these details until the deal goes through.

Legally, Pfizer and Wyeth are separate companies, and there are a lot of difficulties involved in sharing information in such depth. Even when that eventually happens, there are going to be plenty of other things to work out. Let’s say that Project Y from Wyeth looks to be in better shape than the corresponding Project Y-Prime from Pfizer, so it goes on through. Fine! But under whose rules does it proceed?

Every company has its own culture about these things – the criteria that are used to recommend a compound to the clinic, the ways those boxes are filled in, the sorts of people who have to sign off on them. A project caught in the middle can stall while all these details are cleared up, losing months (or even a year or two) in the process.

You can imagine the disconnects: you guys did check this compound for hERG activity, right? With what assay? And with what cutoff? That’s not the one we use, anyway; we’ll have to run it again, and get that signed off on by. . .hmm, well, by someone, we’ll figure out who’s in charge of that sort of thing soon, about the same time that we figure out who reports to them. Now, about your formulations work. . .you used what, again?

No, all this has a ferocious price, when you measure it in opportunity costs. The people caught up in all this could be doing something much more productive with their time, for sure. This sort of thing doesn’t show up on the books. And the longer the process drags on, the worse it’ll be.

I have been in an R&D support role in a large pharma and have seen what goes on in such an organization. Considering the credibility of many of today's Captains of Industry, believing all these details have been worked out seems to me to be more the belief of a fool than a rational being.

Coming from a former fast food company manager, I would say "Witch Doctor Medicine" sounds like the more appropriate term for the merger.

To be followed by massive indigestion.

I extend my sincere sympathies to the many fine people on Kindler's List who will lose their livelihoods and perhaps more as a result of the experiments of a non biomedical "micro surgeon."

-- SS

Pfizer/Wyeth Merger And Sacrificing The Future: "Laying Off Scientific Staff All Over The Place"

In yet another massive waste of money, Pfizer has been touting its merger with Wyeth via full page ads in major newspapers. I saw the ads yesterday in the Wall Street Journal and my local Philadelphia newspaper under this large self-aggrandizing banner in capitals:

CREATING THE WORLD'S PREMIER BIOPHARMACEUTICAL COMPANY

A website with the presumptuous name "www.premierbiopharma.com" has also been created.

What is pathetic is an apparent continuing belief that mergers of two companies in trouble for essentially the same reasons can produce a company that is successful.

Each individual company has not been doing well despite billions in expenditures. They will continue not doing well despite the merger because they suffer an organic problem, namely, they both mismanage R&D.

This "merger = miracle" belief persists, in part, because those in charge are unable to see the problems that impair R&D. The problems are "hiding in plain sight." The reason the problems hide in plain sight from the leadership is that the leaders are blind.

Those in charge cannot see that which the domain specialist sees.

They cannot see because they lack the training, experience, and what is described as 'meta-competence' (in this brilliant article on competence) essential to seeing that which is obvious. Obvious, that is, to those who do not lack these characteristics. In addition, I've also observed that some lack the fundamental analytical abilities essential to understanding and managing the complexities of biomedical R&D.

Why those without domain expertise are in charge of organizations whose long term viability depends entirely on the most advanced and creative pursuit of biomedical 'miracles' is another matter. I won't address this here, other than saying it reflects the adverse consequences of a bias that has evolved in management "science." That bias is the belief that all the world consists of faceless labor resources performing easily definable processes upon interchangeable widgets, and that management can therefore be done by generic managers, exclusively. Some of the world is like that, but some isn't, such as biomedical R&D.

Management in the absence of domain expertise in this industry is, in fact, mismanagement.

There is nothing here to spin, there is nothing to debate. There is nothing to discuss. This is a first principle. Failure to accept this reality results in corporate failure.

Under this mismanagement, pharmaceutical R&D has become R&D in name only.

My own observations from working in the industry in a direct R&D support role tend to validate that description:

• The budgets for informatics tools essential for R&D were controlled by non-scientists such as IT personnel with their own agendas, causing scientist to have to utilize extremely inefficient paper based information wasting much time, or avoid difficult and innovative research pursuits altogether.
• Research support staff were micromanaged by non scientific superiors.
  
• Scientist recruitment efforts were impaired by generic HR workers who served, in effect, as a barrier to creative talent not fitting the "judgment" of HR as a good fit (or whose defective eRecruiting systems rendered the CV of such people effectively invisible). Generic HR staff have no idea about who really is the best talent, as they (like many senior executives) lack the background to render such judgments. Talent often never gets seen by the hiring managers as a result.
  
• Scientists were burdened with meetings, inundated with needless emails calling for equally unneeded information, requests for ill conceived "metrics" on productivity, and other petty tasks distracting them from actual scientific and intellectual focus.
• Scientists were burdened with the time consuming bureaucratic insanity of developing yearly "management by objective" plans where they defined what they would accomplish for the year to then be evaluated upon (e.g., for bonuses), as if that were even possible and did not in effect create an atmosphere of "covertly lowered expectations." Scientists were also burdened by an increasing number of tedious and onerous HR processes for ongoing performance evaluation of themselves, their reports and their peers, again a distraction and disruption from scientific focus.
• Scientists were forced to play nasty politics due to the pressures of constant downsizing, distracting them from useful work. At one pharma, for example, at times of downsizing scientists were made to "bid on their own jobs" as well as others, or face layoffs if no "match" was found. It was as if the company involved did not know what its people did, could do, and what it needed them to do. Nor did it seem to care that such a degrading process was anathema to innovative discovery.
• Some VP or other executive comes up with some impractical if not crazy pet idea and puts scientists to work on it. The scientists know the idea is a bad one but are intimidated against speaking up lest they be "downsized" or otherwise penalized. Their time for more creative endeavors is thus wasted.
  

My colleagues in other pharmas describe similar circumstances.

A better description for what I describe above is perhaps the term coined by a correspondent, Felix Fulmer. He summarizes the situation as follows in this pithy and insightful statement:

What we today call pharmaceutical R&D is in reality busywork disguised to look like R&D, in effect a well engineered, well managed, massively expensive failure.

He opined that a small fraction of prime scientist intellectual horsepower and time is actually spent on true R&D, the rest wasted on feeding the bureaucratic corpulence that is the modern pharma research lab.

When you spend tens or hundreds of billions of dollars, you should have something to show for it if you are doing real research. The low hanging fruit haven't been that fully picked. That contention is supported by the accomplishments of the far less bureaucratic biotech and academic research sectors.

Today's Wall Street Journal editorial hit the nail on the head about the merger (my business-speak translations are in red italics):

The risk is that the cost savings [i.e., reduced personnel expenses gained by putting people out on the street -ed.] and bureaucratic mayhem from combining labs and streamlining R&D [cannibalizing good people -ed.] end up stifling research productivity [creativity - ed.]

Pfizer CEO Jeffrey Kindler is a lawyer [i.e., lacks biomedical and scientific education, experience and insight -ed.] who came to the drug giant from McDonald's [the hamburger joint - ed.] in 2006 and has been laying off scientific staff all over the place.

I had commented on Kindler's credentials in my July 2006 post "Pfizer brings life to my 'If you've run McDonald's, you can run anything' metaphor."

Merging with other companies and laying off scientific staff (instead of keeping them, hiring more of the best, and repairing the defective environment that distracts them from their work) is apparently the only "solution" that non biomedical business managers in this industry can proffer. They, like their impaired scientists, also suffer a lack of creativity in thought and application.

Through what magic is a merger between two companies that no longer know how to carry out effective R&D believed to work a miracle?

(Perhaps it is some form of ... management alchemy?)

Company growth depends on the new drug pipeline. Pipeline depends on R&D. R&D depends on leadership and research talent just as a good movie depends on both a good director and good acting. When both are lacking you cannot have growth, therefore why bother merging?

I simply do not see how shareholder value is created via this merger. I hold no stock nor financial interests nor relationships with either of these companies or any pharmas. I've chosen not to as a result of my observations from within the industry. It is also a fact that many if not most large mergers do not actually produce gains. I therefore suggest that individual and institutional investors and analysts take a bearish view of this merger.

Finally, the full page ad touting the merger mentioned at the beginning of this post ends as follows:

"The talented people we have the privilege of working with have a tireless commitment to improving the health of the patients we all serve. We look forward to working together to meaningfully advance our shared mission of applying innovative science to improve world health in the years to come." - Jeff Kindler, Pfizer Chairman and CEO, and Bernard Poussot, Wyeth Chairman, President and CEO

I guess the "talented people" and the "we" in the above self-aggrandizing passage doesn't include those scientists and other people who will find themselves on the street during the worst economic downturn since 1929.

As I observed in my July 2007 post "Happy Accidents in pharma doubtful: Tax Break Used by Drug Makers Failed to Add Jobs", the people who actually write this copy must understand the shallowness of their words.

Further, employees who read this rhetoric fall into one of two groups: those who believe it or are comforted by it, and thus are deluded, and those who don’t believe it, but cannot speak up due to fear of retaliation or layoff, and thus may easily become demoralized and cynical.

Environments of the deluded, demoralized and cynical are not the best for leading-edge drug R&D.

-- SS

Addendum Feb. 5:

Based on a Feb. 2 interview in Financial Times entitled "An Acute Talent for Innovation", Nobel prize winner and drug inventor Sir James Black would probably agree with many of the assessments above. I particularly like his recollection that:

Max Perutz, director of one of the most successful postwar science institutions, Cambridge University's Molecular Biology Laboratory, had compelling ideas on how best to nurture research, says Sir James: "No politics, no committees, no reports, no referees, no interviews - just highly motivated people picked by a few men of good judgment."

and his observation that:

There is no shortage of scientific talent, he says. "But [I am] much less optimistic about the managerial vision [of the pharmaceutical industry] to catalyse these talents to deliver the results we all want."

-- SS

Merger Mania Redux: the Case of the Carilion Health Care System

The Wall Street Journal published an article on how one not-for-profit hospital system came to dominate its market, and the effects of that domination on local health care.

How the System Became Dominant

The WSJ article documented how a hospital merger created a vertically-integrated health care system. Note that in the old days of "merger mania," there was a lot of buzz in the health care research and policy circles about how creating such integrated systems to benefit quality and access, and lower costs. This rationale appears below.

In 1989, the U.S. Department of Justice tried but failed to prevent a merger between nonprofit Carilion Health System and this former railroad town's other hospital. The merger, it warned in an unsuccessful antitrust lawsuit, would create a monopoly over medical care in the area.

After the 1989 merger, Carilion continued to operate Roanoke's two hospitals separately. It later consolidated the hospital boards and in 2006, transferred most of Roanoke Community Hospital's staff and services to a renovated and enlarged Roanoke Memorial Hospital.

The moves eliminated any hospital competition in Roanoke proper....

[Carilion CEO Dr Murphy] was convinced that the cost and quality of care in Roanoke could be improved if doctors worked in a more centralized system. In June 2006, he announced a seven-year, $100 million plan to transform Carilion into a multispecialty clinic, like the Mayo Clinic.

Carilion began approaching private physician groups, offering to buy their practices and pay their salaries.

We shall see what effects CEO Dr Murphy's advocacy of more centralization had.

Effects on Costs

The domination by a single vertically integrated health care system apparently lead to rising costs.

Nearly two decades later, the cost of health care in the Roanoke Valley -- a region in southwestern Virginia with a population of 300,000 -- is soaring. Health-insurance rates in Roanoke have gone from being the lowest in the state to the highest.

That's partly a reflection of Carilion's prices. Carilion charges $4,727 for a colonoscopy, four to 10 times what a local endoscopy center charges for the procedure. Carilion bills $1,606 for a neck CT scan, compared with the $675 charged by a local imaging center.

Alan Bayse, founder of a local benefits-consulting firm who has sold health insurance in the area for 30 years, says health-insurance rates in the Roanoke Valley used to be 20% lower than in Richmond, Virginia's capital, and the lowest in the state. Today, he says, they are the highest in the state and 25% higher than in Richmond, citing rate information from insurer Cigna Corp. Anthem, another health insurer, says its rates are 6% higher in Roanoke than in Richmond.

Mr. Lionberger, whose construction company has about 100 employees, says his health-care costs have risen 50% over the past three years, hampering his ability to compete with contractors from other parts of the state.

While the increasing domination by the system been associated with increased health care insurance rates, its leadership has aggressively pursued patients who failed to pay their share of its exaggerated bills.

The Roanoke City General District Court devotes one morning a week to cases filed by Carilion. In its fiscal year ended Sept. 30, Carilion says it sued 9,888 patients, garnished the wages of 5,478 people and placed liens on 3,920 homes. Carilion says the people it takes to court have the means to pay their bills.

When some patients don't pay their bills, Carilion places liens on their homes. Carilion says it doesn't track how many liens it has outstanding, but the close to 4,000 it filed in 2007 'is representative of a typical year,' Mr. Earnhart says. Carilion doesn't foreclose on homes and only collects when properties are sold, he says.

Dr. Murphy says Carilion only sues patients and places liens on their homes if it believes they have the ability to pay. 'If you're asking me if it's right in a right-and-wrong sense, it's not,' he says. But Carilion can't be blamed for the country's 'broken' health-care system, he says.

Ah, yes, the "broken" health care system made me do it, says CEO Dr Murphy.

Decreasing Access

One effect of the merger seems to be a squeeze on physicians who are not part of the integrated system, which presumably will decrease, not improve access to health care.

Some doctors who chose to remain independent say the number of patients referred to them by Carilion physicians plummeted. Carilion controls a large proportion of Roanoke's referrals because it employs a majority of doctors who make them, such as family practitioners, pediatricians and emergency physicians.

Joseph Alhadeff, an orthopedic surgeon who is a member of a private practice called Roanoke Orthopedic Center, says the number of joint replacements he performed dropped off sharply after he stopped getting such referrals from Carilion doctors, prompting him to plan to relocate to Pennsylvania. 'I spent seven years building up a practice and watched it evaporate in six months,' he says.

In fact, it appears that the integrated system was out to decrease the business of physicians not in the system.

Geoffrey Harter, an ear, nose and throat doctor at another Roanoke private practice, Jefferson Surgical Clinic, says Carilion-employed colleagues told him the hospital system asked them not to refer patients to doctors it didn't employ, calling such referrals 'leakage.' Keeping referrals within Carilion is lucrative for the hospital system because it ensures tests and procedures performed on patients take place at Carilion facilities.

Dr. Murphy says Carilion uses the term 'leakage' in internal marketing discussions and that he would rather see its doctors refer patients to other Carilion doctors to optimize their care. But he says Carilion doesn't require its doctors to keep referrals in-house even though it would be legal to do so.

Meanwhile, as the integrated system grew more powerful, its leadership appeared to use other tactics that have become all too familiar to readers of Health Care Renewal

Silencing Criticism

As tension between Carilion and Roanoke's independent doctors grew in 2006, a group of 200 doctors formed an organization called the Coalition for Responsible Healthcare to protest the Carilion Clinic plan. The group posted a petition on its Web site and put up billboards around Roanoke that read: 'Carilion Clinic. Big Dream. Big Questions.' The local newspaper, the Roanoke Times, covered the controversy in a series of articles written by its health-care reporter, Jeff Sturgeon.

A few months later, in March 2007, the Roanoke Times moved Mr. Sturgeon off the health-care beat after Carilion complained repeatedly about his coverage. Carilion says it communicated its displeasure to the paper's editors, but never asked that Mr. Sturgeon be reassigned. Carilion withdrew most of its advertising from the paper, but says it did that as part of a reallocation of its ad budget.

Follow the Money

As the system became more dominant, and more profitable, more money accrued to its top leaders, particularly, of course, its current and former CEOs.

In 2001, Dr. Murphy took the nonprofit hospital system's helm. Dr. Murphy, ... has a medical degree from Harvard but doesn't practice medicine....

Fueled by large, untaxed investment gains, Carilion's profits have risen over the past five years, reaching $107 million last year. Over the same period, the total annual compensation of its chief executive, Dr. Murphy, nearly tripled to $2.07 million. His predecessor, Thomas Robertson, received a lump-sum pension from Carilion of $7.4 million in 2003, on top of more than $2 million in previous pension payouts.

Carilion says Dr. Murphy's compensation is in line with comparable health-care organizations and notes he doesn't receive car allowances, a spousal allowance or club memberships. It says Mr. Robertson's pension accrued over a 32-year career at Carilion.

Members of Carilion's board of directors also seemingly profited from their relationship with the hospital system. The WSJ documented some major financial relationships among the hospital and companies in which board members had an interest.

A large part of the clinic conversion's costs have involved the construction of a new medical campus around Roanoke Memorial Hospital that began several years earlier.

The lead contractor building the site is Swedish construction giant Skanska. But one of the project's biggest beneficiaries has been J.M. Turner & Co., which is owned by Carilion board member Jay Turner. Carilion says it paid J.M. Turner a total of $14.9 million in direct contracting work from 2004 to 2007.

Dr. Murphy says Carilion's board authorized 'arm's length work' with J.M. Turner, but adds that "a case could be made that we shouldn't award work to J.M. Turner to avoid the appearance of impropriety."

Mr. Turner isn't the only Carilion board member with a financial stake in the new medical campus. Another board member, Warner Dalhouse, has invested in a hotel being built on the campus to accommodate patients and their families. HomeTown Bank, a local bank Mr. Dalhouse founded and of which he was until recently chairman, is financing the hotel's construction. Dr. Murphy and Mr. Turner sit on HomeTown Bank's board.

Carilion and Mr. Dalhouse say he didn't make his $130,000 investment in the hotel until after Carilion sold the parcel to Texas developers in early 2006. 'I wasn't dealing with Carilion. I was dealing with the new owners of that land who had paid fair market value for it,' Mr. Dalhouse says.

Management versus Mission

The Carilion Health System's statement of mission and vision are as follows

Mission Statement

Carilion Health System exists to improve the health of the communities it serves.

Vision

- Assure accessible, affordable, high quality healthcare that meets the needs of the community
- Motivate and educate individuals to improve their health
- Champion community initiatives to reduce health risk

Yet, the investigative reporting by the WSJ has shown how the increasing domination of local health care by the Carilion Health System has made health care less accessible and less affordable, despite its leaders' proclamations to the contrary. It has "educated" the local newspaper to reduce its critical coverage of the system's activities. Thus, the bigger and more dominant the health care organization, the more mission-hostile its leadership is likely to be. Meanwhile, increasingly mission-hostile leadership tends to become increasingly lucrative for its practitioners.

I submit that if we really want better quality, more accessible, more reasonably priced health care, we need to bust the new health care "trusts." We need smaller health care organizations with ethical leadership truly devoted to the health care mission. We need organizations whose governance is representative of key constituencies; accountable to patients, health care professionals, and the public at large; open and transparent; and which upholds clear ethical principles.

Merger Mania Redux: Combination Would Lead to Windfalls for Blue Cross Executives

The Philadelphia Inquirer published a story about what seems to drive merger mania in health care. In Pennsylvania, the two largest health insurance companies in the state, both not-for-profit, Highmark and Independence Blue Cross, have been pushing to merge

Highmark Inc. and Independence Blue Cross would pay their top executives as much as $4.2 million more if they were allowed to merge.

Kenneth Melani, the chief executive of Highmark, who is expected to have the same job at the combined companies, would get a 31 percent raise, to $3.9 million from $2.97 million, including incentives, according to documents filed with the Pennsylvania Insurance Department.

Independence Blue Cross' CEO, Joseph Frick, who is slated for the role of chief operating office after the merger, would earn $2.94 million, the same as his current pay. In 2006, Frick's pay was $1.6 million.

The two biggest raises after Melani's $930,000 are planned for chief financial officer Nanette DeTurk and David M. O'Brien, executive vice president for government services, both from Pittsburgh-based Highmark.

DeTurk, who is in line to be CFO of the combined entity, could get a $635,098 increase in total pay, which includes possible annual and long-term incentives. O'Brien, head of Medicare operations, would get a $556,184 raise under the plan filed Thursday.

Lance Haver, director of Philadelphia's Office of Consumer Affairs, said yesterday that the raises were another 'indication that the Blues have lost their social mission and operate more like for-profit insurance companies.'

If the reason for the merger is 'to better serve the public, then they don't need to raise executive salaries like this,' he said.

The insurers have said that efficiencies from the merger, which would create the largest health insurer in state history and one of the largest in the nation, would spin off $1 billion in savings to benefit subscribers, the uninsured and other charities.

Part of the savings would come from the elimination of 745 to 1,200 jobs, the companies have projected.

An editorial in the same newspaper noted that while executives would enrich themselves, the benefits to others were not so obvious.

Short of the windfalls for the top execs, the proposed merger looks like a loser for other Pennsylvanians.

Employees: Up to 1,200 Blue Cross jobs are expected to be eliminated if the deal goes through. Mergers create job overlaps that lead to reductions and a big annual savings.

Of course, there's no overlap for the two chief executives, who instead will divvy up their duties and still get big paydays.

Customers: Independence Blue Cross and Highmark already have a stranglehold on their respective markets, which helps explain why they can jack up rates without much recourse by their clients.

The proposed merger won't lead to a reduction in premiums for customers, who have been socked with annual double-digit increases. The Blue Cross CEOs say the merger will have 'minimal' impact when it comes to reining in rate hikes.

Competitors: If the merger is approved, the prospect of any real competition among health-insurance providers in the state will disappear.

The merger would give the new firm a combined market share of roughly 65 percent - making it the largest private health insurer in Pennsylvania. The result will be a more dominant health-insurance provider, making it even harder for other existing insurers to expand while scaring any new competitors from entering the state.

The leaders of not-for-profit corporations are supposed to have a duty of obedience, the obligation to advance their organization's mission, and a duty of loyalty, the obligation to put the mission ahead of their self-interest when acting in their leadership capacity. Highmark proclaims its mission to be "to provide access to affordable, quality health care." Independence Blue Cross seems to have avoided committing itself to a mission, but by implication also should be about providing fairly priced, accessible health insurance. However, the main effect of this merger seemingly would be to enrich the two organizations' top executives, not to improve health care or make it more affordable or accessible. This example of merger mania reminds us that far too many health care leaders seem more interested in enriching and empowering themselves rather than improving health care.

We need health care leaders who actually care about health.

Making the governance of health care organizations, particularly not-for-profit organizations, more representative of key constituencies, more transparent, more accountable, and subject to clear ethical standards might encourage people who care about health to lead health care organizations, and discourage people who care mainly about their own wealth and power from doing so.