A Severance Package to an Un-Severed CEO - A Manifestation of "CEO Disease?"

The latest jaw-dropping story about executive compensation in health care has been unfolding in California, but at least now I have a diagnosis for this syndrome. 

A Generous Retirement Package, Paid Before Retirement

In April, the Los Angeles Times reported about the generous retirement package given to an outgoing public hospital district CEO in California:

When he turned 65 two years ago, Samuel Downing received a $3-million retirement payment from a public hospital district in Salinas, Calif., where he serves as president and chief executive.


But Downing continued working at his $668,000-a-year job for another two years, and after he retires this week, he will receive another payment of nearly $900,000. That comes on top of his regular pension of $150,000 a year.

Note that not only was this pension package large in an absolute sense, but it was provided before the CEO actually retired. This compensation was clearly out of the ordinary:

The payments amount to one of the more generous pension packages granted to a public official in California and come amid growing debate about 'supplemental' pensions that some officials receive on top of their basic retirement benefits.

Though Downing's case is extreme, it follows the disclosure of extra pension benefits received by employees in municipalities including Bell and San Diego. Earlier this year, a state watchdog group called for stricter pension rules, saying California's retirement plans are 'dangerously underfunded, the result of overly generous benefit promises, wishful thinking and an unwillingness to plan prudently.' Seventy percent of Californians support a cap on pensions for current and future government workers, according to a recent Los Angeles Times/USC Poll.

Furthermore, there was a disconnect between the size of the pension payments and the hospital district's financial situation:

But the $3.9 million in supplemental retirement payments to Downing has come during a period of cutbacks at the hospital, including the reduction of 600 positions through layoffs and attrition.

Hospital representatives said the cuts were mainly a response to recent economic conditions. The hospital has faced declining revenues and patient admissions and has been burdened by construction costs of a state-mandated retrofit project, they said.

Hospital district apologists had the usual excuses: the pensions reflected the market, and the CEO is brilliant:

Officials at the Salinas Valley Memorial Healthcare System defended the payouts, saying they need to pay private-sector-level benefits to retain top talent. They described Downing as a gifted and experienced administrator.

'I think I've earned it,' Downing said in an interview. 'I've stayed here out of my commitment to try to build a great hospital.... I worked for this institution and gave them my heart and soul.'

As usual, left unsaid were how the CEO's "brilliance" was justified, other than by his own assertion, and why the CEO deserved so much credit for the performance of a hospital system that employed many other people.

A Generous Severance Package, Paid to Someone Still Employed 

Yesterday, it turned out that there was even more to Mr Downing's compensation. As again reported by the Los Angeles Times,

A Salinas public hospital district, already under fire for granting its outgoing chief executive $3.9 million in retirement payments, also gave him nearly $1 million as part of an unusual severance agreement, according to records obtained by The Times.

The payment fattened what was already considered one of the more generous public pensions ever given in California. Its disclosure prompted the state Assembly earlier this month to order an audit of the hospital district's finances.

The Salinas Valley Memorial Healthcare System board gave Samuel Downing a cash payment of $947,594 in 2008, according to a hospital report on his compensation. The money came from a special severance fund set aside for when Downing ended his employment with the agency.

But the board decided to award him the money while he was still CEO.

By the time Downing retired last month, he had received a series of supplemental retirement benefits totaling $3.9 million, in addition to the severance payment. He will also be paid a regular pension of $150,000 a year. He earned about $670,000 in base salary during his final years of employment, along with other benefits such as a car allowance and paid time off.

The details of how the CEO became entitled to this severance agreement, and how a severance payment was made to someone whose employment was not severed was sketchy:

Salinas Valley officials said the severance payment stemmed from a handshake agreement in the 1980s between Downing and a previous president of the board of directors. In 2000, the hospital's board agreed to a contract in which Downing would be paid 18 months' salary upon the end of his employment. In 2008, the board voted to give Downing that money, which totaled nearly $948,000.

It's unclear exactly why the board of directors decided to grant Downing the cash-out. The five board members, who are elected at-large by residents of the hospital district, didn't return calls seeking comment.

Mr Downing, of course, once again asserted he deserved the money:

Downing said he felt he deserved the pay after a long and successful career at the hospital, where he started in 1972.

'It sounds like a lot of money to everybody … but I know what the industry is and I know the board did an independent study,' he said. 'The board did an excellent job. They made sure we had competitive salaries.'

Once again, a hospital district public relations person went to bat for him, by blaming previous board members:

A hospital district spokeswoman released a statement Wednesday saying the current hospital directors were 'obligated by a previous board' to pay out Downing's severance.

At least no one so far is claiming that this part of Mr Downing's compensation was determined by the almighty "market." In fact,

But several outside experts said it is unusual for an entity to award severance to someone who remains an employee.

Typically, they said, severance is promised to employees only in the event that they are pushed out of their jobs. Downing's severance was also atypical because he was entitled to it even if he retired of his own accord rather than being forced to leave.

'It's absolutely outside of the industry standard to pay a severance upon retirement,' said Jeff Christenson, a compensation consultant at the firm Integrated Healthcare Strategies. 'The theory of severance pay is to protect an executive or an employee from an unforeseen termination.'

And of course the severance was not even paid on retirement, but paid while Mr Downing was still working.

Summary - A Manifestation of "CEO Disease?"

Once again we see how top health care leaders are different from you and me.  Despite the fact that executives are paid employees, they seem to be entitled to special treatment far beyond that afforded other employees.  While the modern treatment of health care executives as minor deities seemed to start in the private health care sector, it seems to be extending even into government.

It turns out, over 20 years ago, the BusinessWeek cover story was entitled "CEO Disease."  It summarized the pathology that now seems to be the major cause of health care system dysfunction.  Yet the warning still goes largely unheeded:

Pampered, protected, and perked, the American CEO can know every indulgence. The executive who finally reaches the top of a major corporation enters an exclusive fraternity. The CEO's judgment and presence are eagerly sought by other captains of industry and policymakers. CEOs zip around the world in private jets and cash the heftiest personal paychecks in industry. They take home 85 times what the average blue-collar worker makes, unlike their counterparts in Japan, where the ratio is closer to 10 to 1 (page 60). [That was in 1991.  For larger US companies, the ratio was 343 in 2010.  See this link. -Editor]

It is a job that can easily go to one's head--and often does. 'Too many people treat CEOs as some kind of exalted, omnipotent leader,' says John Sculley, CEO of Apple Computer Inc. 'The real danger is that you start believing that stuff.' Sculley took a sabbatical in 1988 as a way of "reacquainting myself with the fact that I'm a mere mortal."

Many chief executives come to believe that they are much more than that. The perquisites and deferences create a protective cocoon--if not a full-fledged fantasy world--for the chieftains of some of the nation's largest companies. 'Many CEOs take on a level of self-importance that goes way beyond reality,' says Douglas D. Danforth, former CEO of Westinghouse Electric Corp. and now a director at several large corporations. 'They view the company as their own . . . . Some people's personalities change completely. If you're not careful, you can be seduced.'

Call it CEO Disease. The symptoms are all too familiar: The boss doesn't seem to understand the business anymore. Decisions come slowly, only to be abruptly changed. He (there are only two women CEOs in the BUSINESS WEEK 1000) feels he can do no wrong and refuses to concede any mistake. He begins to surround himself with sycophants in senior management and on the board.

TELLTALE SIGNS. Increasingly, the boss may seem out of touch--spending too much time away from the job, playing the role of statesman for the sake of personal recognition. He may even compete with industry counterparts over how much money he makes, how big the headquarters building is, or how many corporate jets are parked on the landing strip. And when it's time to leave the job, the boss just hangs on, often by undermining potential successors.

In 1991, the BusinessWeek article suggested some ways to prevent CEO disease. In 20 years, these suggestions have been largely ignored in health care corporations, and in the larger health care system and the surrounding economy:

A few fairly simple reforms would go a long way toward preventing many cases of CEO Disease, at least in its most virulent form. One obvious answer is to disperse decision-making. An advantage of this approach is that it focuses attention on a group of executives, not just the CEO.

The prevalence of the problem also makes an overwhelming case for more involvement at the board level. To be effective, boards must be composed of a sizable percentage of outside directors who have the time to learn enough about a company and its management to make informed decisions about its leadership.

If the boss isn't receptive and problems mount, a responsible director has no choice but to press for change. On four separate occasions since he started serving on boards, Jewel's Perkins says, 'I've sat down with the CEO and said: `In my judgment, you've made the contribution you can to this organization.' Three CEOs took early retirement.

Ultimately, the power to prevent, and if necessary, cure CEO Disease rests with the shareholders. They have the right, and the duty, to insist on a board of competent and aggressive outsiders. At least, they do in theory. In reality, shareholders are often either passive, indifferent, or only invested in the stock on a short-term basis.

CEO disease would seem to be an explanation for why a public hospital district gave an outlandish retirement package and a severance payment to a CEO who was still in office. CEO disease would describe much of the bad management we have described on this blog.

So, as I have said before,.... health care organizations need leaders that uphold the core values of health care, and focus on and are accountable for the mission, not on secondary responsibilities that conflict with these values and their mission, and not on self-enrichment. Leaders ought to be rewarded reasonably, but not lavishly, for doing what ultimately improves patient care, or when applicable, good education and good research. On the other hand, those who authorize, direct and implement bad behavior ought to suffer negative consequences sufficient to deter future bad behavior.


If we do not fix the severe problems affecting the leadership and governance of health care, and do not increase accountability, integrity and transparency of health care leadership and governance, we will be as much to blame as the leaders when the system collapses.

We need to launch a crash program to prevent CEO disease and cure existing cases, before it kills off our health care system. 

Khadafy's Academic Mercenaries' Health Care Connections

We just discussed Henry Kissinger as an early example of the intellectual mercenary, and recent striking examples of academic mercenaries,particularly the Harvard University-derived Monitor Group's academically disguised public relations work for Libyan tyrant Moammar Khadafy.

We concluded that academic mercenaries help foster the corporate culture in which health care is now immersed.  However, it also appears they may have direct influence on health care. 

Monitor Group Leadership

Consider for example the main figure in the Monitor Group - Khadafy scandal.  According to a Boston Globe article, Michael Porter developed the Monitor-Khadafy connection:

Monitor’s work in Libya began when Michael Porter, a Harvard Business School professor who is among the country’s top theorists on management strategies, received a call from Saif Khadafy around 2001, according to Porter. Saif, a Western-leaning doctoral student who US officials hoped would become the next leader of Libya, asked for his expertise to help change Libya’s battered, Soviet-style economy.

(Saif, of course, later sided with his father in brutally putting down anti-government protesters.)

According to his official Harvard biography, Michael Porter also has a big interest in health care:

Since 2001, Professor Porter has devoted considerable attention to competition in the health care system, with a focus on improving health care delivery. His work with Professor Elizabeth Teisberg, including the book Redefining Health Care: Creating Value-Based Competition on Results (Harvard Business School Press, 2006), is influencing thinking and practice not only in the United States but numerous other countries.

In fact, the New England Journal of Medicine published his four-page commentary on "value-based" health care reform in 2009 [Porter ME. A strategy for health care reform - toward a value-based system. N Engl J Med 2009; 361: 109-112. Link here.]

The journal required that he disclose financial relationships with other health care organizations, including

receiving lecture fees from the American Surgical Association, the American Medical Group Association, the World Health Care Congress, Hoag Hospital, and the Children's Hospital of Philadelphia, receiving director's fees from Thermo Fisher Scientific, and having an equity interest in Thermo Fisher Scientific, Genzyme, Zoll Medical, Merck, and Pfizer.

The Boston Globe article identified two more Monitor leaders who helped develop the Libyan connection:

Porter brought in Monitor, a firm he had helped found, along with other associates including former Harvard professors Mark Fuller, who is now the firm’s chairman, and Joseph Fuller, who works at Monitor and also collaborates on research with some Harvard professors.

Mark Fuller, the current CEO of the Monitor Group, who wrote to the Libyan government proposing to counter its "deficit of positive public relations" as described by Mother Jones, per the New Profit Inc web-site is:

a Member of Harvard University's Major Gifts Steering Committee, a Member of the [Harvard] Board of Overseers' Committee on University Resources,...

Joseph Fuller was an unsuccesful candidate for the Harvard Board of Overseers in 2010. His biography for that candidacy also stated:

He and his wife, Ruthanne Schwartz Fuller, MBA ’83, served on the HBS Board of Dean’s Advisors and Joe on the Harvard College Fund and the FAS Undergraduate Education Planning Committee.

So of the three Monitor Group leaders who developed the stealth public relations campaign for Khadafy, the leader who set up the relationship with Libya has a professed interest in health care, published on health policy in a prominent journal, and has financial ties to multiple health care organizations. The two others have leadership roles within their own university which are likely to affect its medical and health care spheres

Monitor's Hired Academics

Furthermore, of the seven outside academics the Monitor Group paid to help promote the Khadafy regime per the Mother Jones article, three had health care connections. 

Richard Perle is on the board of directors of New Health Sciences Inc, a biotechnology company.

In 2008, Francis Fukuyama was elected a member of the Board of Trustees of the Rand Corporation, which does substantial health care research.

Benjamin Barber's own biography claims he has been on the National Advisory Board of American Health Decision Inc since 1992.

Summary

As we noted before, severe problems with the leadership and governance of health care seem not to be only due to specific deficiencies within health care, but may also be influenced by larger societal problems.  The leadership of many organizations seems to have been given over to self-serving opportunists with no fixed values or loyalties. David Halberstam described Henry Kissinger as a prototype of these "wildly ambitious agents of opportunity," also as:

the free agent—the professional political player who brilliantly manipulated the press, played both sides of issues, and put his own agenda ahead of all others.

We discussed examples of such free agents who cloaked themselves in the mantles of two formerly prestigious academic institutions, Columbia and Harvard Universities. Both universities have medical schools, teaching hospitals, and considerable influence within medicine and health care. So it seems likely that the free agency of faculty outside of medicine and health care could influence how things are done within medicine and health care. Furthermore, we have demonstrated that many free agents whose focus may not primarily be on health care and medicine may have wide-ranging activities including some that directly affect medicine and health care.

The pervasive nature of free agents, or agents of opportunity within academia, government, and the rest of society shows why it has been so hard to challenge the threats to core values created by conflicts of interest in medicine and health care. The conflicted already hold much of the power within the larger society in which medicine and health care operate. They are unlikely to favor restrictions on their brother and sister free agents within the medical and health care sector.

So our effort to address concentration and abuse of power in health care, and promote accountability, integrity, honesty, and ethics in health care leadership and governance must necessarily take into account these issues in society at large. The bad news is that the problems are much bigger than we first imagined. The good news is that we have potential allies facing similar problems throughout the world.

But it is now really clear that to truly reform health care, we must improve the accountability, integrity, honesty and ethics of not only health care leadership and governance, but of all organizational leadership and governance. That should keep us busy for a while.

Logical Fallacies in Support of Payments for Board Members of Non-Profit Health Insurers

The kerfuffle over the huge golden parachute given the departing CEO of an ostensibly non-profit Massachusetts health insurer/ managed care organization continues to evolve (see posts here and here), providing some new insight into governance problems afflicting health care organizations. 

One of the issues that aroused initially aroused concern was that Massachusetts Blue Cross Blue Shield paid the members of its board of trustees substantial amount, an unusual practice for a non-profit organization.  Board members who feel they owe their pay to the CEO they are supposed to be overseeing might be particularly inclined to over pay that same CEO.

Nonetheless, the Boston Globe just reported that other non-profit Massachusetts health insurers were defending their payments to board members:

The state’s second- and third-largest health insurers said yesterday their board members have decided to keep paying themselves five-figure annual fees despite objections from the state attorney general and an inquiry into directors’ compensation at nonprofit health plans.

The rationales for these decisions were fascinating, amounting to four variations of special pleading, plus an appeal to tradition.

Special pleading: Our board members are experienced and independent

'Good governance is advanced by the recruitment and retention of experienced, independent, reasonably compensated directors,' Harvard Pilgrim said in its statement. 'In 2010, our board worked more than 2,000 hours.'

I doubt any non-profit organization would admit to not wanting experienced, independent board members,  but very few other non-profits pay their board members. Asserting that board members of the Massachusetts insurance companies especially deserve pay because of characteristics they share with other members of other boards who are not paid amounts to a special pleading.

The second statement seems just to be a simple exaggeration, since 2000 hours a year implies that the board members work there full-time (40 hours/week * 50 weeks = 2000 hours).  

Special Pleading: Our board members are skilled and experienced

Wellesley-based Harvard Pilgrim, however, said in its statement that board members 'apply their specialized experience and skills in the areas of medicine, accounting, finance and law, to support our company and its mission. Our board serves as responsible, independent fiscal stewards for our members’ premium dollars.'

Again, board members of all sorts of non-profit organizations could be described in similar terms. So using this as an argument for paying board members when members with the same attributes of other boards are not paid is another special pleading.

Special Pleading: Our boards have great responsibility

Tufts, based in Watertown, said its board believes there is 'an additional overlay of responsibility' for directors of a health insurance company.

'Unlike the directors of other nonprofits, they are subject to distinct regulatory considerations,' the Tufts statement said. 'Therefore, compensation for time, commitment and skill of top talent is a responsible approach for the oversight of an organization that provides health care coverage to hundreds of thousands' of members.

Of course, boards of hospitals have their own "distinct regulatory considerations," as do boards of academic institutions  Boards of hospitals are also responsible for the health of their patients and boards of academic institutions are responsible for the education of their students. So this is a third example of a special pleading.

Special Pleading: Our responsibility, our time, our effort
Appeal to Tradition: Our tradition is to pay directors

The history and tradition of nonprofit health plans is to pay [directors] in this state. These are people from various walks of life who bring a skill set. These are not political hacks. . . . It’s because of the responsibility, the time, the effort, and the work you have to put into it. It’s a lot of homework.

It is true that the four non-profit Massachusetts health insurers all apparently did pay their board members, although in many other states, members of the boards of non-profit health insurers were not paid. But in the absence of any further argument that Massachusetts organizations were right when the others were wrong, this amounts to an appeal to tradition.   The rest of this personal statement was again a special pleading. 

Summary

Board members of non-profit organizations generally are said to have three duties, as per BoardSource:
- The Duty of Care: "a board member owes the duty to exercise reasonable care when he or she makes a decision as a steward of the organization."
- The Duty of Loyalty: "a board member must give undivided allegiance when making decisions affecting the organization. This means that a board member can never use information obtained as a member for personal gain, but must act in the best interests of the organization."
- The Duty of Obedience: "The duty of obedience requires board members to be faithful to the organization's mission. They are not permitted to act in a way that is inconsistent with the central goals of the organization."

The notion that boards stewarding non-profit organizations, including health care organizations, have these core responsibilities seems to have become increasingly ignored and forgotten in an increasingly commercialized health care environment.  Simply fulfilling these duties should not be regarded as exceptional board service, and certainly not so exceptional as to require pay.  The fallacious arguments made on behalf of lucrative payments given to members of the boards of two of the more highly regarded non-profit health insurance corporations in the country indicate how low governance and stewardship of health care organizations has sunk.

Again, we need governance of health care organization by people who understand their fundamental duties, who are willing to be accountable, and who put their organizations' mission ahead of personal gain. 

Those who profess concern about the stewardship of health care need not go far to find examples of fundamental misconceptions about what such stewardship involves.  We need to restore core values of governance to our health care organizations. 

On the Interconnectedness of the Leadership of Health Care Organizations: the Abbott Laboratories Case

We just posted about some misbehavior by Abbott Laboratories: a physician Abbott paid as a "key opinion leader" to help market its cardiac stents was accused of inserting stents in many patients who had no need for them; Abbott settled for over $400 million a lawsuit alleging the company defrauded Medicare and Medicaid; and it settled an unrelated suit for over $40 million alleging the company paid kickbacks to physicians for prescribing its drugs.  I thus thought it would be interesting to see how well paid are the corporate leaders who presided over these activities, and who are the board members who were supposed to be providing stewardship of this company.

According to the company's 2010 proxy statement, the five highest-paid executives were:

Miles D White, Chairman of the Board and CEO - $26,213,966 total compensation
Thomans C Freyman, Executive Vice President, Finance, and CFO - $9,561,227
Olivier Bohuon, Executive Vice President, Abbott Pharmaceutica Group - $5,232,589
Laura J Schumacher, Executive Vice President, General Counsel, and Secretary - $5,724,060
James V Mazzo, Senior Vice President, Abbott Medical Optics - $10,394,085

Now, let us turn to the company's board of directors.  Note that I looked for board members who also held leadership positions in other health care organizations whose interests may not be aligned with the corporation.  I also looked for those who held leadership positions in the discredited financial services corporation who helped usher in the global financial collapse.  (I  used similar methodolgy here.)

Abbott currently has 12 board members, including

• Robert J Alpert MD - Ensign Professor of Medicine, Professor of Internal Medicine, and Dean of the Yale School of Medicine.  He also "serves as a Director on the Board of Yale-New Haven Hospital."
• Roxanne S Austin - President and Chief Executive Officer, Move Networks Inc, and President, Austin Investment Advisors
• William M Daley -"Vice Chairman and Head of the Office of Corporate Responsibility and Chairman of the Midwest, JP Morgan Chase & Co."  He is the board of directors of  "Loyola University of Chicago and Northwestern University."
• W James Farrell - Retired Chairman and Chief Executive Officer of Illinois Tool Works Inc
• H Laurence Fuller - Retired Co-Chairman of BP Amoco, former chief executive officer of Amoco
• William A Osborne - Retired Chairman and Chief Executive Officer of Northern Trust Corporation and the Northern Trust Company.  He is "Chairman of the Board of Trustees of Northwestern University."
• Rt Honorable Lord Owen - Chairman of Europe Steel Ltd
• Roy S Roberts - Managing Director, Reliant Equity Investors.
• Samuel C Scott III - Retired Chairman,  President and Chief Executive Officer of Corn Products International.  He "currently serves on the board of directors of Bank of New York Mellon Corporation."  He also is on the board of "Northwestern Healthcare."
• William D Smithburg - Retired Chairman, President and Chief Executive Officer of Quaker Oats Company.  He is on the "board of trustees of Northwestern University."
• Glenn F Tilton - Chairman, President and Chief Executive Officer of UAL Corporation and United Airlines Inc.  He is on the "board of directors of Northwestern Memorial Hospital."
• Miles D White - Chairman of the Board and Chief Executive Officer, Abbott Laboratories, "is on the board of trustees of "Northwestern University." 

Of Abbott's 12 directors, seven have leadership positions at teaching hospitals, academic medical centers, medical schools or their parent universities (Northwestern University, its medical school and teaching hospitals, in particular, are stewarded by six Abbott directors). 

Two have leadership positions in  financial services corporations that were implicated in the global financial collapse.  (Note that JP Morgan Chase staffers helped to invent some of the kinds of financial derivatives widely viewed as causative of the collapse, but the firm itself did not fail. [See Tett G. Fool's Gold.]  Through TARP, the US government took preferred equity stakes in both JP Morgan Chase and Bank of New York Mellon.  [See Ritholtz B.  Bailout Nation. p. 222]) 

Two more are leaders of financial services firms.  All but one are current or former high-level hired executives (seven are or were CEOs), or chairpersons or co-chair persons of corporations (the one exception is a dean of a medical school.) 

Note how similar our findings were here to those found after our perusal of the boards of Genzyme and Medtronic (see post here).   So we find again that executives of health care organizations who preside over various questionable activities not only rarely pay any penalty, but usually become extremely wealthy in the process.

We also find how interconnected is the leadership of health care.  The boards and leadership of drug and device companies overlap with the boards and leadership of medical schools, teaching hospitals, and their parent universities. 

Yet, as we have noted before, there are obvious conflicts.  In particular, teaching hospitals and medical schools are supposed to provide unbiased teaching, including about issues relevant to drug and device corporations, such as choice of diagnostic strategies and treatments, and relevant health policy.  They are supposed to perform unbiased research, including research that evaluates drugs and devices.  They are supposed to provide the best possible patient care at a reasonable cost, which relates to choices of and prices paid for drugs and devices. 

On the other hand, drug and device companies are supposed to put making a profit for their share-holders first.  The directors of such companies, like the directors of all for-profit corporations, are supposed to show an unyielding loyalty to their companies' financial health and profits, although contemporary corporate directors have been accused of acting more like cronies of the hired management.  (See this post.)

Also, we note that the vast majority of people chosen as stewards of a given health care organization are current or former top hired executives of other corporations.  The board members, that is, stewards of health care organizations, to whom the top hired executives reports, are usually not people with large ownership interests in the organizations (in the case of public, for-profit corporations.)  For the most part, they also do not seem to be people with clearly demonstrated devotion to the values of health care, in particular, putting the care of individual patients first, and advancing health care teaching and research.  Instead, they seem to be people with the perspective of hired executives, who may be prone to putting the interests of hired executives, rather than patients, doctors, teachers, scientists or the public at large, first.

So here is another admittedly limited case study of the board of directors, that is, the ostensible stewards of a health care corporation, selected this time because of its history of ethical missteps, which showed  - that the leadership of health care organizations is incredibly interrelated, interlocked, incestuous.  Again, it appears that top leaders of various health care organizations may be more familiar with and identify more with each other, and with other hired executives and managers, than with their organizations, their organizations' missions, and their organizations' professionals, staff, students, clients, and patients.

So to repeat-

I strongly believe that there needs to be much more investigation, academic, journalistic, and perhaps legal, of the identity, nature, and culture of the leaders of health care, and their relationships. A few bloggers cannot do it all. Obviously, the anechoic effect mitigates against medical and health care academics looking into their own leaders. However, failing to understand who is leading our march to the brink of health care failure ought not to be something such academics would want on their conscience.

Finally, and obviously, health care organizations need leaders that uphold the core values of health care, and focus on and are accountable for the mission, not on secondary responsibilities that conflict with these values and their mission, and not on self-enrichment. Leaders ought to be rewarded reasonably, but not lavishly, for doing what ultimately improves patient care, or when applicable, good education and good research.

If we do not fix the severe problems affecting the leadership and governance of health care, and do not increase accountability, integrity and transparency of health care leadership and governance, we will be as much to blame as the leaders when the system collapses.

The Boards Who Ought to be Accountable for the Misbehavior of Health Care Corporations

I recently posted about the multiple conflicts of interest affecting a university health sciences leader.  While he was supposed to be running a medical school and an academic medical center, he was also responsible for the stewardship, as a board member, of three health major health care corporations, and a food and beverage corporation (whose products have bearing on nutrition and public health.)  .

This one case suggested how pervasive are conflicts of interest affecting the people at the top of health care leadership in the US, and also how such conflicts may be associated with problems for all the organizations involved.  The story originally came to my attention because students were demonstrating against the lavish compensation given the health sciences leader at a time of university cutbacks, suggesting that university leaders were paying more attention to their own enrichment than to the mission of the university.  At the same time, one of the corporations which he was stewarding (Genzyme) had to shut down a factory because the extremely expensive drug it was producing was found to be impure and adulterated, while its CEO continued to be compensated lavishly.  The other corporation (Medtronic) had to settle litigation accusing it of manufacturing defective products for hundreds of millions of dollars, while its CEO again continued to be compensated lavishly. 

So I thought it might be interesting to see who are the other stewards of these troubled corporations.  I consulted the official biographies of their board members from their 2010 proxy statements (Genzyme here, Medtronic here).  I looked for board members who also held leadership positions in other health care organizations whose interests may not be aligned with the two corporations of interest.  I also looked for those who held leadership positions in the discredited financial services corporation who helped usher in the global financial collapse.

The specifics of what I found follow.

Genzyme

Genzyme had 10 directors in 2010.  The following directors had relationships of interest:

-  Douglas A Berthiaume is "Chairman of the Children's Hospital (Boston) Trust Board, a member of the Children's Hospital board of trustees, and a Trustee of the University of Massachusetts Amherst Foundation."  Children's Hospital is a teaching hospital.  The University of Massachusetts includes a medical school. 
-  Robert J Bertolini "retired from Schering-Plough Corp following its merger with Merck & Co in November, 2009."  Schering-Plough was a large pharmaceutical company now combined with Merck to form an even larger company.
-  Gail K Boudreaux "has served since May 2008 as an Executive Vice President of United Health Group Incorporated."  Also, "she serves on the board of directors of America's Health Insurance Plans...."  UnitedHealth is one of the US' largest health insurance/ managed care corporations.  Incidentally,it has frequently misbehaved, as can be seen in this set of posts.  AHIP is the health insurance corporations' trade associations.
-  Robert J Carpenter "is Chairman of Hydra Biosciences Inc... He is also a trustee of the Immune Disease Institute, a non-profit institute affiliated with Children's Hospital in Boston...." 
-  Charles L Cooney "is a director of India-based Biocon Limited, a biotechnology healthcare company."
-  Victor J Dzau MD (discussed in the earlier post) is "Chancellor for Health Affairs and President and Chief Executive Officer of Duke University Health System...."  He "sits on the board of directors of Pepsico Inc, Anylam Inc, Medtronic Inc, and the Duke University Health System."
-  Senator Connie Mack III is "Chairman Emeritus of the parent board of the H. Lee Moffitt Cancer Center and Research Institute...."  He also is director of "EXACT Sciences Corporation and Moody's Corp."  EXACT Sciences is a biotechnology company that develops diagnostic test technology.  Moody's Corp is a financial ratings agency whose lax ratings of financial derivatives, perhaps arising from conflicts of interest produced by payments from the producers of the derivatives, have been implicated as a major cause of the global financial collapse.
-  Richard E Syron was from "January 2004 to September 8, 2008 ... Chairman and Chief Executive Officer of the Federal Home Loan Mortgage Corporation, commonly referred to as Freddie Mac...."    Freddie Mac as bailed out and taken over by the US government when he departed, or was forced out.  Freddie Mac, was a "government-sponsored enterprise," (GSE) one of another group of companies whose enthusiastic participation in securitizing dubious mortgages was implicated as a major cause of the global financial collapse.
- Henri A Termeer (CEO of Genzyme) is a "director of Massachusetts General Hospital, a board member of Partners HealthCare, and a member of the board of fellows of Harvard Medical School." 

So the box score for Genzyme's 10 directors: six have leadership positions at teaching hospitals, academic medical centers, medical schools or their parent universities (some such institutions are lead by more than one Genzyme director).  Seven have leadership positions in other drug, device or biotechnology corporations.  One have leadership positions in health insurance/ managed care corporations.  Two had or have leadership positions in discredited financial services corporations that were implicated in the global financial collapse.

Medtronic

Medtronic had 11 directors in 2010.  The following directors had relationships of interest:

- Richard H Anderson "was Executive Vice President of UnitedHealth Group Incorporated."  As above, UnitedHealth is a health insurance/ managed care corporation.
- Victor J Dzau (see above) is "Chancellor for Health Affairs at Duke University and President and Chief Executive Officer of the Duke University Health System."  He is "a director of Alnylam Pharmaceuticals Inc, ... PepsiCo Inc, and Genzyme Corporation." (See discussion above.)
- James T Lenahan "served as President of Johnson & Johnson from 2002 until June 2004...."  He is "director of Telecris Biotherapeutics Inc, Alton Pharma Inc and Imacor Inc."  Johnson & Johnson is a large drug, device, and biotechnology company.  Telecris, and Alton Pharma are biotechnology pharmaceutical companies.  Imacor is a medical device company.
- Denise M O'Leary "is a director of Lucille Packard Children's Hospital and Stanford Hospitals and Clinics."  Also, "she was a member of the Stanford University Board of Trustees from 1996 through 2006, where she chaired the Committee of the Medical Center...."
-  Robert C Pozen is "an advisor to Gelesis Inc."  Gelesis is a biotechnology company.
-  Jack W Schuler "has been a director of Stericycle Inc since March 1990...."  He is a "director of Quidel Corporation and Elan Corporation plc...."    Stericycle company disposes of medical waste, including that produced by medical devices.  Quidel is a biotechnology and (medical diagnostic) device company.  Elan is an multinational biotechnology and pharmaceutical company.

So the box score for Genzyme's 11 directors is: Two have leadership positions at teaching hospitals, academic medical centers, medical schools or their parent universities (some such institutions are lead by more than one Genzyme director). Ten have leadership positions in other drug, device or biotechnology corporations. One has a leadership position in health insurance/ managed care corporations. None had or have leadership positions in discredited financial services corporations that were implicated in the global financial collapse.

Summary

Just to summarize the sorts of conflicting interests these relationships suggest. 

Teaching hospitals and medical schools are supposed to provide unbiased teaching, including about issues relevant to drug and device corporations, such as choice of diagnostic strategies and treatments, and relevant health policy.  They are supposed to perform unbiased research, including research that evaluates drugs and devices.  They are supposed to provide the best possible patient care at a reasonable cost, which relates to choices of and prices paid for drugs and devices. 

Other drug, device, and biotechnology corporations may be producing, or developing products that compete with those of the index corporations.

Health insurance companies ostensibly try to control costs and improve quality in part by reducing excess utilization and bargaining down prices of drugs and devices. 

So this limited case study of the boards of directors, that is, the ostensible stewards of two health care corporations, selected because they have a common member who is the leader of a large medical school and academic medical center, and which both have histories of poor management or ethical missteps showed  - that the leadership of health care organizations is incredibly interrelated, interlocked, incestuous. 

This gave an example of how pervasive are the conflicts of interest that affect all kinds of health care organizations.  Companies that ought to be competing have interlocked directors.  Companies that ought to be negotiating at arms length have interlocked directors.  Not-for-profit academic medical institutions have leaders who are also directors of companies whose drugs their patients may take, whose devices their patients may receive, whose insurance their patients may buy, and whose products and services they may teach about and evaluate through clinical research and policy research. 

This also gives an example of how the failed culture of finance may be linked to the culture of medicine and health care.  Some of the stewards of health care organizations were also the stewards of financial services corporations whose reckless, if not arrogant, greedy and amoral leadership is widely believed to have caused the global financial collapse and our ongoing economic problems. 

Finally, this suggests how top leaders of various health care organizations may be more familiar with and identify more with each other than with their organizations, their organizations' missions, and their organizations' professionals, staff, students, clients, and patients. 

What is to be done?

I strongly believe that there needs to be much more investigation, academic, journalistic, and perhaps legal, of the identity, nature, and culture of the leaders of health care, and their relationships.  A few bloggers cannot do it all.  Obviously, the anechoic effect mitigates against medical and health care academics looking into their own leaders.  However, failing to understand who is leading our march to the brink of health care failure ought not to be something such academics would want on their conscience.

Finally, and obviously, health care organizations need leaders that uphold the core values of health care, and focus on and are accountable for the mission, not on secondary responsibilities that conflict with these values and their mission, and not on self-enrichment.  Leaders ought to be rewarded reasonably, but not lavishly, for doing what ultimately improves patient care, or when applicable, good education and good research. 

If we do not fix the severe problems affecting the leadership and governance of health care, and do not increase accountability, integrity and transparency of health care leadership and governance, we will be as much to blame as the leaders when the system collapses.   

More Than $1 Million to Run a Public Health Agency

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

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

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


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

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

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

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

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

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

Why is Mr Covert paid so much?

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

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

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

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

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

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

Making a Community Health Agency into the Leaders' Private Sand-Box

As we predicted, it seems that the US Internal Revenue Service's (IRS) increased reporting requirements for not-for-profit organizations are leading to more examples of the coziness now prevalent among the top leaders of such organizations.  The latest entry in this new parade comes from a story in the Bradenton (Florida) Herald about a not-for-profit community health agency whose mission is to provide health care to the poor and disenfranchised:

Providing medical services to the indigent and uninsured in Manatee and Sarasota counties has financially benefitted some of Manatee County Rural Health Services Inc.’s officers, board members and their families, records show.

The nonprofit agency has paid nearly $2 million in recent years to businesses owned by board members, officers, employees or their relatives, according to tax documents obtained by the Bradenton Herald. And its chief executive officer, Walter “Mickey” Presha Sr., has long been the highest-paid CEO of any such agency in Florida: His salary last year was $433,000 — $140,000 more than that of his closest counterpart, records show.

The article listed multiple examples self-dealing by the top leaders of Rural Health Services.

According to tax returns filed since 2004, Rural Health has paid:

- $558,121 to John Lewis, a board member, for optometry services.

- $536,591 to The Pinnacle Group of West Coast Florida Inc. for construction, maintenance and repair work. One of its principals is Trina Presha-Rosier, Presha’s daughter.

- $344,766 to The Lawn Authority of Manatee County Inc. for lawn care maintenance at the agency’s facilities. Wardell Jackson, the agency’s vice president of support services, is a principal in the business.

- $387,673 to A to Z Complete Property Management Inc. for janitorial cleaning and maintenance services. It is owned by Chris Mullinex, the agency’s facilities director.

- $96,000 to R & L Healthcare Advisors, whose principals include Marc Lazarus, a board member, for consulting services.

- $44,242 to More Power Properties and Investments LLC, co-owned by board Chairman J. Garry Lowe, for storage of agency files and equipment and the purchase of a modular building.

Leaders of rural health offered mostly the usual explanations:

>>As long as we say it is not a conflict, it is not a conflict<<

According to a conflict of interest statement that board members are required to sign, Rural Health prohibits them, management and their families from having any 'beneficial interest or substantial obligation to' any entity engaged in business with the agency. But some have been able to bypass that prohibition because of this loophole: 'Unless it has been determined by the board, on the basis of full disclosure of facts, that such interest does not give rise to a conflict of interest.'

>>We, our relatives, and our firms are the best possible source of the services<<

Jackson, Mullinex and Presha-Rosier’s businesses won competitive bids, which are reviewed by a board committee and approved by the full board, Lazarus said. Presha said he is not involved in reviewing bids for construction projects that his daughter might seek.

The agency chose to do business with the three board members’ companies because of special circumstances, agency officials said.

Lewis is one of Manatee Rural Health’s founders and has overseen its optometry services since the beginning. Lowe offered the storage space for less than what commercial storage facilities charged, then sold one of the storage buildings to Manatee Rural Health for a reduced price. And Lazarus has 36 years’ experience in the health care field, including as an executive at Sarasota Memorial Hospital.

They were hired because they provide needed services at a lower cost, thus allowing the agency to spend more money on patient care, officials said.

>>Trust us, because we are wonderful people<<

'It’s always disclosed to the board, so we always have the opportunity to not do it,' said Juanine Lowery, a board member since 1984. 'It hasn’t been a problem. It’s always been competitive.'

And a slightly more coherent version of that:

'Everything’s checked out and vetted,' Lazarus said. 'The arrangements are as good as or better than what we could get on the open market.'

The explanation for the CEO's out-sized salary should come as no surprise. He got that high salary because

>>I am a wonderful CEO and I deserve it<<

Rural Health board members also defend Presha’s $433,000 salary, which makes him the highest-paid chief executive officer of any federally qualified community health center in Florida. His job performance, managerial skills and the organization’s complexity and size are all reasons he makes the top salary, board members say.

Of course, the CEO himself thinks he is a wonderful CEO and deserves it:

'I know what I do,' said Presha, who said he took a pay cut to take the Manatee Rural Health job in 1984 and has turned down job offers with higher salaries since then. 'If I could do it for free, I would do it for free. But I earn my keep.'

So here we have another case of the cozy leadership of a not-for-profit health care organization, who all think they are doing just a wonderful job, who never seem to question their own actions, and who all believe all their buddies are also doing just a wonderful job. So naturally, since they are all such wonderful people doing a wonderful job, we should not begrudge them a few dollars here and there.

Of course, if they were the leaders of a privately held company that made widgets, it would be their own money that they are spending, and maybe no on else should care.

Even if the amounts involved seem relatively small relative to some of the cases that appear on Health Care Renewal, we should care particularly about how the leaders of Manatee County Rural Health Care Services throw around money (to each other), because of the nature of the organization's mission, as described by CEO Presha himself:

MCRHS has served the poor and underserved in our communities with the mentality of a 'provider of choice.'

Our group is not only compassionate, but also innovative,....

It is truly unseemly for a not-for-profit community health care organization dedicated to serving "the poor and undeserved" lead by people so complacent about their own entitlement.

So to repeat what I have written before, in my humble opinion, this sort of coziness, this sort of fuzziness at the boundaries of institutional duties and personal interests, may be a fundamental reason that our current health care system has become so solicitous of the interests and prerogatives of its leaders, and so cold to the needs of patients and the values of professionals.


The need for more transparent, accountable leadership of health care who explicitly are subject to clear ethical rules was never more apparent.

Stay tuned as more and more cases like this appear....

Where No Hospital CEOs are Below Average

In Lake Woebegon, all children are above average.  Now it seems that hospital CEOs have moved there. 

Ventura County, Where No CEO is Below Average

The Ventura County (California) Star reported on the uniformly high remuneration of the CEOs of local, mostly small, not-for-profit hospitals and hospital systems.

T. Michael Murray reaped $330,545 in 2008 as chief executive officer of St. John’s hospitals in Oxnard and Camarillo. He drew an additional $187,071 in bonuses with $73,113 more in benefits and other compensation.

His total package, according to IRS records, reached $590,729.

And he may have been underpaid, according to a statewide survey of 118 nonprofit hospitals. The report by the Payers & Providers healthcare business publication suggests the base salary for CEOs averaged $514,237.

Kick in bonuses, retirement money, reimbursement for education costs, expense accounts and the average total compensation hit $732,004.

Public records show similarly lofty numbers at Ventura County’s three nonprofit, tax-exempt hospital groups. Gary Wilde of Community Memorial Health System, which runs hospitals in Ventura and Ojai, was the highest paid CEO in 2008. He earned a base salary of $508,682 and his total compensation was $853,528, with much of the additional money placed into a retirement fund that won’t be paid out until Wilde serves six more years as CEO.

Simi Valley Hospital changed its leadership in 2008, with a total compensation of $1.25 million recorded in 990 tax forms for two different CEOs. That’s slightly more than the hospital provided in treatment for poor uninsured patients where there was no attempt to collect payment, though hospital leaders say charity care definitions encompass only a fraction of the total care they provide without pay.

Outside the county, tax records from the Cottage Health System in Santa Barbara showed a base salary of $848,826 for CEO Ronald Werft and other compensation of $546,846. His total topped $1.3 million.

Ken Anderson of the John Muir Health System, which operates hospitals in Walnut Creek and Concord, was the highest compensated CEO in the Payers & Providers study. He made $745,000 in base salary and nearly $7 million in other compensation, much of it deferred over his career for retirement.

Recall that these people are leading relatively small, not-for-profit community hospitals whose missions are to provide health care to the community.  Total compensation ranging from three-quarters of a million dollars to multi-millions seems vastly disproportionate to the jobs and their settings.

Explanations and Excuses
As expected, those supporting the CEOs have all sorts of explanations and excuses:

Hospital leaders in Ventura County and throughout California say the numbers are inflated by retirement plan accumulations that must be included on tax records even before executives qualify to receive the money. They defend the half-million-dollar salaries, with bonuses on top, as the only way to compete with for-profit hospitals for executives who can lead a facility that may employ more than 1,000 workers, drive a community’s economy, provide access to the uninsured and deliver care that saves lives.

'Given the context, it’s not out of line,' said Murray, a CEO with 28 years of experience who is now semiretired after resigning from St. John’s at the end of March. 'I think you need to retain and also attract sufficient talent. I’m not saying there aren’t inappropriate salaries out there. I don’t think mine was one of them.'

Also,

But [economist Sung Won] Sohn said that paying below average is risky.

'When you try to get somebody at $400,000 rather than $700,000 you will get plenty of takers but they’re not competent,' he said. 'Hospitals are so important in the community that you want to make sure it’s run properly.'

Nor does he see any problem with paying more than average if a hospital board wants to reward an executive.

Furthermore,

John Romley, an economist at the Schaeffer Center for Health Policy and Economics at USC, said the amount hospitals spend on executive pay is a sliver of their total expenses and can’t legitimately be blamed for driving the rising cost of healthcare.

'I guess I’m not shocked even though I’m jealous,' he said of the compensation.

Some people were not pleased about this use of health care dollars:

Others worry the compensation may push hospitals into spending more on executives than their nonprofit mission of providing care for the poor. Federal regulations already limit compensation for CEOs of corporations bailed out by the government to $500,000. Similar caps placed on nonprofit hospitals could create dramatic differences, said Ron Shinkman, author of the Payers & Providers statewide survey on CEO salaries.

'You’re looking at close to $39 million that could be used on uncompensated patient care,' he said. 'It’s a lot of money.'

Consumer advocates aim much of their concern at nonprofit hospitals that not only reward CEOs with lucrative paydays but also provide little charity care to poor, uninsured patients. The Payers & Providers research identifies 17 hospitals — all outside of Ventura County — where the total compensation to CEOs exceeded the cost of charity care.

'It would be outrageous if hospitals are paying more to their (entire) executive teams than in indigent care in their community,' said Anthony Wright of Health Access California. 'For some hospitals to provide more to one individual just seems wrong.'

The Mechanism: Ego Bias

The mechanism making CEO compensation constantly increase appears to be simple:

Typically, hospital boards hire consultants to conduct studies showing market averages for comparable hospitals in their regions. They often try to pay somewhere around the 50th percentile.

That’s a reasonable way to do it, but such studies tend to push up the salaries, said economist Sung Won Sohn, who was involved in setting compensation at two Minneapolis hospitals.

'People at the low end try to increase the CEO closer to the average,' said the professor at CSU Channel Islands. 'If everyone does that, the average CEO salary will go up.'

So there you have it. At no hospital is the CEO deemed by a sympathetic (and sometimes crony filled board) below average. If the CEO's compensation has somehow dropped below average one year, it is immediately raised to at least average the next. Apparently almost never is the CEO's pay deemed to be too high.

That notion is corroborated by the assumption by the CEO documented above that all CEOs have "sufficient talent," and the assertion above that anyone who would accept a lower salary would be "not competent."

So every year all the CEOs who had below average compensation the previous year get compensation increased at least to last year's average.  Almost no CEO gets a reduction.  So the average moves up relentlessly year after year. 

Of course, unless all CEOs are exactly alike, some CEOs must be below average. 

So this becomes a great example of the ego bias at work. Ego bias is a common cognitive bias usually discussed in the context of making probabilistic judgments. A simple definition is that people tend to believe that outcomes of what they do, or what a group with whom they identify does will be above average. A long time ago, colleagues and I showed that interns in an intensive care unit judged the survival of their patients on average to be better than their judgments of the mean survival of all patients in the ICU. On the other hand, ICU attending physicians displayed a slightly more sophisticated version of the bias. They judged their patients' survival accurately, but judged the mean survival of their ICU's patients to be higher than it really was. [Poses RM, McClish DK, Bekes C, Scott WE, Morley JN.  Ego bias, reverse ego bias, and physicians' prognostic judgments.  Crit Care Med. 1991 Dec;19(12):1533-9.  Link here.]

So we have the ego bias writ large in judgments made about the performance and compensation of hospital CEOs, at least in Ventura County, California.

The Implications

I agree that paying a CEO more than a hospital's entire expenditures for the care of the poor is unseemly.

However, in my humble opinion, the issue is even bigger than that. It is not so much how much of the hospital's budget goes to executive compensation, but what lessons this teaches CEOs.  I propose they are:
-  I am a wonderful person.   I can do no wrong.
-  If I do wrong, I cannot be punished.
-  I can get rich and powerful doing this.

Of course, as we have written many times, being the CEO of a small community hospital is supposed to be a calling, whose goal is to uphold the institution's mission.  Instead, CEOs are learning to be tin-pot dictators.  Some are probably sensible enough to resist learning this message.  I am afraid many are not.

Furthermore, there is no reason to think that this phenomenon is confined to Ventura County, California, or to small community hospitals.  We have discussed how the management of health care organizations have become unsympathetic to, or even hostile to the mission.  We have discussed their organizations' institutional conflicts of interests.   We have discussed how they have wound up with imperial CEOs. 

The resulting ill-informed, mission-ignorant or mission-hostile, self-interested, conflicted, or even corrupt leadership is a major, but still largely anechoic cause of our health care dysfunction.

As I have said endlessly, true health care reform will require finding well-informed leaders who understand and support the mission, put the mission before their own self-enrichment, and are unconflicted and honest.

The Hospital CEO as Debt Collector

Last year we noted that the US Internal Revenue Service (IRS) required more detailed reporting starting in 2009 by US not-for-profit organizations. Many US health insurance companies/ managed care organizations, most hospitals, nearly all medical associations, nearly all disease advocacy organizations, all health care charities, and nearly all medical schools are not-for-profit organizations. We suggested then that this reporting might lead to more transparency about the leadership and governance of these organizations.  The 2009 990 forms seem to be trickling into public view, sometimes leading to some striking disclosures about how US not-for-profit health care organizations are lead.

The California Watch blog just reported about the interesting part-time job of a hospital CEO:

The former president of a Laguna Beach hospital has been operating a debt-collection company that recovered medical payments from his own facility, raising conflict-of-interest questions as the CEO moves to a new hospital in Riverside County.

Bruce Christian ran South Coast Medical Center from 2005 until it was sold in 2009. At the same time, Christian was owner of Metro Republic Commercial Services, a consulting and medical debt-collection firm that provided at least $110,000 in services to South Coast while Christian was a top manager, records show.

South Coast Medical Center disclosed the arrangement as 'self-dealing' in federal tax filings. State law allows self-dealing by board members of nonprofits, typically as long as the body explores other options and determines they are not unduly enriching one of their own.

Of course, I also get to write, but wait, there is more:

Christian was also at the helm of the hospital in 2006 when Adventist hired one of his Metro Republic consultants as interim chief financial officer, tax records show.

Adventist said it appointed the interim CFO when it believed the hospital would be sold quickly.

Additionally, a version of the Metro Republic website in 2006 said the firm supplied South Coast Medical Center with health care financial consulting, managed care-revenue recovery and accounts-receivable services.

The website, which appears to have been offline since 2006, describes Christian as a health industry leader for 30 years who built the Corona-based Metro Republic from a three-person office to one with 150 employees.

Predictably, the response from the hospital and its parent health system was that it was all no big deal.

Adventist Health West, the Roseville-based company that owned South Coast, acknowledged that the arrangement was 'unusual' and 'not the norm' for the firm.

In a statement, Adventist said Christian's firm collected hospital debts for years before Adventist bought the hospital and prior to Christian’s tenure as president and CEO.

Board members were aware of the arrangement. It remained in place while the chain sought to sell the medical facility throughout Christian’s tenure, the statement said.

'Unfortunately, it took much longer than originally envisioned to sell the hospital,' Adventist Health said in a statement. 'Adventist Health continues its deep commitment to providing mission-driven, quality health care to the communities we serve.'

Some thought otherwise:

But allowing a hospital administrator – who can have considerable power over setting prices on medical procedures – to operate as the hospital’s own bill collector presents a thorny conflict of interest, said Ken Berger, executive director of Charity Navigator, a New Jersey-based charity evaluation group.

'Just because the (hospital) board may sanction it doesn’t make it right, appropriate or ethical,' he said. 'The mission of hospitals and the mission to squeeze money out of those that are slow to pay can be quite contradictory. It’s just wrong.'

Another expert thought something ought to be done:

Kathryn Peisert, managing editor for publications at the San Diego-based Governance Institute, said a hospital CEO’s duty is to further the interests of the hospital. As such, she said, Christian should have eliminated all appearances of impropriety and cut ties between the medical center and his consulting firm.

'That’s really a big no-no,' said Peisert, whose organization advises hospital boards. 'I’m surprised some regulatory agencies haven’t been after this.'

We will see if anything will be done, but this conflict of interest seems not to have gotten in the way of Mr Christian's career advancement.

Christian is now chief executive of a Loma Linda University Medical Center campus expected to open in 2011 in Riverside County. A Loma Linda University Medical Center spokesman said the Murrieta campus will not contract with Metro Republic.

As I have said before, I expect that as more 990s dribble out, seemingly as slowly as many organizations can manage, we will see many more examples of these sorts of conflicts of interest, in which top organizational leaders also turn out to be vendors, consultants, etc.

In theory, and perhaps in a golden era in the past, leaders of not-for-profit health care organizations were supposed to regard their work as a calling, and to be primarily concerned with upholding the mission of the organization. Instead, we now see more leaders who seem to regard their organizations as their own personal sand boxes, providing opportunities for play, and sometimes personal enrichment. (Note that Mr Christian's total compensation from the hospital was "$360,000 and $400,000 in salary, benefits and deferred compensation in 2006 and 2007 at South Coast Medical Center.")

Unfortunately, Mr Christian's case demonstrates that leaders who get used to their organizations as personal sand boxes, rather than face punishment,  may be given the opportunity to play in larger venues. One wonders how much he will make at the helm of a new academic medical center, what other side deals he will manage, and how much he will be concerned with the academic and clinical missions.

Once again, I say that true health care reform will only be achieved when health care organizations are lead by people who put the mission ahead of their personal enrichment, and are held accountable for their ability to do so.

More Hospitals Hiring CEOs' Children, Doing Business with Board Members' Firms

As we predicted (here), the new reporting requirements imposed on US not-for-profit organizations are beginning to yield interesting results about the coziness of the leadership of some health care organizations. 

Western Pennsylvania

For example, we start with an article in the Pittsburgh Tribune-Review about hospitals in western Pennsylvania.

Board members at Western Pennsylvania hospitals have provided legal, real estate, insurance and advertising services to their organizations, according to IRS reports examined by the Tribune-Review.

The reports, which cover the fiscal year ending June 30, 2009, are the first under new reporting requirements imposed on nonprofit hospitals by the IRS. Still more requirements will kick in next year.

Details of the filings by the two largest area health care firms, UPMC and West Penn Allegheny, were made public last month. UPMC reported $10 million and West Penn reported $5 million in dealings with board members or top executives.

Five other major nonprofit health care providers reported business dealings with board members and, like UPMC and West Allegheny, cited in-place reporting and monitoring systems to avert or minimize any conflict of interest.

The specifics include this about Ohio Valley General Hospital:

At Ohio Valley General Hospital, the tax return shows two relatives of the chief executive officer are on the payroll.


Dr. David Provenzano, son of CEO William F. Provenzano, was paid $613,781 in salary and benefits. The CEO's daughter-in-law, Dr. Dana Dellapiazzo, was paid $130,525.


David Provenzano is the medical director of the hospital's pain center. Dellapiazzo is an anesthesiologist.

About Excela Health:

At Excela Health, which operates the Westmoreland Regional Hospital and two other hospitals, a company part owned by CEO David Gallatin was paid $253,835 for direct mail services.

Excela spokeswoman Robin Jennings said Mailing Specialists 'processes our mail in preparation for sending to the post office with appropriate bar coding.'

Excela reported payments of $683,250 to Westmoreland Emergency Medicine, which employs board member Dr. Robert Whipkey.

About Washington Hospital:

At Washington Hospital, board member Thomas Northrop's Observer-Reporter newspaper was paid $212,071 for advertising services. The hospital paid $308,185 in premiums to the Campbell Insurance Agency, where board member John Campbell is an owner.

About Jefferson Regional Medical Center:

Jefferson Regional Medical Center in Jefferson Hills, according to its report, paid $151,940 in legal fees to the law firm of board member Gregory Harbaugh. It paid $331,280 in real estate commissions to the firm run by board member Kevin Langholz.
The hospital paid $75,035 to the Thorpe Reed law firm where board member Anne Mulaney works.

About St. Clair Hospital:

At St. Clair Hospital in Mt Lebanon, a radiology firm that employs Dr. Donald Orr, who is a board member, was paid $1.95 million for providing medical services, according to the hospital's filing.

The hospital paid $80,000 for insurance related services to the HGH Group headed by hospital board member Bryan Hondru.

New Hampshire

The New Hampshire Union-Leader reported on Catholic Medical Center:

The head of Catholic Medical Center, whose salary is being questioned by the Attorney General's Office, has two offspring and two step-children employed or in one case recently employed there, the hospital acknowledged.

A hospital official defended its hiring practices, saying no favoritism is shown and that of the 11 members of senior CMC management, seven have relatives who either work or have worked at the hospital, some on a per-diem basis.

Executive Vice President Ray Bonito said his own son held a per-diem job during college. Offspring of trustees can also work at the hospital, he said.

Alyson Pitman Giles has been CMC president and chief executive officer since 1999. Her bid to intertwine CMC with Dartmouth-Hitchcock Health has been stalled by the New Hampshire attorney general, who deemed it an acquisition of CMC and said it violates state law and would need court approval.

CMC provided the following information on Giles' four relatives.

-- Son Seth Pitman has worked per-diem over the past several years. Late last month, the hospital said he was working as a project writer in the marketing office. But last week, the hospital said he is not actively employed there.

-- Daughter Sarah Pitman manages a primary-care physician practice. The hospital has not said when she started at that job. She was a hospital volunteer from June 1999 to January 2001, when she started working per-diem.

Two Giles stepchildren are also employed at the West Side hospital.

-- Stepdaughter Megan DeSantis is a physician assistant at Surgical Care Group, where she was hired six years ago. CMC acquired the group in May 2009.

-- Stepson William Giles is a physician recruiter. He started as a program analyst with the IT department in June 2000 and received several promotions over the last 10 years, CMC said.

Summary

The defenses for hiring top leaders' relatives, and doing business with top leaders' firms were similar in both locations. For example, in western Pennsylvania,

All reported that any dealings with connected firms individuals were 'at arm's length' with prices set at 'fair market value.'

In New Hampshire,

'It's not just a question for hospitals,' Bonito said of hiring relatives. 'It's a question for all companies.'

What's important, he said, is that a strict process be followed.

'Everyone goes through the same process. I don't care whose kids they are,' said Bonito. 'Everyone gets treated the same. We hire the most qualified candidate.'

It all smacks of an excess of coziness.  One wonders if there was any effort made to find other candidates when the CEO's family members showed up, or to find any other vendors when the board members' firms were available. Maybe they could have found writers, physician recruiters, and even physicians other than the immediate family members of the hospital CEO. Maybe they could have found direct mail companies, advertising agencies, and law firms available where no relatives of the CEO work, and which were not run by hospital trustees.  However, rejecting a CEO's child, or a board member's firm may require an independence of spirit rarely found in today's bureaucratic health care environment.  Instead, it may be easier to "go along to get along."

Once hired, furthermore, even when there are "processes and procedures" in place, it may become all to easy to treat the CEO's relatives differently than run of the mill employees, and to treat the trustees' firms differently than the usual vendors.  That is where the real conflicts of interest set in.  The sort of coziness that allows hiring leaders' relatives and doing business with leaders' firms could soon lead to confusion between leaders' interests and the institutions' mission.  However, leaders of hospitals and other not-for-profit health care organizations have a duty to put the mission of the organization ahead of their personal interests. 

In my humble opinion, this sort of coziness, this sort of fuzziness at the boundaries of institutional duties and personal interests, may be a fundamental reason that our current health care system has become so solicitous of the interests and prerogatives of its leaders, and so cold to the needs of patients and the values of professionals. 
The need for more transparent, accountable leadership of health care who explicitly are subject to clear ethical rules was never more apparent. 

Stay tuned as more and more cases like this appear....

The Stewards of an Elite University, or a "Politburo" of "Shadow Bankers?"

We have postulated that one of the key reasons US health care has become so dysfunctional is that the leaders of some of the most august health care institutions have strayed from, if not totally abandoned their organizations' fundamental missions.  There are many possible reasons for this phenomenon, but one is that the ultimate stewards of not-for-profit health care organizations, their boards of directors or trustees, have become uninterested in the mission, or impotent to uphold it.  So, we have tried to figure out what has happened to these boards that has lead to this sorry state.

Dartmouth College: the Packing of the Board of Trustees

One example we have come frequently discussed (beginning here) is that of Dartmouth College, despite its name, really a university, and one of the elite American universities which includes a well-regarded medical school.   For a long time, Dartmouth had one of the more accountable and representative systems of governance found in US universities.  Recently, however, this accountability and transparency was challenged by some of the College's own leaders. 

Most boards of trustees are self-elected.  When an old member leaves, the new members elect his or her successor.  Dartmouth alumni, however can elect eight members of the board of trustees. Until recently, eight others were "charter trustees," who were individually chosen by the other charter trustees, and two were ex-officio. Although the College's Association of Alumni traditionally nominated alumni to run for trustee positions, candidates could be nominated by petition, and starting in 2004, four such petition candidates were elected.

As described by FIRE, the Foundation for Integrity and Responsibility in Medicine, this more open process fostered change in how the university was lead, and seemed to foster renewed attention to the institution's mission:

These trustees spoke out when they perceived their alma mater as not living up to its mission, and Dartmouth students benefited. In May 2005, the college repealed its speech code, and it immediately moved from FIRE's 'red-light' rating and became a 'green-light' institution.

As might be expected, the reigning leadership was not pleased.

Some campus officials viewed the propensity of petition candidates to voice their opinions on illiberal policies as detrimental to the school's image. The Wall Street Journal profiled T.J. Rodgers, a petition-nominated trustee, who explained the criticisms leveled at the 'divisive dissidents.'

'If 'divisive' means there are issues and we debate the issues and move forward according to a consensus, then divisive equals democracy, and democracy is good. The alternative, which I fear is what the administration and [Board of Trustees Chairman] Ed Haldeman are after right now, is a politburo-one-party rule.'

In 2007, in apparent response to the "divisiveness" of the petition trustees, the Charter Trustees proposed increasing their own numbers. Chairman Ed Haldeman's rationale for this, as we discussed here, was to ensure that the board "has the broad range of backgrounds, skills, expertise, and fundraising capabilities needed," and that the board members would possess "even more diverse backgrounds."

Charter Trustees or "Shadow Bankers"?

Yet when we examined the backgrounds of the current charter trustees, we found that they exhibited little diversity. Remarkably, three-quarters (6/8) were in leaders of the finance sector. The board chairman, Ed Haldeman, was then the leader of Putnam Funds.  Now, he is the CEO of "Freddie Mac."  In 2007, the significance of this kind of lack of diversity were not clear.  However, it did seem strange that those accused of seeking to form a "politburo" came from the Wall Street, the street that the left once loved to hate.

However, by late 2008, the world economy descended into an unprecedented financial collapse. Many concluded that the global economic collapse was caused by arrogance, greed, and corruption within the financial sector. This suggested that leadership of academia, and academic medicine in particular, by leaders of the finance sector might not, in retrospect, have been a such a good idea. When we reexamined the composition of the now enlarged cohort of Charter Trustees, however, we found nine of 13 "charter" trustees were leaders in finance, now including three in asset management, two in private equity, one in the field formerly known as investment banking, one in venture capital, one in mutual funds, and one in strategic consulting and investment. Of the remaining four, one was the CEO of a large diversified corporation that has a major finance subsidiary. The remaining three were two physicians and a pharmaceutical corporate CEO.

Given the ongoing financial chaos at the time, we again suggested that a board dominated by business leaders in the finance sector might not be a good idea. Last week, a report came out suggesting why we were right.

Charter Trustees as Dartmouth's Own "Shadow Bankers"

"Educational Endowments and the Financial Crisis: Social Costs and Systemic Risks in the Shadow Banking System," published by the Center for Social Philanthropy, Tellus Institute, focused on how prominent educational institutions, including Dartmouth College, came to invest much of their endowments in risky, illiquid "alternative" investments, the sort provided by the "shadow banking system." The report noted that this change lead to greater financial risks, leading to recent losses and consequent sharp cutbacks in spending, programs, and employment at the affected institutions. In particular, however, it focused on leadership and governance problems at the institutions that lead to this state of affairs.

Although the emergence of the high-risk Endowment Model of Investing has taken place against the backdrop of powerful forces of financial globalization and the influence of Modern Portfolio Theory, its consolidation and influence today at colleges and universities depend vitally on college leaders: senior administrators, trustees, and investment managers, especially the increasingly prominent role of chief investment officer, or CIO. The financial crisis has in many ways been a crisis of leadership. The precipitous declines endowments have suffered during the credit crisis need to be understood as the logical outcome of the Endowment Model’s high risk strategies, but behind the model stand those who are ultimately responsible for its execution: whether as professional money managers, investment officers, affiliated investment management companies, outside managers, or investment consultants, or as the fiduciaries sitting on governing boards and investment committees.

At Dartmouth, in particular, the report focused on conflicts of interest among the board of trustees:

When it comes to weakened endowment oversight, the most glaring problem arises from trustees from the finance industry whose firms provide investment management services. One of the most disconcerting cases in this respect is that of Dartmouth College, where the sudden departure of CIO David Russ in 2009 created a leadership vacuum over endowment management. The college’s investment committee chair and trustee Stephen Mandel has played the CIO role on a voluntary, part-time basis since last summer and will continue to do so until he becomes chair of the board of trustees later this year. At the same time, Mandel’s firm, Lone Pine Capital LLC, a well known hedge-fund complex he founded in 1997, has also managed an investment mandate from the college’s endowment valued originally at $10 million. Although the college has a conflict-of interest policy and is required to disclose such 'pecuniary benefit transactions' with the state of New Hampshire, it would seem difficult for fellow trustees to provide proper oversight of investments managed by a fellow trustee serving as the de-facto CIO. Additionally, if Mandel recuses himself from committee or board deliberations related to his firm, then the investment committee must function without its chair.

However, the problem is magnified because Mandel is only one of more than half a dozen Dartmouth trustees whose firms manage multimillion-dollar investments for the endowment, according to the college’s filings with Charitable Trusts Unit of the New Hampshire Department of Justice. Leon Black’s firm Apollo Management has reportedly managed at least $40 million in Dartmouth investments. Russell Carson’s private equity firm[Welsh, Carson, Anderson and Stowe] has reportedly received at least $45 million in commitments of capital from Dartmouth. William Helman, IV’s venture capital firm Greylock Partners, has reportedly received $10 million investment mandates from the college, while R. Bradford Evans’ firm Morgan Stanley has done multiple transactions
with the college, varying from investments in international real estate and hedge funds to bond issuances, all at undisclosed levels. P. Andrew McLane [T A Associates] and Jonathan Newcomb [Leeds Weld and Co] have also had reported interests in college investments at undisclosed levels. For an endowment of its size— Dartmouth’s endowment fell to less than $3 billion in fiscal year 2009—the deep dependence on trustees’ own businesses for endowment management seems disproportionate.

Thus, one half of the membership of Dartmouth's Charter Trustees were also being paid by Dartmouth to manage its endowment investments.  However, as the Tellus Institute report noted,

Leading experts on nonprofit board governance, such as Richard Chait at Harvard University, stress that colleges should simply not do business with the companies of their board members, in order to avoid inevitable distractions and the sense of divided loyalties that arise, to say nothing of appearances of self-dealing and personal enrichment

Another "Missing Link": Board Members Doing Business with the Organizations They are Supposed to Steward

We have frequently discussed the web of conflicts of interest that now permeates health care.  Most of the conflicts we have discussed up to now involve physicians or academicians who have financial ties to pharmaceutical, biotechnology, and device companies.  Health care organizational leaders also do business  with the organizations they lead have not until recently been a topic of discussion, mainly because such conflicts of interest have rarely been disclosed.

It looks like this is going to change.  The US Internal Revenue Service sought disclosure of such conflicts of interest affecting hired executives and boards of trustees of not-for-profit organizations beginning in 2009.  These disclosures, reported on IRS form 990, are just beginning to be made public.  We just posted about members of the board of directors of a large academic health care system who also lead or owned companies that did substantial business with the system.  Now we see that a substantial portion of the board of trustees of Dartmouth lead financial firms that managed a major portion of the College's endowment, perhaps to the overall detriment of the endowment's performance.  No wonder the Charter Trustees got nervous about petition trustees poking about their business.

 As summarized by BoardSource, there are three traditional duties of members of boards of trustees of not-for-profit organizations:

Duty of Care

The duty of care describes the level of competence that is expected of a board member, and is commonly expressed as the duty of "care that an ordinarily prudent person would exercise in a like position and under similar circumstances." This means that a board member owes the duty to exercise reasonable care when he or she makes a decision as a steward of the organization.

Duty of Loyalty

The duty of loyalty is a standard of faithfulness; a board member must give undivided allegiance when making decisions affecting the organization. This means that a board member can never use information obtained as a member for personal gain, but must act in the best interests of the organization.

Duty of Obedience

The duty of obedience requires board members to be faithful to the organization's mission. They are not permitted to act in a way that is inconsistent with the central goals of the organization. A basis for this rule lies in the public's trust that the organization will manage donated funds to fulfill the organization's mission.

Letting a board member's firm manage millions of dollars worth of the institution's endowment portfolio seems an obvious violation of the duty of loyalty. (Letting a board member's legal firm handle the institution's legal issues, or having a board member's advertising firm do its marketing, as described in our earlier post, also seem to be obvious violations of this duty.) A board member who sees nothing wrong with doing business with the organization he or she is supposed to steward would likely see nothing wrong in allowing the organization's mission to become a casualty of the means used to protect that business relationship.

I suspect we are soon to see many more examples of hired executives and board members of revered not-for-profit organizations who have been doing business on the side with the organizations of which they are supposed to be leaders or stewards.  These sorts of conflicts of interest may be another "missing link" explaining why the leadership and governance of health care organizations has gone so far astray. 

As disclosure continues, maybe enough outrage will ensue so that improved leadership and governance will become possible.