Thursday, May 20, 2010

A $7.8 Million Golden Parachute for a Not-For-Profit Health Care System CEO Who "Didn't Leave Under Great Circumstances"

These sorts of hits just keep on coming.  This story comes from the Baltimore Sun.

The Golden Parachute

First, let us just review the financial details,
Former University of Maryland Medical System CEO Edmond F. Notebaert, who resigned two years ago during a tumultuous time that included infighting and a board shakeup, is again the subject of controversy over his $7.8 million pay package.

The package included $2.4 million in severance, about $639,000 in salary for seven months, deferred bonuses and contributions to a retirement plan that instantly vested when he left.
By the way, Mr Notebeart did not actually go into retirement after he received this largess,
A spokeswoman for Temple University, where Notebaert now heads the health system, said he was not available for comment.
The Justification
The view from some amongst the local leadership was that the price was reasonable,
[Current Board Chairman Stephen A] Burch acknowledged that Notebaert's compensation was large but said it was justified because of Notebaert's experience and accomplishments while working at the medical system. The system added Shore Health System and Chester River Health System to its roster of institutions under Notebaert's tenure.

Total profit reached $301 million during Notebaert's tenure, compared with $49 million during the prior five-years, according to the medical system. Revenue was $2.1 billion when Notebaert left in fiscal 2009, Burch said.

'Mr. Notebaert's salary reflected his many years of successful and significant experience at large, complex health systems and was well within the range of comparable executives,' Burch said.

The Lack of Disclosure
Of course, the golden parachute given to Mr Notebaert did not seem to be something that UMMS wanted to boast about:
Notebaert walked away with the compensation — details of which weren't disclosed in filings with the Internal Revenue Service until this week — after he announced his retirement in July 2008.

The Process
In fact, there were questions raised about the process that lead to the golden parachute,
The system's protocol for deciding compensation came under fire in the months after Notebaert's retirement because the pay was awarded without full board approval. Now, the recently detailed pay package is drawing criticism anew.

"This is an outrageous case of excessive executive compensation in a public institution," Gov. Martin O'Malley said Wednesday in an e-mailed statement. "This sort of 'golden parachute' has no place in the public sector."

[Maryland's Speaker of the House, Michael E] Busch served as interim chairman of the board after Chairman John P. Erickson resigned amid the controversy. Busch said the compensation committee at the time left the rest of the board in the dark about Notebaert's payout.
The Questions About Prior Performance
In addition, the Baltimore Sun article recounted some major questions raised about Mr Noteabert's leadership:
Tensions had arisen between him and physicians over how the system was run. Shortly after his departure, one-third of the board resigned, including the chairman and vice chairman.

Under Notebaert, physicians had complained that relations between the medical system and the medical school had deteriorated to a point that jeopardized both institutions. Critics said the system was becoming too focused on profits and less on medicine and research.

In addition,
Maryland's House Speaker, Michael E. Busch, who serves on the medical system board, said there is little legal recourse to try to recoup any of the compensation and that he thought the severance package was excessive given the dysfunction at the medical system when Notebaert left.

'I think a lot of the members of the board disagree with the payment, considering how he left,' Busch said. 'It's not like he left being hailed by the institution. He didn't leave under great circumstances.'

In addition, Maryland Governor Martin O'Malley said,
There were quite a few messes that had to be cleaned up over the last four years and leadership dysfunction at UMMS was one of them
The Summary

So there you have it, a leader noted for his "dysfunction" by the state Governor, and for his bad relationships with health care professionals, who felt he was putting profit ahead of the system's mission, walked off with a $7.8 million golden parachute provided without the approval of the hospital system's full board of directors, and only disclosed two years later. Mr Notebaert seems to be another member of the enlarging group of health care organizational leaders who received enough compensation to make them rich, despite performance that was questionable at best.

For other posts about the often outrageous compensation given health care leaders, often seemingly completely at odds with their performance, look here.  For a longer discussion of the implications of current executive compensation in health care, look here

I will just conclude, as I have before, with this....  executive compensation in health care seems best described as Prof Mintzberg described compensation for finance CEOs, "All this compensation madness is not about markets or talents or incentives, but rather about insiders hijacking established institutions for their personal benefit." As it did in finance, compensation madness is likely to keep the health care bubble inflating until it bursts, with the expected adverse consequences. Meanwhile, I say again, if health care reformers really care about improving access and controlling costs, they will have to have the courage to confront the powerful and self-interested leaders who benefit so well from their previously mission-driven organizations. It is time to reverse the coup d'etat of the hired managers.


Joseph P. Arpaia, MD said...

I'm sick of hearing how these executives and administrators in general are responsible for the profits brought in by the health-care companies. That is nonsense.

The following thought-experiment demonstrates my point. Imagine a virus appeared that killed off all the executives in every health-care company in the country within 24 hours. What would happen? Well we'd fly the flag as half-mast and all the doctors, nurses, technicians, receptionists, janitors, etc would continue doing what they always do and not one patient would notice.

Now imagine that a different virus appeared that killed off the doctors, or nurses, or technicians. What would happen? Health-care would grind to a screeching halt and a lot of patients would die. There would be chaos for months.

So who is more important, the executives or the workers?

And therefore, it is absurdly stupid to pay executives such grandiose amounts of money.

Anonymous said...

A May 21 WSJ editorial closed with this “…problem is all too typical of a sense of entitlement and impunity that has built up over many years of exercising vast power with little restraint. This is not the kind of character that will change Washington.”

In the private sector we see the drive to increase revenues while decreasing cost with the end game being higher income and thus higher salaries and bonuses. After reaching certain levels of efficiency the only avenue left to achieving this goal is the perverse incentive of cutting the incomes of the very people you rely on to provide the services that make the organization function.

What we have witnessed in the last decade is the politicization of business. The CEO takes credit for all of the good of the organization while all of the bad were done by someone else. The ultimate excuse is that the people working for the organization simply do not understand the greatness of the plan and are unable to execute it, thus assuring failure.

What we are lacking today is the sense, any sense, of personal responsibility. The result is we promote our problems while they reach ever higher levels of incompetence. The Peter Principle is at work in many organizations.

Steve Lucas

Matthew Holt said...

Oh, Roy, you're such a stick in the mud. The point is not how much the Maryland taxpayer had to pay to get him to leave, it's how much less they had to pay than if the CEO in question had successfully drawn the comparison to what they'd have earned if they'd been running a health plan!