Monday, January 10, 2011

Executive Compensation at Non-Profit Hospitals: Pay for ... Fraud?

We have often discussed executive compensation at US hospitals and academic medical centers, which seems to run from generous to outrageous.  The usual explanation by organizational spokespeople, and occasionally boards of trustees is that this is the sort of compensation needed to attract the best and the brightest, a variation of the "pay for performance" meme that resounds throughout business schools and executive suites.  However, almost never does anyone at any hospital or AMC acknowledge that their leaders are not the best and brightest, although outside of Lake Woebegone, all cannot be above average.

Here are two recent stories about hospital executives whose compensation contrasted with their performance.

Danbury Hospital

We previously posted about how the former chief financial officer (CFO) of Danbury Hospital, now part of Western Connecticut Healthcare, was found in violation of a no-contact order that arose after he was charged with multiple counts of fraud.  It turns out that the William Roe, the former CFO, previously was paid $267,990, per the Danbury News-Times

This month, again according to the News-Times, he pleaded guilty:
William Roe, the former chief financial officer of Danbury Hospital arrested in August and charged with defrauding the hospital out of more than $100,000, pleaded guilty Tuesday to one count of wire fraud.

The plea reduces the charges against Roe. In September, in addition to the wire fraud charges, federal prosecutors charged him with two counts of interstate transportation of stolen money. Those charges have been dropped as part of the plea deal.

Along with the guilty plea, Roe has agreed to reimburse Danbury Hospital more than $140,000. He also will reimburse St. Rita Hospital in Lima, Ohio, where he worked as CFO before coming to Danbury Hospital, an additional $75,000 for funds he allegedly stole there.

Archbold Memorial Hospital

This is one of those cases it would be hard to make up. The Dow Jones News Service originally reported in December, 2010:
A Georgia hospital paid $13.9 million to settle allegations it submitted false claims to the state's Medicaid program, the Justice Department said Wednesday.

The settlement resolves allegations that between November 2002 and July 2008, Thomasville, Ga., John D. Archbold Memorial Hospital Inc. made false representations to the Georgia Department of Community Health, the state agency that administers the Medicaid program in Georgia, that it was a public hospital for Medicaid purposes in order to increase the amount of funds provided to the hospital.

Under Medicaid rules, only public hospitals may participate in the Medicaid Upper Payment Limit, or UPL program. Contrary to its state certification, Archbold Memorial was in fact a private hospital, the Justice Department said, and as a result received millions of dollars in funds to which it was not entitled.
A private not-for-profit hospital claimed to be a public hospital to Medicaid?  And it took years for anyone to figure out that was not the case?  It would have been hard to make that one up.
Two executives took the rap:
in early 2008, then-Chief Financial Officer William Sellers resigned after a three-month suspension and pleaded guilty to charges related to his role in the matter. Former Chief Executive Ken Beverly, who also resigned in February of that year, was recently convicted on charges regarding his involvement.

The Albany (Georgia) Herald reported that Mr Beverly did quite well between the time of his resignation and his conviction:
Former CEO Ken Beverly resigned from his post in 2008 and walked away with more than $6.1 million in compensation and benefits. He was later indicted by a federal grand jury.

Convicted Dec. 8, 2010, of six felony counts related to an indictment alleging he was part of a scheme to defraud Medicaid, Beverly remains free on bond and is awaiting a sentencing hearing.

So is that $1 million per felony count? At least we can be assured it was not a "golden parachute,"
Archbold Spokesman Mark Lowe said that the figure as noted in the hospital’s Form 990 for 2009 as filed with the IRS on August 2010 is the sum of Beverly’s deferred compensation and benefits package as it has accumulated over the course of his 30-plus year career with the hospital and was not a 'golden parachute,' as described in some media reports.

'The ‘other compensation’ is from his retirement program that accumulated deferred compensation over the entire term of his employment. In his case, that was in excess of 30 years of deferred compensation. It’s not severance; rather, it’s compensation that was earned but not paid out until retirement,' Lowe said.

Well, that is reassuring.  Of course, regardless of what you call the payment, a lump sum of $6.1 million is far more than most citizens ever will get for their retirement from any employer.  Having $6.1 million in one's retirement account would fit most peoples' definition of "rich." 


Again, almost all hospital and academic medical center executives seem to be well-paid, even if they work at small institutions, or at those with shaky finances. When their pay is noticed by the news media, the usual explanation is the executives' general brilliance and excellence, with little more than more vague adjectives supplied in justification.

Given the lack of clear evidence for most executives' large compensation, I believe it is reasonable to cite anecdotes where generous compensation was obviously, if retrospectively coupled with poor performance to challenge the rationale for ever-increasing executive compensation in health care. The two cases above are not of merely poor, but criminal performance, and so stand out.

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


Live it or live with it said...

Shouldn't a board be responsible for trying to 'claw back' these payments? What equivalent is there to a stock holder suit in this sort of institution?

Structurally, who keeps the board of trustees honest?

Roy M. Poses MD said...

I think that in the first case, the settlement involved some restitution to the hospital system. But I'm not sure that included any "claw-back" of the executive's compensation.

I do agree that the board should try to "claw-back" compensation in cases in which in retrospect the executive's performance was much worse than it seemed, and in which the compensation was particularly generous relative to performance.

I don't think there are formal equivalents of share-holders. In some sense, you could consider the alumni of an academic institution to be share-holders, since their degrees' values are based on the integrity of the institution. But except in rare cases (e.g., Dartmouth, see: ) alumni have no formal input into boards of trustees. I suppose you could consider the communities in which hospitals provide care as equivalent to share-holders for not-for-profit hospitals. However, I don't believe there is any direct legal mechanism for them to oversee boards of trustees.

Live it or live with it said...

Yet these are public institutions that (in many cases) get tax support. Is there no audit capability regarding use of public funds that may shed light on what goes on behind closed doors?

I think that there is an opportunity for a straightforward approach to this from state and federal law enforcement. I also believe that enforcement is a responsibility particularly of the executive branches of government.

I make the case that it is simply a lack of will in the executive branches of government to take the initiative.

I suggest that future elections could be won or lost based on the responsivness to the public desire for a breakdown of the insiders clubs at medicine and academia.