Tuesday, August 14, 2012

When Does Lavish Executive Compensation Become "Embezzlement?"

A single article in the Miami Herald raises the question of when is excessive executive compensation in health care too excessive.  To set up the question, I will be quoting from the story in an order quite differently from how the story was presented.


The story is about the executives of the Miami Beach Community Health Center, described thus:
Headquartered on Biscayne Boulevard in North Miami, the Miami Beach Community Health Center is one of the oldest and most well-respected public health clinics in Florida. It opened more than three decades ago, and now includes four locations, three on the Beach, including two sites that care for people with mental illness. The center employs more than 280 people, with a monthly payroll of around $1.2 million.

The health center’s annual budget is about $36 million — about one-third of which comes from private insurance, Medicaid, the state and federal health insurance for needy people, Medicare, the federal insurer for elders, and private payments.

The CEO's Compensation

Previous stories, and public records suggested that the Center's CEO, Kathryn Abbate, was very well compensated. First,
an October 2010 Miami Herald business story ..., relying on federal tax documents, reported Abbate’s compensation package as $824,000 in 2008. In the article, Abbate said the compensation package was inflated by cashed-out sick time, vacation time and a retirement account.

She did even better in subsequent years,
The Miami Beach Community Health Center’s federal tax report for 2010 indicates Abbate’s base salary was $261,165 — but includes an additional $956,584 in 'bonus and incentive' dollars that pushed her total compensation to more than $1.2 million. The center’s IRS disclosure for the prior year reported Abbate’s base salary as $970,532, and total compensation of $987,902. In 2008, Abbate’s total reported compensation was $824,686, records show.

The CEO got very generous compensation given the size of her organization.  This compensation was documented on forms the organization submitted to the IRS that were in the public domain.

However, as we have discussed many times before (look here), many leaders of health care organizations, including non-profit organizations, have been collecting very generous compensation.

The Role of the Board of Trustees

As we have discussed before, e.g., here, exceptional compensation for top hired managers is often justified by the governing boards, that is, boards of trustees or directors, to whom the hired managers nominally report.  These governing board members often seem to be working off a common set of "talking points." 

In this case, there was a difference. The Herald reported that the Centers board of trustees "never agreed to pay Abbate more than $300,000, [Center Chief Medical Officer Dr Mark] Rabinowitz said."

The board seemed totally unaware of what their organization was paying its CEO.
Rabinowitz and a health center spokeswoman, Alia Faraj-Johnson, said that board members they spoke to had not seen the [2010] newspaper story [about the CEO's 2008 compensation]until just recently, and acknowledged its content would have raised significant red flags.

'That would have tripped everybody’s light,' Rabinowitz said.
Why the board had never thought to look at the organization's own reports (990 forms) to the US Internal Revenue Service which detailed the executives' compensation, reports that were in the public domain, and are easily available online (look here), is unknown.

The article implied that the board was somehow not up to this task even though it has fiduciary responsibilities to oversee the top hired managers, oversee the overall budget, and try to maintain both the organization's mission and fiscal stability did not seem up to the task. The article noted,
board members remained unaware until last spring. Under federal law, at least half of the board members of federally subsidized health centers such as Miami Beach’s must be consumers of the clinic, and some of the clinic’s board members were simply ill-equipped to detect what the center calls a sophisticated financial crime.

The board members seemed to think that it was the job of the CEO's subordinates to keep tabs on her compensation,
'One of the sad things about this, regrettably, is that if the gatekeeper in this case, the chief financial officer, had done his job, a large portion of this would have been discovered a long time ago,' said Bill Dillon, a Tallahassee-based healthcare lawyer who is advising the center.

The Chief Financial Officer contended that he would not have been able to successfully blow the whistle:
[CFO Stanley] DeHart, who lives in Coral Springs, said he was aware of many of Abbate’s activities, but declined to alert the board of directors. 'The board of directors was very close to her, and I really thought they would not believe me,' DeHart said. 'They held her in very high esteem.'

DeHart and members of his staff 'discussed whistle-blowing,' he said, but they all agreed taking such an action was more likely to result in their firing than Abbate’s. 'I felt at the time, and I still feel, that I had no proof that the board of directors would accept.'

And, DeHart added, blame for the scandal should include outside auditors, who failed to raise any objections when Abbate wrote dozens of checks to herself for 'community development' — a department that regularly generated an enormous amount of 'abnormal activity.' DeHart said he told auditors he suspected something was amiss in the community development department.

'The external auditors had to have known about this,' DeHart said, 'because I laid it out to them in plain view. I did not hide anything.'

In fact, the CEO's total compensation, plus a variety of other payments she seemed to direct to herself, were not made clear until
May, after a routine audit required by federal funders turned up irregularities, said Mark Rabinowitz, an obstetrician and gynecologist who is the center’s chief medical officer. Abbate had written a check for $5,000 to herself, and cashed it, labeling the expenditure a 'community development' expense....

Only after that,
Calling the actions of their former administrator an 'outrageous betrayal of trust,' authorities with the Miami Beach Community Health Center are investigating what they call the theft of almost $7 million in taxpayer money by the center’s longtime chief executive.

Members of the health center’s board of directors fired Chief Executive Officer Kathryn Abbate, saying she diverted the nearly $7 million in money intended to provide healthcare for the needy to her personal use beginning in 2008.


So let me backtrack a bit. The board of a moderately big, non-profit community health center seemed to make no attempt to monitor the organization's finances, did not even review the organization's own filings with the US government, and therefore had no idea what they were paying their CEO. Nonetheless, they seemed to assume that the organization's finances would be kept in order by an executive who reported to that same CEO. When an audit ordered externally ordered revealed that the CEO was being paid much more than the board had assumed, they charged "embezzlement," again even though a good chunk of such payments were in the form of compensation reported to the US government.

The real distinction between this case and many other cases of huge executive compensation we have discussed is that in this one the board seemed to be trying to maintain "plausible deniability" of any knowledge of the CEO's compensation, even though supervising that compensation was its direct responsibility. In other cases, board seem fully aware of enormous compensation, but blithely dismissive of any concerns about it. 

So does this case could represent "embezzlement, " why were all the other cases of hired managers lavishly compensated not so regarded, even when their compensation was completely out of proportion to their known accomplishments, their organizations' financial performance, much less their organizations' fulfillment of their missions and positive impact on patients' and the public's health?  In many of those cases, the money paid out in executive compensation was also partially derived from taxpayers, and also was partially meant to "provide healthcare for the needy."

As I have said many times 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.

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.

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