Thursday, January 21, 2016

Health Care Managers as Ever More Effective Value Extractors - Following Up on Novant Health and Cape Cod Healthcare

The ever increasing compensation of top managers of health care organizations provides incentives to continue business as usual.  We have frequently discussed executive compensation for top health care leaders that seems wildly disproportionate to their contribution to their organizations' health care mission.

Furthermore, not only does executive compensation seem to have anti-gravity properties, rising even at institutions facing financial challenges, or while other employees face salary cuts and job loss, but it continues even after the lack of justification for it has been called out.

Herein we discuss two examples of continuing anti-gravity compensation that occurred at institutions we have previously cited for similar problems.  These are discussed in the order of their appearance in the media.  

Novant Health
In 2011, we first noted that executives of Novant Health, headquarted in Winston-Salem, NC, were getting raises while they were laying off  more lowly employees.  Then in 2014, we posted about more raises going to Novant executives, again while more lowly employees had their pay cut.

Recently, in December, 2015, Richard Craver, writing for the Winston-Salem Journal, discussed the latest (2014) compensation figures from Novant Health.

Carl Armato, chief executive and president of Novant Health Inc., received a 14.4 percent jump in salary during fiscal 2014 to $1.19 million.

In addition,

Armato is in his fourth year as the system’s top executive. His salary has risen 70.9 percent since he took over as the top executive Jan. 1, 2012, following the retirement of Paul Wiles.

Armato’s incentive compensation increased less than 1 percent to $919,738. Altogether, Armato’s core compensation was $2.59 million.

Other top executives also did very well,

Jeff Lindsay, chief operating officer, received $709,856 in salary, $382,813 in bonus and incentive pay and overall core compensation of $1.23 million. Lindsay, former president of Forsyth Medical Center, was not listed among Novant’s top executives in fiscal 2013.

For the 27 listed current executives, as of Dec. 31, 2014, on Novant’s Form 990 filing with the Internal Revenue Service, the system spent $12.17 million on salaries and $8.73 million on bonuses and incentive pay.


Seven other listed Novant Health Inc. executives received at least $442,000 in salary and core compensation of at least $517,000 for fiscal 2014.

* Fred Hargett, chief financial officer, received a 15.9 percent raise in salary to $708,924, bonus and incentive pay of $565,120 and overall core compensation of $1.54 million.

* Jesse Cureton, chief consumer officer, received a 14.2 percent raise in salary to $573,683, bonus and incentive pay of $472,173 and overall core compensation of $1.07 million.

* Jacqueline Daniels, chief administrative officer, received a 3.9 percent raise in salary to $565,283, bonus and incentive pay of $518,631 and overall core compensation of $1.13 million.

* Sallye Liner, former chief clinical officer, received a 2.9 percent raise in salary to $516,171, bonus and incentive pay of $474,991 and overall core compensation of $1.05 million.

* Dr. Thomas Zweng, chief medical officer, received $470,217 in salary, bonus and incentive pay of $282,014 and overall core compensation of $790,191.

* John Phipps, president of Novant Medical Group, received $459,024 in salary, bonus and incentive pay of $377,219 and overall core compensation of $873,015.

* Peter Brunstetter, chief legal officer, received $442,116 in salary, bonus and incentive pay of $45,000 and overall core compensation of $517,765.

The hospital system trotted out some of the usual talking points used to justify very high pay for top executives.

Novant, like most health care systmes serving North Caroling, says high compensation levels are necessary to recruit and retain executives to run 'a very complex organization.'

That was nearly identical to what they said last year,

Novant, as do most not-for-profit health-care systems serving North Carolina, stresses high compensation levels are necessary to attract executives to run 'a very complex organization.'

Furthermore, the system's board of trustees say

bonuses and incentives are based on annual and three-year goals that 'focus on the quality and safety of health care, improving the patient experience, transforming to an electronic health record, financial stewardship and providing community benefit.'

To put that in perspective, the 27 top executives are about 0.1% of the system's total workforce of "about 25,000."  The $20.9 million used for their salaries, bonuses, and incentive pay (but apparently not retirement benefits and other perks) amounted to 0.55% of the system's total revenue (of about $3.79 billion) and approximately 1% of the approximately $2 billion the system spent on all employee salaries and benefits (according to the Novant 2014 financial statement).

However, just a month before, the Triad Business Journal and Mr Craver again in the Winston-Salem Journal covered a case that certainly questioned the "financial stewardship" of Novant top management, but did seem like some sort of parody of the "community benefit" they provided. Per the former,

Novant Health has reached a preliminary settlement with a group of current and former employees over handling of their retirement plans, with the health system agreeing to pay $32 million and make changes going forward.

The proposed settlement has been agreed to by Novant and the seven plaintiffs, which include a variety of doctors, nurses and other health care workers,...

The point of the litigation was

what plaintiffs claim are excessive fees associated with the system's retirement plan along with 'kick-backs' to a Triad businessman with a long-standing relationship with the health system.

The complaint alleged that during a three-year period starting in 2009, the plan paid excessive compensation of close to $18 million to Colorado-based Great-West Life & Annuity Insurance Co. and brokerage firm D.L. Davis & Co., based in Winston-Salem and operated by CEO and President Derrick Davis.

Along with the allegations of excessive fees, the plaintiffs claimed that entities owned or controlled by Davis benefited from real estate and development deals with Novant Health.


The agreement would also bar Davis and his companies from being involved in the management of Novant Health retirement plans and would prohibit Novant from entering into any new real estate deals or business relationships with Davis and his companies for at least four years.

As is customary in such cases, a Novant statement said its leadership "do not agree with the claims in the lawsuit," but agreed to the large settlement and other stipulations apparently to avoid "a long and costly legal battle."  But if the complaint was unfounded, how would it be good stewardship not to contest it?  Of course, were it to be true, then there would be even more evidence of poor stewardship.

In fact, for full disclosure, I got to add my skepticism about how Novant recompenses its managers in the text of Mr Craver's December, 2015, article,

'Each organization seems to have their own set of metrics, often frequently adjusted, and that somehow always make their own executives seem good,' Poses said.

'Every organization thinks their executives are above average,' Poses said. 'There are no overseers willing to question executive pay, since boards are mainly executives of other organizations; and executives are always compared only with other executives.' 

Somehow, I doubt that any Novant executives or board members would care about what I said, or that Novant executive pay will not continue to climb, unless push comes to shove.

Cape Cod Healthcare

In January, 2015, we blogged about how the former CEO of Cape Cod Healthcare had been collecting severance pay for 3 years, totaling more than $3 million, after he abruptly left his  and after being sanctioned by the state medical board for faulty prescribing abusable psychoactive drugs (which he allegedly took himself) ; and it was revealed that there were concerns about financial mismanagement at the health care system which he formerly ran.  While CEO of Cape Cod he also presided over multiple layoffs, some of which were of clinical personnel.  At that time, of course, the system board of trustees defended his leadership because they said it improving system finances.

No, on January 14, 2016 the Cape Cod Times reported,

For the fourth year since abruptly leaving Cape Cod Healthcare, former CEO Dr. Richard Salluzzo pulled in a hefty paycheck, according to new financial reports filed with the state attorney general’s office.

Since parting ways with the nonprofit corporation in November 2010, Salluzzo has taken in about $3.5 million, including $407,371 for the most recent year on file, fiscal 2014.

In many ways, this report doubled down on the previous 2015 version. Dr Salluzzo did not merely preside over layoffs, but

During his tenure Salluzzo presided over what he called the largest job cut in Cape Cod Healthcare’s history, a layoff of about 200 employees, in addition to bringing about improvements such as better billing.

The chairman of the system's board of trustees did not merely defend Salluzzo's financial results, but

'The actual performance was just phenomenal,' [Chairman William] Zammer said. 'We have a healthy, vibrant health care system.'

The Cape Cod Times suggested that observers outside the hospital system begged to differ,

But a professor of business ethics at Bentley University in Waltham questioned the extent of Salluzzo’s 'golden parachute,' while the spokesman for a nurses union called it 'outrageous.'

'These post-employment payouts must have been in his initial contract,' said W. Michael Hoffman, executive director of the center for business ethics at Bentley.

'It does sound crazy and wrong given the amount of his golden parachute,' Hoffman said in an email.

'It’s unconscionable we’re still paying someone who left under questionable circumstances,' said David Schildmeier, spokesman for the Massachusetts Nurses Association.

Schildmeier said the money would be better spent on patient care, especially since Cape Cod Healthcare draws a large percentage of its patient revenue from taxpayer-funded Medicare and MassHealth programs.

Dr Salluzzo is gone, but I doubt that the board of trustees is listening to these critics, and again unless push comes to shove, I suspect the new CEO will find his position to be very remunerative.


As I said in 2015,...

 As health care organizations have become increasingly big and influential, their leadership has been increasingly in the hands of generic professional managers, not health care professionals.  These hired managers have commanded generous and ever increasing pay, which has been justified by the common talking points: managers have extremely hard jobs and are brilliant, and high pay is necessary in a competitive market to attract and maintain top leaders.

Yet none of the boosters of high pay for health care managers, who mainly seem to consist of the legal, marketing, and public relations personnel who answer to them, and occasionally the board members who also are hired manager, answer the obvious questions:
What is the evidence that managers are brilliant and their jobs are so hard, especially when compared to the highly-trained health care professionals at their own institutions?
Is their really a free market in hired managers, and why is it so isolated from the market for health care professionals and other people employed by health care organizations?

These justifications seem particularly ridiculous when managers whose results are obviously not brilliant, e.g., marked by deficits, losses, and lay-offs, are getting huge and increasing pay.  They also seem ridiculous when the "market" apparently dictates salary cuts and lay-offs for all employees other than the managers of a particular organization.

 Instead, it seems likely that hired health care managers make more and more because of the influence they have on their own pay.  This influence is partially generated by their control over their institutions' marketers, public relations flacks, and lawyers.  It is partially generated by their control over the make up of the boards of trustees who are supposed to exert governance, especially when these boards are subject to conflicts of interest and  are stacked with hired managers of other organizations.  Furthermore, per the dogma of pay for performance, their pay may be heavily tied to short-term financial results, rather than fulfillment of the patient care or academic mission.

Thus, as in the larger economy, non-profit hospital managers have become "value extractors."  The opportunity to extract value has become a major driver of managerial decision making.  And this decision making is probably the major reason our health care system is so expensive and inaccessible, and why it provides such mediocre care for so much money.

So to repeat, true health care reform would put in place leadership that understands the health care context, upholds health care professionals' values, and puts patients' and the public's health ahead of extraneous, particularly short-term financial concerns. We need health care governance that holds health care leaders accountable, and ensures their transparency, integrity and honesty.

So push needs to come to shove.  I just posted that generic management/ "managerialism" just drove physicians who are corporate employees of one big health care system to unionize and contest their working conditions and other outcomes of generic management.  I submit that to get true health care reform, physicians, health care professionals, and members of the public concerned about our ever more expensive, yet constantly declining health care system need to do more than just read angry blog posts.

But until they do, I guess I will have an infinite number of follow-up posts, like this one, to write.  


afraid said...

Roy, your last paragraph shows a tired soldier. Heck, it's only January, there are lots of similar posts to go in 2016.
Keep the faith.

Judy B said...

How do we get rid of these guys (both the executives and the boards of directors)? There must be some way to prove their malfeasance and financial chicanery!
(I fear that the only way they will go will be if their institutions fail and can no longer pay them. At that point, communities will be left without hospitals.)

afraid said...

Judy, Pitchforks.