2 Legal Settlements + 1 Corporate Integrity Agreement = $130 Million Retirement Package?

Omnicare's Trail of Legal Settlements

Last year, we discussed a $98 million settlement made by Omnicare, US based corporation that manages pharmacy-benefits, of allegations that it received kickbacks from generic drug manufacturers for buying and recommending their drugs.  Omnicare had previously submitted to a corporate integrity agreement in 2006, and paid $102 million to settle allegations it defrauded Medicaid.  At the time, we noted that this was yet another of the many cases in which the organization alleged to be involved in wrong-doing paid a fine, but no one who authorized, directed, or implemented the bad behavior was subject to any negative consequences.

So last week, Cincinnati.com ran a story on the retirement of the CEO who presided over Omnicare during the time of the alleged misconduct. 

Before reading further, would anyone care to guess whether the company's previous bad behavior would negatively impact his fortunes?

Contrasted with the Size of the CEO's Retirement Package

No exactamente:

As Omnicare Inc.'s new leadership begins to reshape its corporate culture - one that had included generous pay for senior executives - the Fortune 500 firm's exiting CEO stands to collect one of the largest payouts landed by a U.S. corporate executive in recent history.

Former president and CEO Joel Gemunder, who surprised analysts and investors when he retired on July 31, is in line to receive more than $130 million in severance, pension and departing payouts.

At 71, Gemunder had led Omnicare Inc., the nation's largest provider of pharmaceuticals for the elderly, for nearly 30 years.

On his retirement, Gemunder was up for a lump sum pension payment of more than $91 million. That's in addition to a monthly pension payment of $1,719 and roughly $5.38 million from a deferred compensation plan.

Gemunder also will receive $16.2 million in cash severance payable through next July. His 2.7 million in stock options and more than 705,100 shares of restricted common stock also became fully vested on his retirement. Collectively, the shares were worth more than $21.7 million, according to the company's most recent proxy.

To recapitulate so far: the company had to make two settlements of charges of kickbacks and fraud, totalling about $200 million, and accept a corporate integrity agreement. The CEO on whose watch this occurred left the company with a $130 million retirement package.

Can we spell "impunity?"

Protest from the Main-Stream Media

But this case was different from many of the legal settlements that we have chronicled in the past. In those previous cases, we noted how corporate bad behavior cost the organization as a whole, and hence collectively cost the stock-owners, the employees, and the customers/ clients/ patients involved, but not the leaders who authorized and directed the bad behavior, nor the particular people who implemented it. Hardly anyone else, however, took notice.

However, after Mr Gemunder's obese retirement package was made public, there was actually outrage in the opinion section of the Wall Street Journal:

Health-care costs, the national debt and taxes are all going up, and Joel Gemunder is one reason why.

Until Mr. Gemunder's abrupt retirement was announced on Monday, he was CEO of Covington, Ky.-based Omnicare, the nation's largest dispenser of pharmaceuticals to nursing homes.

Omnicare gets most of its revenue from Medicare, Medicaid and other companies sucking on these same government feeding tubes. Omnicare also lives up to its name, serving 1.4 million beds in 47 states.

Mr. Gemunder, 71, had been in charge since 1981, but now he's split with one of the largest lump-sum pension payouts in history, The Wall Street Journal reported. He's getting a $91 million pension payout, plus severance, vesting of restricted stock and other goodies that bring his final payday to at least $130 million. And that's on top of the $14 million he bagged last year.

As CEO, Mr. Gemunder touted 'cost reduction initiatives,' including salary cuts for employees, but these initiatives didn't apply to himself.

And what did the shareholders get for their money? Omnicare shares took a tumble last week after the company reported a shocking drop in the number of prescriptions it fills.

Omnicare stock peaked in March 2006 at more than $61, but now trades under $23. That's a drop of more than 60% -- versus a roughly 11% decline in the S&P 500 during the same period.

And what did the taxpayers and customers get? Omnicare has long been plagued by huge litigation costs amid allegations of kickback and billing schemes.

It's nice to have company. And it's very nice that the issue of the impunity enjoyed by leaders of top health care organizations has made it into the main-stream media. Now it is time to do something about it.

Summary

Let me say it again:  The Omnicare settlement coupled with its CEO's outlandish retirement package fit right into the parade of legal settlements we have discussed. As we have said again and again, the usual sorts of legal settlements we have described do not seem to be an effective way to deter future unethical behavior by health care organizations. Even large fines can be regarded just as a cost of doing business. Furthermore, the fine's impact may be diffused over the whole company, and ultimately comes out of the pockets of stockholders, employees, and customers alike. It provides no negative incentives for those who authorized, directed, or implemented the behavior in question. My refrain has been: we will not deter unethical behavior by health care organizations until the people who authorize, direct or implement bad behavior fear some meaningfully negative consequences. Real health care reform needs to make health care leaders accountable, and especially accountable for the bad behavior that helped make them rich.

Postscript: A Conflicted Board Member?

The Cincinati.com story described the bizarre process used to set the size of the Omnicare CEO's retirement package.

Just ahead of Gemunder on the big pension list is Thomas M. Ryan, president and CEO of CVS Caremark Corp. with $94.4 million at the end of 2009.

CVS posts annual sales in excess of $98 billion compared to Omnicare's $6.17 billion. Annual profit at CVS is $3.6 billion compared to $ 211 million at Omnicare.

Despite the sizable differences, CVS is among 40 companies whose CEOs pay is considered when Omnicare's executive compensation committee determines pay for its top executives, according to the firm's April proxy. The company's compensation committee, which declined comment for this story, is made up of three long-time directors Andrea R. Lindell, board chair John T. Crotty and Steven J. Heyer.

Other companies considered include New York-based Bristol-Myers Squibb Co. with $17.8 billion in sales; Dublin, Ohio-based Cardinal Health, Inc. with $99 billion in sales and New Jersey-based Medco Health Solutions, Inc. with $72 billion in sales.

'These companies are enormously bigger than you would expect for a comparative group' for Omnicare, Crystal said. 'It's the equivalent of the local ball team that's not in the major leagues using their comparative group as the New York Yankees.'

Note that one member of the compensation committee that used this absurd standard to set the CEO's compensation was one Andrea R Lindell. The above story did not identify her further, but as we noted last year, she "is also Dean of the College of Nursing at the University of Cincinnati. One would think that someone who thus boasts 'the success of our students, faculty, staff and alumni who work together to promote excellence in education, research, service and practice' needs to keep a closer eye on the ethical aspects of her company's management. But as the New York Times just noted on the front-page of last Sunday's business section, as another blow to the anechoic effect, "Academics may be trained to ask tough questions in their own fields, but when confronted with tricky business issues far above their level of expertise they 'often become as meek as church mice'...." and hence are just the sort of directors that self-interested CEOs intent on lining their own pockets love. 

So this case becomes another reason to take seriously the increasingly frequent conflicts of interest generated when top leaders of non-profit health care organizations sit on boards of for-profit health care corporations.  These conflicts may not only distract the leaders from the mission of the non-profit organizations, but also distract them from their fiduciary duties to the stock-holders of the for-profit corporations.