Tuesday, November 08, 2011

CEOs First to Benefit from For-Profit Takeovers of Non-Profit Hospitals

Last year, we noted concerns about the againy fashionable practice of for-profit corporations taking over previously not-for-profit hospitals and hospital systems. Two examples we cited were the planned acquisitions of Detroit Medical Center (DMC) by Vanguard Health, which was owned by the Blackstone Group, and of Caritas Christi Health Care by Cerberus Capital Management.

At the time, we noted, "for-profit leaders tend to expect even larger compensation than not for-profit CEOs. Their decisions tend to be driven by their short-term compensation, rather than the good of the organization." So we asked, "will making a not-for-profit health care organization into a for-profit corporation really lead to more efficiency and lower costs?" In a later post, we worried about "ever-increasing executive compensation while making money becomes the overwhelming priority for the organization, completely eclipsing such quaint concepts as quality of care, reasonable costs, or adequate access."

About one and one-half years later, we have some follow-up from the media about the results of these deals, especially as they pertain to executive compensation.

Detroit Medical Center, Vanguard Health Systems, Blackstone Group

Our post last year quoted then Mike Duggan, then CEO of DMC, that "We were being choked to death by the nonprofit business model."

This month, the Detroit Free Press reported,
Detroit Medical Center CEO Mike Duggan's total compensation this year from Vanguard Health Systems, the private health care company that bought the DMC, is $2.41 million in pay, bonuses and several years of stock options, up from the $1.98 million in 2009 when DMC was a nonprofit, according to public documents.

About $1.3 million of Duggan's total compensation is in stock options that he would start receiving next year through 2019, the documents show.

Note also that,
The package also calls for Duggan to get $1 million if he's fired or $5 million if Vanguard sells the DMC to another company -- fairly common conditions in contracts, experts said.

Duggan's new compensation package puts him in the top tier of local health care executives.

It seems like Mr Duggan is no longer being "choked to death."

Cursory review of the media reveals that since the acquisition, DMC has some major construction projects planned. However, I saw nothing yet about whether the acquisition has decreased costs, increased access, or improved the quality of care.

I should note that Mr Duggan appears just a bit uncomfortable with his generous compensation in this era of anger about the power of the one percent:
Duggan said he agreed with Occupy Wall Street protesters who point to the growing gap between the poor and rich: "I do believe people should be able to work hard and earn a lot of money. (But) the gap between the top and the bottom is not fair in this country," he said. "I don't have the ability to fix the world, but my wife and I are making a gesture that's appropriate for us. If people say we get paid a lot of money, I think they are right. I'm trying to do something to share some of the benefit."

The gesture mentioned above would be
he and his wife plan to create a foundation next year to hold the stock earnings, after taxes, for scholarships for children of DMC employees.

Whether it is carried out, of course, remains to be seen.

Caritas Christi Health Care, Steward Health Care, Cerberus Capital Management

The initial story about the proposed take-over in the Boston Globe noted that one rationale was how:
Caritas has long struggled financially, but since coming to the chain two years ago, [CEO Dr Ralph] de la Torre has worked to strengthen its financial position by aggressively cutting costs and boosting revenue from medical care. It posted operating income of $30.5 million for the fiscal year ending last Sept. 30 compared with a $20.5 million loss the prior year.

The aim would be:
to provide quality community-based care at a reasonable cost.

Some specific goals of the proposed take-over would be
Under the agreement, Cerberus will invest $430 million to $450 million immediately to pay off Caritas debt, finance renovation projects, and provide working capital, while also assuming its pension liability.

To pursue all this,
While de la Torre and other senior executives will retain their current salaries and benefits, they would be eligible for additional compensation from Cerberus based on the financial performance of the hospitals, Caritas officials said. They said the details of those financial incentives have yet to be worked out.

Last month, a Boston Globe article provided a little more clarity about these compensation arrangements:
Ralph de la Torre, former chief executive of Boston-based Caritas Christi Health Care, drew a total pay package of $2.2 million from the Catholic hospital system in 2009, making him the best-compensated hospital executive in Boston that year, according to documents filed with the state attorney general’s office.

The package, which included base salary, a performance bonus, and incentive compensation linked to improving finances at the hospital chain, marked an increase from the $1.2 million de la Torre earned from Caritas in 2008.

Note that after the take-over, the Caritas Christi system was renamed as Steward Health Care.

So prior to the actual take-over by Cerberus, but presumably while initial negotiations about it were going on, Dr de la Torre had already become the best paid hospital CEO in Boston.

Becker's Hospital Review noted that De la Torre's 2010 total compensation was exactly $2,270,076. The Caritas Christi 2010 IRS form 990 also listed 19 executives who received more than $400,000. Of these, 11 received more than $600,000. Meanwhile, according to this form, the system's losses were accelerating, going from -$6,583,625 in 2008 to -$23,858,733 in 2009.

So, it seems that Dr De la Torre became significantly richer in anticipation of the proposed (and now accomplished) take-over of Caritas Christi by Cerberus Capital Management, even though his hospital system's hemorrhaging of money was increasing at that time.

Again, I was not able to find any clear evidence whether the take-over had decreased costs, increased access, or improved quality of care. I did find one report suggesting that some Steward Health nurses did not think that it had stabilized their pensions as promised. According to the Boston Business Journal,
Nurses and other health care workers from several of the hospitals owned by the for-profit Steward Health Care, plan to protest outside the company's Boston headquarters today at 1:30. They include nurses from St. Elizabeth’s Medical Center, Brighton, Norwood Hospital, Good Samaritan Hospital in Brockton, Morton Hospital in Taunton, Quincy Medical Center Carney Hospital in Dorchester, Holy Family Hospital in Methuen and Merrimack Valley Hospital in Haverhill.

Nurses argue that Steward, owned by New York private equity firm Cerberus Capital Management, has not honored agreements to the workers, including a commitment to create a defined-benefit pension plan. They also say that Steward has threatened to eliminate essential services in retaliation for the nurses demand for the pension plan.


Two acquisitions by private equity firms of non-profit hospital systems have resulted in increased compensation for the systems' CEOs, and perhaps other top executives.  These increases predated any recognizable improvements in quality or access, or decreases in health care costs.

Acquisitions of non-profit hospitals and hospital systems by for-profit entities, including private equity firms, is one of the newly fashionable ways our health care leaders have promised to improve care, increase access and control costs. The evidence about whether this tactic accomplishes these aims is not yet in. However, it appears that this tactic may be another, and a rapid way for top health care executives to increase their personal incomes.

Health care professionals, patients, and the public at large ought to be increasingly skeptical of the latest fashions in health care management, especially those that have potential to further enrich managers.

As we recently noted, more people in the US and other countries are frustrated that their attempts to work hard and follow the rules of the economic system yield less rewards. Meanwhile, it appears that well-connected insiders are increasingly gaming the system for their personal profit. We have noted how health care executives' compensation seems independent of their talent, skill, or innovation, much less their ability to uphold the values and fulfill the mission of their organizations. Their compensation often seems to rise inexorably, regardless even of the financial status of their organizations.

Now it appears that inflating compensation in anticipation of or due to a merger or acquisition is another mechanism by which insider executives gain, while others in health care lose.

Once more with feeling .... true health care reform requires competent, ethical leadership that upholds health care's core values within a governance structure of accountability, integrity, transparency, and honesty. Tackling the deep problems in health care will require tackling the deeper problems in the global political economy which helped to generate them.

1 comment:

Afraid said...

Um no surprises here. This may all get fixed when our system crumbles and we get back to what's important.