Once More, the Hospital CEO as Scrooge - Cape Cod Healthcare CEO Collected Millions in Severance After Laying Off Hundreds of Health Professionals, and Being Sanctioned by the State Medical Board

The theme of non-profit hospital CEO as Scrooge seems to be persisting in the media even beyond the holiday season.  (Our last post on this theme was in December, 2014).  The previous cases we discussed (also here) involved  marked contrasts between how well top hired managers of non-profit hospitals were doing, and how their institutions were doing.

Turning Around the Hospital, but Turning Away Employees

The background to this story comes from an article in the Cape Cod (MA) Times from January, 2014.  Cape Cod Healthcare, a regional non-profit hospital system, hired Dr Richard Saluzzo as CEO to turn around the system's troubled finances.

Cape Cod Healthcare had 'a pretty significant economic turnaround' under Salluzzo's stewardship, as well as accolades for quality of care, [board chairman Thomas] Wroe said.

'We were really in trouble. He was the architect and foundation of turning that around,' Wroe said.

In this case, the turn around seemed to be strictly financial,

During his tenure Cape Cod Healthcare's bond rating improved from one grade above junk status to BBB with a favorable outlook.

However, the turn around also involved turning away employees,

The financial turnaround came in part from cost-cutting measures such as layoffs for about 200 employees and improved billing.

More details about these layoffs were in a Cape Cod Times article from 2008,

A hospital chaplain and several psychiatric nurses are among the cuts emerging from Cape Cod Healthcare's announcement last month that it is eliminating 169 positions.

In particular,

the hospital's largest union is expected to begin the process of 'bumping' later this week, which allows employees with more years of service to move into jobs of junior colleagues.

Most of the layoffs announced last month are at Cape Cod Hospital.

Union jobs scheduled for elimination are going through a process of negotiation with management.

Seventy-six positions held by members of the 1199SEIU United Healthcare Workers East are slated for elimination.

Also still in negotiation is the fate of seven members of the Massachusetts Nurses Association, several of whom are employees of the psychiatric center located across the parking lot from Cape Cod Hospital in Hyannis.

Some of the nurses work part time, said Marilyn Rouette, president of the Cape Cod Hospital chapter of the association.

But the psychiatric services help 'a very vulnerable population,' she said.

So the hospital apparently did improve its financial performance during the reign of Dr Saluzzo, but at the expense of quite a few employees, including health professionals serving vulnerable patients.

CEO Compensation as the Gift that Keeps on Giving

CEO Dr Saluzzo earned pretty good pay during his last full year, as reported by the Cape Cod Times in 2014,

In fiscal 2010 — his last full year of employment at Cape Cod Healthcare — Salluzzo earned under $1 million, garnering $835,609 in salary and $23,967 in other compensation. He also received a benefit plan worth $78,618.

He did much better than did the previous CEO,

Salluzzo's most recent salary stands in striking contrast to that of his predecessor, retired Cape Cod Healthcare CEO Stephen Abbott, whose salary came to $621,225 in fiscal 2008, his last full year on the job. That year he also had a benefit plan worth $111,544.

However, CEO Dr Saluzzo's compensation did not stop when he left.  The 2014 article in the Cape Cod Times included,

Even as Dr. Richard F. Salluzzo abruptly left his CEO position at Cape Cod Healthcare more than three years ago, he was due to receive more than $2 million in compensation.

Reports filed with the state attorney general's office for fiscal 2012 and 2011 show that Salluzzo remained Cape Cod Healthcare's highest-paid employee those years, despite the fact that he left just two months into fiscal 2011.

Salluzzo earned $1,309,308 for fiscal 2011 and $1,095,342 for fiscal 2012, according to forms filed with the attorney general's nonprofit/public charities division. Cape Cod Healthcare's fiscal year starts Oct. 1.

This week, the January 5, 2015 Cape Cod (MA) Times updated the figures,

Three years after he abruptly left Cape Cod Healthcare, former CEO Dr. Richard Salluzzo continued to be one of its highest-paid employees, according to new financial reports filed with the state attorney general’s office.

Since departing the nonprofit organization in November 2010, Salluzzo has taken in more than $3 million in compensation, including $857,953 for the most recent fiscal year on file, 2013.

The compensation made Salluzzo the fourth-highest-paid employee at Cape Cod Healthcare for that period, which started Oct. 1, 2012, according to forms recently filed with the attorney general’s nonprofit/public charities division. The payout is less than what Salluzzo earned in fiscal years 2011 and 2012, which came to $1,309,308 and $1,095,342.

The Board Continues its Defense of the Seemingly Endless CEO Compensation

According to the 2015 Cape Cod Times article, the new board chairman continued the defense of the continuing payment of a CEO who departed over three years ago,

This was a commitment made by the board years ago,' said William Zammer, chairman of the Cape Cod Healthcare Board of Trustees. 'The system was hemorrhaging money, and we were in a terrible position.'

'Salluzzo came onboard and did the job' of shifting the health care system from the red to the black,' Zammer said.

Never Mind the Questions Raised about the CEO Since 2008

This defense, admittedly not as strident as some other defenses by hospital board members of CEO compensation that we have discussed, was maintained despite some pretty significant questions about former CEO Dr Saluzzo since he was hired back in 2008.

Dr Saluzzo's Leadership of Wellmont Health System

This concern goes all the way back to 2009, as reported again by the Cape Cod Times,

Amid the good news, however, comes word from the Wellmont Health System in Kingsport, Tenn., that profits under Salluzzo were significantly less than first reported. A recent audit by a new firm found the system overstated its net earnings for fiscal years 2006 and 2007 by nearly $20 million and lost $4.6 million in 2008. The financial restatement came as a shock to Salluzzo, who said audits during his tenure always came back clean.

'This is a disagreement between auditors,' he said. 'I know my team and I did nothing wrong.'

Wellmont officials, who have not returned phone calls, said in a prepared statement that the audit turned up no evidence of criminal acts. The press release referred to errors in recording expenses, receivables and assets and said the system was imposing a new set of controls to reconcile accounts and strengthen internal auditing.

At that time, the board of Cape Cod Healthcare just seemed relieved that the issue was not criminal,

'There's no indication of fraud, manipulation of funds or personal gain,' [board chairman Thomas Wroe] ... said. 'They changed auditors. Any time you do that, you have a different translation of financial results. We have strong confidence in Dr. Salluzzo. He's been doing a great job for us.'

Saying that there is no indication that a person is a criminal seems like rather faint praise.  Never mind that it was still on CEO Dr Saluzzo's watch that these results, which now appear less than stellar, were produced, and that the belief, not apparently wrong, that CEO Dr Saluzzo produced stellar results at Wellmont was a reason to hire him as CEO of Cape Cod Healthcare.  Never mind that it was on CEO Dr Saluzzo's watch that the Wellmont hospital systems accounting was full of errors, yet it was Dr Saluzzo's financial leadership at Wellmont that apparently endeared him to the Cape Cod board.

Dr Saluzzo Sanctioned by the Massachusetts State Medical Board

In 2011, after Dr Saluzzo left his position as CEO, the Falmouth (MA) Enterprise reported,

Dr. Richard F. Salluzzo, former CEO of Cape Cod Healthcare, was disciplined by the state Board of Registration in Medicine this week for using drugs prescribed to others for his own use and prescribing drugs to family members without keeping proper records.

In particular,

Among the allegations in the board’s investigation of Dr. Salluzzo are that in 2008, before he started at Cape Cod Healthcare, he wrote four prescriptions for Valium for an employee working under him and then asked the employee to fill the prescriptions and give him the drugs. In 2009, while holding the top job at Cape Cod Healthcare, he wrote prescriptions for Zoloft for a friend and filled the prescriptions for his own use.

According to the board’s allegations, he also wrote prescriptions for controlled substances for his wife, his two adult children and his father but did not keep medical records for the family members.

In disciplining Dr. Salluzzo for those actions, the board cites the American Medical Association’s Code of Medical Ethics that 'physicians should not treat themselves or family members as professional objectivity may be compromised and issues of patient autonomy and informed consent may arise.'

In a consent order, Dr. Salluzzo agreed to the ruling and punishment, signing the document on November 1.

At that time, the Cape Cod Healthcare board of trustees responded to the disciplinary measures taken for unprofessional actions by the system's former CEO thus,

Cape Cod Healthcare’s board of directors, in a press release, stated, 'We became aware of a complaint and followed our established policies to ensure that the licensing board was involved in this matter on a timely basis. We then cooperated fully with the Board of Medicine’s investigation.'

The board notes that the Board of Medicine discipline concerns Dr. Salluzzo’s private practice and not his management performance.

'No complaint was ever reported or filed by any patients or physicians here regarding the quality of the clinical care provided by Dr. Salluzzo during his tenure on the medical staff of both CCHC hospitals,' according to the statement.

The board reiterated its statement last year about Dr. Salluzzo’s tenure at the hospital. 'He achieved the goals set for him as witnessed by our financial turnaround and improved relationships with our physicians, then decided to pursue other career challenges and professional interests.'

By the way, the January, 2014, Cape Cod Times article also noted,

On the basis of the Massachusetts disciplinary actions, Salluzzo also was fined and reprimanded in 2012 by medical boards in New York, Tennessee and Pennsylvania — all states where he has practiced medicine in the past.

I would guess that this means that actions uncovered by the Massachusetts board of medicine included some that took place in these other states.  

The real issue raised was not whether Dr Salluzzo's professional actions harmed patients, but whether a physician so sanctioned for unprofessional conduct deserved continuing payments, amounting to millions of dollars, for his previous employment as CEO of  Cape Cod Healthcare. 

The usual justification for extremely high compensation of hired health care managers is their brilliance. Recall that in 2014, well after CEO Dr Saluzzo departed from Cape Cod Healthcare, then chairman of the board of trustees Thomas Wroe gave him accolades for "quality of care."  It seems that one could question the quality of care produced by the leadership of a physician who wrote used subterfuges to obtain controlled substances for himself and his family.  Such questions did not occur to the former chair of the system's board of trustees even by 2014.

Summary

Note that the 2014 Cape Cod Times article quoted W. Michael Hoffman, executive director of the Center for Business Ethics at Bentley University, who called CEO Dr Saluzzo's cumulative compensation "outrageously lucrative."  The 2015 Cape Cod Times article quoted David Schildmeier, spokesman for the Massachusetts Nurses Association, who called it "obscene," and furthermore,

We're paying this failure of a CEO millions of dollars.

Nevertheless, heaven forfend that a hospital board of trustees would try to withhold pay for a CEO, even pay provided years after that CEO's departure, that might violate a previously written contract, even new information discovered might now provide reasons to challenge that contract.

So here is an amazing example in which a former hospital system CEO continues to be rewarded with millions of dollars after he actually left his employment as CEO.  These rewards started even though the financial turnaround he supposedly engineered required layoffs of health care professionals serving vulnerable patients  The hospital system board of trustees continued to authorize, and failed to question these payments even after subsequent revelations that the CEO's initial hiring was apparently based on a false impression of the financial performance of his previous hospital system generated by accounting problems within that system, and that the CEO had behaved unprofessionally in obtaining prescriptions of controlled substances for his family and for himself.

As we have said before, in US health care, the top managers/ administrators/ bureaucrats/ executives - whatever they should be called - continue to prosper ever more mightily as the people who actually take care of patients seem to work harder and harder for less and less. This is the health care version of the rising income inequality that the US public is starting to notice.

 Thus, like hired managers 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. 

One wonders how long the people who actually do the work in health care will suffer the value extraction to continue?

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.

But this sort of reform would challenge the interests of managers who are getting very rich off the current system.  So I am afraid the US may end up going far down this final common pathway before enough people manifest enough strength to make real changes.