A $1 Million CEO for a $27 Million Corporation

From the Seattle Times comes a story of how top executives in biotechnology may be paid for lack of performance,

Even in a disastrous year on Wall Street, Cell Therapeutics stood out in 2008. Its stock price dropped 99.25 percent.

But the cash-strapped Seattle biotech's top five executives had reason to celebrate Dec. 31: That day they were awarded year-end bonuses totaling more than $1 million.

Chief Executive James Bianco, who has run the company since founding it in 1992, was awarded a $487,500 bonus to supplement his $650,000 salary and other perks.

Cell Therapeutics' eight board members, who include Bianco, chose to pay 75 percent of the bonuses in cash, and will decide March 1 whether 'the company is sufficiently liquid to pay the remaining amount.' In other words, the board wasn't certain Cell Therapeutics would be able to spare the $250,000 to complete its New Year's gift to top management.

Here's another way to put the bonuses in context: Cell Therapeutics' market capitalization is about $27 million, according to Bloomberg. If Starbucks (which had a difficult 2008 but only lost half its stock value) gave its top five officers a bonus equal to one-twentyseventh of its market cap, the execs would walk off with about $270 million.

Cell Therapeutics is Seattle's oldest surviving public biotech and has the longest-reigning CEO. The company has lost a remarkable $1.3 billion over the past 16 years, with no sign of stopping. Its board chairman since 2006 is longtime director Philip Nudelman, the former president and CEO of Group Health Cooperative.
Company spokesman Dan Eramian, one of the five New Year's Eve awardees, says that 'in this market environment, stock prices are not valid measures of company performance.' He defends the bonus awards, saying executives at the 110-employee company have not had a raise in their base salary since 2005.

During that period, however, Cell Therapeutics has been an even bigger loser than Washington Mutual, as shares went from a split-adjusted $310 on Jan. 1, 2005, to the current penny-stock level, 11 cents on Friday.

And, Bianco had the highest base salary of all the local biotech leaders, including companies with 30 times the market value of Cell Therapeutics.

You just can't make this stuff up. This is an illustration of how the main beneficiaries of the our dysfunctional health care system are the top leaders of health care organizations. It seems that no matter how badly their organization performs, the top leaders always do very, very well. In this case, bonuses equal to about 4% of the corporation's entire market value went to top executives at a time when the board thought the company was in danger of completely running out of cash.

So who was responsible for giving more than $1 million to the CEO of a company whose market capitalization was $27 million? Looking over the company's board members, we see two familiar names.

The first such Cell Therapeutics board member is Vartan Gregorian, currently President of the Carnegie Corporation. Mr Gregorian was President of Brown University (in the spirit of full disclosure, my alma mater, and where I currently hold a voluntary faculty appointment) at the time Dr David Kern was forced off the Brown faculty. As we discussed briefly here, and Dr Aubrey Blumsohn discussed in more detail here, Dr Kern lost his position as head of occupational medicine, and ultimately his faculty position after he insisted on presenting an abstract about a new occupational disease over objections by officials at the company whose workers were afflicted with it. The company threatened a lawsuit over what it claimed was Kern's breach of a trade-secrets agreement. Brown officials blamed Kern for signing the agreement, even though the agreement was unrelated to the research Kern did on the disease, and his research did not obviously reveal any trade secrets. Gregorian refused appeals from Kern (see here), and at one time asserted that the occupational medicine program Kern lead did not exist (see here), despite obvious evidence to the contrary.

The second such Cell Therapeutics board member is Mary Mundinger. Ms Mundinger was on the board of directors of UnitedHealth, and in that position served as a cheerleader for Dr William McGuire, former CEO of the company who retired abruptly after allegations that he received more than $1 billion in back-dated stock options. A 2006 Pulitzer Prize winning article in the Wall Street Journal quoted her thus, "We're so lucky to have Bill. He's brilliant." Dr Mundinger's support of McGuire lead Institutional Shareholder Services (ISS) Inc. and Proxy Governance Inc, to suggest that institutional investors withhold votes for her in the 2006 board election (see post here.) We most recently summarized these leadership issues at UnitedHealth here.

So it often seems that not only do health care organizations often have bad leaders, but also that there is a web of bad leadership in health care. Questionable leaders often cross-link across organizations. The boards of directors of for-profit corporations, and the boards of trustees of not-for-profit organizations often are packed with the cronies of the organizations' hired executives. These board members are often current or former executives and managers. So these boards often seem more sympathetic to the financial fortunes of the CEOs they are supposedly supervising than to the mission of their organizations or its other constituencies, whether they be stock-holders, employees, health care professionals, patients, or the general public.

To improve health care, we thus need major changes in the governance of health care organizations, making it more representative of important constituencies, devoted to the mission, accountable, transparent and subject to ethical rules. Doing so would require ensuring that the boards of directors and trustees of health care organizations put the mission of the organizations ahead of the enrichment of its hired executives.

A More Entangled Web: the UnitedHealth Case

More issues are surfacing regarding the question of whether stock options given to top executives of UnitedHealth Group were back-dated. We have posted frequently on this topic, most recently here (and see links within to earlier posts.

According to multiple news sources, (see, for example, this article by Melissa Davis in TheStreet.com), UnitedHealth has delayed its latest quarterly report "due to possible accounting changes that could prove material in nature. The changes, if necessary, would reflect the rising value of options issued to company employees -- including massive grants to CEO William McGuire -- and drive up reported expenses as a result." Several analysts proposed that this delay indicates more severe problems with the stock options than were heretofore anticipated.

Bloomberg News noted that the board of directors that approved the huge grants of stock-options to UnitedHealth CEO Dr William McGuire was itself particularly well compensated, especially in terms of stock options.

UnitedHealth's 10 non-executive directors held $230 million in stock as of March 21, according to the health insurer's most recent proxy. Director Richard Burke, who joined the board in 1977, had $169 million in shares, while Douglas Leatherdale owned $47 million. The directors, including former New Jersey Governor Thomas Kean and former Fannie Mae chief executive officer James Johnson, held more than 3.1 million stock options, whose underlying value is about $175 million.

Each UnitedHealth director makes at least $400,000 a year, counting pay and exercisable options, according to Jesse Fried, a professor at the law school of the University of California at Berkeley. The Corporate Library, a Portland, Maine-based governance group, says UnitedHealth had the eighth-best- compensated board in the nation in 2004, with total compensation of $5.4 million.

The outside directors are paid in a combination of cash and options grants. According to the April 7 proxy, they get an annual cash retainer of $30,000, plus payments for each board and committee meeting attended. They also get an initial one-time option to buy 58,000 shares, plus quarterly options to buy 8,000 shares, or 32,000 options a year for each year they serve.

The initial grants are exercisable over three years, while the quarterly grants can be exercised immediately. The price of the initial options is set by the closing price of UnitedHealth stock on the day the director is elected, which is at the annual meeting. The price of the quarterly options is set by the closing price of UnitedHealth shares the first business day after the quarter ends, the proxy says.

As of March 21, the three members of the compensation committee -- Johnson, 62, the chairman, Mary Mundinger, 68, dean of Columbia University's school of nursing, and William Spears, 67 -- held a total of more than 1.1 million options, the company's proxy shows. Spears also held $3.7 million in stock and Mundinger held $1.8 million.

Some commentators suggested a discrepancy between the magnitude of the board members' compensation and the extent of their efforts supervising McGuire and other top executives. For example, Patrick McGurn, Executive Vice President of Institutional Shareholder, said,

This is the no-show board of all time in terms of the job they did in overseeing compensation.

They handed the reins over to management and played the roles of cheerleader.

Finally, the Pioneer Press has been investigating other potential conflicts of interest affecting the UnitedHealth board of directors. These conflicts are important because,

With options under scrutiny at more than 80 companies so far, regulators and prosecutors haven't the resources to conduct full-blown forensic probes of every company. They often rely on companies' own internal inquiries to do the initial digging that helps authorities decide whom to pursue most vigorously. In addition, the companies rely on these internal probes, either to show the public they've been diligent or to defend against shareholder suits.

In these probes, 'if the government catches wind of issues affecting independence, they will naturally be more skeptical and less trusting of the process and the results,' said W. Scott Sorrels, an Atlanta attorney who has conducted investigations for corporate boards in the past. Sorrels, not speaking of any particular company, said, 'We advise companies to avoid any appearance of impropriety so you don't have the situation blow up in your face six months down the road after the investigation is done.'

One conflict affected board of directors member Thomas H. Kean, former governor of New Jersey, who was a member of the compensation committee.

The same day as the [May 1] board meeting, some UnitedHealth directors and executives were supporting a campaign by Kean's son for a U.S. Senate seat from New Jersey. Some of them attended a fundraiser for Tom Kean Jr. that day, in UnitedHealth's home state of Minnesota.

It isn't clear whether McGuire and his wife attended but each donated $2,000 to the cause. So did Richard T. Burke, who sits on a special board committee that is overseeing the options investigation. All told, UnitedHealth-affiliated donors have contributed $25,000 to the campaign.

When the donations to the Kean Senate campaign were described to former SEC Chairman Harvey Pitt, he said they struck him as 'ill-advised and strange' and something that could be seen as an attempt to influence a witness because of the senior Kean's role on the compensation committee.

A spokeswoman for the Kean campaign said the fundraising came at a 'UnitedHealth breakfast' hosted by Minnesota Republican Sen. Norm Coleman, and there was absolutely no effort to curry favor with the elder Kean. The former New Jersey governor didn't return calls seeking comment.

Another involves board compensation committee member William Spears,

One longtime UnitedHealth comp-committee member, William Spears, is a money manager with the New York firm Spears Grisanti & Brown LLC. The firm appears to manage money for McGuire's family foundation. In tax filings covering two recent years, the foundation put the name of Spears' firm atop a list of its securities transactions. A partner in the firm, Christopher Grisanti, said privacy regulations barred him from saying whether the foundation was a client. Spears didn't return messages seeking comment.

Another involves board compensation committee member Mary Mundinger. We have previously posted about Mundinger, since she is also a Professor and Dean of the School of Nursing at Columbia University. We proposed that Mundinger's fiduciary duties to the shareholders of UnitedHealth may be at odds with her duty to uphold the mission of Columbia University and its School of Nursing. The university's academic medical center must undoubtably deal with managed care organizations that compete with UnitedHealth, or with UnitedHealth directly.

Another longtime member of the health insurer's compensation panel is Mary Mundinger, dean of the Columbia University nursing school. Mundinger has championed the idea that nurse practitioners can provide high-quality primary care, and in the mid-1990s she shepherded a pioneering project to create a nurse-practitioner clinic in New York. The support of health insurers was critical to getting patients to use it, and UnitedHealth was among several insurers to sign on. In media interviews at the time, UnitedHealth officials spoke approvingly of her project.

The anecdote again illustrates the complex relationships between Mundinger's academic work and her duties to UnitedHealth.

There are at least two major issues here for health care.

One is the continued and ever more glaring contrast between UnitedHealth Group's stated mission, to

* Improve access to health and well-being services;

* Simplify the health care experience;

* Promote quality; and,

* Make health care more affordable.

and the largesse it granted to its top leaders, executives and board members.

The second is the more and more apparent web of conflicting interests that entangles many health care organizations who are ostensibly supposed to be operating at arms' length. This web is of particular concern when it entangles leaders of academic medicine with simultaneous duties to uphold the interests of corporate stockholders. The interests of the stockholders may be at variance with the missions of the academic leaders' institutions. (And note that the UnitedHealth Group board of directors includes Donna Shalala, the President to the University of Miami, and hence the leader to which the university's medical school and academic medical center reports, and Gail Wilensky, a well-known health services researcher at Project HOPE.)

To Whom Do "Udidoos" Owe a Duty?

We recently posted at length about the negative consequences of the growing control of managers and bureaucrats over health care. This may have been inspired by the call of one of the key advocates of managed care, Alain Einthoven, to break up the supposed physicians' "guild."

This theme seems to be on many minds. Philip Alper writes an interesting, pithy column on medicine and health care for the Internal Medicine World Report, (unfortunately not available on the web). In his February column, he took up the issue of the intrusion of managers and bureaucrats into practice.

He coined the term "udoos" for those who say "you do this and you do that," "udids," for those who "chillingly remind us that 'you did this and you did that." He noted, "both types are familiar to physicians because authority figures and critics with whom we interact characteristically speak this language."

Further, the managers who must "redress our [physicians'] failures," he termed "udidoos, who offer 'because'-based prescriptions for doing better in the future. Udidoos simultaneously creat guilt and the promise of expiation. Consequent anxiety pushes us to accept the controls of managed care, for example, no matter what doubts we may privately harbor about their utility or effectiveness."

Alper went on to critique The Future of Primary Care, edited by Showstack et al. He took particular exception to a chapter by Mary O'Neill Mundinger, RN, DrPH, Dean of the Columbia University School of Nursing, whom he would apparently would consider a "udidoo." The chapter was entitled "Advanced Practice Nurses: The Preferred Primary Care Providers for the 21st Century."

Mundinger's prescription as a "udidoo" was for advanced practice nurses (APNs) to take over from primary care physicians. As Alper wrote, "the underlying notion is that nurses are better suited than physicians to be primary care providers. There is no attempt at collegiality here. Dr Mundinger has previously written about why nurses should be paid the same as doctors (they get equal results). Now she wants not only to replace the primary physician but also commandeer their title." Alper finally decided,

Maybe the best thing to do is to just laugh. Even gallows humor certainly beats crying - or going crazy.

Although I do not have a copy of the book, Mundinger has made similar assertions elsewhere. For example, in Pediatrics,(1) she wrote that physicians should be subservient to nurses (and others) in health care teams, "the disease specialist - the pediatrician - merits leadership of the team only when disease is the major concern. At other times, it may be the nurse practitioner... who directs the team." And she asserted that pediatric nurse practitioners are more competent than some physicians in caring for children: "it is questionable that non-pediatric physicians are more qualified to care for children than pediatric nurse practitioners. Education for non-pediatric physicians is often limited to 1-month clerkships in pediatric medicine during the third year of medical school." Furthermore, she claimed these nurse practitioners spend five times as much time in pediatric training than do family physicians.

In a review article in Academic Medicine,(2) Mundinger claimed "APNs - whose advanced primary care is delivered with full accountability and is indistinguishable from such care delivered by physicians - offer a different style of practice, which involves caring, nurturing, support, engagement with patients, attention to illness prevention and health promotion, and patient education."

Mundinger was the lead author of the study that claimed outcomes of patients seen by nurse practitioners in ambulatory settings were comparable to those seen by primary care physicians.(3) The study received wide attention, although its external validity was questioned.(4)

Mundinger's advocacy of nurse practitioners as substitutes for and superiors to physicians is helpful for the managed care organizations Alper criticized. Nurse practitioner care currently costs less than physician care. Although physicians have not always loudly expressed their doubts about managed care, as Alper noted above, nurses are not likely to be more vocal.

But while I read Alper's commentary, and then Mundinger's writing, a small voice in my head reminded me that I had just seen her name before. But where?

Ah yes, it was here. A while back, we commented on the irony that Donna Shalalaw, living the good life as president of the University of Miami, was as on the board of directors of UnitedHealth Group, a large commercial managed care organization whose public mission includes making health care more "affordable," while the University of Miami's outsourced maintenance workers, including those who worked at its medical center, had no medical insurance.

On the roster of UnitedHealth Group's board of directors also was the name of Mary O'Neill Mundinger DrPH. She has been on the board since 1997. If one goes to the Columbia University School of Nursing web-site, Dr Mundinger's biographical page does include her directorships (of Welch Allyn, Gentiva Health Systems, Cell Therapeutics as well as UnitedHealth Group). However, none of the articles cited below(1-3) mention her seemingly important conflict of interest. And Dr Alper informed me he saw nothing about it in the book chapter she wrote that he critiqued.

Thus, she has had a fiduciary duty to UnitedHealth Group and its stock-holders since 1997. And it would clearly seem to be in the interest of UnitedHealth Group to reduce its costs by paying for more care by nurse practitioners, and less by physicians. So how much of Mundinger's advocacy of advanced practice nurses to replace physicians is based on her academic work, and how much is based on her duties to UnitedHealth? I cannot tell.

But readers of her work up to now would never have thought of this question, unless they fortuitously had learned about her responsibilities to UnitedHealth from some other source.

In summary, it seems that the more one looks, the more examples one finds of leaders of academic health care organizations who also are directors of health care companies. Yet these often influential figures have not always revealed their conflicts when writing about health care, even when their works relate to the interests of the companies whose interests they are legally bound to protect. So how much of their influential work reflects their professional and academic research and beliefs, and how much reflects their fiduciary responsibilities to commercial organizations? Inquiring minds really want to know.

References
1. Mundinger MO. Toward a quality workforce. Pediatrics 2003; 112: 416-418.
2. Mundinger MO. Twenty-first century primary care: new partnerships between doctors and nurses. Acad Med 2002; 77: 776-780.
3. Mundinger MO et al. Primary care outcomes in patients treated by nurse practitioners or physicians: a randomized controlled trial. JAMA 2000; 283:59-68.
4. Sox HC. Independent primary care practice by nurse practitioners. JAMA 2000;283:106-108.