A Case Demonstrating Links Between Poor Governance, Conflicts of Interest, and Excess Executive Compensation at a Hospital System

The Salinas Valley Memorial Healthcare System in California first appeared on our radar in 2011 for not only giving an improbably large severance package to its CEO, but doing so two years before he actually retired.   At the time, hospital "officials" gave the usual sorts of justifications we see for huge executive compensation packages.  They suggested the CEO is brilliant, in particular, "gifted and experienced," and that to retain him they needed to pay "private sector-level benefits."  Then it turned out the system was rapidly raising the compensation of other executives while laying off employees who actually took care of patients. 

A Government Audit

Because the system, despite its title, is actually a local government agency, these controversies triggered not only outrage, but also a state audit.  The Los Angeles Times described its results. 

The audit found that the Salinas Valley Memorial Healthcare System regularly did business with firms that the board and top officials had financial stakes in — in some cases in apparent violation of state conflict-of-interest laws.

The report stated that Salinas Valley lacks sufficient safeguards against making decisions that violate conflict-of-interest laws, and that the district therefore can't guarantee 'that it's board members and executives do not experience personal financial gain from its transactions with businesses.'

The audit found 11 instances between 2006 and 2010 in which board members had reported economic ties — including stocks, salaries and other types of payments — to vendors with which the district did business.

Not all the cases represented violations of conflict-of-interest rules, state auditors said, but in two cases they found that officials may have broken the law.

One case involved former Chief Executive Samuel Downing, who had $50,000 in investments with 1st Capital Bank, an institution Salinas Valley and the executive agreed to deposit $1 million into.

In another case, the hospital made $5.6 million in disbursements to Rabobank, where a board member, Harry Wardwell, serves as a regional president and receives a salary of more than $100,000, according to his most recent statement of economic interest.

A San Jose Mercury News article listed some other problems found by the audit:

· Absence of a formal executive compensation policy despite paying its top administrators at the upper end of the industry scale. Downing received a nearly $5 million retirement payout, and other executives received generous pay topping out at $341,000 per year. The reported also cited supplemental pensions, which have been discontinued.

· Violations of state open-meeting laws as the board approved executive pay.

· Failure to ensure all employees who are required to file statements of economic interest had done so.

· Absence of a duly approved, legally binding conflict of interest code, which must be approved by the county Board of Supervisors. The report noted the hospital board instituted a properly approved code in December.

· Lack of proper documentation on the selection process for no-bid contracts, necessary to ensure the hospital gets the best value for its money. The report found only one of eight contracts reviewed during the audit included such documentation.

· Need for better oversight of hospital funding of community events, including the rationale for why and how they benefit Salinas Valley Memorial, to adhere to the ban on making gifts of public money. The report found the board delivered $54,000 to California Rodeo Salinas without any evidence it had considered how it furthered its public purposes.

Conclusions

First, this case should not be viewed as an indictment of hospitals run by local governments.  Rather than indicating that bad behavior is particularly likely at such hospitals, the fact that questionable behavior came to light at such a hospital is more likely due to better regulation of such hospitals leading to more transparency about them compared to other hospitals.  The regulations and laws governing the operations of non-profit hospitals not run by government agencies, or for-profit hospitals vary from US state to state.  To my knowledge, rarely do states strictly regulate conflicts of interest affecting, or require much transparency about governance at hospitals that are not government run.  There is a similar lack of state regulation of for-profit hospitals, and federal regulation of either non-profit or for-profit in these areas.  Thus it is extremely rare to see an audit or report about any non-governmental hospital like the one about Salinas Valley Memorial Healthcare.  Without the greater transparency produced by such investigations, there is little data about whether the practices seen at Salinas Valley are common at other hospitals, be they government run, non-profit and private, or for-profit.   

However, while this is just one case, it does allow an interesting comparison.  We have discussed the usual "talking points" proffered by management and boards to explain outsized compensation packages in health care.  They often include statements about the brilliance of the executives in question, almost never with any supporting evidence, and the need to pay "market" rates.  Although these, and other talking points may seem implausible, they are hard to challenge, because hospital and other health care organizations are usually able to conceal the processes which actually lead to compensation decisions. 

However, in this case there is documentation of problems with governance processes which may have plausibly enabled unjustified levels of compensation.  Failure to maintain processes to disclose and deal with conflicts of interest could increase the likelihood that conflicts would occur.  A board that included individuals who may have been personally profiting from their board membership might be inclined to go along to get along with the CEO.  Meeting in secret despite an open meeting law would prevent discovery of cronyism.

This case therefore suggests that governance that lacks transparency, accountability and integrity may lead to self-interested, conflicted leadership that responds to perverse incentives.  Such leadership is likely to pay more attention to its own interests than the health care mission, short-changing patients' and the public's health.

So once more with feeling.... health care organizations need leaders that uphold the core values of health care, and focus on and are accountable for the mission, not on secondary responsibilities that conflict with these values and their mission, and not on self-enrichment. Leaders ought to be rewarded reasonably, but not lavishly, for doing what ultimately improves patient care, or when applicable, good education and good research. On the other hand, those who authorize, direct and implement bad behavior ought to suffer negative consequences sufficient to deter future bad behavior.

If we do not fix the severe problems affecting the leadership and governance of health care, and do not increase accountability, integrity and transparency of health care leadership and governance, we will be as much to blame as the leaders when the system collapses.

More Revelations About How Top Managers Prosper While Care-Giving Employees are Laid Off This Time Leads to Labor Strife

Last month, we discussed the contrast between executive compensation at Salinas Valley Memorial Healthcare System (SVMH), a small California public hospital system, and the treatment of employees in the trenches. While the hospital had laid off workers ostensibly because of the poor economic climate, the local newspaper revealed that its CEO was leaving with a multi-million dollar retirement package, and that some of his supposed severance pay had been given him before he was severed.

This month, amidst growing labor unrest partially driven by the disparate treatment of the hired top manager and the more lowly employees who actually take care of patients, a new report revealed further contrasts between how hired executives and "regular" employees are treated.

Let me give a blow by blow summary in chronological order.

The Employees Strike

This month, the hospital system suffered its first strike ever, partially in response to the discrepancy between executive compensation and how lesser employees were treated.  According to the Los Angeles Times:

About 850 workers at a Salinas public hospital went on strike Tuesday, about two months after revelations of a multimillion-dollar pension awarded to the hospital's CEO.

Caregivers at Salinas Valley Memorial Hospital walked off their jobs at 6 a.m., according to representatives of the National Union of Healthcare Workers. The workers are protesting proposed layoffs and cuts to their retirement benefits as well as pay given to hospital executives and consultants.

The Times reported in April on the retirement package granted the hospital's outgoing chief executive, Samuel Downing, which included about $5 million in supplemental payments along with a $150,000 annual benefit. Hospital officials and board members have defended the package, saying that Downing was a successful leader throughout his 27 years as CEO.

The hospital workers' union has been negotiating with administrators since January and indicated its plan to strike earlier this month, according to union vice president John Borsos.

'There's a sense of disbelief here that the hospital can come up with millions of dollars for Downing's retirement and millions for their consultants, but when it comes to caregivers by the bedside, they say they can't find the money,' he said.

The Management's Lock-Out

Then, hospital managers' responses to the strike provoked more anger from union members, and one state agency affirmed their complaints, according to The Californian:

The California Public Employment Relations Board issued a five-page complaint against Salinas Valley Memorial Healthcare Systems, alleging that the public hospital district violated several sections of state labor law when it barred striking workers from returning to their posts Wednesday.

Prompted by charges brought by the National Union of Healthcare Workers, PERB Regional Attorney Katharine Nyman charged SVMH with committing unfair labor practices and with violating PERB regulations in the way it blocked workers from going back to work after Tuesday's one-day labor walk-out.

Strikers Picket a Board Member

Then, the union escalated its protest by picketing the house of the hospital board treasurer, according to television station KION:

Thursday morning, some union members took their demonstration from the front entrance of SVMH directly to the home of Harry Wardwell, Treasurer of the SVMH Board of Directors and President of Rabobank. 129 employees were still unable to go back on the job, replaced by temporary workers for one more day.

Wardwell is one of five publicly elected members of Salinas Valley Memorial Healthcare System's Board of Directors.

'We have to draw the Salinas community and everybody in the hospital district. Every resident in this neighborhood votes and they need to know that Harry Wardwell is making these cuts,' said Marilyn Benson, an NUHW member.

How Executive Pay Rose Faster than Inflation While Employees Were Laid Off

Just after that protest ended, The California published a new article about executive compensation:

At the same time it laid off hundreds of rank and file employees, the Salinas Valley Memorial Healthcare System steadily provided generous increases to the salary and benefits packages of its senior executive team, records show.

SVMH vice presidents Bev Ranzenberger, John Fletcher, Dr. David Perrott, Elizabeth Lorenzi, Irene Neumeister and James Griffith all received double-digit increases in their total compensation packages during the years of 2005 through 2010 according to an SVMH document obtained by The Californian on Thursday.

And while not all of the vice presidents received salary increases every year during that time period, they all received percentageincreases in total salary and benefits of 29.4 percent to 153.8 percent, which translates to annual average increases of between 5.9 percent and 30.8 percent. By comparison, for the12 months that ended in May, the national rate of inflation rose just 3.6 percent, based on the Consumer Price Index.

News of the increases incensed National Union of Healthcare Workers leaders whose members went on a one-day strike Tuesday after declaring an impasse with health care district management over wage and benefit issues and over how many more employees will be laid off as SVMH continues to struggle with reducing costs.

'How could a majority of the board approve of the outrageous salary increases while claiming that the hospital had to lay off hundreds of caregivers out of financial necessity?' asked union vice president John Borsos. 'It's not just hypocritical, but it demonstrates that the hospital has more than enough money to keep caregivers at the bedside.'

Note that the SVMH leadership's defense of the pay given top executives was typical of explanations of outsize pay given to other health care leaders:

But according to SVMH spokeswoman Adrienne Laurent, the executives' salaries are in keeping with industry standards and have been reviewed by an outside consulting agency for appropriateness.

"Compensation for our hospital executives is not taken lightly, and that's why our [Board of Directors] engaged an outside, third party to assist us in this process. An important goal set forth by our board is that all of our employees, including our executives, receive compensation that is comparable to our competitors. In order for us to successfully recruit and retain the best people, it is critical that we remain competitive with not only other public district hospitals, but also private companies," Laurent wrote in an email to The Californian.

In her email, however, Laurent did not address the seeming disparity of the institution increasing executive salaries while at the same laying-off employees.

Laurent also added that the six SVMH vice presidents do not enjoy some of the standard perquisites offered to executives at other health care institutions such as bonuses and car and cellphone allowances.

It must be tough having to pay for a cell-phone package when one's salary is only somewhat in excess of a quarter-million dollars a year.

Note that the irony of defending high pay to recruit "the best people" to executive positions while health care professionals are being laid off seemed to escape Ms Laurent.
Summary

Once again we see how the notion that "top management are different from you and me" plays out throughout the health care system. Even at a small public community hospital system, the top hired managers seem to feel entitled to be treated differently, and much better than other employees, even those who directly care for patients.  Top hired managers do not flinch at the doublethink necessary to use poor financial results as a rationale for laying-off line employees, but simultaneously for hiking the pay of top hired managers.

Again, we see how top hired managers of all sorts of health care organizations, big and small, for-profit, not-for-profit and government, delivering direct care, and manufacturing products used in care, have become accountable only to themselves. This situation, of course, produces health care done first for the benefit of its new overlords.

The case of Salinas Valley Memorial Healthcare, however, also now demonstrates that this situation is starting to produce reactions.  It now seems that the ordinary employees of health care organizations are not continuing to welcome their new overlords. SVMH endured its first strike ever mainly in response to the disparity between how top hired managers treated other employees and treated themselves. Angry employees publicly identified the board of trustees that seemed to exert no functional oversight over top management as part of the problem. I suspect that if current trends continue, we will see more labor unrest, and that unrest will be directed at hired managers and those who are supposed to oversee them.

This may eventually yield major changes in how health care is lead, but if the confrontations continue, these changes may be very messy, and continued strife may end up being bad for everyone.

Instead, we should consider real, peaceful health care reform. As I have repeated endlessly,... health care organizations need leaders that uphold the core values of health care, and focus on and are accountable for the mission, not on secondary responsibilities that conflict with these values and their mission, and not on self-enrichment. Leaders ought to be rewarded reasonably, but not lavishly, for doing what ultimately improves patient care, or when applicable, good education and good research. On the other hand, those who authorize, direct and implement bad behavior ought to suffer negative consequences sufficient to deter future bad behavior.


If we do not fix the severe problems affecting the leadership and governance of health care, and do not increase accountability, integrity and transparency of health care leadership and governance, we will be as much to blame as the leaders when the system collapses.