Haunted by US Healthcare Inc - $27.9 Million/Year Aetna CEO Threatened Obamacare Pullback in Apparent Retaliation for Government Anti-Trust Litigation

We do not write about health insurance and managed care as much as we used to.  Dysfunction in this area now gets much media attention.  US Physicians frequently complain that bureaucratic impediments imposed on them by health insurance and the government  are major causes of health care dysfunction. 

However, managed care was at the sharp edge of the movement to change the focus of health care from individual patients cared for by individual professionals and at local hospitals, to an (unregulated) business dominated by huge corporate entities.  The wedge with that sharp edge has now driven very deep.  So it may be instructive to look at what is going on now.

The Proposed Aetna-Humana Merger

In 2015, the big news in the US health insurance sphere were big mergers.  One example was the proposed merger between Aetna and Humana.  An Aetna press release trumpeted that the

Combined Entity ... [would] Drive Consumer-Focused, High-Value Health Care

That it would have the

Ability to Lead Effort to Transform Health Care Delivery to a More Consumer-Focused Marketplace

And that it will

Improve Affordability, Quality and Convenience for Consumers

What could possibly go wrong?

Up to now, mergers that created ever bigger drug/ device/ biotechnology companies, hospital systems, and health insurance companies got little US government opposition.  After all, the fashion among health care managers and health policy experts as been to extoll all the efficiences and advantages large organizations could provide, usually absent much evidence in support of this contention. (See, for example, the press release above, and see what we have written about concentration of power.)

The Government Wakes Up to the Anti-Trust Issue

But this time, the government eventually indicated it might push back.  In July, 2016, as reported by the NY Times,

United States Attorney General Loretta E. Lynch announced that the government had filed lawsuits to block the deals, between Aetna and Humana and Anthem and Cigna.

The proposed mergers, she said, 'would leave much of the multitrillion-dollar health insurance industry in the hands of three mammoth insurance companies.'

'If these mergers were to take place, the competition among insurers that has pushed them to provide lower premiums, higher-quality care and better benefits would be eliminated,' she said.

The companies responded by vowing, in varying degrees, to fight the government’s challenge. Aetna, which had hoped to gain an advantage by being the first to reach a deal, aggressively defended its proposed merger, which it contended was different from the larger Anthem-Cigna deal that followed.

'I like my chances in front of a judge,' Mark T. Bertolini, chief executive of Aetna, said in an interview.

 Parenthetically, I wonder what evidence she had that previous competition had led to "lower premiums, higher-quality care and better benefits" up to now, but I digress.

Aetna Suddenly Abandons ACA Exchanges

Soon after that, Aetna announced it was pulling out of the "markets" created by Obamacare, aka the Affordable Care Act (ACA), e.g., per CNBC.

Aetna is sharply cutting its participation in Obamacare exchanges for 2017.

The health insurer said it will offer individual Affordable Care Act exchange plans in just four states, down from 15 this year, in an effort to reduce its losses.

'As a strong supporter of public exchanges as a means to meet the needs of the uninsured, we regret having to make this decision,; Chairman and CEO Marc Bertolini said in a statement.

This despite the fact that

as recently as April, Aetna's Bertolini had expressed strong support for the exchanges, telling analysts that it would have cost the company more than a $1 billion to acquire the million new customers it had signed up on Obamacare exchanges.

Cut to Michael Hiltzik writing for the Los Angeles Times. As he noted,

Aetna’s announcement this week that it was pulling out of most of the states where it was serving the Obamacare individual exchanges was a head-scratcher; after all, just three months earlier, Chief Executive Mark Bertolini was calling its participation in the market 'a good investment,' despite near-term losses.

Bertolini also had tried to tamp down speculation that its withdrawal was anything like a payback for the government’s move to block its $37-billion merger with Humana. That was 'a separate conversation' from its evaluation of the exchange business, he said during an Aug. 2 conference call with Wall Street analysts.

However,

Now evidence has emerged that Aetna was lying. The smoking gun is a July 5 letter from Bertolini to Ryan Kantor of the Justice Department, unearthed by Jonathan Cohn and Jeffrey Young of the Huffington Post via a Freedom of Information Act request. In the letter, sent before the DOJ formally announced it would sue to block the Humana deal, Bertolini explicitly ties the two issues together.

'Our analysis to date makes clear that if the deal were challenged and/or blocked we would need to take immediate actions to mitigate public exchange and ACA small group losses,' Bertolini wrote. 'Specifically, if the DOJ sues to enjoin the transaction, we will immediately take action to reduce our 2017 exchange footprint. We currently plan, as part of our strategy following the acquisition, to expand from 15 states in 2016 to 20 states in 2017. However, if we are in the midst of litigation over the Humana transaction, given the risks described above, we will not be able to expand to the five additional states.'

So to review, Aetna and Humana, already large for-profit managed care organizations/ health care insurance companies announced a merger, proclaiming it was all about better, higher value care for patients .  The government begged to differ.  Aetna suddenly announced its retreat from government backed insurance markets.  Its CEO denied that move was retaliation, but was allegedly "lying."

Why am I not surprised by Aetna's apparent untrustworthiness?

The History of US Healthcare Inc

As we just discussed, many large health care organizations are the products of mergers, acquisitions, and other kinds of financial engineering.  This makes their corporate history and culture much harder to comprehend.

In particular, let us not forget that the current Aetna is a product of the merger of US Healthcare Inc and Aetna in 1996.  Many readers may not remember much about this merger, and it may have occurred before others' time.

Promises of Wonders to Come

In short, US Healthcare Inc was one of the earliest for-proft managed care companies.  A 1996 Philadelphia Inquirer story described its origin.  It was started by Leonard Abramson, based on work done in the early 1970s. 

By the early 1970s, Abramson had shifted gears and gone to work for R.H. Medical Inc., a small but innovative hospital-management company then headquartered in Cheltenham.

Abramson held the title of vice president for corporate development. But even colleagues didn't know what that meant. `Nobody knew him,' one former R.H. Medical executive says. 'He was running some project nobody knew anything about.'

The project Abramson was running turned out to be a prototype of the health maintenance organization a prototype of the health maintenance organization: a new form of health plan that turned a la carte medicine on its head by paying doctors and hospitals set, all-inclusive fees for their services, instead of paying each and every time they treated a patient.

The idea was to change the incentives from doing more to doing only what was appropriate and kept the patient healthy, Abramson once said. In short, it was a lower-cost alternative to the inflationary fee-for-service medicine then in vogue.

Managed care has been promising lower costs for patients and society, better access, and higher quality for a long time.  Yet, there was never any good evidence that it ever really was "a low-cost alternative" for patients, and while it helped enable the decline of fee-for-service medicine, its alternative was not obviously less "inflationary."

Making the Insiders Rich


On the other hand,  US Healthcare Inc was good at extracting a large amount of money from the health care system to benefit its founder and CEO, and his family tremendously wealthy. Again per the Inquirer in 1996,

Abramson's 1993 salary of $3.52 million, based on a 40-hour week, worked out to $1,692.30 an hour. That's not including his $6.3 million in stock options.  [That would be total compensation of at least $9.82 million in 1993.]

A 1995 proxy listed Abramson's 1994 base salary at $1.8 million, plus a bonus of $1.6 million.

Forbes magazine estimated his 1994 worth at $780 million, making him No. 110 among the 400 richest people in America. He was ranked that year as the Philadelphia area's highest paid CEO of a publicly traded company.

In addition,

He's made sure his children haven't had to struggle. A proxy report showed U.S. Healthcare paid daughter Nancy Wolfson $239,999 in salary and bonuses in 1993, and her husband, Richard, who directs the pharmacy and dental operations, $270,000. Another daughter, Marcy A. Shoemaker, made $280,000.

Company shares also are held in trust for Abramson's grandchildren.

Angry Doctors and Allegations of Worse Care

While the company provided monetary advantages to its insiders, but not clearly to patients or society, I remember US Healthcare Inc from my days as a fellow and then junior faculty member in the Philadelphia area as rather a nasty player.  At the time of the 1996 merger, a Philadelphia Inquirer story about the CEO of US Healthcare Inc stated

U.S. Healthcare is considered one of the nation's toughest HMOs....

And retold

a joke making the rounds in Philadelphia-area doctors' lounges:

[US Healthcare CEO Leonard] Abramson dies and goes to heaven, where he compliments God on what a great place he has. 'Don't get too comfortable,' God advises. 'You're only approved for a three-day stay.'

The Philadelphia Inquirer separately described Mr Abramson thus:

to his detractors in the health-care industry, Abramson is anything but charitable. They view him as a ruthless, bottom-line-oriented executive who has made himself and his Blue Bell company fabulously wealthy while ratcheting down payments to hospitals and skimping on patient care.

For years, some of the most prestigious hospitals in Philadelphia refused to sign contracts with U.S. Healthcare. Those that did often complained bitterly about the hard-line negotiating style of Abramson and his colleagues, which resulted in lower reimbursement rates for the hospitals.

The story concluded,

 Abramson continues to receive heavy criticism from some in the health-care industry. These critics say his HMOs have stressed profits and shareholder value over quality patient care.

So US Healthcare Inc was one of the first important US for-profit managed care organization.  It promised lower costs for patients and society, and better health care.  While there is no evidence these promises were fulfilled, it made its top insiders very wealthy, while alienating health care professionals, many who thought it led to worse health care for their patients.

This pattern repeated when Aetna merged with US Healthcare.

The Aetna - US Healthcare Merger

 Promises of Wonders to Come

When the merger between Aetna and US Healthcare Inc was proposed, according to the Philadelphia Inquirer in 1996,

The deal would put the new company in a position 'to redefine the way in which medical care is delivered in the country,' said Aetna chairman Ronald E. Compton, who would serve as the combined firm's chief executive. 'U.S. Healthcare was the best possible partner for Aetna. . . . This is, no kidding, a once-in-a-lifetime opportunity to create a model for exceptional' health care.

Yet in retrospect there is no evidence that the merger produced "exceptional health care," at least not exceptional in terms of being exceptionally good for patients.

Making the Insiders Rich

But like the old US Healthcare Inc, Aetna did succeed in making its CEOs very wealthy.  In 2012, we noted that the first new CEO of the combined entity, Dr John Rowe, was to get an initial salary of $1 million and bonuses of $1 to $3 million to start in 2000.  And by 2010, as we posted here, according to its 2010 proxy statement, Aetna CEO Ronald A Williams' total compensation in 2009 was a mere $18,058,162. Other top executives made proportionate amounts, from more than $1 million to more than $12 million.

In 2015, as noted by the Hartford Courant,

Aetna Chairman and CEO Mark Bertolini received $27.9 million in compensation last year, according to a filing Friday with the Securities and Exchange Commission.

About $24.8 million of the package was due to gains in value on restricted stock that vested in 2015 and on stock options he was awarded 10 years ago and exercised in 2015.

The total was up from $15 million in 2014.

His compensation also included $1,034,483 in salary, $1.84 million in cash bonus, and $271,908 in perks, mostly from the cost of his using the corporate aircraft for personal use.

Angry Doctors and Allegations of Worse Care


Also, once Aetna and US Healthcare Inc merged, Aetna acquired a bad reputation among physicians.  As we wrote in 2012, by 1998, an American Medical News article documented the "rocky relations" between Aetna and physicians. By early 2000, Aetna CEO Richard Huber was known as "the managed care executive physicians love to hate," per the American Medical News. His departure was characterized by then American Medical News Street Smarts columnist Dr Scott Gottlieb, as partly due to how

Huber talked out of one side of his mouth about his company's obsessive quest for 'quality' health care -- while out of the other he was screaming at doctors, hospitals and drug firms about controlling costs. Yet Aetna's medical costs were still creeping up. As Richard Huber learned, you can't talk the talk if you don't walk the walk.

So once again, after US Healthcare merged with Aetna, the combined, larger company did not deliver on promises of lower-cost, higher-quality care, while it made its insiders very wealth, angered health care professionals, and allegedly led to poor health care.


Conclusion

So the story of US Healthcare Inc, and its merger with Aetna showed a repeating pattern: unfulfilled promises of wonders to come, angry health professionals complaining of bad health care, while the corporate insiders become rich.  So do we really think that the proposed Aetna Humana merger would "Drive Consumer-Focused, High-Value Health Care?"  If so, could I sell you a bridge from Brooklyn to Manhattan?

This case shows how we have turned health insurance over to large for-profit corporations, in an era of laissez faire capitalism and light touch regulation, and in an era in which managerialism enables the leadership of health care organizations by business trained people with little understanding of or sympathy for the health care calling, but who can get rich by pursuing short-term revenue, and can deploy armies of marketers and public relations specialists to obfuscate what is going on.

Why on earth should we expect by continuing in the same direction we will now actually produce lower-cost, higher-quality care?

One big problem is that many people in the US now think of commercialized health care as the norm, and cannot conceive of any alternatives.  Even our recent attempt at health care reform, the Affordable Care act, depended on the continued dominance of health insurance by for-profit corporations.

True health care reform would consider alternatives.  At least we could start with much tougher regulation of commercial health care.  For example, in his article noted above, Michael Hiltzik suggested

We’ve mentioned before that the government isn’t entirely powerless to goad big insurers like Aetna into greater participation in the ACA exchanges. Among other things, the companies make money hand over fist by serving Medicaid expansions in many states and in Medicare managed-care plans. Why not tie their access to those lucrative markets to sticking with the exchanges until they’re finally stabilized?

Bertolini implicitly tied Aetna’s participation in Obamacare to a green light from the government on the Humana merger. But two can play that game.

That would not go over well with neoliberals who believe all corporate regulation is bad.

Furthermore, mabye we should reconsider whether most, or any health insurance should be provided by for-profit corporations. The "government option" is no longer a taboo topic in conversations about "Obamacare." There are other options. Other countries rely on tightly regulated, accountable non-profit organizations to provide health insurance. Such organizations may not enrich insiders as well as big for-profit health insurance companies, but maybe for once we should think of putting patients' and the public's health ahead of these insiders' enrichment.

The Adventures of the Purloined Bequest, the Resident Heiress, and the Hidden Hospital System

The game is afoot again.  A series of recent articles in the media described a series of cases whose mysterious interrelationships Sherlock Holmes might have appreciated.

The Purloined Bequest

A singular article in the Wall Street Journal, entitled "Judge Rules in Case of Fortune Tied to Buffett," first made this case explicit, but some background is required to understand it.

The story focused on Long Island College Hospital, in Cobble Hill, Brooklyn, New York.  [Full disclosure: this story got my attention particularly because I grew up nearby in Brooklyn, and was born at that hospital, which was also the local hospital my parents often used.]   LICH has long been the major community hospital for downtown Brooklyn.

The story appeared to begin in 2011, per the WSJ,

 In 2011, Judge [Carolyn] Demarest approved the merger of LICH and SUNY Downstate on the condition it would keep the charitable hospital going. As part of the deal, the hospital transferred properties to Downstate estimated to be worth as much as $1 billion collectively, according to a previous court order.

The merger was supposed to keep LICH in operation as a community hospital and provider of acute care to the poor.  However, things did not work out.

 This year, however, Downstate announced plans to shut the hospital, leading to protests from Brooklyn residents and local politicians.

'It is clear that the premise upon which this Court authorized the transfer of assets has been defeated,' Justice Demarest wrote in her Aug. 20 decision, adding that Downstate had breached its contractual obligations. She cited a 'legal and moral responsibility' to correct her earlier error in approving the merger.

She directed Downstate to return all assets to the hospital's previous owner, Continuum Health Partners Inc., which subsequently said it couldn't take the reins. The court is expected to review other proposals.

The judge also discovered that hospital management had been raiding an large endowment fund intended for other purposes,

A New York state judge ruled this week that a struggling Brooklyn hospital must repay tens of millions of dollars it borrowed from an endowment set up by early investors with billionaire Warren Buffett.

The ruling aims to rectify the previous use of the money by Long Island College Hospital, which is hurting financially and was scheduled to close. Mr. Buffett in July told The Wall Street Journal that his late friends, Donald and Mildred Othmer, would have felt 'betrayed' at the way the funds were spent.

Apparently,

 The Othmers, natives of Omaha, Neb., who later lived in Brooklyn, were longtime friends of Mr. Buffett's, and each invested $25,000 with the billionaire in 1961.

When they died—he in 1995 and she in 1998—they gave away a fortune estimated at $780 million, including the $135 million permanent endowment for the hospital. The Othmer wills stipulated the interest on the endowment could be used for operating expenses but the principal should be held 'in perpetuity.'

In a series of court-approved transactions that began in 2000, the hospital borrowed from the funds repeatedly to meet short-term obligations and cover debts.

The hospital argued that the money was necessary to keep the hospital afloat, which it said the Othmers would have wanted. The transfers depleted most of the endowment, a result that came to light after the Journal wrote about the situation in July.

New York Times and Brooklyn Daily Eagle articles focused on the question of whether SUNY/ Downstate intended to close the hospital so it could sell its apparently valuable real estate assets in a now fashionable neighborhood, but not on how the hospital fell into these dire straits.


There seem to be some lingering questions -

-  If the losses and borrowing began in 2000, or earlier, who was responsible for them, given the current owners have only been in place since 2011?

Note that the phrasing in the article above ("the hospital argued that the money was necessary to keep the hospital afloat") suggested that before SUNY took over, the hospital was independent.  However, the article mentioned, albeit only briefly in passing, that the hospital had a previous owner, Continuum Health Partners Inc.

-  How were the losses explained when they occurred, and what was the rationale for  borrowing from restricted endowment as a response, instead of, for example, direct efforts to minimize losses or increase capital and revenue?

Note that the article implied that when SUNY acquired LICH, it acquired some very valuable real estate.  Why did the previous management of LICH not consider selling off some of this real estate to resolve its debts?

-  Did mismanagement of the hospital lead to excess losses, and did borrowing funds from the principle of the hospital's endowment to offset these losses amounted to more mismanagement?
 

Meanwhile, a second even more bizarre story about another New York City hospital almost simultaneously got media attention.

The Resident Heiress

The case first made it into the media in 2012, when the tabloid New York Post reported,

Beth Israel Medical Center milked reclusive copper heiress Huguette Clark for more than $13 million in fees, donations and even a priceless painting during her 20-year stay as a patient — and greedy executives angled for $125 million more, her relatives allege in shocking new court filings over Clark’s estate.

The alleged shakedown was illuminated in an e-mail in which hospital board member and former CEO Dr. Robert Newman referred to Clark as 'the biggest bucks contributing potential we’ve ever had,' according to court papers.
He told a colleague her 'potential has been overwhelming[ly] unrealized.'

At one point, he suggested to Clark that she pay nearly one-third of her estimated $400 million fortune to keep the now-shuttered Beth Israel North on the Upper East Side open so she could keep living in the room she had refused to leave for 15 years despite being in good physical health, the papers allege.

But instead of addressing Clark’s crippling anxiety, hospital honchos played on her fears, engaging in 'a concentrated effort, orchestrated at the highest board and executive levels,' to get her money, court documents obtained by The Post allege.

Clark’s death last year at age 104 set off a battle over her estate. Her distant relatives claim lawyer Wallace Bock, accountant Irving Kamsler, private-duty nurse Hadassah Peri and the Beth Israel administrators manipulated the feeble Clark for her money.

The nurse, who received cash and gifts from Clark, stands to inherit nearly $34 million and Clark’s priceless doll collection in the now-disputed will. Beth Israel is to get $1 million.

The Paris-born Clark inherited her money from her father, William, a rail and mining baron and former US senator whose wealth rivaled the Rockefellers’.

She went to Beth Israel North in 1991, when she was 85, after a doctor found her emaciated and ill in one of her three sprawling Fifth Avenue apartments.

She spent the last two decades of her life in dismal hospital rooms with the shades drawn and door shut even though there was 'no medical basis for keeping her' past the first few months, documents show.

Clark was 'the perfect patient' for the hospital, her relatives charge, noting, 'She required no medical care, possessed enormous wealth, paid over $800 a day for her room, and became progressively more dependent on the hospital.'

'Beth Israel had a plan to subtly, but ever so persistently, court Huguette for the purpose of garnering gifts and ultimately do a will in favor of the hospital,' court papers claim.

This case also seems to be about wealthy donors and hospital executives.  Yet what makes it most bizarre are the circumstance of Ms Clark's hospital stay.  As a former intern, resident, fellow, and teaching hospital attending, I can attest that most hospital administrators are concerned, if not obsessed, with discharging patients quickly.  Hospital stays are currently paid by most insurers according to the patients' diagnoses, but not their length of stay.  Long stays cost hospitals money.  Furthermore, unnecessarily long stays use up resources that could better serve acutely ill and injured patients.  Yet Ms Clark stayed an astounding 20 plus years, without any obvious medical rationale.  No hospital official contested the fact that Ms Clark stayed that long in the NY Post article.

Furthermore, in a 2013 New York Times article, the hospital's lawyer, defending a parallel attempt to recover the money donated to the hospital, wrote

 Beth Israel had provided Mrs. Clark with 'a well-attended home where she was able to live out her days in security, relative good health and comfort, and with the pleasures of human company.' Besides, he said, the amount of money she gave to Beth Israel was “not very large considering her vast wealth.”

Furthermore, a member of the Beth Israel fund-raising staff wrote in a memo disclosed during litigation,

 She was well enough by then to go home to her spacious apartment at Fifth Avenue and 72nd Street, overlooking Central Park, Ms. [Cynthia L] Cromer said, but 'she asked if she might stay in the hospital longer: she feels comfortable and safe, and her apartment is being renovated.'

Never mind that the fundamental mission of the hospital is to provide acute care for the sick and injured, not to provide comfortable retirement housing. But hospital managers are apparently on record acknowledging that the hospital was basically providing Ms Clark with services that are normally available in a retirement community, not services that acute care hospitals normally provide anyone   There is no evidence that the hospital ever provided similar services to any other patients. 

The obvious mystery, then, is

- why no one at the hospital, no doctor, nurse, or manager, or no visitor, regulator, accrediting agency, insurer ever questioned why the hospital was providing a long-term residence to a former patient?

No answer to the question has appeared in any coverage I have seen of this case, including a September, 2013,.NY Times followup article on the occasion of the case nearing trial. 

In the absence of a creditable explanation for this strange distortion of the hospital mission,

- is there any other conclusion than that its purpose was to extract a large amount of money from a vulnerable, rich, but no longer acutely ill former patient?

This would suggest an unusual but monumentally unethical kind of hospital mismanagement.

So we have two recent stories about major, unusual, apparently severe mismanagement by hospital executives.  These stories were reported as if they were independent.

However, buried in the original NY Post article, but unmentioned in either of the major NY Times articles, however, was a hint of how this case and that above of the purloined inheritance appeared to be linked.

The Hidden Hospital System

The NY Post article referred thus to the Beth Israel CEO who allegedly pushed Ms Clark for contributions,

 Newman, former CEO of Continuum Health Partners, Beth Israel’s parent organization, took the unusual step of offering to help Clark complete a will so 'some faceless bureaucrat of the government' wouldn’t get his hands on her estate, court papers say.

Quick Watson, did you see that?

Continuum Health Partners was the "parent organization" of Beth Israel Hospital during at least some of the time Ms Clark was in residence there.  Continuum Health Partners also was the "previous owner" of Long Island College Hospital during at least some of the time it apparently was suffering large losses and its endowment was being depleted.  So were both these stories really about the same organization, the same hospital system?

Digging a little further, per its own LinkedIn page,

 Continuum Health Partners, Inc. was formed in 1997 as a partnership of three venerable institutions — Beth Israel Medical Center, St. Luke's Hospital, and Roosevelt Hospital.

So while the hospital system did not exist when Ms Clark first entered Beth Israel Hospital, the heiress' "care" was under the control of the organization apparently from 1997 to the day she died.

Furthermore, as noted in a 2011 Chronicle of Higher Education article, available from Innovative Resources Group Inc,

 If there was a honeymoon after the merger of Long Island College Hospital, in Brooklyn, with Continuum Health Partners, in New York in 1998, few remember it. The bickering began early and dragged on for years, but divorce didn’t seem inevitable until the doctors went public.

So the hospital system called Continuum Health Partners took over Long Island College Hospital in 1998 and held it for 13 years.  Furthermore, apparently LICH was part of Continuum Health Partners during the time when its losses rose and the Othmer bequest was depleted.  For example, from the CHE article,

  Several physicians told a crowd gathered outside the hospital’s entrance in 2008 that Continuum had withheld money from the 150-year-old institution, needlessly cutting patient services and endangering the hospital’s future.

Also in 2008, the Brooklyn Heights Blog reported this response to a question about finances from the Continuum Health Partners CEO, Stanley Bazenoff,

 LICH faces an immediate fiscal crisis. Unless action is taken quickly, he said, LICH will not have cash on hand to meet payrolls and other current expenses. He ascribed LICH’s problem to three factors. First, the hospital carries a heavy debt burden–approximately $150 million in long-term bonds financed through the New York State Dormitory Authority and $25 million in short-term commercial paper–which results in annual debt service (including interest and amortization) cost of approximately $22 million. Second, LICH has an operating deficit, presently about $40 million on an annual basis,...

Denis Hamill, a columnist for the New York Daily News, made this accusation in a February, 2013, editorial:

Under Continuum, the once-profitable LICH ran up $300 million in debt from pure administrative malpractice. And then Brezenoff brokered the smelly SUNY Downstate merger, with state taxpayers absorbing the $300 million debt.

So it certainly looks like there is an argument that Continuum Health Partners, under its CEO, Stanley Bazenoff, was responsible for the manipulation of pseudo-patient and rich heiress Hughette Clark to secure a large donation, and the nearly simultaneous depletion of Long Island College Hospital's finances, including a large bequest that was supposed to be untouchable.

Not surprisingly, Mr Bazenoff, described by Mr Hamill as

a ruthless powerbroker ... whose nickname at LICH is Darth Vader 

and

a quintessential member of what muckraker Jack Newfield called The Permanent Government of New York  

also seems to have gotten rich in his position as leader of Continuum Health Partners, along with his other top managers.   The blog LICH Watch found these results from the system's 2009 IRS 990 report,

here are some highlights, figures for Continuum employees who, hm, earned more than a million dollars for the year:

Chandra Sen, MD, $2,109,204
Stanley Brezenoff, $2,014,413
Kathryn C. Meyer, Esq. $1,049,807
John Collura, $1,307,556
Gail Donovan, $1,365,354

 A 2011 New York Post article stated,

 Stan Brezenoff, CEO of Continuum Health Partners, overseeing such hospitals as Beth Israel, St. Luke’s and Roosevelt, pulled in about $3.5 million. 

 So this leads to yet more mysteries, first about the individual cases when viewed as occurring within one large hospital system:

-  Why were Long Island College Hospital's finances addressed as if it were an independent entity, when it was in fact just a subsidiary of Continuum Health Partners? 

-  Why was Continuum Health Partners role in the hospital's enlarging debt and depleting endowment not discussed?

Similarly,

-  Why was the bizarre treatment of Hughette Clark attributed to "Beth Israel executives," but not Continuum Health Executives, when Beth Israel was also just a subsidiary of Continuum Health? 

Then there is the larger mystery,

-  Why have these two cases been discussed as completely independent, when they appear to be part of a pattern of conduct by Continuum Health Partners management?

Summary

While we continue to see cases, some amazingly bizarre, suggesting mismanagement and unethical management of hospitals and hospital systems, there seems to be an amazing lack of curiosity about how they occurred and what their implications may be.  This lack of curiosity is so profound that no one seems to have noticed that two vivid and strange cases getting prominent media notice in the same city and the same time involved the same large hospital system. 

Health care organizations seem to become ever larger.  Such enlarging organizations can concentrate their power, dominate their "markets," and hence increase their revenues and the compensation of their top hired managers.  Without any countervailing force, they push seemingly inexorably towards oligopoly and then monopoly.

Furthermore, the cases of the purloined bequest and the resident heiress show that ever larger organizations with ever more complex structures are ever better at hiding the accountability of their top hired managers.  We have previously noted, e.g. a case in which a subsidiary of GlaxoSmithKline pleaded guilty to crimes involving production of adulterated drugs, thus shielding GSK and its management from responsibility, how subsidiaries of large corporations may plead guilty to crimes, thus absolving their parent organizations and its managers of any blame.

In the current cases, it seems that somehow a large health care system was able to avoid accountability by letting its component hospitals appear to be independent.  Yet it is the larger system that was booking the revenue and making millionaires out of its hired managers.  This seems to show how concentration of power into ever more complex organizations can be used to enhance the anechoic effect, making mismanagement and those accountable for it ever more obscure.

As we have said until blue in our collective faces, if we do not hold the real leaders of health care accountable for their actions and the actions of their organizations on their watches, we can expect continued misbehavior, and hence continued health care dysfunction.  

It's appropriate to conclude with this, a video of Jeremy Brett in A Scandal in Bohemia, from the first season of the show as first shown on PBS.

55 of Medtronic's Best Hospital Friends, Including HCA, Settle for $34 Million

The case of the over-marketing of Kyphon's kyphoplasty device (look here) just got more complicated, and now appears to have involved an amazing number of players.

The State of Play

 As reported by the AP (via the Washington Post),

 Fifty-five hospitals in 21 states have agreed to pay $34 million to the U.S. government to settle allegations that they used more expensive inpatient procedures rather than outpatient spinal surgeries to get bigger payments from Medicare, the U.S. Justice Department said Tuesday.

The settlement involves kyphoplasty procedures used to treat spinal fractures usually caused by osteoporosis. It can be done as an outpatient procedure, but he Justice Department said the hospitals performed the surgeries as inpatient procedures to increase Medicare billings.

The current media reports provided little detail about the allegations, but did note that this case has been litigated for a while,

 A similar settlement was reached last year, when 14 hospitals agreed to pay a settlement of more than $12 million. And in 2008, the Justice Department agreed to a $75 million settlement with Medtronic Inc.’s spine business. The government was investigating allegations that Kyphon, a company that had been acquired by Medtronic Spine in 2007, advised hospitals to do inpatient kyphoplasties to bulk up their Medicare payments.

The Players

Per the AP, there were quite a few

In the latest settlement, the largest payments are being made by Atrium Medical Center of Middletown, Ohio, which will pay $4.2 million; Mount Sinai Medical Center in Miami, $1.8 million; Altru Health System of Grand Forks, N.D., $1.5 million; Cedars Sinai Medical Center in Los Angeles, $1.5 million; Wayne Memorial Hospital in Goldsboro, N.C., $1.3 million; Trover Health System of Madisonville, Ky., $1.2 million; The Queen’s Medical Center in Honolulu, $1.1 million; and Des Peres Hospital in suburban St. Louis, $900,000.

Several multi-hospital organizations agreed to settlements, including:
—Twenty-three hospitals with HCA Inc. of Nashville, Tenn., paying a total of $7.1 million.
—Six hospitals with Lifepoint Hospitals Inc. of Brentwood, Tenn., $2.5 million.
—Five hospitals with Trinity Health of Livonia, Mich., $3.9 million.
—Four hospitals with Morton Plant Mease BayCare Health System of Clearwater, Fla., $2.4 million.
—Three hospitals with Baptist Memorial Hospital-Golden Triangle of North Columbus, Miss., $1.8 million.
—Two hospitals with Bayhealth Medical Center of Newark, Del., $1.1 million.

A Modern Healthcare report noted that the leadership of HCA, the hospital system with the largest liability, made it out to all be a misunderstanding,

Hospital executives say the allegations are prompted by  unclear Medicare rules on when spinal-surgery patients should be held overnight. And they note that even though the whistle-blowers and the government are targeting hospitals, the decision to admit patients is usually dictated by the treating physician.

'We are pleased to see new clarification of industry care standards, which help physicians make decisions regarding kyphoplasty patients,' HCA spokesman Ed Fishbough said in an e-mailed statement Tuesday. 'We are confident as a result that this issue has been resolved.'

However, the case appears to be more complicated than that.

What Really Happened, and Who Benefited?

In fact, we discussed the Medtronic settlement in 2008.  At that time, a New York Times article described the government's allegations about what went on this way,

A unit of Medtronic defrauded Medicare of hundreds of millions of dollars, according to a civil lawsuit that was unsealed Thursday and simultaneously settled with the Justice Department.

Two insiders had said Kyphon, which Medtronic acquired in 2007, improperly persuaded hospitals to keep people overnight for a simple outpatient procedure to repair small fissures of the spine. Medicare then reimbursed the hospitals much more generously than it otherwise would have for the procedure, which was developed as a noninvasive approach that could usually be done in about an hour.

By marketing its products this way, Kyphon was able to artificially drive up demand among hospitals, bolstering its revenue and driving up its stock price. Medtronic subsequently bought the company, its competitor, for $3.9 billion, greatly enriching Kyphon’s senior executives.

Furthermore,

 The scheme at Kyphon was based on Medicare’s practice of reimbursing hospitals more for complex inpatient back surgery than for outpatient care. The two whistle-blowers, Charles M. Bates and Craig Patrick, said Kyphon had deliberately urged doctors to admit patients overnight, knowing the admissions were unnecessary.

Hospitals saw the overnight admissions as a way to raise revenue, the two said, and bought Kyphon’s products, even though they were expensive, starting at $3,500 to repair one spinal fissure. The hospitals could recover the cost through the improper reimbursements for overnight stays.

Kyphon sold so much equipment this way that at one point it enjoyed a 90 percent profit margin, according to the two insiders, both of whom worked in sales positions.

The former employees said the scheme began in 1999, when Kyphon’s products first came to the market. Kyphon’s rapid sales growth and profitability eventually gave rise to a patent dispute with Medtronic, which was dropped when Medtronic acquired it. The acquisition richly rewarded Kyphon’s shareholders, particularly its top executives. The company said its top 15 executives stood to receive about $145 million by cashing in their options and restricted stock.

Note that at that time, Medtronic leadership, whose decision to purchase of Kyphon would end up so enriching Kyphon executives, seemingly had no worries,

A  spokeswoman for Medtronic, Marybeth Thorsgaard, said the company had known Kyphon was under investigation when it made the acquisition. She said it knew that Kyphon’s marketing strategy was being challenged, and took the risk of litigation into account. 'There were no surprises,' she said.

I can find no public record that any individual who authorized, directed, or implemented the arrangements above that lead to huge overcharges to Medicare, and huge revenues to Kyphon and the hospitals was subject to any negative consequences.  As noted above, it appears that the executives who lead Kyphon at the time it was acquired by Medtronic made substantial amounts of money apparently attributable to this scheme to allegedly "defraud Medicare of hundreds of millions of dollars" (as it was described above in the New York Times). 

Using the public record available on the internet, I tried to see how the top three Kyphon executives are doing now.  It appears they are not doing badly, and remain influential in health care.  According to its 2007 proxy statement, just before Kyphon was bought out, its CEO was Richard W Mott.  As best as I can tell, per Equilar, he currently runs a consulting firm (Walkabout Consulting LLC), and was previously chairman of PhotoThera, which just went out of business.  Kyphon's chief science officer was  Karen D Talmadge, PhD, who is now on the board of directors of the American Diabetes Association, and is also "Chair of the Board of Directors of Gynesonics, and serves on the Boards of Directors of Amplyx Pharmaceuticals, Velocity Pharmaceutical Development and Venous Health Systems."  Kyphon's chief operating officer was Arthur T Taylor, who is now on the board of directors of Providence Medical Technology.

The CEO of Medtronic at the time it bought out Kyphon, and the CEO of HCA at the time the arrangements began appear not to be doing badly either.  The CEO of Medtronic at the time it acquired Kyphon was Arthur D Collins Jr, who is now on the boards of directors of Boeing, Alcoa, and US Bancorp, also, according to his Boeing biography, he is a senior adviser to Oak Hill Capital Partners, and is on the Board of Overseers of the Wharton School.  The CEO of HCA at the time of its arrangement with Kyphon began was Dr Thomas Frist Jr, who is currently on the Forbes list of billionaires at number 262 in the world, with a total worth estimated at $4.3 billion.

Summary

In retrospect, this case allegedly involved arrangements between Kyphon, a device company, and multiple hospitals to increase the revenue of all parties by billing the US government for unnecessary hospitalizations occurring after the use of a device made by Kyphon.  The arrangements appeared to have been particularly lucrative for Kyphon's executives after a larger device company, Medtronic, chose to buy Kyphon. Medtronic ultimately paid a large fine and entered into a corporate integrity agreement nine years after the arrangements began.  Now fourteen years after the arrangements began, at least some of the hospitals involved have also paid fines.  The former Kyphon executives who benefited the most seemingly paid no penalties, nor seemingly did any managers of Medtronic or the hospitals who might have gotten larger compensation because of all the revenue that these arrangements generated.    

So initially, the big losers from this complex dance were the US government, and ultimately US tax payers.  Some patients may have also paid out of pocket for unnecessary services and thus lost money too.  Whether some patients suffered due to adverse effects of unneeded procedures was not clear.  Much later, Medtronic and some of the hospitals involved did pay big fines and thus lost some money.  However, it does not appear that they paid anything like what they made from the original scheme, and their payments were delayed for years.  However, the insiders who personally made a lot of money never apparently paid anything later.  So, this case appears to be a vivid example of how such insiders can walk away with piles of money from the misbehavior of their own corporations, while others pay the price.


Many of those of us of a certain age were brought up on myths that ultimately the good guys win and the bad guys lose.  We would all like to believe that the "arc of the moral universe ... bends toward justice."  History and this recent example suggest that it may not do so without our active intervention. 

In health care, as we have said many times (look here for examples), when bad behavior occurs within a large health care organization, rarely are the insiders who authorized or directed it, and who had the most to gain from the behavior ever made to suffer any negative consequences.  As long as health care leaders have such impunity, expect them to continue to personally profit from unethical behavior.  As a result, expect health care costs to continue to rise as quality and access get worse and worse.

True health care reform.needs to make health care leaders accountable, and especially accountable for the bad behavior that helped make them rich.

Broken Promises: Latest HCA Settlement Suggests Skepticism about the Next Big Thing in Health Care

A long time ago in the US, most people got care from physicians who were self-employed, or part of physician partnerships.  If they had to be hospitalized, it was at hospitals that were community or academic non-profit organizations.   If they had health insurance, it was likely from a non-profit Blue Cross Blue Shield affiliate.  However, with the rise of market fundamentalism, we have heard the promises of increased efficiency and innovation from for-profit health care.  So hospitals, insurance companies, and now increasingly physicians' practices have been bought up by for profit corporations.

Many politicians and policy-makers seemed to believe the promises, and often joined the cheering sections for the latest and greatest for-profit conversions.  Should they have done so?  Let us look at a case that recently hit the news again and think about it..

Background - HCA Acquired Health Midwest

Way back in 2002, large for-profit hospital chain HCA, formerly Columbia/HCA, acquired a sizable non-profit hospital system, Health Midwest.  As the Los Angeles Times then reported,

In a setback for Tenet Healthcare Corp., rival hospital giant HCA Inc. said Wednesday that it has agreed to buy Health Midwest, a 14-hospital chain based in Kansas City, Mo., for $1.13 billion.

Santa Barbara-based Tenet and HCA were the two finalists in a rare opportunity to acquire, in one swoop, a dominant hospital system in a growing urban market. The 20-member board of Health Midwest, a nonprofit company that has been struggling financially, said it voted unanimously to go with HCA.

The biggest factor in the decision by the Health Midwest board to accept the HCA offer was apparently the almighty dollar.

 'HCA's bid was much higher,' [Tenet spokesperson Harry] Anderson said, noting that he could not disclose Tenet's offer because of a confidentiality agreement.

But in addition to cash, HCA made some promises that sounded attractive to the board.

 In addition to the cash price, HCA said it would spend $450 million for capital improvements over the next five years.

That promise came from the top of HCA, as reported by the Nashville post,

 HCA Chief Executive Jack Bovender said: 'This has been a comprehensive, thorough process with a lot of community participation. We are ready to get to work to improve these hospitals through significant capital infusion and by making long term operational improvements.'

 Furthermore, as the Los Angeles Times also reported

Health Midwest spokesman Chris Whitley said price was not the only factor in the decision.

'As important to the board was to find a party that would offer a strong commitment to maintain and honor the various religious, cultural and charitable traditions,' he said.

There were objections by people who did not have decision making authority, but they apparently did not carry much weight

Labor and community activists in Kansas City have opposed a takeover of a nonprofit health system by an investor-owned corporation, raising concerns that such a conversion would lead to cuts, hurting employees and consumers.

In retrospect, why Health Midwest was so trusting of HCA at the time was unclear.  HCA, after all, did not have a track record then that should have inspired trust.  The HCA acquisition of Health Midwest was approved only a few years after what was then Columbia/ HCA settled allegations of extensive Medicare fraud.  the $1.7 billion the company paid made it the largest Medicare fraud case settled up to that time (and was larger than the amount it later spent on this acquisition.    See this post for some details and sources.)  This certainly could have raised a "red flag" before the deal was concluded.  But it did not. 

This deal was typical of many deals in which for-profit corporations, some backed by private equity firms, took over sometimes struggling non-profit hospitals, while promising great things for their communities.  For example, see our posts about the take-over of a health care system called Caritas Christi, by Cerberus Capital Management.  Caritas Christi was given the reassuring name of Steward Health Care, and then proceeded to take over, or try to take over additional hospitals. (Click the links for this long story.)  

Broken Promises - the New HCA Settlement

A new legal settlement by HCA suggests that such takeovers of non-profit hospitals by for-profit corporations ought to be regarded with much greater skepticism.  This time, per the New York Times,

HCA, the nation’s largest profit-making hospital chain, was ordered on Thursday to pay $162 million after a judge in Missouri ruled that it had failed to abide by an agreement to make improvements to dilapidated hospitals that it bought in the Kansas City area several years ago. 

Thus the new HCA settlement suggested that those fine promises made by HCA executives and their cheer leaders when HCA was seeking to take over Health Midwest were broken.

The trouble in the Kansas City area began a year after HCA acquired a dozen hospitals from Health Midwest in 2003 for $1.125 billion. As part of the deal, HCA agreed to make $300 million in capital improvements in the first two years and an additional $150 million in the following three. The hospital chain also agreed to maintain the levels of care that had been provided to low-income individuals and families in the area for 10 years. 

But when the members of the Health Care Foundation of Greater Kansas City, a nonprofit created from the proceeds of the sale of the hospital, received their first report from HCA in 2004 they discovered the hospital was already way behind.

Of the $300 million it was supposed to spend in the first two years, its own documents showed it had spent only about $50 million, according to Mark G. Flaherty, one of the founding members of the foundation and its general counsel.

HCA’s reports to the foundation also indicated that the level of charitable care it provided at the system’s large inner-city hospital had fallen while charitable care provided at the more affluent suburban hospital had risen sharply, Mr. Flaherty said.

'That was a big red flag to us,' he said.

After repeatedly asking HCA executives for explanations but receiving none, the foundation sued HCA in 2009. The case went to trial for several weeks in 2011.

 Note that there were alleged violations of two key provisions of the original deal, improvements to existing hospitals and guarantees of charitable care.  So here is at least one case, involving the largest US for-profit hospital corporation, showing violation of the sorts of promises that those promoting for-profit take-overs tout as showing at least the goodwill of the new corporate owners.

Should the HCA Track Record Have Led to Questions About Trustworthiness?

It is unclear how often anyone has bothered to check whether similar promises made in other deals were fulfilled.  It appears that such inquiries might actually involve a lot of bother.  Note that in this case it took almost six years for the community foundation to obtain enough information to conclude that HCA had not met its obligations and file a lawsuit, and another almost four years to get the case resolved.

The New York Times hinted that there was at least one other inquiry about a contemporaneous HCA deal.  While "a judge ruled in HCA's favor, deciding that Portsmouth Regional Hospital [in New Hampshire] would remain part of HCA after community leaders tried to regain control," the court proceedings did produce

 testimony in a 2011 trial, [in which] a former hospital official claimed he had difficulties getting HCA to pay for what he and others described as critical equipment and facility upgrades.

Meanwhile, there have been other recent events that should raise further questions about the trustworthiness of HCA going forward.  Last year extensive reporting suggested that HCA hospitals put short-term revenue ahead of patients' welfare through overuse of lucrative cardiac procedures and and undertreatment of poor patients in emergency departments and debilitated patients with bed sores (see this post).   Also last year HCA settled allegations it provided kickbacks to physicians at some of its hospitals to refer patients to its hospitals (see this post).     

Moreover, the record over the long term raises a big question as to why the good people of Missouri, the "show me" state, trusted HCA sufficiently for hospital acquisition deal to go forward in 2003.  As we wrote above, HCA was only a few years out of making the biggest settlement for federal health care fraud known at that time. 

Summary

 In 2010, we suggested that the take-over of non-profit hospitals by for-profit firms owned by private equity ought to be viewed with extreme skepticism.  In 2010, in Deadly Spin, former CIGNA public relations chief Wendell Potter showed how the conversions of non-profit Blue Cross Blue Shield health insurance plans to for-profit corporations were justified by the need to gather more capital to provide services comparable to new for-profit competitors, but were really motivated by the greed of executives who "would earn bigger pay packages for managing larger businesses, and if they could convert them to for-profit companies, they stood to earn even more." 

I submit that if anyone were able to look carefully at the results of the various deals that allowed for-profit corporations to take over hospitals, other organizations that directly take care of patients, health insurance companies, and now even physicians' practices, they would likely find that a lot of fine sounding promises made were broken and assurances made were false.  


From now on, I can only hope that health care professionals, policy-makers, politicians, but mainly the public at large will be appropriately skeptical of the fluffy promises made by those who stand to personally gain from the latest big thing in health care.  In particular, we all should be acutely skeptical the next time someone promises lower costs, better care, innovation, etc, etc by converting a community non-profit hospital to a subsidiary of a big for profit corporation.  

Huge Insurance Company WellPoint Settles Once Again, Providing a Window On the Ethical Questions Its Birth Presented

Another month, another question about the ethical conduct of for-profit insurance giant WellPoint. 

WellPoint Settles Allegations its Predecessor Anthem Cheated its Former Policy-Holders

This time the issue was how the company treated people insured by its now Anthem subsidiary a long time ago.  Here is the Reuters version:

Health insurer WellPoint Inc has agreed to pay $90 million to settle a class-action lawsuit against its Anthem unit over accusations the company did not fairly compensate former members when Anthem was converted from a mutual company into a stock company.

The Indianapolis Star noted:

WellPoint had fought the lawsuit for seven years in court.

The lawsuit alleged that WellPoint's Anthem subsidiary underpaid policyholders who opted to receive cash instead of stock when the Blue Cross-Blue Shield franchisee converted in 2001 into a stock company.

Of course, a WellPoint spokesman denied the company had done anything wrong, per Reuters,

Anthem spokeswoman Kristin Binns said in an e-mailed statement.

'We continue to believe that in all ways the company acted appropriately and in the best interests of its former members,...'

The Historic Context: the Conversion of Non-Profit Health Insurers into For-Profit Corporations

This may seem very dry and only of historical interest, but consider the historical context. Per Wendell Potter's Deadly Spin, after the Clinton administration's failed attempt at health reform, leaders of previously non-profit Blue Cross and Blue Shield insurance plans saw a new opportunity. In the mid-1990s,

the Blue Cross and Blue Shield Association took a little-noticed but monumental step. The trade group, a bastion of non-profit health insurers that included the founders of the modern health insurance system, modified its bylaws to permit members to convert into public-stock companies.

Potter opined about the executives' main motivation for conversion to for-profit status, and then consolidation of the resulting companies,

They would earn bigger pay packages for managing larger businesses, and if they could convert them to for-profit companies, they would earn even more.

So,

Fourteen Blue Cross plans, most of which dominated their state-wide markets, converted from nonprofits to for-profits, and by 2004 all fourteen wound up as wholly owned subsidiaries of WellPoint....

The Anthem Demutualization as a Step to WellPoint Executives' Enrichment

Anthem began as a non-profit insurance company, Blue Cross/Blue Shield of Indiana. Its hired managers first converted it into a mutual insurance company, a company that was owned by its policy-holders, and hence somewhat a non-profit in spirit. Then the executives started to acquire other formerly non-profit Blue Cross and Blue Shield plans. Then they converted the mutual insurance company into a pure for-profit. The for-profit Anthem eventually acquired WellPoint, taking that company's name. The resulting company then had become the biggest for-profit US health care insurer. In 2003, as the acquisition of WellPoint was pending, the Indianapolis Star reported:

The top executive at Anthem Inc. will receive a $42.5 million stock-and-cash award for guiding the company as it became the state's largest firm and now stands to become the nation's largest health benefits company.

Larry C. Glasscock will receive the merit-based performance award over the next three years on top of his salary, bonus and other compensation of $3.73 million last year. It's the most compensation Glasscock has received since he became the company's chief executive in 1999 and helped convert it to a publicly traded concern in 2001

Furthermore,

Award amounts of $16 million each went to Glasscock's two highest-ranking associates: executive vice presidents David R. Frick, an attorney and former Indianapolis deputy mayor, and Michael L. Smith, a former chief executive of moving company Mayflower Group.

In addition, the president of Anthem Midwest, Keith R. Faller, will get a stock-and-cash award of $11.9 million, while Anthem Southeast President Thomas G. Snead Jr. got $4.36 million.

The allegation that the company's hired managers failed to adequately reimburse policy-holders for the policy-owners' ownership interests in the mutual version of Anthem was the basis of the law-suit that was just settled. The Anthem demutualization was a key step in the formation of the WellPoint behemoth. Its creation was the rationale to make the executives listed above rich. The allegations made in the lawsuit just settled suggest that they earned these huge windfalls on the backs of the policy-holders who at one point thought it was their company, and formerly thought that their insurer was a benign non-profit organization.

A Continuing Record of Ethical Misadventures

Thus, the lawsuit just settled suggests that WellPoint was born in ethically questionable circumstances, and that its creation served more to enrich its hired executives, who may have started as hired leaders of mission-oriented non-profit organizations. So in retrospect maybe it is not so surprising that WellPoint's leadership has continued to generate a series of ethical questions.

Since we began Health Care Renewal, we have noted that the company:

• settled a RICO (racketeer influenced corrupt organization) law-suit in California over its alleged systematic attempts to withhold payments from physicians (see 2005 post here).
• subsidiary New York Empire Blue Cross and Blue Shield misplaced a computer disc containing confidential information on 75,000 policy-holders (see 2007 story here).
• California Anthem Blue Cross subsidiary cancelled individual insurance policies after their owners made large claims (a practices sometimes called rescission).  The company was ordered to pay a million dollar fine in early 2007 for this (see post here).  A state agency charged that some of these cancellations by another WellPoint subsidiary were improper (see post here).  WellPoint was alleged to have pushed physicians to look for patients' medical problems that would allow rescission (see post here).  It turned out that California never collected the 2007 fine noted above, allegedly because the state agency feared that WellPoint had become too powerful to take on (see post here). But in 2008, WellPoint agreed to pay more fines for its rescission practices (see post here).  In 2009, WellPoint executives were defiant about their continued intention to make rescission in hearings before the US congress (see post here).
• California Blue Cross subsidiary allegedly attempted to get physicians to sign contracts whose confidentiality provisions would have prevented them from consulting lawyers about the contracts (see 2007 post here).
• formerly acclaimed CFO was fired for unclear reasons, and then allegations from numerous women of what now might be called Tiger Woods-like activities surfaced (see post here).
• announced that its investment portfolio was hardly immune from the losses prevalent in late 2008 (see post here).
• was sanctioned by the US government in early 2009 for erroneously denying coverage to senior patients who subscribed to its Medicare drug plans (see 2009 post here).
• settled charges that it had used a questionable data-base (built by Ingenix, a subsidiary of ostensible WellPoint competitor UnitedHealth) to determine fees paid to physicians for out-of-network care (see 2009 post here). 
• violated state law more than 700 times over a three-year period by failing to pay medical claims on time and misrepresenting policy provisions to customers, according to the California health insurance commissioner (see 2010 post here).
• exposed confidential data from about 470,000 patients (see 2010 post here) and settled the resulting lawsuit in 2011 (see post here).
• fired a top executive who publicly apologized for the company's excessively high charges (see 2010 post here).
• California Anthem subsidiary was fined for systematically failing to make fair and timely payments to doctors and hospitals (see 2010 post here).
• management was accused of hiding the company's political contributions from the company's own stock-holders (see 2012 posts here and here).

Meanwhile, top hired managers have continued to draw bloated compensation from the company.  For example, as we noted here, current WellPoint CEO Angela Braly got $13.2 million compensation, and received an additional $6.9 million from newly vested restricted stock units in 2011, despite falling company earnings.

Summary: A Company Too Big to Manage Except to Enrich Its Executives

Thus, we have seen an amazing string of incidents suggesting that company leadership has consistently put short-term revenues, and the resulting exaggerated management compensation, before stock-holders' interests, and before patients' interests.  Yet this pattern, so plain above, has largely not been assembled from its component pieces in public other than on Health Care Renewal.  Lack of perception of this pattern may explain why this incredible compilation of ethical missteps has failed to generate any calls for massive revisions in how this company is lead and governed, or perhaps calls to dismantle such a large for-profit company as unmanageable except as a source of nearly unlimited dollars for the enrichment of its top insiders.

True health care reform would require the leaders of health care organizations to uphold the health care mission ahead of their own self-interest, and to be accountable to the organizations' owners, when they exist, and to patients and the public at large.

A New Low - A Hospital CEO Got a "Golden Parachute" for A Merger that Never Occurred

We recently posted about how top hospital managers are often the first to benefit from mergers and acquisitions, which once again have become fashionable in management circles.  Now it appears that top executives can benefit even from failed mergers, as reported by the Daytona Beach (Florida) News-Journal,

Five months after Bert Fish Medical Center's failed merger, one board member said he was surprised to learn payments are still being made toward the $1 million buyout of the former hospital CEO.

Hospital board member Joe Benedict said he didn't know former hospital Chief Executive Officer Bob Williams, who steered the board into the illegal deal with Adventist Health System, is due to receive his $289,000-a-year salary until 2014 –– paid through the publicly owned hospital.

At the time the merger was announced, a memorandum of understanding with Williams became public and showed the deal had triggered a three-year buyout clause in Williams' contract. Starting July 1, 2010, the Adventist agreement paid him his salary for three years, as his contract required, plus seven months and eight days –– a deal worth $1 million and benefits.

'That man has got away with a lot more than he should have,' said Benedict, a former County Council member, explaining that he considers Williams as responsible for the failed merger as Jim Heekin, the board's former attorney.

These payments were made to the former CEO despite the cost of the failure of the merger:

The hospital district incurred $3.4 million in administrative and legal fees as a result.

Apparently, there are allegations that the merger failed because former CEO Williams agreed to keep the board meetings of this public hospital secret, which was illegal:

The hospital board has voted to pursue a legal malpractice lawsuit against Heekin, of the Orlando firm Lowndes, Drosdick, Doster, Kantor & Reed, for his advice to keep the public out of talks about merging the New Smyrna Beach hospital with a partner. The 21 closed meetings that were held over 16 months were called 'so much darkness for so long' they couldn't be cured, according to a ruling earlier this year from Circuit Judge Richard Graham, who threw out the merger.

Also,

Williams is quoted in transcripts of the closed meetings telling board members not to tell anyone Adventist had been chosen as Bert Fish's partner

Other contractual provisions for golden parachutes exist, but have yet to be activated:

Benedict said he's still hopeful he can undo other buyout clauses in hospital contracts he believes obligate the hospital to pay more than is allowed, under state law, for the departure of Bert Fish Medical Center administrators. According to the current contracts, provided to the News-Journal, the hospital's current CEO, chief financial officer and chief of nursing must be paid 24 months' salary should they be dismissed from their positions through no fault of their own. Their departures could be a possibility if Bert Fish were to seek another merger partner who doesn't want to keep them on.

The contracts were executed June 30. On July 1, a new state law went into effect that limits the buyout of public employees to 20 months.

Summary

So, a hospital CEO had a contract that made him eligible to begin receiving "golden parachute" payments just because a merger was in process, and these payments could not be stopped even though the merger was declared illegal, and hence never occurred. We noted recently that CEOs and other top officials of health care organizations are often the first to benefit financially from mergers and acquisitions, even when such transactions to not prove so beneficial to the affected institutions, much less patients' and the public's health in the long run. Here is a case in which a CEO could get extra money just because a merger was contemplated. This is some sort of new record for health care leaders personally profiting from their insider positions.

There has been growing public outrage about how ordinary people who play by the rules are disadvantaged in today's economy, while insiders profit from their positions. There ought to be equal outrage in health care over its version of this pheonomenon.

As long as health care leaders can continue to put their self-interest ahead of the health care mission in this way, is it any wonder that health care costs continue to rise while access and quality suffer? When will would be health care reformers realize that to truly reform health care, we will have to reform health care leadership? We need health care leaders who understand and uphold the mission, are accountable for how well they do so, and whose incentives depend on how they do so. We do not need leaders who put their self-interest first. Right now, however, that seeems to be the leadership we have.

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.

Summary

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.