Who Benefits? - Hospital Profits and Quality May Fall, But Hospital Executives' Compensation Keeps Rising

Despite recent attempts at health care reform, US health care dysfunction seems to proceed inexorably with ever rising costs, and continuing problems with access and quality.  A likely reason is that those who find the current system personally profitable are in a position to resist real reform.  The people who seem to gain the most from the status quo are top hired executives of big health care organizations.

In particular, stories about huge pay for hospital and hospital system managers continuously appear in the media.  For example, starting in October, 2015, we saw the following headlines:

- Pittsburgh, PA, October, 2015: "Former Highmark CEO Made Nearly $10 Million in 2014, Tax Records Show"
- Regarding Rochester General and Unity health systems in Rochester, NY, November, 2015: "Here's Why Execs Got Millions After Health Merger"
- Regarding the CEO of North Shore-LIJ Health System in NY, November, 2015: "This Guy Makes $10M a Year to Head a Nonprofit"
- In Idaho, February, 2016, "Pay for 9 Treasure Valley Nonprofit Hospital Employees Hits or Tops $1 Million"

Even more interesting are stories that show massive compensation of executives despite their hospitals' apparent poor performance.  Since October, 2015, we also found the following (in chronological order)


Let Go After "Uneven Financial Performance," CEO of Kaleida Health Got $1.6 Million of Severance in One Year, with More to Come

In November, 2015 the Buffalo (NY) New reported that James R Kaskie, the CEO of Kaleida Health, the "largest healthcare provider in Western New York," per its website, was "forced out" when

the board cited a need for a change in leadership amid an uneven financial performance for the system....

Nonetheless,

Kaleida Health paid $1.6 million in 2014 to its former CEO, James R. Kaskie, after forcing him out early last year, according to its most recent federal regulatory filing.

Also,

Kaleida will pay Kaskie 24 months of severance under the terms of Kaskie’s employment contract with the system, John R. Koelmel, chairman of the Kaleida board, told The Buffalo News on Thursday.

Kaskie was paid 10 months of severance plus deferred compensation, which is the $1.6 million reflected in the latest regulatory filing. He will be paid 12 months of severance in 2015 and a final two months of severance in 2016.

Mr Kaskie was paid even better the year before:

Kaskie earned $1.9 million in 2013, his last year as CEO.

Furthermore, other executives who were let go after Mr Kaskie's departure also were very well paid,

Dr. Margaret W. Paroski, former executive vice president and chief medical officer, who was replaced by Lomeo after he took over as CEO last year, $763,552.

Joseph M. Kessler, former executive vice president and chief financial officer, who was replaced by Lomeo, $608,454.

The article explained that

Hospitals, corporations and other entities negotiate severance agreements as part of the employment contracts when they hire top executives

So not only to these executives earn top dollar, but their earnings continue even if they lose their jobs because of poor performance. When asked to explain these levels of remuneration, and contracts that allow executives to get continuing pay even after being "forced out" for "uneven financial performance," John R Koelmel, the chairman of the system's board, said

Companies pay at market. To recruit the best talent, you need to pay at least market.

Public Hospital MetroHealth Medical Center Scored Below Average on Patient Satisfaction and Quality, but CEO Got $1.1 Million

In March, 2016, Cleveland Ohio television station NewsNet5 reported

MetroHealth Medical Center is a public hospital that is supported with $32.4 million of taxpayer money--roughly 5 percent of the hospital's budget.

Also,

a check with a federal database of patient satisfaction levels and quality measures at hospitals across the country found MetroHealth fell below the national average.

Nonetheless, its CEO, Dr Akram Boutos, got $1.1 million in salary, and presumably considerably more in bonuses.

Dr J B Silvers, '"a nationally recognized expert on hospital CEO compensation and professor at Case Western Reserve's business school," who is a MetroHealth board member,

insisted that Dr. Boutros is being fairly compensated when compared to his peers. 

Furthermore,

He admitted the salary is first tied to profits--then a series of other quality measures like patient care, diversity, hospital improvements and employee satisfaction.

But the ties to satisfaction and quality may not bind, because he then tried to explain away the quality and satisfaction data,

Silvers argues those surveys may be misleading.

'Populations like ours, Medicaid populations, uncompensated care--poor people tend to rate organizations lower,' said Silvers.

But then admitted it was really about the money,

'We have to have a target in terms of financial performance because if you don't make the money you can't be in business,' said Silvers.

In Massachusetts, "As Hospital Profits Fall, Executive Pay Soars"

In April, 2016, the Lowell (MA) Sun published a long report on local hospital executive compensation.  It started

It has been a lean couple of years for the region's hospitals.

Drawn by the higher reimbursement rates that insurers pay to academic teaching hospitals, such as those in Boston, more physicians are affiliating themselves with those institutions. Patients are following, and so is the money.

Some community hospitals, including Lowell General Hospital and Emerson Hospital in Concord, saw profit margins drop by more than half from 2012 to 2014.

Other hospitals' financial indicators, like ratios of assets to liabilities, are also weakening,...

However,

As they look to weather those storms and protect their space in a rapidly changing health-care landscape, the boards of directors of the region's hospitals have doubled down on a key investment: their executives.

'Each organization has to make its own decisions about how it can best compete in the marketplace,' said Gary Young, director of Northeastern University's Center for Health Policy and Healthcare Research.

Senior executives of hospitals and health-care systems -- there's a competitive market for that kind of talent ... some would say when organizations run into trouble, they need to spend more to get leaders.'

So,

At Lawrence General Hospital, compensation paid to top non-physician administrators increased 41 percent from 2012 to 2014, according to tax documents. President and CEO Dianne Anderson, who heads the list, was paid a total package of $884,092 in 2014.

Also,

From 2012 to 2014, Lahey Health's non-physician executives saw a compensation increase of 36 percent. A large part of that increase was in the salary of Dr. Howard Grant, who was promoted from president and CEO of Lahey Clinic to president and CEO of the entire Lahey Health system. The system includes facilities throughout northeastern Massachusetts and southern New Hampshire. Grant received $1.7 million in 2014.

In addition,

Lowell General Hospital's executives saw a slightly smaller increase during that three-year span, at 18 percent, although CEO Normand Deschene remains the highest-paid hospital executive in the region with a package worth $1.9 million in 2014. The hospital also pays the taxes on retirement benefits, which are worth hundreds of thousands of dollars, for Deschene and several other executives.

The justifications for these increases in times of financial trouble were similar.  For example, re Lawrence General Hospital,

'Because we're resource-limited, compared to (academic) hospitals, we're even more dependent in these challenging times to bring in somebody who can manage risk,' said Richard Santagati, chairman of Lawrence General's executive compensation committee. 'It takes a different breed and there's real competition for these people ... and once you have them there, you want to keep them because there's a learning curve there that is unique to each hospital.'

Re Lahey Clinic,

'Our executive compensation is comparable to the programs of other, similarly sized health networks and is reflective of the complex role of an executive leader at a leading health system,' Lahey Health said in a statement.

Finally, at Lowell General Hospital, the CEO defended his own pay:

'Lowell General has weathered significant changes in the delivery of health care,' Deschene said. 'At a time when many hospitals have failed, it's very crucial and critical that we have very talented individuals to lead the hospital.' 

The Usual Talking Points Again Invoked

Hospital management used the usual talking points to justify the pay they received,  As I wrote last year 

It seems nearly every attempt made to defend the outsize compensation given hospital and health system executives involves the same arguments, thus suggesting they are talking points, possibly crafted as a public relations ploy. We first listed the talking points here, and then provided additional examples of their use. here, here here, here, here, and here, here and here. 

They are:
- We have to pay competitive rates
- We have to pay enough to retain at least competent executives, given how hard it is to be an executive
- Our executives are not merely competitive, but brilliant (and have to be to do such a difficult job).

So in the stories above, we found, for example:

- Competitive Rates: "you need to pay at least market" (Kaleida), and "there's real competition for these people" (Lawrence General)
- Retention: "you want to keep them" (Lawrence General)
- Brilliance: "the best talent" (Kaleida),  "very talented individuals" (Lowell General)

It appears that those justifying huge executive payments have all been handed these same talking points.

Yet none of them quite make sense.  The brilliance argument is particularly suspect in cases like those above of CEOs whose hospitals' performance was clearly not brilliant according to the metrics supposedly used to judge them. 

Economists Challenge the Management Dogma Justifying Huge Executive Compensation

Furthermore, these talking points seem to derive from decreasingly credible current management dogma about executive compensation propagated by business schools.

The Invisible Hand, or A Hand on the Scales?

For example, writing in the Independent during January, 2016, Ben Chu questioned the market fundamentalist theory that all employees pay has been perfectly chosen by the infallible invisible hand of the market:

When confronted with an outburst of public anger over massive corporate pay for a privileged few, a common response of the libertarian right is to invoke the economics of the free market.

Such spectacular rewards, we’re informed, are delivered by individuals selling their labour in a free market. And because such pay levels were set through this natural process, no one has the moral right to question them. Further, to interfere with such natural processes would be economically inefficient, making us all worse off in the end.

Such contentions are based on

a venerable economic theory [that is] behind this kind of reasoning. At the end of the 19th century, the American economist John Bates Clark hypothesised that in a perfectly competitive economy, demand for labour is determined by its 'marginal productivity' and wage rates are determined by the 'marginal product' of labour.

To translate, if a firm can make a profit by adding another worker to its payroll, it will do so. And the amount a firm will be willing to pay for that labour in wages will be determined by the additional profit the individual worker adds to the company’s bottom line. So if a worker adds a lot of profit, he or she can command a lot of compensation. But if they add only a little profit, he or she will get only a little. This means people with low personal productivity get small amounts. But people with high personal productivity (chief executives for instance) receive big bucks.

For a start, how does a company know what the marginal product of an individual worker is, or will be? This isn’t something that is directly measurable. The vast majority of us work in teams; how is it possible for management to determine our individual contribution to the financial success of that team, or of that team to the company? How can a business know how much of the profit added was due to the individual’s particular skills? The conditions necessary for the Clark theory that everyone gets what they 'deserve' don’t exist.

But isn’t the marginal product of bosses, who make big strategic decisions, easier to measure? The ASI cites the late Steve Jobs of Apple as an employee who was clearly worth a lot. However, there are plenty of other chief executives whose individual contribution is impossible to measure. Yes, the company’s share price might have gone up. But was this because the boss was smart? Or just lucky?

Furthermore,

The economist Dani Rodrik, in his latest book Economics Rules, argues that such broad theories of income distribution by the market are best viewed as intellectual 'scaffolding', adding: 'They are shallow approaches that identify the proximate causes but need to be backed up with considerable detail'.

And there are other theories of wage determination that are likely to be relevant. One important one is bargaining theory. This suggests that those who have political power within a firm can extract more than those without it. Maybe the reason chief executives tend to get paid ever growing multiples of the pay of the average worker is not because they are 'worth it' but because they are powerful. As the economist JK Galbraith put it: 'The salary of the chief executive of a large corporation is not a market award for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself.'

The Dangers of Pay for Performance

In a February, 2016, article in the Harvard Business Review, Cable and Vermeulen challenged the dogma that managers' (and in health care, physicians' and other professionals') pay should largely be based on "performance."

performance-based pay can actually have dangerous outcomes for companies that implement it.

They cited five points based on at least some research evidence to back up their contention.

1. Contingent pay only works for routine tasks. Companies should abolish contingent pay for their top executives because theirs is the least appropriate job for it. Decades of strong evidence make it clear that large performance-related incentives work for routine tasks, but are detrimental when the tasks is not standard and requires creativity.

***

2. Fixating on performance can weaken it. The goal of most executive incentive plans is to focus leaders on hitting goals and achieving outcomes. After all, that’s why it’s often called performance-based pay.' But as researchers have found, if you want great performance, performance is the wrong goal to fixate on.

Several studies have shown that when employees frame their goals around learning (i.e., developing a particular competence; acquiring a new set of skills; mastering a new situation) it improves their performance compared with employees who frame their work around performance outcomes (i.e., hitting results targets; proving competence; seeking favorable judgments from others).

***

3. Intrinsic motivation crowds out extrinsic motivation. When people feel intrinsically motivated, they do things because they inherently want to, for their own satisfaction and sense of achievement. When people are extrinsically motivated, they do things because they will receive bigger rewards. The goal of contingent pay is to increase extrinsic motivation – but intrinsic motivation is fundamental to creativity and innovation.

***

4. Contingent pay leads to cooking the books. When a large proportion of a person’s pay is based on variable financial incentives, those people are more likely to cheat. In academic terms, we would put it this way: extrinsic motivation causes people to distort the truth regarding goal attainment.

When people are largely motivated by the financial rewards for hitting results, it becomes attractive to game the metrics and make it seem as though a payout is due. For example, different studies have shown that paying CEOs based on stock options significantly increases the likelihood of earnings manipulations, shareholder lawsuits, and product safety problems. When people’s remuneration depends strongly on a financial measure, they are going to maximize their performance on that measure; no matter how.

***

 5. All measurement systems are flawed. Incentive plans demand that some metric be used as the trigger for a payout. The problem is that whatever package you construct – bonds, stocks, or bonuses – whatever performance criteria you decide on will be imperfect. For a complex job such as senior management, it is simply not possible to precisely measure someone’s “actual” performance, given that it consists of many different stakeholders’ interests, tangible and tacit resources, and short- and long-term effects. Even with HR executives clamoring for enhanced “people analytics” (and technology companies bending over backwards to deliver them) any measure you choose is going to be an inadequate representation of how you would like your CEO to behave.

Note first that these points suggest that the increased use of performance based pay for health care organizations' top managers may explain why many health care organizations actually perform so badly, and point 4 may help explain why pay for performance may actually help increase health care corruption.  

Note further that pay for performance (P4P) for health care professionals has been strongly pushed by many health policy experts, yet all these points also seem applicable to that usage.

Conclusion - Change Will be Resisted

So even when non-profit hospitals and hospital systems perform poorly, their executives continue to receive ever greater remuneration.  The executives, their public relations flacks, and their often compliant boards of trustees continue to cite the same stale talking points to justify their pay.  Yet these talking points are based on market fundamentalist theory and business school dogma whose credibility is increasingly challenged.  In the absence of anyone willing to confront them with these criticisms, the apologists for soaring health care executive pay continue to prattle their tired talking points.    

Meanwhile, as corporate governance expert Robert A G Monks said in a 2014 interview,

Chief executive officers' pay is both the symptom and the disease.

Also,

CEO pay is the thermometer. If you have a situation in which, essentially, people pay themselves without reference to history or the value added or to any objective criteria, you have corroboration of... We haven't fundamentally made progress about management being accountable.

Moreover, top health care executives' power to make warm personal gestures to themselves correlates with the ability to defend this power, per Mr Monks,

People with power are very reluctant to give it up. While all of us recognize the problem, those with the power to change it like things the way they are.

So I expect that many hospital and health system CEOs, like leaders of other big health care organizations, may talk about health care reform, but will avoid talking about, and will likely oppose attempts at real reform using their command of their organizations' marketers, public relations flacks, lobbyists, and lawyers.


We need true health care reform that would enable leadership that understands the health care context, upholds health care professionals' values, and puts patients' and the public's health ahead of extraneous, particularly short-term financial concerns. We need health care governance that holds health care leaders accountable, and ensures their transparency, integrity and honesty.  What we will get is endless resistance to such reform from those who personally profit from the current dysfunctional, and increasingly corrupt system.

Money vs Mission - How Generic Managers vs Physicians Think

On Health Care Renewal, we emphasize problems in leadership and governance in large health care organizations, and how they affect health care professionals' attempts to carry out their mission, and ultimately how they affect patients' and the public's health.  Large health care organizations are increasingly led by people trained in business, not health care professionals, thus generic managers.  The stewards of these organizations, the members of their boards of directors or boards of trustees, are also increasingly current or former managers without direct health care experience. Yet all too often, health care leadership is ill-informed, incompetent, unsympathetic or hostile to health care professionals' values, self-interested, conflicted, dishonest, or even corrupt.

Recently, in an effort to "bridge the gap" between physicians and MBAs, a new article in Becker's Hospital Review by Todd Kislak discussed differences in the thinking and values among business trained health care managers and physicians.  The author, an MBA, listed nine issues on which MDs and MBAs have different views.  I have summarized below what appear to me to be the main points, somewhat reorganized from how he did it. Whether he meant to or not, Mr Kislak showed why physicians may have reason not to trust their new generic managers. 

Making Widgets vs Treating Patients

Mr Kislak wrote that MBAs see health care in terms of orderly, uniform and standardized processes, while physicians see it in terms of the complexity and variability of patients, the ambiguity of diagnosis, and the unpredictability of outcomes.  

 2. Scalability. As a rule, MBAs tend to seek solutions to problems in a way that they perceive to be scalable and replicable, trained in the belief that the capacity to perform repetitively and consistently leads to better efficiency and quality. One-off situations are by definition outliers, and as such their importance tends to be downplayed.

Also,

 3. Centralization....   MBAs, ... tend to seek centralized approaches to decision-making, often appearing in the guise of policies, programs and processes. 

So, the gist is MBAs see health care as analogous to an assembly line.  The idea is to provide uniform, consistent services that conform to the policies, programs and processes that come down from central headquarters, run by MBAs.

On the other hand, he noted that physicians think that "every case has the potential to be unique in some way," while MBAs "view the unusual case as an unwelcome break in the routine, adding cost while slowing down the efficient care of other patients."

IMHO, common sense, and a raft of epidemiological data support the MDs.  Patients differ in demographics, biopsychosocial characteristics, co-morbid conditions, histories of previous treatment, responses to therapy, etc, etc, etc.  Patients, their complaints, and their situations are complex and variable.   Furthermore, acute illnesses, complications of chronic illnesses, accidents occur unexpectedly, in unexpected ways.  Diagnosis are often unclear and ambiguous.  Patients' prognoses and responses to therapy are unpredictable.  Thus, IMHO, seeing health care like an assembly, in terms of regularity and uniformity, seems dissociated from reality.  I have a hard time believing that MBAs who actually require medical care want to be treated as if they were identical to the next 10 patients.

"You Manage What You Measure" vs Complexity, Variability, Ambiguity, and Unpredictability of Patients, Diseases, Prognoses, and Treatments 

Mr Kislak suggested that MBAs emphasize measurement, especially the measurement of physicians' performance,

5. Performance. One of the healthcare MBA's favorite analytical tools is performance rankings of the MDs. Quantifying 'results' based on pre-determined metrics, assigning them a weight for averaging purposes and reducing performance down to a number is, to the MBA, how MDs and indeed all workers should be measured. 'You manage what you measure' is the MBA's mantra.

Also,

6. Productivity. MBAs look at MDs' productivity statistics (another performance measure) and wonder why so many MDs claim they are overworked. Looking at work hour statistics supplied by the Medical Group Management Association, one would not come away convinced that most MDs are logging more hours than, say, the typical healthcare MBA or indeed any high-caliber professional service provider.

Mr Kislak noted that physicians object to pay for performance and "may viscerally react to this uniform approach to performance assessment as inappropriate and even fundamentally at odds with the practice of medicine. Too much context is lost in the numbers, and too many factors beyond their personal control bear upon the performance 'data.'"   He did explain why MBAs are unconcerned about the accuracy and meaning of the measures they manage. 

The "you manage what you measure" heuristic seems based on the concept, or better yet fallacy that everything in health care is uniform and predictable.  This seems an extended version of what has been called the streetlight effect or the drunkard's search.  (See, for example, the version from Wikipedia, attributed to David H Freedman.  (2010). Wrong: Why Experts Keep Failing Us)  It begs the question of what is practical to measure is worth measuring, that is, is accurate, reliable, and meaningful.
 
Furthermore, there is now a considerable literature in medicine and health care showing that it is extremely difficult to develop performance measures that are reliable and meaningfully predictive.  (I cannot claim to have written comprehensively on this topic, but see posts here, and here.  For some good informal writing on why pay for performance [P4P] may not work, see Dr Robert Centor's blog DBs Medical Rants)

Considerable research has also shown that P4P rarely improves performance, and may make it worse.   For example, the results of a systematic review published in 2012 [Houle SKD, McAlister FA, Jackevicius CA et al.  Does performance-based remuneration for individual health care practitioners affect patient care? - a systematic review.  Ann Intern Med 2012; 157: 889-899.  Link here.] were that

The effect of P4P targeting individual practitioners on quality of care and outcomes remains largely uncertain.

Furthermore, a 2012 analysis of pay for performance [Glasziou PP, Buchan H, Del Mar C et al.  When financial incentives do more good than harm: a checklist.  Brit Med J 2012; 345: e5047. Link here.] included the summary statement,

Current evidence on the effectiveness of financial incentives is modest and inconsistent.

Thus, it would seem that the MBAs have neither good logic nor good evidence to support their faith in their current metrics, particularly those they use to assess physicians' performance. 



Power and Money vs Patients' and the Public's Health

Mr Kislak saw himself as supporting physicians in "their mission to provide high quality and effective care to their patients."  In the conclusion to his article, he asserted that physicians and MBAs "share the same overarching goals ... - effective healthcare delivery...."  However, in the body of the article, Mr Kislak suggested that MBAs see their goals in terms of power and money...  

4. Leadership. MBAs like to think of themselves as either nascent or actual leaders. It is understood that their intention is to build a career trajectory that will move them up in their organization (or in another organization) into positions of increasing authority and control. After all, this is an important reason why they become MBAs in the first place.

Furthermore, Mr Kislak wrote

8. Language. MDs and MBAs usually work for some type of business entity, whether that entity is for-profit, nonprofit, academic, government or sole proprietorship. To the MBA, however, it is all too apparent that with few exceptions MDs have little training in the language of business that all entities speak — the language of finance and accounting.

He noted that "this is a significant disconnect and a root cause of why MDs and MBAs often find themselves talking past each other on even the most basic business issues."  However, interestingly he did not even mention that MBAs may have as little facility with the language of medicine and health care as physicians have with the language of finance or accounting.  Furthermore, he seemed unaware that it makes as little sense to say that discourse in health care should be in the language of finance as to say discourse in finance should be in the language of health care. 

Finally, Mr Kislak made it very clear that to MBAs, money comes ahead of patient care,

9. Growth. MBAs are trained to look for ways to grow the organization's revenues and profits to the long-term benefit of the owners or stewards of that organization. Improvements to quality, efficiency, profits, revenues, technology and the like are generally viewed as a means to that end of growing,

Yet he noted that

the MDs sometimes wonder what all the growth talk may be costing their own priorities, including their compensation. This issue can become rather sensitive when it implies that the MD is less concerned with the long-term health of the organization than the MBA, and can devolve into finger-wagging about lack of engagement or weak physician-hospital alignment.

It is a measure of how much generic managers have taken over that the physicians may be blamed for lack of interest in the long-term "health of the organization," while the MBAs seem totally unconcerned about what effects the organization has on the real health of patients or the public.

Thus, fundamentally, MBAs running health care organizations are mainly interested in growing their organizations so that they bring in more money.  MBAs hope to leverage their organizations' financial performance so that they personally can rise to positions of greater power and wealth.  Health care is simply a "means to that end."  Mr Kislak seems to have confirmed my worst fears that most of health care's current generic managers put short-term revenue, and their own wealth and power, ahead of patients' and the public's health. 

Summary

In 1988, Alain Enthoven advocated in Theory and Practice of Managed Competition in Health Care Finance, a book published in the Netherlands, that to decrease health care costs it would be necessary to break up the "physicians' guild" and replace leadership by clinicians with leadership by managers (see 2006 post here). Thus from 1983 to 2000, the number of managers working in the US health care system grew 726%, while the number of physicians grew 39%, so the manager/physician ratio went from roughly one to six to one to one (see 2005 post here). As we noted here, the growth continued, so there are now 10 managers for every US physician. 


Now we have one MBA with considerable experience inside health care, and personal sympathy for the goals of high quality and effective care for patients, who. perhaps inadvertently, suggested why this managers' coup d'etat was a terrible idea, and why MBAs should not be allowed to lead health care organizations.  He corroborated our concerns that generic managers may be ill-informed and do not understand the health care context, particularly the variability and complexity of patients and their problems, the ambiguity of diagnosis, and the unpredictability of prognosis and response to therapy.  They believe in simplistic management approaches, particularly the usefulness of measurement and metrics, even in the absence of logic or evidence supporting them.  Furthermore, they may be heedless of the mission of health care, particularly of the primacy of the patient, and in fact put their own organizations' revenue ahead of patient care, and ultimately may pursue power and money rather than patients' and the public's health.  

As I have said before,  true health care reform would put in place leadership that understands the health care context, upholds health care professionals' values, and puts patients' and the public's health ahead of extraneous, particularly short-term financial concerns. We need health care governance that holds health care leaders accountable, and ensures their transparency, integrity and honesty.

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

ADDENDUM - This post was re-posted on the Naked Capitalism blog. 
 

Our Man in the NQF? - CareFusion Settles Kickback Allegations for $40.1 Million and Government Alleges They Meant to Manipulate National Quality Forum Standards

What appeared to be yet another entry in the march of legal settlements turns out to be more interesting than it first appeared.

The Basic Story: Off-Label Marketing 

The story was initially briefly reported in the media.  A report in the Seattle Post-Intelligencer on 9 January, 2014, was perhaps the most complete,

CareFusion, a manufacturer of medical and surgical supplies and medical devices, has agreed to settle charges of illegal marketing practices and kickback payments for promoting sales of the company’s surgical preparation solution, Chloraprep.

Under the terms of the settlement with Washington, other states, and the federal government, CareFusion will pay a total of $40.1 million.

In particular,
 

When the FDA approves a surgical solution such as Chloraprep as safe and effective, its manufacturer can’t market or promote it for an 'off-label' use – any use not approved by the FDA.

Chloraprep was approved for specific inpatient hospital procedures, including the preparation of a patient’s skin prior to surgery or an injection. The FDA rejected its use for prepping the skin prior to inserting catheters into veins for administering medications, or cleaning the skin as part of closing wounds.

The lawsuit alleges that from Sept. 1, 2009 to Aug. 31, 2011, CareFusion promoted Chloraprep for improper uses. CareFusion also allegedly publicized unverified information about Chloraprep during the same time period, Ferguson said.

So this follows a template we have seen before, most recently here.  A company promotes a drug or device for "off-label" uses.  While physicians are legally allowed to prescribe a drug or use a device for reasons other than its official indications, companies are not legally allowed to promote such uses.  Sometimes it turns out that the drug has benefits that outweigh its harms when used off-label, in which case the violation could be considered technical.  In other cases, the drug might turn out to be useless or even net harmful when used off-label, so the violation indicates putting revenue ahead of patients' welfare.  

The reporting on the CareFusion Chloraprep settlement did not clearly suggest that the off-label use was harmful to patients.

Allegations of Kickbacks to Promote Off-Label Use, but How?

It gets more interesting.  The Post-Intelligencer also noted,

The states also contend that in 2008 CareFusion’s predecessor corporation entered into agreements that CareFusion assumed legal and financial responsibility for. This included payments to Health Care Concepts Inc., payments that were allegedly made to hide kickbacks to the physician-owner of HCC for promoting and influencing providers to use Chloraprep, he said. This violates federal and state anti-kickback laws.

Now the allegations also include kickbacks to the "physician-owner" of a company to facilitate off-label promotion.  So the issue goes beyond a technical violation of the law.  The Post-Intelligence report, however, did not make clear what Health Care Concepts Inc actually did to contribute to off-label promotion.

A quick attempt to find out more about this company via the web was not fruitful.  There are lots of companies/ organizations called Health Care Concepts or some variant.  The most relevant may be this one, which lists CareFusion as a "partner" on its main web-page.  What this company actually does is a bit unclear.  Its business model is described as "a private incubator of early products, services, and technologies, as well as an accelerator of mature solutions that will be taken to scale." What that has to do with off-label promotion of a product of a big established company like CareFusion is not clear.  How this company could have influenced providers is not clear, given that it is not an advertising firm, public relations firm, or medical education and communication company (MECC).

So what is going on here?  

Allegations of a $11.6 Million Payment to Manipulate the National Quality Forum Standards


Yesterday, 21 January, 2014, Modern Healthcare began to explain the mystery.   

Many healthcare companies have been accused of paying kickbacks to influence physicians' medical decisions, but one major supplier allegedly tried to steer an entire industry by influencing the recommendations of the National Quality Forum

The NQF, which reviews medical evidence and makes recommendations for improving healthcare, acknowledges that a well-known patient safety advocate is alleged to have received millions of dollars to promote a surgical sterilization product while co-chairing an NQF committee that suggested hospitals use that product. 

Federal officials say Dr. Charles Denham, co-chair of NQF's Safe Practices Committee in 2010, received $11.6 million from San Diego-based CareFusion to promote the company's ChloraPrep line of skin-preparation products. Denham's committee at the NQF also recommended surgeons use ChloraPrep products to prevent surgical infections, the NQF said.

The allegations about the role of Dr Denham in the NQF also did appear in the the official US Department of Justice press release.

Allegations of Bogus Contracts, and Non-Denial Denials

The allegations produced some non-denial denials (in the phrase found in All the President's Men).

Dr Denham responded, but through a lawyer:

A statement from Denham's attorney, Larry Gondelman of Powers Pyles Sutter & Verville in Washington, said reports that the underlying lawsuit involved Dr. Denham were 'blatantly false.'

Denham was not accused of wrong-doing in the whistleblower lawsuit, and Gondelman said Denham has and continues to cooperate with investigators in the case.

Note that while the attorney denied that Dr Denham was named in the underlying lawsuit, he did not apparently specifically deny the allegations.

The NQF also reponded,

 An NQF review committee removed the reference to the specific product before final publication of 'Safe Practices for Better Healthcare' in 2010.

'An NQF ad hoc review did not find sufficient evidence to support one skin preparation over another,' a statement from the organization said. 'The ad hoc review effectively served its role of rapidly responding when a potential issue is identified.'

Note that the NQF press release did not deny that the CareFusion money was given to Dr Denham's organization, nor that the NQF report might have promoted the use of a class of products in which CareFusion's Chloraprep resides.

A follow-up story in Modern Healthcare noted that Dr Denham confirmed the payment of the money to his company, but not its purpose,

 Renowned quality expert Dr. Charles Denham confirms that CareFusion paid his company more than $11 million, but Denham says he was surprised to see the U.S. Justice Department describe the money as kickbacks intended to influence national quality-of-care guidelines published by the National Quality Forum.

Dr Denham's lawyer confirmed the payment, but did not further explain it:

Denham's lawyer, Larry Gondelman of Powers Pyles Sutter & Verville in Washington, acknowledged that CareFusion did pay Denham's company under two contracts. 

And,

Gondelman said the $11.6 million paid to Denham's company covered 'an array of services' and that he could not elaborate.

Again, note that Mr Gondelman did not specifically deny that the money served as a kickback.

Meanwhile, the Department of Justice alleged something more elaborate, and nefarious, 

The Justice Department, though, says the contracts were written to look as though CareFusion was buying consulting, software development and strategic marketing services, as well as the completion of three unnamed projects. The value of the deals, the government alleges, far exceeded the fair-market costs of those services, and that one of the actual purposes of the deals was to conceal kickbacks to Denham while he served on the National Quality Forum.

Interval Summary

So what is clear so far is that:
-  CareFusion agreed to a $40.1 million settlement of allegations that it provided kickbacks to promote off-label use of its product.
-  CareFusion paid $11.6 million to Health Care Concepts
-  Health Care Concepts is run (and possibly owned) by Dr Charles Denham, who chaired a National Quality Forum committee that recommended use of CareFusion's product ChloraPrep in a performance standard and the final version of the NQF standard recommended use of a group of products including ChloraPrep

We have frequently discussed how health care corporations may promote goods, particularly drugs and devices and services through deceptive and unethical practices, including inducements ranging form creation of conflicts of interest to outright bribes and kickbacks.   We have also discussed the influence of individual and institutional conflicts of interest on clinical practice guidelines.  This has become an important enough problem for the US Institute of Medicine to weigh in with standards for trustworthy guidelines that markedly limit such conflicts of interest. 

This case seems notable because it may link the problems of deceptive and unethical promotion with the influencing of clinical practice guidelines.  It is particularly notable because the organization generating the guidelines in question, the National Quality Forum, has become large, influential, and authoritative.  Re the latter point, the latest Modern Healthcare article affirmed,

The NQF is a standards-setting organization for the healthcare provider industry. It holds the exclusive contract to provide Medicare and Medicaid with recommendations on a national quality-of-care strategy and the measures used to gauge improvements.

In fact, while the NQF performance standards can function as guidelines, they also may be bases for pay for performance schemes that attach real incentives to guidelines, which could become perverse if the guidelines have been manipulated.

Can the NQF Defend Against Conflicts, and If Not, Should it Remain So Authoritative?

So the big question is whether the NQF, given its unique influence, has any meaningful approach to prevent its standards from being influenced by conflicts of interest?

The NQF does have a recent conflicts of interest policy. However, according to my reading, it neither bans committee members with conflicts of interest, nor even requires public disclosure of conflicts of interest.  All it seems to require is that committee members disclose conflicts internally and voluntarily recuse themselves from deliberations which may be affected by them.  Although the policy states that conflicts of interest may be made public, I could find nothing in the report which Dr Denham co-authored about conflicts of interest or competing interests affecting any of the authors, including Dr Denham

Furthermore, a very quick look at information publicly available on the NQF web-site suggests the organization itself may have major institutional conflicts of interest.  The NQF is one of those "public-private partnerships" that have become all the rage.  Several members of its board of directors have leadership positions in large health corporations, financial firms with large health care interests, or trade associations for large health care corporations: 

- Elizabeth J. Fowler, PhD, JD, is Vice President, Global Health Policy, in the Government Affairs & Policy group at Johnson & Johnson.

- Robert Galvin, MD, is Chief Executive Officer, Equity Healthcare, at The Blackstone Group.

 - Karen Ignagni, President and Chief Executive Officer of America’s Health Insurance Plans (AHIP), is the voice of health insurance plans....

- J Mark Overhage MD, PhD,  Chief Medical Informatics Officer, Health Services, Siemens Healthcare


Thus it is conceivable that they could personally profit, and that their organizations could institutionally profit from standards that favor their organizations' interests.  

Furthermore, NQF receives funding from the US government and private foundations, but also from pharmaceutical companies and their in-house foundations:

the Bristol-Myers Squibb Foundation, the Cardinal Health Foundation, Pfizer Inc., Sanofi-aventis,...

Unless the current case leads to big changes in the prevalence of conflicts of interest among the NQF board, the continuation of its institutional conflicts of interest generated by its sources of funding, and its weak policy on conflicts affecting committee members, the question becomes whether it should continue to have such an authoritative role?

As we have said over and over, pervasive conflicts of interest affect health care decision-makers and policy makers and the organizations within which they function.  Such conflicts threaten to put various private interests way ahead of patients' and the public's health.  If we really want health care that will put patients' and the public's health first, we need to end such arrangements that favor private gain.  

 Roy M. Poses MD on Health Care Renewal

ADDENDUM (23 January, 2014) - A closer re-reading of the NQF conflict of interest policy made it clear that recusal is not voluntary, and that conflicts of interest may be revealed publicly, but that such disclosure is not mandatory.  The paragraph above dealing with these issues was revised accordingly.  

What the Pfizer (III)? - Enormous Pay for Poor Performance

The recent in-depth investigation by Fortune reporters of 10 years of dysfunctional leadership at Pfizer, the "world's largest research-based pharmaceutical company," raises many issues about leadership and governance in health care (see our post here).  To continue what is likely to become a lengthy series, let us now discuss the discrepancy between the markedly dysfunctional leadership performance documented in the Fortune article and the pay given to the leaders involved.

"Hank" McKinnell et al - 2003-2006

Mr McKinell was forced to retire in 2006. The Fortune article described Mr McKinnell as a "desperate CEO" by 2002 because he could find no way to replenish the company's fading drug pipeline; who then became an absent CEO who "left a power vacuum" and then triggered internal political warfare by setting up a "bitter contest" over succession planning.

The 2006 Pfizer proxy statement reported the total compensation received by Mr McKinnell from 2003-2005.
2003 - $10,706,002
2004 - $11,355,317
2005 - $12,767,270
Each line reflects the combination of salary, bonus, other annual compensation, restricted stock awards, securities underly  options, LTIP payouts, and all other compensation. 
 
The four other best paid executives were Karen Katen, Vice Chairman and President, Prizer Human Health,  David Shedlarz, Vice Chairman, Jeffrey B Kindler, Vice Chairman and General Counsel, and John LaMattina PhD, Senior Vice President, President, Pfizer Global Research and Development.  Their total compensation for these years were
Ms Katen
2003 -  $4,747,478
2004 -  $8,541,220
2005 - $6,663,283
Mr Shedlarz
2003 - $3,722,508
2004 - $6,743,591
2005 - $3,897,293
Mr Kindler
2003 - $3,113,308
2004 - $4,181,817
2005 - $3,338,728
Mr LaMattina
2003 - $2,228,804
2004 - $4,410,130
2005 - $3,558,415

Despite MrMcKinnell's poor performance, he never received less than $10 million a year in the three years before he was forced out.  Other top managers, despite never effectively compensating for Mr McKinnell's bad performance earned at least $ 3 million a year in these three years, with one exception, one manager who only made a bit over $2 million in one of the three years.

Jeffrey Kindler et al 2007 - 2010 

Kindler was forced to resign in 2010. The Fortune article also described Mr Kindler as "suddenly desperate" after two failures of drugs in development; someone who "just couldn't make up his mind," about acquisitions and spin-offs; "anguished" about research, leading to a "messy" overhaul; and putting "destructive" trust in a subordinate with previously described problems with "character, integrity and divisiveness" leading to loss of the loyalty of the executive team.

The 2010 Pfizer proxy statement revealed the total compensation received by Mr Kindler from 2007-2009.
2007 - $13,075,099
2008 - $15,547,600
2009 - $14,898,038
In this proxy statement, each line included salary, bonus, stock awards, option awards, non-equity incentive plan compensation, change in pension value and non-qualified deferred compensation earnings, and all other compensation. 

The four other best paid executives were F D'Amelio, Chief Financial Officer, I Read, Group President, Worldwide Biopharmaceutical Business, M Mackay, President, Pharmatherapeutics Research & Development, and Dr F Lewis-Hall, Chief Medical Officer.  Their total compensation for these years was:
Mr F'Amelio
2007 - $12,338,821
2008 - $6,979,111
2009 - $7,858,969
Mr Read
2007 - $4,560,869
2008 - $7,629,185
2009 - $9,447,036
Mr Mackay
2007 - $3,590,158
2008 - $6,718,580
2009 - $5,878,806
Dr Lewis-Hall
2009 - $5,087,263 (hired in 2009)

Despite Mr Kindler's poor performance, he never received less than $13 million a year in the three years before he was forced out.  Other top managers, despite never effectively compensating for Mr McKinnell's bad performance earned at least $ 4.5 million a year in these three years, with one exception, one manager who only made a bit over $3.5 million in one of the three years.


Summary
 
The business oriented leaders of health care, and some of their sympathizers in health care and policy research are given to preach that "pay for performance," (P4P) applied to health care professionals is a solution to the problem of ever rising health care costs, and ever declining health care access and quality. 
 
Pay for performance applied to the top hired leaders of health care organizations has become a cruel joke.     The Pfizer example shows a company with chronically bad leadership paid hundreds of times what average workers receive.  Despite a parched drug pipeline and languishing stock price, top managers made millions a year, and CEOs who would eventually be forced out for poor performance made tens of millions a year.  One cannot help but conclude that the main goal of Pfizer was to enrich its top managers.  Managers whose main goal is to enrich themselves, of course, are unlikely to manage well, and unlikely to promote development and manufacturing of drugs whose benefits exceed their harms, and which decrease symptoms, improve function, prevent morbidity, extend life, and generally benefit health.   
 
Now that the scope of the failings of Pfizer's hired leaders has been made clearer, the company has become one of the best, or worst examples of self-interested leadership and its perils for health care. 
 
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.

What the Pfizer (II)? - Lack of Transparency About Dysfunctional Leadership

The recent in-depth investigation by Fortune reporters of 10 years of dysfunctional leadership at Pfizer, the "world's largest research-based pharmaceutical company," raises many issues about leadership and governance in health care (see our post here).  To continue what is likely to become a lengthy series, let us discuss the most obvious one, is the discrepancy between what appeared in Fortune and what Pfizer chose to make public about its leadership.

This discrepancy is most apparent when one compares official descriptions of executive performance with what the Fortune reporters found.  To illustrate, consider the official descriptions of the performance of former Pfizer CEOs Hank McKinnell and Jeffrey Kindler in the respective years in which they were forced out.

"Hank" McKinnell -2006

Mr McKinell was forced to retire in 2006.  The Fortune article described Mr McKinnell as a "desperate CEO" by 2002 because he could find no way to replenish the company's fading drug pipeline; who then became an absent CEO who "left a power vacuum" and then triggered internal political warfare by setting up a "bitter contest" over succession planning.

The 2006 Pfizer proxy statement  explained how the Board of Directors' Compensation Committee assessed Mr McKinnell's performance,

The Committee does not rely solely on predetermined formulas or a limited set of criteria when it evaluates the performance of the Chairman and CEO and the Company's other elected officers.

In 2005, the Committee considered management's continuing achievement of its short and long-term goals versus its strategic imperatives, including Dr. McKinnell's objectives which are shown below:

• Achieve specific revenue, EPS, operating cash flow per share, and merger-related synergy goals
• Effectively communicate strategy and financial results to increase shareholder value
• Deliver more new medicines more quickly to patients, through industry- leading R&D productivity and significant in-licensing activity
• Adapting to Scale
• Promote new directions in health and wellness
• Shape a positive environment for better healthcare
• Developing People, Talent, and the Organization

The Compensation Committee then assessed McKinnell's performance thus:

Financial and merger synergy goals

Overall, the financial targets, which reflected a significant stretch for the organization given the dynamic business environment and the loss of exclusivity for certain key products, were exceeded.

Communicate effectively

However, given the performance of the Company's stock price in 2005 when compared to prior years, the Committee felt that the goal of effectively communicating strategy and financial results to increase shareholder value was not met.

More medicines more quickly

All R&D productivity and licensing goals were met or exceeded, with, notably, five products under priority review at the FDA — an industry first. As the R&D organization continues to establish the industry standard in productivity, the Committee determined that performance against this objective significantly surpassed expectations.

Adapting to scale

In 2005, initiatives related to Adapting to Scale resulted in twice the cost reduction that had been estimated for the year, giving a very strong start to the Company's efforts to reduce the cost base and streamline the organization.

So,

the Committee believes that overall performance significantly surpassed the expected outcomes for this objective.

Promote new directions

In promoting new directions in health and wellness, Pfizer's newly launched Healthy Directions program for U.S. based colleagues far exceeded expectations.... the Committee determined that these goals were significantly exceeded.

Shape a positive environment

The Company is also leading efforts to rebuild trust in the industry and large companies in general.

So,

Overall, the Committee believes that the Company surpassed expectations of performance against this particularly challenging objective.

Developing people, talent, and the organization

With respect to the final objective for 2005 — Developing People, Talent, and the Organization — the Committee recognized that senior leadership of the Company has been instrumental in developing and implementing new People & Talent strategies related to long-term development planning for key talent, enhancing leadership skills for all 'people managers', and enabling Pfizer to become a global leader in attracting, developing, and engaging a diverse workforce that delivers superior business results. As a result, the Committee determined that the goals of this objective were surpassed.

So, according to the Committee, Mr McKinnell's performance was excellent in all areas but one.

Accordingly, based apparently on this stated "General Compensation Philosophy,"

The Committee believes that compensation paid to executive officers should be closely aligned with the performance of the Company on both a short-term and long-term basis....

So the present value of Mr McKinnell's total compensation was estimated to be $15,880,989.

Jeffrey Kindler - 2010

Kindler was forced to resign in 2010. The Fortune article also described Mr Kindler as "suddenly desperate" after two failures of drugs in development; someone who "just couldn't make up his mind," about acquisitions and spin-offs; "anguished" about research, leading to a "messy" overhaul; and putting "destructive" trust in a subordinate with previously described problems with "character, integrity and divisiveness" leading to loss of the loyalty of the executive team.

However, in the company's 2010 proxy statement, the Compensation Committee made this general assertion:

The Committee believes that Mr. Kindler's leadership was a significant factor in the continued progress made by Pfizer in 2009 in strengthening the foundation for future growth and long-term success.

Then, Mr Kindler, like Mr McKinnell, was assessed against specific performance standards thus:

Financial Results

Despite the unprecedented challenges in the global macroeconomic environment and other challenges, the Company exceeded the target goals for 2009 set by the Committee for annual incentive purposes

Enhancing the Product Portfolio

Under Mr. Kindler's leadership and oversight, during 2009 we improved the product portfolio (early stage through late stage),...

People Management

In 2009, we met or exceeded each of our people management goals,...

Business Model Implementation

the Company remains on track to meet the various research and development goals announced in March 2009. Mr. Kindler also further strengthened the Company's leadership team through strategic hiring and the redeployment of key senior leaders across the Company.

Wyeth Transaction

During 2009, we devoted significant attention to the acquisition of Wyeth. Under Mr. Kindler's leadership, we finalized negotiations, gained regulatory approval and closed the $68 billion acquisition of Wyeth, all in an expeditious manner. During the year, Mr. Kindler oversaw a detailed review of Wyeth and its businesses and the development of an integration plan,...

So,

With the completion of the acquisition under Mr. Kindler's leadership, Pfizer is one of the largest biopharmaceutical companies in the world, as well as a more diversified company in the health care industry.

Industry Leadership

During 2009, Mr. Kindler was actively involved, through both Pfizer and external organizations, in developing and advancing U.S. and global public policies that serve the overall interests of our Company and our shareholders

In summary,

In view of Mr. Kindler's accomplishments noted above and the fact that he achieved all of his objectives and exceeded most of them, the Committee believes that Mr. Kindler successfully led the Company toward the achievement of its strategic goals during 2009....

Based on the same general compensation philosophy noted above, Mr Kindler's total compensation in 2009 was $14,898,038.

Summary

Anyone who depended on these proxy statements to assess the performance of the Pfizer CEOs in 2006 and in 2010 would have likely concluded that both CEOs exhibited exemplary performance. These impressions would have apparently been sharply discrepant with the realities inside the company at those times.

Like the children of Lake Woebegone, we have frequently noted how almost all CEOs seem to appear "above average" or better to their boards of directors or trustees. The case of Pfizer in 2006 and in 2010 shows a board of directors which painted a grossly optimistic view of CEO performance to the public. In both years, these views would almost immediately clash with the fates of the particular CEOs. Now, based on the Fortune investigative report, these views seem even more overblown if not absurd.

This case, which again concerns the "world's biggest research driven pharmaceutical company," suggests one should be very skeptical about evaluations of executive performance in proxy reports. Proxy reports now appear to be a very cloudy window through which to view how corporations are really run. However, in the US, proxy reports have legal standing and are supposed to be sources of definitive information for stockholders and anyone else interested in the corporations that produce them.

Thus, the large organizations that dominate US health care may be even less transparent than they appear. True health care reform requires true transparency, and meaningful deterrence of propaganda disguised as fact.

Pay for What? - Redux: Surrealistic Pay for Health Care Corporate CEOs

Pay-for-performance has been a persistently fashionable mantra for health care business leaders and policy advocates, particularly as applied to physicians to control costs and perhaps even improve quality.  We have been highly critical of current methods proposed to measure performance and tie pay to it (e.g., here), and other bloggers, notably Dr Robert Centor at DB's Medical Rants, have vigorously pursued this issue (e.g., here).

It is beyond ironic that meanwhile, the pay of health care organizations' leaders seems less and less related to their performance.  For example, in a recent series on local executive pay in the Boston Globe there were these examples:

Hologic

Hologic Inc. gave its chief executive, John W. Cumming, a $1.5 million “retention payment’’ as part of his $10.5 million pay package last year. He was promised the payment in mid-2006 if he remained with the company through the end of 2008. At the same time, the Bedford women’s health care products company posted a $2.2 billion loss, largely resulting from a big write-down related to the 2007 purchase of Cytic Corp. Cumming has since stepped down as chief executive, but remains chairman. Hologic declined to comment.

Charles River Laboratories

Charles River Laboratories International Inc. chief executive James C. Foster received $1.3 million in deferred compensation in a year when the company disclosed plans to cut 300 workers, or 3 percent of its workforce. Charles River declined to comment.

Note that a Charles River board member was one of the authors of an Institute of Medicine report advocating P4P for physicians, as we posted here. Ah, the irony.

Boston Scientific

New Boston Scientific Corp. CEO J. Raymond Elliott started midyear and received a $1.5 million bonus. Boston Scientific posted a $1 billion loss last year.

Elliott got a lot more than that, as reported in a companion Boston Globe article:

Elliott, whose experience includes running another medical device company, Zimmer Holdings Inc., was paid a performance bonus of nearly $608,000 last year, in addition to a $1.5 million signing bonus and $29.4 million in stock awards and options.

Meanwhile, the company's losses continue to mount:

And in February, Boston Scientific agreed to pay $1.7 billion to settle patent infringement charges from rival Johnson & Johnson, making it likely the company will post another loss this year.

Note that Boston Scientific has had its ethical as well as financial failings, especially involving the case of the faulty implantable cardiac defibrillators, which resulted in settlements of civil lawsuits alleging that it hid data about the defects, and two guilty pleas by a company subsidiary to charges that it did not notify the FDA about these problems (see post here).

Vertex Pharmaceuticals Inc

At Vertex Pharmaceuticals Inc., chief Matthew W. Emmens, who took over five months into the year, received $2.8 million performance award last year, a year in which the company lost $642 million.

He actually got a lot more than that, too, as per the second Globe article:

His pay package included more than $15 million in restricted stock and options.

Cephalon

At the same time, an op-ed by Michael Hiltzik in the Los Angeles Times noted that a health care company had the most unfairly paid CEO, according to "veteran compensation consultant Fraef Crystal,"

Cephalon Inc., ... CEO, Frank Baldino, Crystal identifies as the most overpaid chief executive in his database. (Baldino's $11.1 million pay last year is 832% of what would be fair, Crystal calculated.)

Note that Cephalon settled charges of off-label promotion of narcotics for over $400 million in 2008 (see post here).

Summary

So the general rule seem to be that top executives of health care organizations make large, sometimes enormous amounts of money, and that occurs regardless of company or personal performance. The riches keep flowing even if the company loses millions or billions, or lays off significant chunks of its workforce.

Hiltzik identified corporate executive pay as:

the No. 1 scandal of American business — executive pay that bears scant relationship to what these people are worth.

The CEO pay curve has been galloping out of control for so long that it has achieved the status of a cliche. In 1965 the average U.S. CEO earned 24 times the pay of the average worker. Four decades later the ratio was 411 to 1..

Furthermore,

The dismal reality of CEO pay is that it comprises two problems, not one. Top executive pay generally is too lavish in the U.S. no matter what performance standard you apply. Good performance or bad, the pay disparity between the CEO and the rank and file is larger than in any other country, contributing to rising income inequality and to its consequent social pathologies.

It's also based on several flawed assumptions, argue Jay Lorsch and Rakesh Khurana of Harvard Business School in a recent article for Harvard Magazine. One is that money is the only motivating factor behind executive performance.

Another is that shareholders are the only stakeholders in corporate performance whose interests matter. This is a relatively recent paradigm, they observe; as late as 1990 business groups recognized the importance of a corporation's responsibility to stakeholders such as employees, customers, suppliers and the community.

The flaw in the latter assumption is that it ties CEO pay to stock prices, which they can't influence on their own. But the picture of the CEO as virtually the sole auteur of a corporation's fate permeates American society. Listen to a Meg Whitman campaign ad talking about 'the EBay Meg created.' If you pay attention you may catch a reference to the 15,000 employees who were there when she left, at least a few of whom must have had something to do with the company's success.

A further problem is that the pay of top corporate leaders is generally set not by the share-holders, that is, the owners of the company, but by boards of their cronies, many of whom are also members of the CEO club.  As Hiltzik noted,

although most corporate boards make a show of placing pay decisions in the hands of a committee of 'independent' directors, the members are almost always current or former top executives themselves, members of a tight club.

By the way, as we posted here, a member of both the Hologic and Vertex boards was a former hospital CEO who got a generous retirement package despite its financial straits.

So while their policy flacks continue to push pay-for-performance for physicians, maybe health care corporate leaders should set an example by embracing real pay for performance themselves.

To repeat, again, again, again,.... Until they do, top executives remain really different from you and me.  If we do not hold health care leaders accountable, if we do not provide them with incentives that are proportional to their actual performance, why should we expect health care organizations to do any more than satisfy their leaders' self-interest?

University of California CEO - You Can Reduce My Pay if "You Throw In Air Force One"

The San Francisco Chronicle recently reported how students at the University of California have been providing a satirical approach to the problems of the university's leadership:

It's been a seriously dramatic year at the University of California, where hundreds of students seized buildings, demonstrated and shut down regents meetings last fall to protest rising tuition and the perceived privatization of the public school.

It's also been a satirically dramatic year, thanks to the UC Movement for Efficient Privatization, a fledgling group of mostly grad students in business attire that uses humor tinged with sarcasm to lampoon UC officials.

Their own name is an example. Many UC students believe leaps in tuition and reduced state funding are turning the public university into a private institution.

In particular, they drew attention to the university president's sense of entitlement:

UCMeP has made itself known on the Berkeley campus since September. That's when UC President Mark Yudof, who earns about $600,000, drew students' ire for telling the New York Times he'd take a $200,000 pay cut for salary parity with President Obama - if Air Force One were part of the package.

Seeing this as a philanthropic opportunity, UCMeP issued fundraising flyers: 'Help Buy Mark Yudof a Plane!'

The relevant parts of the New York Times interview, which I regret to say I missed at the time it was published, are:

Some people feel you could close the U.C. budget gap by cutting administrative salaries, including your own.
The stories of my compensation are greatly exaggerated.

When you began your job last year, your annual compensation was reportedly $828,000.
It actually was $600,000 until I cut my pay by $60,000. So my salary is $540,000, but it gets amplified because people say, 'You have a pension plan.'

What about your housing allowance? How much is the rent on your home in Oakland?
It’s about $10,000 a month.

Does U.C. pay for that on top of your salary?
Yes, and the reason they do that is because they have a president’s house, it needed $8 million of repairs and I decided that was not the way to go. Why the heck would I ever authorize $8 million for a house I didn’t want to live in anyhow?

Why can’t you have architecture students repair the house for course credit?
Let me ponder that.

What do you think of the idea that no administrator at a state university needs to earn more than the president of the United States, $400,000?

Will you throw in Air Force One and the White House?

While Yudof's response is clearly sarcastic, he obviously never substantively addressed why he is entitled to be paid comparably to the President of the richest country in the world.

We have written a few times about the travails of the University of California, some of its multiple campuses, and in particular its medical schools and teaching hospitals.  Most recently we have written about how leaders of its teaching hospitals also seemed to feel entitled to substantial compensation, including bonuses for "performance" even when their institutions were receiving bad publicity for quality problems (posts here and here).

Again and again we see examples of leaders of academic medical institutions, and health care organizations in general who seem to feel entitled to be judged differently, and rewarded differently than the common folk.  These entitlements exist even when the economy, or the financial performance of the specific organization prevents other people from making any economic progress. This entitlement exists even if those other poeple actually do the work, and ultimately provide the money that sustains the organization.


Although the executives of not-for-profit health care organizations generally make far less than executives of for-profit health care corporations, collectively, hired managers of even not-for-profit health care organizations have become richer and richer at a time when most Americans, including many health professionals, and most primary care physicians, have seen their incomes stagnate or fall. They are less and less restrainted by passive, if not crony boards, and more and more unaccountable. In a kind of multi-centric coup d'etat of the hired managers, they have become our new de facto aristocracy.

Or as we wrote in our previous post, executive compensation in health care seems best described as Prof Mintzberg described compensation for finance CEOs, "All this compensation madness is not about markets or talents or incentives, but rather about insiders hijacking established institutions for their personal benefit." As it did in finance, compensation madness is likely to keep the health care bubble inflating until it bursts, with the expected adverse consequences. Meanwhile, I say again, if health care reformers really care about improving access and controlling costs, they will have to have the courage to confront the powerful and self-interested leaders who benefit so well from their previously mission-driven organizations. It is time to reverse the coup d'etat of the hired managers.

Hospital Executive Pay in the Land Where All Our CEOs Are Above Average

In the US, it seems to be the season for news reports on the pay of hospital executives.  Here are reports from three states in the southeast, in alphabetical order.

Florida

The St Petersburg (FL) Times reported on the total compensation of local hospital executives:

While many workers in the Tampa Bay area have had their wages frozen or reduced in the past few years, life has been kinder to chief executives at nonprofit hospitals in the Tampa Bay area.

A bright light in a dim economy, most local tax-exempt hospitals have continued to post surpluses, despite losses on investments and the growing number of uninsured. And the executives at the helms of these organizations have been duly rewarded by their community-based boards, according to the federal tax filings required of such organizations. In fact, average compensation at tax-exempt hospitals here is well above the national average.

Members of the millionaire men's club include:

• Isaac Mallah, chief executive of St. Joseph's Hospital in Tampa, who received total compensation of $2.2 million in 2008, the most recent year available.

• Mallah's boss, Steve Mason, who heads BayCare Health System, toted up total compensation of more than $1.7 million.

• Tampa General Hospital's chief executive, Ron Hytoff, also earned more than $1.7 million.

• At All Children's Hospital in St. Petersburg, Gary Carnes' pay package was about $1.2 million. Across the street at Bayfront Medical Center, Sue Brody, the only female chief executive of a freestanding nonprofit hospital in the area, was paid $744,149.

• Dr. William Dalton, president and chief executive of Tampa's H. Lee Moffitt Cancer Center and Research Institute, received just over $1 million in total compensation in 2008. But it could have been higher. In both 2008 and 2009, Moffitt's board eliminated bonuses for all managers because of tough economic conditions.

Average compensation for chief executives at 14 nonprofit hospitals in the Tampa Bay area was about $876,000. Meanwhile, according to an IRS survey of more than 500 nonprofit hospitals last year, the national average was $490,000.

How were these generous amounts of compensation justified?

BayCare's Mason said he won't apologize for what he's paid to lead the seven-hospital system, which had more than $2 billion in revenue in 2008.

'I have significant responsibility over a lot of resources, providing a service that improves the health of the community,' said Mason, who joined BayCare in 2004. 'This is what it would cost our board to replace me.'

In addition,

Officials at area hospitals say their boards adhere 'meticulously' to IRS rules, hiring independent consultants every year to ensure their chief executives' salaries are comparable to pay at similarly sized nonprofit institutions. Mason said BayCare's board tries to ensure that its total compensation stays at about 75 percent of the maximum paid.

North Carolina

The Charlotte Business Journal noted:

Carolinas HealthCare paid Chief Executive Michael Tarwater $3.4 million in 2009, down from $3.5 million a year earlier. His 2009 compensation includes a base salary $950,697 and bonuses of $1.87 million.

Paul Wiles, chief executive at Winston-Salem-based Novant, earned total compensation of a little more than $2 million in 2009, roughly the same as in 2008. His base salary last year was $900,000, and he was paid a bonus of $827,462. Novant estimates Wiles received $339,000 in other compensation, including benefits and deferred compensation.

Carolinas HealthCare released compensation information for these other top executives:

•Joseph Piemont, president and chief operating officer, $1,731,581.

•Greg Gombar, chief financial officer and executive vice president, $1,526,254.

•Paul Franz, executive vice president of the physician services group, $1,399,528.

•Dennis Phillips, executive vice president of the Metro Group, $1,084,859.

•David Dunlap, president and chief executive of Roper St. Francis Healthcare, $1,043,078.

•Laurence Hinsdale, executive vice president, regional group, $1,041,586.

•John Knox, executive vice president and chief administrative officer, $992,993.

•Russell Guerin, executive vice president of business development and planning, $922,769.

•Keith Smith, senior vice president and general counsel, $783,643.

Presbyterian also released compensation information for its other top executives. Its figures include 2009 base salaries and 2008 bonuses, which were paid in 2009:

•Greg Beier, president of acute-care services Novant Health, $1,615,322.

•Carl Armato, president Novant core markets, $1,295,030.

•Dean Swindle, president of ambulatory services and chief financial officer for Novant Health, $1,084,155.

•Dr. Hayes Woollen, former president of Novant Medical Group, $1,009,168.

•Jacque Gattis, chief administrative officer for Novant Health, $902,374.

•Sallye Liner, president of Forsyth Medical Center and Winston-Salem market, $887,109.

•Dr. Stephen Wallenhaupt, chief medical officer for Novant Health, $867,740.

•Lawrence McGee, general counsel for Novant Health, $728,584.

•Dr. A.J. Patefield, chief medical information officer Novant Health, $706,889.

Again, how was the pay justified?

'We need to stay on top of what’s going on in the market and stay competitive,' says James Hynes, chairman of Carolinas HealthCare’s board of commissioners and a member of its compensation committee.

'Our process delivers the number we think we ought to have,' Hynes says. 'We feel like we’ve done it correctly.'

Texas

Moving on to Texas, the Dallas Morning News reported:

Top executives at Parkland Memorial Hospital collected about $1.7 million in bonuses at the end of last year, according to records released recently to The Dallas Morning News.

The 2009 bonuses, approved in December by the hospital's board of managers, went to vice presidents, senior vice presidents and executive vice presidents at the charity hospital.

The bonuses ranged from $36,054 for the vice president who heads the hospital's community clinics to $143,325 for Parkland's chief financial officer.

And what was the justification for these bonuses?

In previous years, Parkland's top three administrators were rewarded with bonuses for meeting certain goals. Last year, the pay plan was expanded to include the hospital's 'senior executive staff.'

Dr. Lauren McDonald, chairwoman of Parkland's board of managers, objected Wednesday to referring to the payments as bonuses, a term that could imply nothing was done to earn the money.

'We kind of stay away from the word 'bonus,'' she said. 'It's really earned incentives. We have certain goals that we set forth as a board.'

'Working with a consultant, we made sure these were earned, instead of just given.'

Dallas County Commissioner John Wiley Price said that he was aware of the new executive pay plan at Parkland and that he wholeheartedly approved.

'It's a step in the right direction,' he said. 'You pay to keep good talent, and what we're paying them is not unreasonable.'

In particular, Price lauded the work of Anderson, who will earn $853,044 when his bonus is approved next week. His bonus will bring the hospital's total to about $2 million.

'The man has 29 years experience at Parkland,' Price said. 'He's put together the kind of executive team that has won Parkland an excellent bond rating. And it's debt-free, too.'

On the other hand, a second Dallas Morning News article noted,

The Parkland Memorial Hospital board of managers began its monthly meeting Tuesday by strongly endorsing the $1.7 million in 'incentive pay it handed out to 27 top executives at the end of December.

'There are a lot of negatives out there about this,' acknowledged Dr. Lauren McDonald, who chairs the board.

Some employees who received only 2 percent to 3 percent in merit increases last year were unhappy to hear last week that their bosses had gotten 19 percent to 31 percent in extra pay.

Dozens flooded online message boards with angry comments. A few called reporters to register their complaints.

Summary

So once again note that the top executives of health care organizations are not like you and me. Their total compensation generally ranges from generous to sufficiently lavish to make them instantly rich. Their pay almost never substantially decreases. If incentives are offered, they almost never fail to earn them.

Furthermore, notice the way the executives, and the boards to whom they supposedly report justify these practices.

It seems that the executives of every hospital are always above average. If pay is determined by comparisons to other institutions, it is never set at or below the average rate.  At every hospital, "our" executives are superior, but without any clear definition of how they might be superior to whom.  The processes by which compensation is made competitive are asserted to be accurate, without any objective confirmation of that accuracy provided (and note above that one leader seemed to justify the process because it produced the numbers he thought were right.)  Bonuses are awarded for reaching "goals," but the goals always seem easily within reach, and the bonuses offered executives are always a much larger proportion of base pay than the bonuses offered anyone else. 

So, to repeat, the sorts of compensation reported in Florida, North Carolina, and Texas are a product of the current management culture that has been infused into nearly every health care organization in the US. That culture holds that managers are different from you and me. They are entitled to a special share of other people's money. Because of their innate and self-evident brilliance, they are entitled to become rich. This entitlement exists even when the economy, or the financial performance of the specific organization prevents other people from making any economic progress. This entitlement exists even if those other poeple actually do the work, and ultimately provide the money that sustains the organization.


Although the executives of not-for-profit health care organizations generally make far less than executives of for-profit health care corporations, collectively, hired managers of even not-for-profit health care organizations have become richer and richer at a time when most Americans, including many health professionals, and most primary care physicians, have seen their incomes stagnate or fall. They are less and less restrainted by passive, if not crony boards, and more and more unaccountable. In a kind of multi-centric coup d'etat of the hired managers, they have become our new de facto aristocracy.

Or as we wrote in our previous post, executive compensation in health care seems best described as Prof Mintzberg described compensation for finance CEOs, "All this compensation madness is not about markets or talents or incentives, but rather about insiders hijacking established institutions for their personal benefit." As it did in finance, compensation madness is likely to keep the health care bubble inflating until it bursts, with the expected adverse consequences. Meanwhile, I say again, if health care reformers really care about improving access and controlling costs, they will have to have the courage to confront the powerful and self-interested leaders who benefit so well from their previously mission-driven organizations. It is time to reverse the coup d'etat of the hired managers.