An Even Bigger Golden Parachute for Captain Outrageous

In 2009, I first posted about the amazingly colorful leadership and governance problems at a small hospital system in Massachusetts. 

Background: Northeast Health System

The story of Northeast Health System then included  leaders who solicited money from the community but concealed what they were doing from the same community, an adolescent pregnancy pact after the hospital system refused to provide confidential birth control information at the high school clinic it ran, a hospital vice-president accused of art theft, various cuts, some concealed, of medical services, accusations of conflicts of interest affecting the board of trustees, and no-confidence votes by nurses and physicians. Finally, Stephen Laverty, the CEO held responsible for much of the mess, resigned and things quieted down a bit.  However, he left a system in deficit, leading to further lay-offs, (e.g., see this story in the Boston Globe).  And the vice-president accused of art theft was also "arraigned on bribery and larceny charges" (also per the Boston Globe.)

Nonetheless, in 2010, it was revealed that Mr Laverty left with a golden parachute worth more than $1 million.  But wait, now there is more.

A Guilty Plea
In May, 2012, per the Salem News,

A former associate vice president at Beverly Hospital pleaded guilty yesterday to soliciting bribes and kickbacks from hospital contractors and stealing valuable paintings and other antiques while overseeing a $50 million renovation of the facility.

Paul Galzerano, 60, was sentenced to serve 18 months of a two-year jail term on four larceny counts and two years of probation on two counts of commercial bribery during a hearing yesterday at Salem Superior Court.

Yet More Severance Payments


But wait, there is even more. Yesterday, the Gloucester Times reported about Mr Galzerano's former boss,

Nearly four years after he resigned under fire, former Northeast Health System CEO Stephen Laverty is still collecting big paychecks from his former employer.

Laverty was paid $573,348 in severance in 2011, the second year in a row he has received buyout money from Northeast, the parent nonprofit corporation to Beverly Hospital and Gloucester’s Addison Gilbert Hospital, and a corporation that was essentially merged with Lahey Clinic to become the new Lahey Health System under an agreement that gained the necessary state approvals earlier this year.

Laverty's total severance payments have reached "more than $1.56 million over those two years." Whether the payments have ended is not clear. Attempts to discover why payments continued and became so large revealed only,

Beverly Hospital released a statement Monday saying, 'We cannot comment on Mr. Laverty or the terms of any agreements between the company and past employees.'

Summary

For a relatively small hospital system, Northeast Health System has produced an enormous example of the perverse incentives given to top executives of health care organizations. Mr Laverty has been made a millionaire despite what the Gloucester Times called in its news article a "tenure plagued by acrimony and controversy," and leadership previously described in a Gloucester Times editorial as "arrogant, dictatorial," and a history of what only can be described as outrageous management failures. Furthermore, the money he received came not from rich stockholders, but from a struggling community hospital system.

The ability of top executives of many, probably most health care organizations to collect bloated paychecks out of proportion to, if not despite their performance attracts the wrong people to lead these organizations, and provides incentives for even the right people to lead badly. 

Until we make health care leaders accountable, and until their incentives reflect their ability to uphold the health care mission, expect more unaccountable leadership that subverts the health care mission, and hence continually rising costs, declining access, and deteriorating quality. 

Another Cautionary Tale about Conflicts of Interest: the CEO's Stretch Limousine, Golden Parachute, and Slush Fund

It remains fashionable in academic medicine to tolerate, if not celebrate conflicts of interest as necessary to support the "collaboration" needed for "innovation," while minimizing their risks (e.g., look here). 

Recently, another cautionary tale about how conflicts of interest signal the risk of all sorts of unpleasantness has appeared in the media.

A Sentinel Event: the First Conflicts Uncovered

In 2009, we wrote about some conflicts of interest at Wyckoff Heights Medical Center in my hometown of Brooklyn, NY.  The New York Daily News had reported that Dr. Addagada Rao, the hospital's chief of surgery was simultaneously the president and part-owner of a Caribbean medical school that funneled medical students to clerkships at Wyckoff.  The hospital's CEO, Rajiv Garg, was an investor in the same school.  At the time, I wrote,

This story illustrates another twist on conflicts of interest affecting the leaders of not-for-profit health care organizations. Many of the smaller not-for-profit hospitals, of which there are thousands in the US, may have minimal conflict of interest policies, which may be minimally enforced, without much transparency or accountability. The coziness of the leadership culture of such smaller institutions may preclude anyone within the culture from asking tough questions. The results may be total confusion as to whose interests particular leaders are serving. In particular, the interests of each hospital's patients may get lost in the shuffle. In this case, the interests of medical students may also get lost in the shuffle. Although the institutions involved may be small, and hence the conflicts may seem small in terms of their monetary value, they aggregate to contribute to the moral miasma that now is the atmosphere of health care.

You heard it here first.

The CEO's Golden Parachute

Fast forward to 2012. In January, the Daily News again reported that CEO Garg had been ousted, but that

Trustees at Wyckoff Heights Medical Center asked to consider a whopping $875,000 severance payout for its former CEO are balking at the package....

It seems that Garg's attorney claimed

They were on the verge of bankruptcy when he arrived. He reduced the debt by tens of millions of dollars.

However,

the hospital’s financial situation remains grim. According to the work group’s final report, Wyckoff’s liabilities are $91 million greater than its assets and it is saddled with $114 million in long-term debt.

So here is yet another example of a CEO personally profiting while his or her organization's finances fester.

The Chauffeured Cars, the Stretch Limousine

The the Daily News began chipping away at the other ways CEO Garg benefited from his leadership of the fiscally troubled hospital. A notable symbol of these benefits was a stretch limousine:

The ousted CEO of a debt-riddled Brooklyn hospital had his security guards ferry friends to the U.S. Open and his wife around town in a stretch limo, the Daily News has learned.

Rajiv Garg, the disgraced honcho of Wyckoff Heights Medical Center, also enjoyed his own commutes in the hospital-issued ride — a sleek, black $33,000 Lincoln Royale.

Garg rolled in style,

The beleaguered hospital bought the fancy car — equipped with a mini-bar, four champagne flutes and a fridge for chilling Dom Pérignon — last summer for Garg It also owned two other cars for his use, sources said.

Several times a week, the limo was dispatched to take Garg’s wife from her job near the hospital to the couple’s midtown apartment, said an employee.

Sometimes, it picked her up and then swung by the hospital to get Garg and whisk them to dinner before dropping them home, sources said. Two or three times a month, the limo picked her up at home and took her shopping.

'I haven’t had a raise in seven years,' said the employee. 'They always tell us they don’t have any money. They spent it on cars.'

The limo has comfy leather seats with room to spare for six passengers and a stereo system capable of drowning out highway noise when Garg and his wife were driven in it to Washington.

More Conflicts of Interest Discovered

Then the Daily News started to reveal conflicts of interest beyond the ones we discussed in 2009:

Then-trustee Frank Chiarello was in a partnership that loaned money to hospital entities, according to a list of board members’ conflicts the Daily News eyeballed. The $2.5 million loan had an 18% interest rate, sources said, costing the hospital hundreds of thousands of dollars.

Chiarello, a real estate exec, resigned from the board last week.

Another trustee who quit the board last week, attorney John Rucigay, serves as a lawyer for other trustees, owns real estate with other trustees, and rents space to the Polish and Slavic Federal Credit Union — whose head of operations is yet another Wyckoff trustee, Agnieszka Poslednik.

Additional trustees on the conflicts list first reported by Crain’s New York Business, include Andrew Boiselle, whose Cebco Check Cashing Corp. does check-cashing business with hospital employees, and attorney Fred Haller, who provides legal services to Wyckoff employees about issues not related to the hospital.

Slush Funds and Bribes

Last week, the Daily News reported about findings by a judge that the CEO kept slush funds used to pay bribes:

Wyckoff Heights Medical Center kept a secret bank account that a former CEO used to bribe a disgraced state assemblyman, an upstate judge said in a court decision.

Orange County Supreme Court Judge Elaine Slobod’s decisionk brought to light new details about the Bushwick hospital’s alleged dealings with Tony Seminerio (D-Far Rockaway), who died in a North Carolina prison last year.

The bank account used for the Stockholm St. hospital’s payoffs to the corrupt pol belonged to 397 Himrod Corporation.

Former Wyckoff board chairman Emil Rucigay originally set up the company to buy real estate for the hospital to turn into a parking lot, the judge’s order said.

The bank account was kept active — though the corporation was dissolved in 2001. The bank account still had approximately $130,000 in it in 2008.

“[Wyckoff’s] CEO was using monies in the Himrod account to bribe Seminerio,” Slobad wrote in her decision last week, referring to Dominick Gio, who was the hospital’s head honcho at the time.

Gio refused to talk a reporter last week. Wcykoff’s interim CEO Ramon Rodriguez also declined to comment.

Money from the Himrod account was used to make payments totaling $15,000 to Seminerio, other court filings charge.

A Lexus, a Bentley, Oh My

Then the story really hit the big time when the New York Times picked it up yesterday. That report added some colorful details about how magnificently the CEO traveled:

In August 2009, Mr. Garg said, he fell asleep at the wheel and crashed his Lexus into a truck. He then lost his license. Asked why in the interview, he said he was not certain, though he offered several explanations, including unpaid tickets and previous accidents.

He then used the hospital’s cars — a Lincoln Town Car and a Cadillac Escalade — for himself and his family around the clock. They were driven by two security guards on overtime, a hospital official said.

He parked his other car, the $160,000 Bentley, at Wyckoff and had the hospital put the vehicle on its own insurance policy.

The limo only came later,

Mr. Garg said in the interview that he suspected that the drivers of the Town Car and the Escalade were eavesdropping on his conversations. So he had the hospital purchase a used stretch limousine for about $33,000.

Yet More Conflicts of Interest Discovered

The Times story also found more conflicts of interest. Some involved CEO Garg:

Mr. Garg introduced hospital officials to Skyscape, a provider of mobile medical references, in which he had a financial interest. Wyckoff signed a contract with the company worth at least $38,700, hospital records show, though the deal eventually fell through.

Others involved hospital trustees. This example might have affected patient care at the hospital:

Dr. Theophine Abakporo arrived at Wyckoff in 1996 from Harlem Hospital to work in emergency medicine. Originally from Nigeria, he said he found his way to the top blocked by what he believed was a clique of doctors at Wyckoff.

In 2009, according to data provided by MapLight.org, Dr. Abakporo, an American citizen, began donating money to the campaign of Representative Edolphus Towns, the Democrat who represents a nearby area. Mr. Towns, a longtime board member of Wyckoff, had by then been replaced by his chief of staff, Albert Wiltshire, on the board.

Dr. Abakporo gave $1,000 to the Towns campaign, then $750, according to election records.

With Mr. Wiltshire’s support, Dr. Abakporo became chairman of emergency medical services.

This example might also have affected patient care:

With his solicitous manner and tailored sport jackets, Gary Goffner, a pharmacist who serves on Wyckoff’s board, has long endeared himself to customers and doctors alike.

He inherited his pharmacy, Kraupner, from his father, a prominent Bushwick landlord as well as a pharmacist, who died recently. It is an old-fashioned store, crammed with supplies, the opposite of an orderly Rite Aid.

It is also a half-mile walk from Wyckoff, a disadvantage Mr. Goffner overcame through a contract that gave him exclusive access to Wyckoff patients as they were being discharged, and allowed him to keep an employee at the hospital to promote his business.

In summary, the Times found,

According to internal hospital documents, 13 of the hospital’s 22 board members declared at least one conflict of interest.

Summary

So, from a single story about conflicts of interest affecting the CEO and a medical leader at the hospital, we have gone to stories about widespread conflicts of interest affecting the hospital's board and leadership, about lavish payments and benefits to the CEO while the hospital's finances suffered, and allegations (by a judge) of bribes and slush funds. 

Recall that the Institute of Medicine's report on conflicts of interest in medicine and health care defined conflicts of interest as “circumstances that create a risk that professional judgments or actions regarding a primary interest will be unduly influenced by a secondary interest.” While no particular conflict of interest is guaranteed to cause someone to abuse entrusted power, conflicts of interest create the risk of such abuse. The case of the leadership and governance of Wyckoff Heights Medical Center shows how such risks may manifest.

Yet we have noted again and again how leaders of supposedly mission-oriented non-profit medical organizations seem to be ignoring these risks while pursuing ever more money from health care corporations. We noted how the Chancellor of the University of California-San Francisco "has no qualms" about faculty's financial relationships with industry. Just this week at Brown University, my alma mater, while discussing a new conflicts of interest policy, we heard,

'People do have conflicts of interest, and it’s not the end of the world,' said Janet Blume, associate dean of the faculty.

Conflicts of interest may not lead to the apocalypse. However, they certainly may lead to all sorts of unpleasantness. As Joe Collier stated, “people who have conflicts of interest often find giving clear advice (or opinions) particularly difficult." Conflicts of interest clearly lead to conflicted, and confused thinking, and such thinking may lead to bad decisions, and hence bad outcomes for patients' and the public's health. Worse, as the IOM asserted, conflicts of interest are a risk factor for outright corruption.

True health care reform might start with a reasoned discussion, based as much as possible on evidence, about the risks as well as the supposed benefits of conflicts of interest affecting those who make decisions about individual patients' health care, and about public health and health care policy.

Despite Recalls, Legal Settlements and Guilty Pleas - A $143.5 Million (or Perhaps $197 Million) Golden Parachute for the Former Drug Representative Who Is Now CEO of Johnson and Johnson

After 30 separate product recalls since 2009, and multiple legal settlements and guilty pleas, we noted that the former pharmaceutical representative who is now the CEO of Johnson and Johnson will be retiring. 

The $143.5 Million (or Perhaps $197 Million) Golden Parachute

The Wall Street Journal just reported his retirement will come with an immense golden parachute:

Johnson & Johnson Chairman and Chief Executive William Weldon stands to collect pension benefits and deferred compensation currently valued at $143.5 million after his retirement, according to new details released by the health-care conglomerate.

The details were:

Mr. Weldon, who will be succeeded as CEO by Vice Chairman Alex Gorsky, stands to collect benefits from two main sources. The present value of his accumulated pension benefits is $48.4 million, portions of which are paid out as a monthly annuity for life, according to Wednesday's filing with the Securities and Exchange Commission.

His pension's value places Mr. Weldon well into the top 10% of CEOs of Standard & Poor's 500 companies, said Paul Hodgson, chief communications officer and senior research associate at GMI Ratings, which tracks corporate-governance information.

Mr. Weldon also has amassed $95.1 million in nonqualified deferred-compensation plans. This represents parts of his salary and bonus that had been deferred in prior years, as well as company contributions to savings plans. Portions of Mr. Weldon's deferred compensation have been recorded each year as part of his total annual pay.

Of the $95.1 million, more than $70 million represents Mr. Weldon's accumulated balance from a legacy cash-incentive plan that J&J has discontinued and replaced with a new executive-compensation plan. This sum would be paid to Mr. Weldon at retirement, J&J said. All deferred compensation is subject to taxes.

Actually, an argument that the $143.5 million figure is an major under-estimate appeared in the Shearlings Got Plowed blog:

The MSM reports calculate only the cash values for soon to be Ex-CEO Weldon, not the present value of his stock options, at today's NYSE closing price for J&J of $65.08. So, that -- plus the vesting of his February 2012 JNJ RSUs and Stock Option awards [see page 45 of the link (but such amounts are ommitted from the year end 2011 proxy, on which the WSJ relied)] -- add about $53.47 million to the Weldon walkaway haul.

Thus, Mr Weldon's golden parachute may be as big as $197 million.

The Board's Justification for the Riches

Of course, the Johnson and Johnson board justified the latest additions to Mr Weldon's wealth, as reported by the WSJ:

In a regulatory filing Wednesday, the board said Mr. Weldon 'successfully managed our company through a challenging economic environment in 2011,' with solid financial results and advances in J&J's pharmaceutical pipeline.

The board added that while J&J made progress in addressing manufacturing-quality issues in 2011, 'continued focus is needed to address critical product supply and quality issues that impact our responsibility of being able to deliver products to patients and customers who need them.'

Johnson and Johnson's Recent Record

The board's upbeat assessment sharply contrasts with Johnson and Johnson's actual recent record.

As we discussed recently, Johnson and Johnson seems to have lost the ability to manufacture high quality products. It has had to make 30 separate product recalls since 2009. The latest was Liquid Infant Tylenol. (The current WSJ Health Blog list of recalls can be found here.)  This seems to be more than a "rough patch," which is how the WSJ article described the manufacturing problems.

In addition, the WSJ article failed to mention that Johnson and Johnson also has an amazing recent record of ethical lapses and guilty pleas, including:
- Convictions in two different states in 2010 for misleading marketing of Risperdal
- A guilty plea for misbranding Topamax in 2010
- Guilty pleas to bribery in Europe in 2011 by J+J's DePuy subsidiary
- A guilty plea for marketing Risperdal for unapproved uses in 2011 (see this link for all of the above)
- Accusations that the company, which makes smoking cessation products, participated along with tobacco companies in efforts to lobby state legislators (see post here)
- A guilty plea to misbranding Natrecor by J+J subsidiary Scios (see post here)
- More recently, in 2012, testimony in a trial of allegations of unethical marketing of the drug Risperdal (risperidone) by the Janssen subsidiary revealed a systemic, deceptive stealth marketing campaign that fostered suppression of research whose results were unfavorable to the company, ghostwriting, the use of key opinion leaders as marketers in the guise of academics and professionals, and intimidation of whistleblowers. After these revelations, the company abruptly settled the case (see post here).
-  Most recently, there are reports that the company is in negotiation with the US Department of Justice to settle other lawsuits about the marketing of Risperdal, perhaps for as much as $1.8 billion (see this BusinessWeek story.)

Meanwhile, an article from the Wharton Business School suggested that the problems at Johnson and Johnson stemmed directly from former drug representative Weldon's management approach, which put short term revenues, "making the numbers," ahead of everything else, apparently including good manufacturing practices, or ethical business practices:

[University of Michigan Ross School of Business Professor Erik] Gordon argues that CEO Weldon's relentless focus on the bottom line -- the company's website touts its record of 27 consecutive years of adjusted earnings increases and 49 consecutive years of dividend increases -- is the reason for the current woes. 'Bill Weldon sets the priorities and the culture for the company,' says Gordon. And the problems, from overly aggressive marketing to underinvestment in safety and quality systems, reflect 'people trying to get their bonuses, hit their numbers and keep their job.'

No doubt the global economic collapse in 2008 put renewed pressure on managers at multinationals like Johnson & Johnson. John Kimberly -- a Wharton management professor and executive director of the Wharton/INSEAD Alliance who has worked with J&J executives in Europe since the late 1990s -- says he detected a shift among those managers starting in 2008. 'I got the sense that there were some things happening at corporate, and that messages were being sent about the need to deliver profitability,' Kimberly notes. 'It seemed as though the people I was working with were feeling pressure from above to pay closer attention to the bottom line. It was a palpable, tangible change.'

Wharton's Donaldson gives J&J management credit for the aggressive steps the company is now taking to overhaul its manufacturing processes and plants. But he also notes that the balance between profits and patients is a tricky one. Managers at J&J, he says, 'are juggling a lot of balls. In the credo, they say they put patients first and stockholders further down the line. But there is a red ball that every manager knows about, [which is] profit -- and they don't let that red ball drop.' Figuring out how to serve patients well and still deliver for Wall Street is not easy. 'J&J believes they can do both those things,' Donaldson says. 'But if the weight of one side of that formula gets too heavy, the entire structure collapses.'

Summary

The ongoing news from the once proud Johnson and Johnson, whose credo famously states:

We believe our first responsibility is to doctors, nurses and patients, to mothers and fathers, and all others who use our products and services. In meeting their needs, everything we do must be of high quality.

suggests that instead, the company's first responsibility is now to the hired managers, to obey their dictates no matter how they undermine the credo, and most importantly, to pay them so much as to make them some of the most wealthy people in the world. Johnson and Johnson has become exemplary, not of putting patients or health care professionals first, but of how hired managers took over health care, and turned it to their own advantage.

So should we trust Johnson and Johnson to do better, now that another former pharmaceutical representative will be its new CEO?

The case of Johnson and Johnson indicates why we need a huge change in how health care organizations are lead.

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.

Three Golden Parachutes and Some Unexpected Sequels

Golden parachutes are an always fascinating aspect of executive compensation in health care.  I have collected three relatively recently revealed stories about golden parachutes given to government and non-profit hospital system CEOs, at least two of which involve unexpected, and also fascinating sequels.  They will appear in order of the apparent size of the parachutes.

Santa Clara Valley Health and Hospital System

Santa Clara Health and Hospital System is a county (government) system of moderate size in California.  Last week, the compensation given its outgoing CEO in 2010 was revealed by the San Jose Business Journal:

Former Santa Clara Valley Health and Hospital System CEO Kim Roberts walked away with an impressive chunk of change when she abruptly left the job in February 2010.

According to a city and county salary report released from the State Controllers Office, the position earned a little over $1 million that year.

A county spokeswoman confirmed that the total included accrued vacation, sick leave and other payments Roberts was entitled to.

The salary was the highest in the Bay Area for public employees in 2010.

Note that

Roberts was hired as CEO in March 2007 with a five-year contract. The agreement included a starting salary of $285,744 with annual salary adjustments, severance and other benefits.

The issue here is that Ms Roberts was the CEO of a local government run health system. Traditionally, the pay given to people in such positions is closely scrutinized by politicians and tax payers, and hence is usually less than that given out by private, non-profit hospital systems, much less for-profit ones. Nonetheless, while it appears that Ms Roberts got something more than $700,000 worth of compensation beyond her usual salary in her last year, the nature of this compensation, and the justification for it is unclear.

Erlanger Health System

The story that got my attention appeared two days ago in the Chattanooga Times-Free Press:

After more than a month of negotiations, Erlanger trustees reversed a previous vote and approved a controversial $728,000 severance package for outgoing CEO Jim Brexler.

Trustees voted 4-4 against the same severance package in December but voted 5-4 to approve it during a 30-minute meeting Monday morning.

More detail about the package:

The approved agreement provides 15 months of severance for Brexler, worth about $713,000. He also keeps his Erlanger health coverage for 18 months, paying his employee portion, a benefit worth about $15,000.

This story is actually a complex sequel. We discussed CEO compensation at Erlanger Health System, an academic medical center affiliated with the University of Tennesse, a year ago. At that time, we noted that a substantial bonus given to then CEO Jim Brexler was based on favorable financial results in the previous year, but did not apparently take into account the more recent decline in the system's finances. That bonus was justified by the typical paean to the leadership's "real expertise in health care" by one member of its board.

By last month, however, Erlanger's finances had deteriorated dramatically. A Free Press article then stated,

Erlanger hospital employees have been asked to take 12 days off in the next two months, consider voluntary buyouts and face possible layoffs as Chattanooga's only public hospital bleeds money.

The hospital has lost more $6 million in the last five months, half of that in November.

The reason for this accelerating misfortune deterioration remain unexplained. Apparently, CEO Brexler had decided to depart, for also unclear reasons, two months earlier:

In October, the hospital announced CEO Jim Brexler would retire at the end of the year.

At that time, the board had voted to give him the severance package described above, but then suddenly began to reconsider after how bad things were became clear:

The board voted earlier this month not to give Brexler a more than $700,000 severance package, but the issue may be brought back up, board members have said.

It was unclear whether the decline in Erlanger's finances had to do with its relationship with another troubled hospital, Hutcheson Medical Center, as described in another Free Press article:

Despite a new board, new management and the infusion of a $20 million line of credit, a struggling North Georgia public hospital continues to lose money.

Erlanger at Hutcheson, formerly known as Hutcheson Medical Center, lost more than $9 million in the first five months of the 2012 fiscal year, which began in July. It lost the most -- $2.7 million -- in September.

Hutcheson board Chairman Corky Jewell could not be reached for comment last week.

The hospital's administrator, Debbie Reeves, and other management personnel were not in the office the week between Christmas and New Year's, according to spokeswoman Haley Johnson.

The publicly funded hospital in Fort Oglethorpe had been losing about $1 million a month, defaulted on a $35 million bond and laid off 75 employees in fiscal year 2011.

In May, Erlanger Health System took over management of the hospital and extended up to $20 million in credit to it.

Apparently inflated compensation to Hutcheson's CEO was also a subject of one of our posts from about a year ago. At that time, we wrote, "despite a major financial loss, lay-offs and service discontinuations, and a bond default," the CEO got "bonus and incentive compensation" in 2009.

So, to summarize, despite major financial problems, Hutcheson Medical Center's CEO got a bonus and incentive compensation in 2009. As its situation got worse, it was taken over in some sense by Erlanger Health System, whose CEO also got a bonus despite increasing financial problems in 2010. Thereafter, the finances of Erlanger really declined, its CEO announced his retirement, and still will collect a golden parachute.

Thus Erlanger Health System's golden parachute for its outgoing CEO symbolizes the anti-gravitational powers of executive compensation. While lavish executive pay is often justified by short-term financial results, health care executives seem to be able to just keep collecting more and more until they have to flee. Health care seems to more and more be run for the benefit of self-interested insiders.

Also, this case demonstrates how skeptical we ought to be of the breathless praise for health care executives and managers and the uncritical touting of their latest advances and initiatives.  (By the way, we posted here, just before it became apparent how badly Erlanger's finances were collapsing, about its breathless advertisement of a "new service excellence program" for Erlanger employees run by the Ritz-Carlton hotel chain.  One wonders whether the attention to the peripheral ahead of core responsibilities this denoted could have been one reason for the system's decline.) 

And we are just working our way up to our big case....

University of Chicago Medical Center

This story actually dates back to 2009, but was first revealed briefly in late 2011, in Becker's Hospital Review,

The other three highest-paid hospital CEOs in Chicago in 2010 include the following:
• James Madara, MD, and Ken Sharigian, University of Chicago Medical Center: $7.9 million
Note: This includes severance for Dr. Madara, who resigned in Oct. 2009. Mr. Sharigian served as the interim in 2010.

A little more detail came out in a side-bar to a story on executive compensation in higher education by the Chronicle of Higher Education:

James L. Madara, dean of the school of medicine and chief executive of the medical center, U. of Chicago
Total compensation: $7,038,944
Mr. Madara’s base salary was $1.3-million, and he received $2.5-million in severance pay.

There was also a hint of why this was so interesting:

Mr. [sic] Madara stepped down after seven years as dean and three as chief executive to return to the faculty. He resigned amid controversy over his management decisions, such as a plan to redirect medical-center patients to neighboring hospitals, according to local news reports.

A little digging shows there was more to it than that. Recall our recent post that discussed the "Urban Health Initiative," a program ostensibly meant to direct some patients, allegedly mainly poor patients, to more appropriate health care venues, allegedly away from the Emergency Department of the university medical center, and again allegedly to make room for patients who need and whose insurance can pay for more lucrative services.

By February, 2009, the Wall Street Journal reported that

In February, two high-ranking doctors quit their administrative posts to protest the plan, saying it could lengthen already long waiting times for patients who visit the ER.

In particular,

The two doctors who gave up their administrative posts in Chicago were Dr. Vanden Hoek, who stepped down as interim chief of emergency medicine, and pulmonology researcher Joe G.N. Garcia, who had been chairman of medicine. The doctors still can practice medicine at the hospital.

About a dozen other doctors from the emergency room and other departments had signed a letter of protest over the hospital administration's plan to reduce the number of beds available to emergency patients in the ER and other units.

Three months later, as reported by Chicago Business,

Some University of Chicago Medical Center faculty members are accusing CEO James Madara of putting hospital finances ahead of research and teaching.

A letter delivered to Dr. Madaar last month and signed by 76 faculty members asserts that, since adding the hospital CEO title in 2006, Dr. Madara has lost focus on his role as a dean of the Hyde Park medical center's vaunted research and academic enterprise. A preocccupation with hospital profits and an 'insular management style' have 'disenfranchised' the faculty, the letter says.

By that month, according to the Wall Street Journal,

More than 190 doctors at the University of Chicago Medical Center signed a letter to trustees protesting plans to reduce the number of beds available to emergency patients as 'unnecessarily risky' and a threat to patient safety.

The plan was put on hold by the university president a few days later. Dr Madara resigned in August.

So, somewhat like the case above, this involved a hospital system CEO who got a very large golden parachute after leaving under fire, not for declining revenue, but for his role in overseeing a program of questionable ethics, one possibly bad for patients, and having lost the confidence of some important proportion of his medical faculty.

He did not, however, go off quietly into the night. His next stop was Leavitt Partners (as noted in this AMA press release), founded by former President George W Bush administration Secretary for Health and Human Services James Leavitt.

As we noted here, Leavitt Partners advertises that it "advises clients that invest in health care and food safety." It does not publicize its client list, but that list apparently includes Alliance Health Networks, whose press release noted that Leavitt Partners "will help it expand its presence in the US health industry and beyond "(look here); and Connextions, Inc, whose press release noted that it would work with Leavitt Partners to " refine existing health insurance exchange models for federal and state governments, as well as private sector organizations that are navigating health care reform law," (look here.)  Mr Leavitt joined the board of Medtronic last year (look here). 

Then, however, he got back into the CEO business.  While still maintaining a role at Leavitt, in 2011, per the AMA release,

The American Medical Association (AMA) today named James L. Madara, M.D., as its new Executive Vice President and Chief Executive Officer. Dr. Madara will assume leadership of the nation’s oldest and largest physician group on July 1.

That news release noted his past positions,

the Thompson Distinguished Service Professorship and deanship at the University of Chicago Pritzker School of Medicine, where he was the longest serving Pritzker dean in the last 35 years. Subsequently, he added the responsibility of CEO of the University of Chicago Medical Center, bringing together the university’s biomedical research, teaching and clinical activities.

Perhaps not surprisingly, it did not mention the controversies at the medical center that preceded his resignation, nor his sizable golden parachute, nor his ongoing role at Leavitt Partners.

So, the American Medical Association claims to represent all US physicians and their values. It turns out that its current Executive Vice President and CEO is a former hospital system CEO who departed under fire with a golden parachute beyond any severance package a practicing or academic physician would dream about.  He also is a former and current consultant with a firm lead by one of our better recent examples of beneficiaries of the revolving door.  We have come a long, and the wrong way since the AMA asserted, "the practice of medicine should not be commercialized, nor treated as a commodity in trade." (See this post.)

This story is not just about the ridiculous compensation given to health care executives, and how this provides perverse incentives and suggests that many health care leaders have become insiders who put their self-interest ahead of the health care mission. This story is also about the connectedness of these insiders, and how they appear to control nearly every part of health care.

The Moral of the Stories

Maybe if I write this often enough, it will get some notice.... 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.

It Was the Best of Times, It Was the Worst of Times ... for Synthes Executives

The latest news about the Synthes Norian XL bone cement case shows just how bizarre incentives for health care leaders can be. 

The Synthes Case

Synthes USA, the American branch of a Swiss based device company, first settled charges that it had been paying surgeons with company stock to use its products in its clinical trials in 2009 (see this post).  Then prosecutors alleged that these were not really rigorous trials. Instead, for marketing purposes, executives of Synthes subsidiary Norian persuaded surgeons to use its Norian XR product in a case series of spine surgery patients and then publish the results.  Three patients who received the product for this "off-label" use died.  This scheme was alleged to have been directed by "person no. 7," whom journalists identified as the company CEO, Hansjorg Wyss (see post here.)   In an unusual move, the prosecutors indicted four company executives, who then pleaded guilty.  They did not take any further action against Wyss, who turns out to be one of the world's richest men (see post here). 

Executives Sentenced

In late November, three of the executives were sentenced, as per the Philadelphia Inquirer:

Three former executives of medical-device manufacturer Synthes Inc. were sentenced to prison Monday. A fourth might have been if his attorney hadn't collapsed while standing at a lectern moments after saying that Synthes' unindicted board chairman was the ultimate authority and responsible for the illegal, sometimes fatal, bone-cement trial at the center of the proceedings.

Michael Huggins, 54, of West Chester, the former president of Synthes USA, was sentenced to nine months in prison and taken into custody immediately. Thomas Higgins, 55, of Berwyn, former leader of Synthes' spine division, got the same sentence. John Walsh, 48, of Coatesville, who was in charge of regulatory affairs, got five months.

U.S. District Judge Legrome D. Davis gave Higgins two weeks to report to prison so he could arrange for extra medical care for his wife. Davis gave Walsh until next Monday to report because Tuesday is his young daughter's birthday.

The three will pay $100,000 each in fines and be on supervised release after prison. All pleaded guilty to a single misdemeanor count under the responsible-corporate-officer doctrine.


Richard Bohner, 56, of Malvern, former vice president for operations, was the third of four defendants on Davis' docket Monday and might have gotten a sentence similar to those received by Huggins and Higgins.

No Penalty for the Former CEO

However, there were no penalties for the company CEO who was allegedly "person no. 7":

Hansjorg Wyss, the Synthes board chairman, who also was chief executive officer when the illegal bone-cement trial occurred, was not in the courtroom but still was part of Monday's events.

Gurney, Bohner's attorney, said Wyss was the undisputed leader of the company. 'He made some of the very critical decisions that put the trials on the ultimate pathway,' Gurney said. 'The culture of an organization is set at the top.'

Wyss could not be reached for comment.

Meanwhile, Mr Wyss continues to grow richer. Forbes currently lists him as number 164 on its list of the world's wealthiest people, estimating his assets at $6.4 billion.

A Golden Parachute for the Current CEO

Mr Wyss may be made even more wealthy because US health care corporate giant Johnson and Johnson has agreed to buy Synthes. Furthermore, as also reported by the Philadelphia Inquirer, the current Synthes CEO is in line to also greatly benefit from that deal:

Orsinger is getting $51.9 million for leaving the old company and a multimillion-dollar pay package from the new company. His new base salary of $700,000 will be a cut in pay from his old firm, but he will have some lucrative bonus opportunities. If he can make do clipping coupons for three years, he will get a stock package worth $17.2 million.

Orsinger is the chief executive officer of Synthes Inc., the medical-device manufacturer based in Switzerland but with U.S. headquarters and facilities in West Chester.

Implications

On one hand, up to now, it has been very rare for any top executives of health care corporations to suffer any negative consequences due to ethical missteps by their companies, much less to go to jail. The current case may be the first real example of government prosecutors using the responsible corporate officer doctrine in such a setting. We first discussed this concept here in 2010. As noted in Reuters about the Synthes case,

After decades in relative obscurity, a U.S. legal doctrine that holds corporate officers liable for company wrongdoing is finding its way back into some high-profile healthcare prosecutions.

The 'responsible corporate officer' doctrine allows for prison terms of up to one year for misdemeanor violations of the Federal Food, Drug and Cosmetic Act, but typically defendants have received only probation.

Recently, however, the government has sought to reinvigorate the doctrine, and some executives are facing stiffer penalties than they had ever imagined.

Why only now has this doctrine been dusted off, when it has been around for over 70 years, and validated by the Supreme Court over 35 years ago, remains unclear.
Does its use now signal the end of health care leaders' impunity? We have noted that despite all sorts of misbehavior leading to a march of legal settlements, almost no one who authorized, directed or implemented the bad behavior within a large health care corporation has ever paid any penalty for it. The penalties for the four Synthes executives are certainly a break in the pattern.

Moreover, while in the Synthes case the executives who pleaded guilty were aware of what was going on, the doctrine allows prosecution of responsible corporate officers who were not so aware. As in the Reuters article,

The principle behind the doctrine was validated by the Supreme Court in 1975, when it affirmed the conviction of John Park, the chief executive of a national food chain who had been charged with allowing warehoused food to be exposed to rodent contamination. The court held that, to convict Park, the jury did not have to find that he was aware of the unsanitary conditions, only that he was in a position of authority to prevent them.

However, in the Synthes case, there was no attempt made to prosecute even more highly placed "responsible corporate officers." As noted above, the past and current CEO were not charged, and meanwhile have engineered a merger that may make them even more wealthy (ironically, with a company, Johnson and Johnson, that has also had a troubled recent record).

Furthermore, as per Reuters, prosecutors are not exactly gung ho about using the responsible corporate doctrine:

Over the next few decades, prosecutors used the doctrine sparingly, concerned that overuse would bring unwanted judicial scrutiny, said Paul Hyman, formerly of the U.S. Food and Drug Administration's Chief Counsel's Office and now a director at the law firm of Hyman, Phelps & McNamara.

Also,

The future of the responsible corporate officer doctrine could depend on whether executives who plead guilty under the doctrine are able to find other employment.

Cory Andrews, a lawyer with the Washington Legal Foundation, which filed a friend-of-the-court brief on behalf of the Purdue defendants, said that as the severity of penalties increase for misdemeanors, so do the odds of a constitutional challenge.

'Arguably, where the deprivation is very small, the due process violations are not as significant,' Andrews said. 'But where the deprivation goes to someone's ability to earn a living -- I think that raises the constitutional temperature.'

Many of the legal settlements we have discussed involved activities that threatened the safety, health or even lives of patients. But if a corporate executive might not be able to get further lucrative employment as such after participating in such misbehavior, quelle horreur!

Let us hope that government officials, who have been so solicitous in the past about the financial well-being of the health care corporations they are supposed to oversee, will start thinking about the consequences of these corporations' misbehavior for the public to whom those officials are supposed to answer.

I conclude, de rigueur, to really deter bad behavior, those who authorized, directed or implemented bad behavior must be held accountable. As long as they are not, expect the bad behavior to continue. Real health care reform needs to make health care leaders accountable, and especially accountable for the bad behavior that helped make them rich.

After Manufacturing Problems, Genzyme CEO's Golden Parachute Means "Failure = Success"

In late 2009, I posted about problems at a Genzyme plant that manufactured some fabulously expensive drugs, e.g. Cerezyme whose cost to patients approximated $160,000 a year. We thought then that for a drug costing that much, the company ought to have figured out a conservative process to provide pure and unadulterated product. In a later post I asked why a company that could afford to make its CEO very rich could not afford to adequately maintain its manufacturing facilities. In May, 2010, I posted about a legal settlement of charges related to its manufacturing problems requiring Genzyme to pay a $175 million fine and function under US government supervision.  And in August, 2010, I posted about how this series of management missteps could lead to the company's CEO becoming even richer because they lead to a declining stock price, which increased the likely that the company would be bought out, which could trigger the CEO's golden parachute.  I suggested then that were this to happen, it would be a gross example of how massively perverse incentives stupendously reward the top brass of health care organizations for mediocre, or worse leadership and bad results for both patients/ clients/ customers and stock-holders alike.

Now it  looks like this will happen.  Yesterday, the Boston Globe reported:

Ggenzyme Corp., the largest biotechnology company in Massachusetts and one of the industry’s historic pioneers, has struck a definitive agreement to be bought by French pharmaceutical giant Sanofi-Aventis SA, in a deal valued at about $20.1 billion.

As a result of this deal,

Genzyme’s high-profile president and chief executive, Henri A. Termeer, who has run the company for 28 years, will resign following the close of the transaction. But he will advise Sanofi on integrating the two companies. Termeer built the company into a global operation with 10,000 employees worldwide and a business model that has been the envy of the biotechnology industry. He turns 65 on Feb. 28.

Termeer, though fiercely proud of Genzyme’s independence, stands to make more than $23 million when the sale is completed, according to a 'change of control' clause in his employment contract. In addition, as a major Genzyme shareholder, he would be in a position to cash out shares that last year were worth more than $275 million.

That and several other articles s noted that it was Genzyme's manufacturing problems that lead to the buy-out:

the string of events that made Genzyme vulnerable to a takeover began in the summer of 2009 when workers discovered viral contamination at Genzyme’s Allston Landing plant overlooking the Charles River.

Genzyme was forced to temporarily shut down and clean up the plant and ration shipments of its best-selling Cerezyme and Fabrazyme drugs, both of which treat enzyme deficiencies. The events created an opening for competitors such as Shire and Israel’s Protalix Biotherapeutics and sent Genzyme’s stock tumbling on the Nasdaq.

The dip in Genzyme’s share price drew activist investors, including Carl C. Icahn of New York and Ralph Whitworth of San Diego, who accumulated shares they hoped to sell at a rich premium. They pressured management to take steps to boost shareholder value, including a stock buyout and the elimination of 1,000 jobs worldwide.

Ultimately, the company gave Whitworth a seat on its board, and, after Icahn threatened to unseat Genzyme directors in a proxy battle, it granted two seats to his associates.

In many ways, industry watchers said, an acquisition became inevitable once Genzyme stumbled at its Allston plant.

A Bloomberg article noted that this sequence of events would lead to

The departure package [which] makes him 'one of the biggest all- time winners in biotech,' said [University of Michigan business professor Erik] Gordon, who has studied the pharmaceutical industry for three decades.

Our criticism of the Genzyme CEO's potential for reaping hugely perverse incentives was paralleled by Jim Edwards' critique of what actually happened:

Here’s how crazy CEO incentive compensation is: Genzyme (GENZ) CEO Henri Termeer walked away from his company with a payout that may be worth $300 million yesterday when Sanofi-Aventis (SNY) acquired his company. But the only reason Genzyme was acquired — triggering Termeer’s gargantuan change-of-control package — is because Termeer nearly ran his company into the ground, making his stock cheap enough for Sanofi to buy.

In other words, failure = success when it comes to change-of-control packages for CEOs.

So let me just repeat my conclusion from last August: As long as being a health care CEO is effectively a license to loot the company, is it any wonder that health care organizations continue to be badly lead, and health care costs soar while quality and access suffer?

Once more with feeling: real health care reform would require us to make health care executives truly accountable for their actions, and penalize them for those that are ill-informed, contemptuous of health care values, self-interested, or corrupt.

A Golden Parachute for Captain Outrageous

A year ago, I posted about leadership and governance problems at Northeast Health Systems, a small hospital system located in neighboring Massachusetts.  The colorful story included leaders who solicited money from the community but concealed what they were doing from the same community, an adolescent pregnancy pact after the hospital system refused to provide confidential birth control information at the high school clinic it ran, a hospital vice-president accused of art theft, various cuts, some concealed, of medical services, accusations of conflicts of interest affecting the board of trustees, and no-confidence votes by nurses and physicians. Finally, Stephen Laverty, the CEO held responsible for much of the mess, resigned and things quieted down a bit.  However, he left a system in deficit, leading to further lay-offs, (e.g., see this story in the Boston Globe).  And the vice-president accused of art theft was also "arraigned on bribery and larceny charges" (also per the Boston Globe.)

Yet, Mr Laverty collected a tidy sum just to leave, as the Salem News just reported:

Former Northeast Health System President and CEO Stephen Laverty collected more than $1 million from the nonprofit hospital chain after he resigned under fire in the fall of 2008, newly released financial records show.

The earnings, $1.08 million in total, include a settlement package of more than a year's salary plus pay for the one month the controversial Laverty was at the helm of Northeast, which owns Beverly Hospital, as well as Gloucester's Addison Gilbert Hospital.

The documents provide the first details of how much Northeast, now laying off workers and cutting costs, was willing to pay to part ways with its CEO who had just endured no-confidence votes from nurses and doctors, plus the arrest of one of his top managers.

Neither the hospital system nor its former CEO was exactly forthcoming about the rationale for this payment:

As part of Laverty's resignation, both sides agreed not to discuss the settlement or any of the details that led them to part ways.

'I have no understanding of what you are talking about,' Laverty said yesterday afternoon from his home in Concord, when asked about his settlement package. He then hung up the phone.

A spokeswoman for Northeast Health System said she could not comment on Laverty or the terms of any agreements between the company and past employees.

So even the hired manager of a small community hospital system is entitled to a million dollar plus golden parachute when resigning in disgrace. This is another great example of the current perversity of the incentives given to hired health care managers. Even small community hospitals, the backbone of real community health care throughout the country, seem to feel obligated to make millionaires out of their managers, no matter how bad their performance.

As we said before, the problem is not just the money wasted paying for bad performance. These perverse incentives are likely to encourage worse performance.  They send the message to even the worst executives that they are wonderful people, they can do no wrong, and should stand for no criticism, all further diverting them from what they really are supposed to be doing: upholding the mission.

As an editorial in the Gloucester Times noted, although the nexus is perverse incentives given to paid managers, it is not only the paid managers who are to blame for this situation.

The other party to his contract was the Northeast Board of Trustees.

So,

Those who want to serve as trustees of Northeast need to get the notion out of their heads that their board seats are not just resume builders — with high-profile community roles and a few corporate dinners thrown in. These are positions of community leadership and responsibility that comes with a measure of accountability.

New Northeast CEO Ken Hanover has indeed seemingly ushered in a new era of relative openness in dealing with the community. But the same cannot be said for the Board of Trustees.

If Laverty's shameful buyout deal and these types of contracts are examples of their 'leadership' and responsibility, each and every one of them should step down now.

As we have said many times before, true health care reform would encourage leaders of health care who understand health care and care about its mission, rather than those who just see a quick road to riches or social respectability.