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

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

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

Background - HCA Acquired Health Midwest

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

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

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

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

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

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

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

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

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

 Furthermore, as the Los Angeles Times also reported

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

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

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

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

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

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

Broken Promises - the New HCA Settlement

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Summary

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

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


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

Will the Circle be Unbroken? - Hospital Executive Compensation Continues to Defy Gravity and Logic

A report from Health Leaders Media, a prominent media site about health care management, shows how non-profit hospital executive compensation continues to levitate.  In general,

For not-for-profit CEOs nationwide the median total cash compensation (base plus incentives) increased 3% to 6.7% over last year, and these organizations' senior leadership teams gained similar pay increases,...

The specifics included

Health system CEOs' median base salaries increased to $717,500 (2012) from $650,000 (2011), while independent hospital CEOs' median base salaries rose to $506,100 from $472,000 during that period, according to IHS. Comparatively, Sullivan, Cotter and Associates shows the base pay for system CEOs nationwide increased while the TCC declined slightly—base pay increased to $334,700 from $325,000, while TCC decreased to $411,100 from $412,100 from 2012 to 2011, respectively. Unlike their health system counterparts, independent hospital CEOs' base pay and TCC climbed between 2011 and 2012—base pay went up to $530,000 from $504,000 (a 4.9% gain) and TCC jumped 4.3% to $600,000 from $574,000.

The report also showed that pay increased for some species of top executives.  CIOs (chief information officers) did the best,

Nationally, system CIOs received one of the largest TCC increases year over year, according to Sullivan, Cotter and Associates (5.8%). IHS reported a median base salary increase of (3.5%).

These increases ought to be compared to the base rate for the population.  In September, the Census Bureau reported that median family income dropped in 2011 (per the New York Times):

 Median household income after inflation fell to $50,054, a level that was 8 percent lower than in 2007, the year before the recession took hold.

The actual decline from 2010 to 2011 was 1.5% (look here).

So executive compensation in health care continues to defy gravity, even as the income of the typical family does the opposite. 

Will the Circle be Unbroken?

Conveniently, the day before, another well regarded site for hospital management information, Becker's Hospital Review, provided a rationale for current health care executive compensation, based on a blog post from Integrated Healthcare Strategies, which claims to be one of the largest US healthcare consulting firms.

The Review article first noted that "executive compensation is a delicate subject," without explaining why it was more delicate than the compensation given to other people.  It then answered the question its title posed, "are hospital executives paid too much?"  In summary,

compensation levels are currently appropriate, on the whole, because employers are generally keeping them on the job with such consistent pay levels.

The syntax is a little difficult, but I believe the translation is the circular cliche, "it is what it is."  More formally, this appears to be a version of begging the question, or circular reasoning.

The Integrated Healthcare Stragies blog post by David Bjork, "thought leader," Senior Vice President and Senior Advisor, who authored two books on executive compensation in health care, rotated this again.

ARE EXECUTIVES PAID TOO MUCH?  The short answer is no. Executives are not overpaid. If they were, employers would not willingly pay them as much as they do.

And again

the intrinsic value of a job can be quantified. Economists and most workers judge the value of a job by how much it pays. A job is worth what an employer is willing to pay an employee to do it, or what an employee is willing to accept as payment for the job. Virtually no one doubts that principle—except when it comes to executive jobs.

Have we got that?  Bjork argued that executive pay is self-justifying.  All executives are worth what they are paid because that is what they are paid.

Another way to understand the fallaciousness of this argument is to try to apply it to jobs other than executive positions.  Presumably, it would mean that everybody's pay is appropriate, and hence nobody's pay could ever be changed.  But one's head begins to hurt just trying to think about this.

Yet those were the main arguments that Mr Bjork made to justify his contention that

There is no rational basis for the view that executives should not be paid as much as they are paid, just a personal attitude, generally held by someone who is paid less.

A Side Trip to the Fallacy of Composition

Mr Bjork did make an attempt to supplement that argument.  For example, he wrote "labor market forces drive pay for executives," without explaining how much they do so, or the nature of the market for executive pay.  Later, he wrote,

Hospitals and health systems continually look for ways to reduce their costs. When they come across jobs that cost more than they are worth, they eliminate the jobs and either eliminate the work, redistribute it to other employees, or outsource it to cheaper labor. They view executive jobs the same way. When hospitals and health systems find an executive job that seems to cost more than it is worth, they eliminate it if they can and redistribute the work to other managers.

Let us unpack this a bit.  First, hospital and health systems are organizations composed of humans.  They do not look for anything, but the executives who run them may certainly look for ways to reduce costs and eliminate apparently unnecessary jobs.  Confusing hospital executives with the organizations they run appears to be a version of the fallacy of composition, which "arises when a person reasons from the characteristics of individual members of a class or group to a conclusion regarding the characteristics of the entire class or group (taken as a whole)."

Taken literally, this paragraph suggested that executives could decide their own jobs "cost more than they are worth," and then fire themselves and give their work to someone else.   

Nonetheless, were this targument to be true, it in fact contradicts the conclusion based on this argument that appeared two sentences later

Therefore, executives must be worth what they are paid, because employers keep them on the job and willingly continue to pay what¬ever they are paid.

Note that this conclusion is yet another restatement of the circular argument above.  . 

Summary

We have noted that logical fallacies are increasingly deployed to defend the status quo in health care, and particularly to defend the interests of those who are profiting the most from the current dysfunctional system.  In our latest example we find some particularly ripe repitition of a fundamentally fallacious argument to support ever rising compensation for health care executives.  It is distressing that the arguments were made by a prominent health care management consultant and published author on the subject of health care executive pay, and was picked up without question by a prominent health care management media site.  It suggests, like other posts we have written about the generous use of logical fallacies to protect the powers that be, that these eminences really may have not the slightest idea what they are doing, and have truly risen to their level of incompetence, if not ridiculousness; or else, they do know what they are doing, but have nothing but contempt for the reasoning powers of anyone outside their circle, and feel no need to justify their actions to such hoi polloi.

The sheer foolishness of arguments made to protect the status quo ought to lead the rest of us, particularly health care professionals, to question that status quo further. 

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.

Why Weren't Existing Laws About Hospital CEO Compensation Enforced in Washington State?

Public radio station KUOW reported on the generous compensation given hospital CEOs in Washington:

KUOW has learned that 15 hospital executives in Washington made $1 million or more in 2009. That elite group includes 14 nonprofit executives and one head of a government hospital. CEOs at Multicare, Providence, Virginia Mason and Valley Medical each made more than $2 million.

Those numbers can be found in the hospitals' latest tax filings and other public records. The pattern was more lopsided in the two prior years. Nobody working at a public hospital cracked the top 10 list of the state's highest hospital paychecks in 2007 or 2008.

But then the story takes an interesting twist:

Most of Washington's largest hospitals are nonprofit organizations. The state gives the nonprofits a break on their business taxes to help reduce the cost of health care.

The hospitals have to jump through some hoops to qualify for the reduced taxes. For one thing, state law limits how much the hospitals can pay their executives. Their pay has to be comparable to what public servants in Washington make in similar jobs — or else no break on their B&O taxes.

Somehow everyone seems to have forgotten about this part of the law:

The limit on executive pay has been on the law books for 30 years.

Gowrylow: 'Frankly, I don't think it's something that's been on our radar since the mid–80s.'

Mike Gowrylow is a spokesman for the Washington Department of Revenue. He says the recent million–dollar incomes were news to the department.

Gowrylow: 'But it's certainly something that I think we need to take a look at again and examine whether these nonprofits are paying their executives excessively or not.'

Gowrylow says the agency only audits 2 or 3 percent of tax returns. It mostly relies on businesses to comply voluntarily with the state's tax laws.

Gowrylow: 'We can't be everywhere. If we become aware of a nonprofit or any other business that's underreporting their taxes, we investigate those complaints, and if tax is due, we will assess it.'

He says the agency can recover back taxes for the past four years, along with penalties and interest.

Although the article cited an unsuccessful legal action to enforce the law in a particular case in 1986, why the state government seemed to forget about it after that is unclear, and maybe deserving of further investigation.
Right  now, hospital management seems to be trying to avoid the issue, or is arguing about the meaning of "comparable,"

Several present day hospital officials declined to be interviewed on tape. They told KUOW they believe they are in compliance with the state law. But they generally provided little detail to back up that claim.

Providence and Group Health representatives both said their organizations are so large and complex that there may not be any comparable public service jobs in Washington.

Swedish spokeswoman Melissa Tizon told me that CEO Rodney Hochman's pay was generally comparable to what the highest paid public hospital executives made, at Valley and Evergreen hospitals.

On the other hand,

Harborview is the state's largest hospital. Eileen Whalen is its head and an employee of the University of Washington. She makes about $470,000.

[State Senator Karen] Keiser: 'That's really not comparable to the million dollar and more salaries of other hospital directors in our state. We are paying attention here in Olympia to that.'

Other executives at UW Medicine did make more than Whalen. Still, none of them, not even the president of UW, made as much as any of the 15 highest paid executives at nonprofit hospitals in 2009.

I searched high and low to find any public officials making as much as the top nonprofit CEOs.

The only one I found who consistently did so was the UW football coach. But it might be hard to argue that Steve Sarkisian's job is comparable to running a hospital system.

We have discussed numerous cases of executives of not-for-profit hospitals and hospital systems receiving lavish compensation and benefits that seem out of proportion to any reasonable measure of their performance or of their positions' difficulties.  (Remember that advocates of corpulent executive compensation love to cite the size of the company and the number of employees, but the CEO really has only to manage the next tier of executives, rarely numbering more than a dozen.)

As we have said before, far too often the leaders of not-for-profit health care institutions seem more interested in padding their own bottom lines than upholding the institutions' missions. They often seem entirely unaware of their duty to put those missions ahead of their own self-interest. Like the financial services sector in the era of "greed is good," health care too often seems run by "insiders hijacking established institutions for their personal benefit." True health care reform would encourage leadership of health care who understand health care and care about its mission, rather than those who see a quick way to make a small fortune.

However, the twist in this story is that it appears the lavish compensation of hospital executives in this particular state may have violated state law, or at least the tax breaks these hospitals got may have violated the law, given their leaders excessive compensation, and that the law in question is over 30 years old.  However, the law seems to have been forgotten or ignored for nearly all that time, for reasons that are unclear. 

This seems reminiscent of how the Responsible Corporate Officers' Doctrine seems to have been forgotten and ignored.  this post from June, 2010).  However, in the last 30+ years, this notion has been ignored and abandoned by US government regulators at least in so far as it applies to health care organizations, particularly drug, biotechnology and device companies.

The big question is why have such laws and legal practices, which have not been repealed or refuted, instead been ignored and forgotten?  Surely this cries out for investigation.

Of course, It seems that somehow in the brave new world of laissez faire, anything goes capitalism foisted on health care over the last 30 plus years, old practices and customs that limited the power and enrichment of top leaders may have seemed increasingly prudish, and those advocating them may have seemed to be old fuddy duddies to those bent on personal gain.  But unhipness and scorn of prudishness are not reasons to ignore an existing law. 

So it is not that there are no legal tools to prevent abuses by leaders of health care organizations.  Instead, there has been increasing forgetfulness of the existence of such tools, and perhaps a growing effeteness of enforcement that has lead to a reluctance to even try to use them.  So we can start truly reforming health care by simply enforcing the laws that are already there. 
  

ACO = Arrogant Clinical or Aggressive Care Oligopoly?

In the 1970s, it was managed care organizations.  In the 1990s, it was vertically integrated health care systems.  In the 2010s, the fashionable concept for improving health care, apparently beloved by left-wing policy wonks and right-wing health care executives is the "accountable care organization." (ACO).  Development of the ACO is funded by the recently passed US health care reform legislation.  The official definition of ACO from the US Center for Medicare and Medicaid Services is: 

An Accountable Care Organization, also called an 'ACO' for short, is an organization of health care providers that agrees to be accountable for the quality, cost, and overall care of Medicare beneficiaries who are enrolled in the traditional fee-for-service program who are assigned to it.

Oddly enough, that seems like it could also describe a 1970s managed care organization, or a 1990s vertically integrated health care system. The only real difference is the idea that the ACO would be paid fees for service. All these similar concepts embody the notion that health care needs to be highly organized into big, bureaucratic organizations to improve quality and access while controlling costs.

Back in August, we warned:

There seems to be a strange and increasing alliance between politically- correct academic theorists and proponents of raw economic power. The theorists' notion of "accountable care organizations" seems to have become a great foil for would-be monopolists, yet the theorists have done nothing to show how their creation would really bring "power to the people." Meanwhile, maybe 'ACO' should stand for 'aggressive care oligopoly.' Meanwhile, be extremely skeptical of the latest health care fad, especially when it is supported both by academics and CEOs.

I am not sure you really heard it here first, but you did hear it here early. Now, three months later, our doubts have become main-stream.

Revisiting Sutter Health

n California, National Public Radio continued to document the increasing market dominance of the Sutter Health system (which we discussed in August here) as it marches toward becoming an ACO:

Through new construction and expanding its doctors' groups, Sutter Health is enhancing its position as one of the most dominant hospital systems in California. In addition, Sutter is further ahead of many competitors in fashioning itself into a so-called accountable care organization, responsible for coordinating care between hospitals, specialists and primary doctors.

A companion article gave examples of how this emerging ACO is becoming increasingly oligoplistic:

Hospital prices in the Sacramento region are among the highest in California, driven in large part by the negotiating clout of the hospital chain Sutter Health.

Over the last decade and a half, Sutter has gradually accumulated hospitals and amassed a roster of doctors who contract exclusively with the company. Sutter is now one of the largest hospital chains in California with 24 acute care hospitals.

'In this Roseville market, which is a big suburban area, the hospital is Sutter,' says John Murray, a veteran insurance broker. 'It's a lock right now. Because Sutter dominates the market, major insurance companies, like Blue Cross and Aetna, can't sell policies that exclude Sutter hospitals and doctors. That dependence means the hospital chain can dictate high prices.'

Concerns about Sutter's market dominance are also increasing:

'As Sutter gets bigger,' says Anthony Wright, executive director of Health Access California, a nonprofit advocacy group based in Sacramento, 'it can dictate higher prices and is less accountable for ensuring good quality because it has a lock on certain markets.'

Doubts in the New York Times

In the New York Times, Robert Pear reported:

When Congress passed the health care law, it envisioned doctors and hospitals joining forces, coordinating care and holding down costs, with the prospect of earning government bonuses for controlling costs.

Now, eight months into the new law there is a growing frenzy of mergers involving hospitals, clinics and doctor groups eager to share costs and savings, and cash in on the incentives. They, in turn, have deployed a small army of lawyers and lobbyists trying to persuade the Obama administration to relax or waive a body of older laws intended to thwart health care monopolies, and to protect against shoddy care and fraudulent billing of patients or Medicare.

Consumer advocates fear that the health care law could worsen some of the very problems it was meant to solve — by reducing competition, driving up costs and creating incentives for doctors and hospitals to stint on care, in order to retain their cost-saving bonuses.

'The new law is already encouraging a wave of mergers, joint ventures and alliances in the health care industry,' said Prof. Thomas L. Greaney, an expert on health and antitrust law at St. Louis University. 'The risk that dominant providers and dominant insurers may exercise their market power, individually or jointly, has never been greater.'

Skeptical Liberals and Libertarians
Amazingly, while ACOs seem to be supported by many left-wing policy wonks and right-wing health care executives, they have also rapidly engendered skepticism from both liberals on the left and libertarians on the right, and from within government and the private sector. For example, at the end of the NY Times article we find:

Dr. Donald M. Berwick, the administrator of the Centers for Medicare and Medicaid Services, hails the benefits of 'integrated care.' But, Dr. Berwick said, “we need to assure both patients and society at large that destructive, exploitative and costly forms of collusion and monopolistic behaviors do not emerge and thrive, disguised as cooperation.”

Dr Berwick is a well-known advocate of innovative approaches to improve the quality of care, but was tarred as a raving left-winger when he was nominated to his current position.

On the other hand, in the New York Post was an op-ed by Dr Scott Gottlieb:

I warned that the creation of 'accountable care organizations,' which put hospitals in control of all the doctors in their outlying areas, would lead to concentrated power over the provision of medical care -- turning physicians into salaried employees and reducing consumer choices.

Furthermore, he wrote:

Since the ACOs will have local monopolies, they'll also have little incentive to compete for more patients in an open marketplace. Yet this is the only incentive that would spur an ACO to truly innovate and improve its delivery of medical care and offer better services.

Private health plans vie to contract with the best doctors and hospitals, creating market prices for services and competition to improve outcomes. If the ACOs squeeze out this competition, the result will be a de facto 'single payer': Every market will be controlled by a single ACO,....

Dr Gottlieb writes frequently about health care and policy issues, and is a "resident fellow at the American Enterprise Institute."

Missing the Main Point: Doctors vs Business Executives as Leaders
At least it did not take long this time for the fundamental flaws in the latest fashionable health care reform effort to get attention. It is really striking that this time around, skepticism is coming from both liberals and libertarians.  Maybe we all have learned something from the failures of managed care and of vertically integrated hospital systems.

A Washington Post op-ed by Steven Pearlstein hinted at one fundamental problem with the ACO concept.

Most reformers believe ...that the best way to deliver affordable quality care is through organizations such as the Mayo Clinic, which coordinate physician and hospital services under one roof and are paid not on the basis of how many procedures they do but on the quality of the care they provide. These organizations tend to rely on salaried doctors, make extensive use of electronic medical records and evidence-based 'best practices,' and, in effect, take on much of the risk traditionally borne by insurers. Several provisions of the new health-care reform law encourage the formation of such 'accountable care organizations.'

Somehow, however, the supposed health care reformers seemed to have overlooked a crucial fact about the Mayo Clinic they are using as a model. The Mayo Clinic traditionally was basically a large physician group practice. It was run by physicians. Even now, the Mayo Clinic's CEO is a physician (Dr John H. Noseworthy) who had a substantial clinical and academic career. The CAO is a nurse, and the three top Vice Presidents are physicians.  I submit the fact that the organization was run by physicians, physicians who once swore to put their patients' clinical care ahead of all other considerations, was crucial to the Clinic's success in taking care of patients as well as maintaining its finances.

However, nearly all of the would-be ACOs we hear about now are centered on big hospital systems, run by business executives who have never taken care of patients, and never swore to put patient care ahead of anything. For example, the most advanced degree possessed by the CEO of Sutter Health is a Master's in Health Administration (see here). Sutter Health does not make biographical information about its top executives particularly easy to find, but according to the most recent (2008) 990 form posted on Guidestar, of its 19 top executives, only 2 had MD degrees. As we have seen time and again on Health Care Renewal, such executives have become extremely good at becoming rich in their jobs. (For example, according to the 2008 990 form, of those 19 executives, all had total compensation greater than $200,000, 16 had compensation greater than $500,000, and 9 had compensation greater than $1 million.) When things go wrong, these royally paid executives may take their golden parachutes and open the exit door, and jump on the slide.

The advent of ACOs reminds me of the advent of managed care. The original managed care organizations, exemplified by Kaiser - Permanante, were also not-for-profit large group practices run by physicians. However, the "managed care organizations" that evolved out of the 1970s law, favored by our glorious former President Nixon, were for-profit corporations run by business executives. Somehow, when legislators seek to promote better health care, the legislation they right often get the crucial details wrong.

The one good thing about ACOs seems to be that they have galvanized liberals and libertarians alike to worry about big, collective, bureaucratic health care organizations run by executives with no clear commitment to putting care of individual patients first.

ADDENDUM (26 November, 2010) - See also comments by David Williams on the Health Business Blog.

About to be Bought-Out Non-Profit Hospital System Tries to Hide Executives' Golden Parachutes

A report from FloridaToday (in Brevard County) about the sale of a not-for-profit Florida hospital system to a for-profit corporation raises some interesting questions. The background is that the non-profit Wuesthoff Health System was bought by for-profit Health Management Associates (HMA):

HMA, a for-profit hospital management company in Naples, bought the not-for-profit Wuesthoff Oct. 1 for $145 million. Wuesthoff lawyer William Kopit has said it was forced to sell because the hospital system lacked the capital to compete.

The question is about the conditions of the sale:

A foundation formed to manage the proceeds of the sale and continue providing indigent health care has refused to disclose the executive packages to the state, claiming it constitutes a trade-secret exemption under Florida law.

This was despite the state Attorney General's authority to oversee sales of charitable non-profit organizations to for-profit entities:

Under its statutory obligation to oversee charities registered in the state, the Attorney General's Office requested the executive pay information from Wuesthoff, Wiggins said. Wuesthoff's lawyers submitted 40 pages of heavily redacted material. Negotiations led to Wuesthoff agreeing to redact only the names and compensation details of the executives.

The materials submitted suggested a lot of executives getting golden parachutes, but not the amounts or conditions involved:

The unredacted portions show as many as eight former executives receiving three years of salary paid out over 12 months, a pay-to-stay retention bonus for continuing to work for the company during sale discussions, a senior executive retirement package and regular retirement pay and extended health benefits. Based on Wuesthoff's tax returns, those payouts will be in the millions.

So, legal action will ensue:

'Therefore we will look to the court for guidance and abide by any judicial ruling on the public record and trade secret issues,' said Ryan Wiggins, communications director for the attorney general.

The notion that how much a for-profit corporation will pay in golden parachutes to former executives of a not-for-profit hospital system is a "trade secret" just boggles the mind.  What could a competitor possibly gain from this information that could lead to specific action that would disadvantage Wuesthoff?

On the other hand, it might be that the size of these golden parachutes, if revealed, would lead to some raised eyebrows, or worse.  Consider first the contrast between payments made and to be made to fortunate executives and the performance of the health care system. 

Note that what is available on the public record (via the hospital system's latest available, that is, 2008 form 990 disclosures to the US Internal Revenue Service) suggests that in the past, Wuesthoff executives were already quite well-paid. On that form we found the following total compensation reported:
Emil Miller, President: $927,543 ($523,069. compensation; $342,130, benefits; $62,344, benefits)
Brian Bodi, Controller: $184,789
George Fayer, CFO: $439,580
Johnette Gindling, Senior Vice President: $236,975
Marchita Marino, Senior Vice President: $264,529

Nearly a million dollars was a lot of compensation for the CEO of a small, non-profit hospital system in 2007.  Although there is no easily publicly available information about executive compensation since 2007 (the year covered by the 2008 report noted above), these high rates of compensation were paid by a hospital system that now apparently has so little capital that it no longer can "compete" without being bought by a for-profit corporation.   Now the executives who could not amass a competitive amount of capital will amass quite a sizable amount of personal riches.

Consider second the contrast between the extraordinary assertion that these golden parachutes should remain secret, and the hospital system's stated interest in "transparency," or its stated devotion to "five core values that drive our hospital and its mission: integrity, courtesy, compassion, competence and stewardship." It seems that preventing embarrassment about executive enrichment may trump transparency and integrity.

Health care, probably infected by the finance industry that brought us the global financial collapse, aka "great recession," seems to have been overcome by "compensation madness."  A central value of many health care organizations seems to be enriching their top leaders/ managers/ executives, no matter what the financial condition of the organization, or the performance of the leaders in terms of fulfilling the organization's mission.  From these perverse incentives, the perverse incentives favoring short-term financial performance over patient care seem to have sprung.  As Prof Mintzberg wrote, "All this compensation madness is not about markets or talents or incentives, but rather about insiders hijacking established institutions for their personal benefit."

If we truly want health reform that addresses spiraling costs, declining access, and threatened quality of care, we need to give health care practitioners and leaders positive incentives for being caring, competent, well-informed, and honest, not for clever financial manipulation and short-term profits, or just for managing to show up for work.

ADDENDUM (2 December, 2010) - 4 days after the above post, Florida Today reported that details about the golden parachutes were released:

[Emil] Miller, who ran Wuesthoff for more than a decade, received $6.25 million total. Of that, $2.2 million was severance pay and $3.2 million was retirement pay. The balance was the cost of his employee benefits.

Former CFO George Fayer has the next highest exit pay at $973,000, which includes a $171,000 for staying through the sale and transition. Fayer is a consultant to the foundation, Gindling said.

Chantal LeConte, who ran the Rockledge hospital, received the third highest payout, $553,000. LeConte's package included about $138,000 for staying through the transition.

Given that the health system was merged out of existence because it supposedly no longer had enough capital to "compete," now we see why system leaders were so reluctant to reveal the amounts.

More on Hospital Market Dominance, Enabled by Secret Pricing

This week two more articles appeared describing how large hospital systems use market dominance to charge more.  Naturally, both were in news publications, not scholarly health services research journals.

San Francisco

Kaiser Health News (via the Contra Costa [CA] Times) discussed hospital market dominance in the San Francisco area.  The article documented how particular systems can command higher prices. Consider the example of John Muir Health vs San Ramon Medical Center:

Often, a hospital's dominance in an area helps determine how much it can charge, experts say. Consider John Muir Health, a two-hospital nonprofit system in the East Bay. With campuses in Concord and Walnut Creek, John Muir has the biggest footprint in the local hospital market, accounting for 54 percent of all the acute care inpatient stays in 2009, more than any other hospital group, according to state data.

The hospital with the weakest market penetration is San Ramon Medical Center, a Tenet-owned, for-profit hospital, with 10 percent of the acute care inpatients.

The least the insurer Aetna paid John Muir for an outpatient colonoscopy was $3,185, according to Aetna's website, which tracks two years of payments. Aetna paid $1,483 to San Ramon Regional Medical Center for the same service. The least Aetna paid John Muir for an uncomplicated birth was $7,722, while its lowest price for a birth at San Ramon was $5,278.

Yet on broad quality measures, John Muir's hospitals generally score no better than San Ramon's, according to the California Hospitals and Reporting Taskforce, a nonprofit that produces hospital report cards published at Calhospitalcompare.org.

San Ramon ranks equal to John Muir's Walnut Creek campus in most major measures, including mortality rates in the intensive care units, overall patient satisfaction and maternity care. John Muir's Concord campus ranks below San Ramon on several measures, including mortality rate and patient experience, though John Muir was rated better in avoiding complications for patients on ventilators.

Then there is Sutter Health:

[Stanford University associate vice president for Benefits Les] Schlaegel says so many employees like to see doctors at the Palo Alto Medical Foundation, a doctors' organization affiliated with Sutter with a clinic near the Stanford campus, that the university feels obliged to keep offering insurance networks that include Sutter.

'Sutter basically has a stranglehold on Northern California,' says Schlaegel. 'They are strategically situated, both for hospitals and medical groups. They know purchasers need them. When you are strategically located, you can say 'this is our price and you can pay it.''

Secret Pricing
The ability of dominant hospitals to charge higher prices is facilitated by secrecy in which hospital pricing is cloaked

The hospitals haven't made it easy for consumers to comparison shop. State law requires hospitals to reveal their charges for specific services. But those charges don't reflect the lower negotiated rates insurers actually pay - rates hospitals usually insist be kept secret. The California Hospital Association has opposed legislation to ban such 'gag clauses'; the most recent of these bills died in the state Assembly in August.

Hospitals have also resisted a four-year campaign by the Pacific Business Group on Health, an employer coalition, and CalPERS to create a 'hospital value initiative' that would allow hospital comparison based on cost and quality of care.

Summary

In many cases, hospitals are able to keep raising prices beyond inflation because their sizes or reputations give them clout in negotiating rates with insurers, researchers say. Yet high prices don't always equate with superior care.

Quality measures for some of the Bay Area's most prestigious hospitals, including Stanford and John Muir, show that in some instances, less expensive competitors perform as well or better in their basic responsibilities, such as avoiding infections and high death rates for patients in intensive care.

'Some hospitals are able to charge higher prices than the market normally would bear, even without providing higher quality,' says Dr. R. Adams Dudley, a professor of medicine and health policy at the University of California, San Francisco. 'That means they're getting those higher prices without really offering more to patients or the rest of society.'

New York City


Meanwhile, a long feature story in New York magazine about the demise of St Vincent's hospital (see our post here) also discussed the market power of its competitors as one factor in its decline:

The city’s largest and most powerful hospitals, which are crucial to an insurer’s customers, exert their leverage to secure deals that are believed to pay well above the average margin; smaller hospitals, which are often located in low-income neighborhoods, have little choice but to accept the dismal rates dictated by insurers if they want to remain in the insurers’ plans. 'When the big players take their cut, there are only scraps left for everyone else,' says the CEO of an outer-borough hospital. “'United HealthCare couldn’t care less about having my hospital in their network. They tell me to take it or leave it.

Secret Prices

Like in California, market dominance is enabled by secret pricing:

the rates negotiated between hospitals and insurance providers are withheld from public scrutiny—even state health and insurance regulators are denied the information

Free Markets?

Secret prices determined by market power hardly sound like characteristics of a free market. Yet in New York, at least, they seem partially to be the result of the free market ideology of previous political leaders:

Then George Pataki took office in 1995, determined to allow hospitals to test their mettle in the free market by negotiating their own terms with insurers. It turned out to be an exercise in shock-therapy capitalism. Inexperienced at the bargaining table, hospitals engaged in intramural rivalry with each other, cutting unfavorable deals with insurers in order to hold on to patients in the short term. With their already thin margins pared down further by deregulation, many hospitals soon built up paralyzing debt loads. Even the largest and seemingly least vulnerable facilities decided that their best hope for survival was to get bigger. A flurry of mergers and buyouts ensued, and by the end of the nineties, the hospital system began to assume its current bewildering patchwork of partnerships and affiliations. Columbia Presbyterian and New York Hospital, both attached to elite medical schools, joined forces. NYU and Mount Sinai forged a deal (it later came undone). On the eastern edge of the city, North Shore hospitals merged with nearby Long Island Jewish, staking out an enormous swath of the hospital market on Long Island, Queens, and Staten Island. Beth Israel and St. Luke’s–Roosevelt, debt-ridden and left on the sidelines by the major academic hospitals, decided to try making a go of it together. It was unclear if bigger was actually better—for patients or the bottom line—but size seemed to offer hospitals a buffer against collapse.

By 2005, less than a decade into its dalliance with free enterprise, the city’s hospital system had taken on something of a post-Soviet tinge, with winners ruling the roost like oligarchs and losers reduced to a state of grim dependency. A pecking order emerged, with elite academic centers at the top, well-regarded independent hospitals like Lenox Hill in the middle, and community hospitals on the bottom.

Summary

We have previously written (for example, here and here) about how increasing market dominance by large, sometimes strategically located, and sometimes politically well-connected (e.g., see here) hospital systems run by conflicted leaders. This seems like another unintended consequence of the "free markets solve all problems" ideology, possibly fueled by conflicts of interest that has done so badly in our financial arena (see here). What some of these free market enthusiasts seem to forget, their forgetfulness perhaps fueled by payments received from the large corporations that have profited from this movement, are that true free markets are hard to maintain. This is particularly so in health care, in which knowledge is asymetric, outcomes are uncertain, and sick and anxious patients have trouble making cool, rational choices (as per Arrow, see this post.)

But if the free market enthusiasts really believe in free markets, why have they not been out campaigning to prevent the "unfree" characteristics, like secret pricing, of current health care markets?  Of course, ending secret pricing might compromise the ability of their financial sponsors to keep earning their millions

Health Care Leaders in Maine Fail to Learn from Past Experience

From down east Maine comes a telling story about the problems of contemporary health care leadership.  I assembled this case from three articles by Meg Haskell in the Bangor Daily News, links are below. (1-3)

Complaints About the CEO's Clinical Policies

The story begins with complaints about clinical policies instituted by the CEO of Acadia Hospital.

[Acadia CEO David] Proffitt has come under fire in recent weeks from current and former Acadia Hospital employees who say the incidence and severity of staff injuries have risen since he initiated a policy that essentially eliminates the use of mechanical and physical restraints with mentally ill patients who become violent. (2)

The concerns were raised with government agencies:

Since the end of July, the federal Occupational Safety and Health Administration has been conducting an on-site investigation into employee complaints of unsafe working conditions at Acadia. The state Department of Health and Human Services also recently has investigated conditions at Acadia, with a report due later this month. (2)

Furthermore,

The OSHA investigation was triggered earlier this summer by a complaint filed with the agency alleging an increase in patient assaults on staff after Proffitt implemented stricter standards against the use of mechanical and physical restraints, even when patients turn violent.(3)

Loss of Experienced Clinicians

There were also concerns that Mr Proffitt presided over the loss of experienced clinicians who were replaced by those with less experience

Employees also have alleged that Proffitt has fired or pushed out a number of clinical leaders at Acadia, including former Vice President for Medical Affairs Dr. Paul Tisher and former Chief Nursing Officer April Giard. They have criticized his replacements as lacking expertise in psychiatric care.(3)

Lack of Clinical Experience or Training, Questionable Educational Credentials

Given his direct involvement in clinical decision making, it surprising that Mr Proffitt has no clinical training or experience:

Proffitt’s academic qualifications also have been questioned.

Proffitt’s education includes a 1984 bachelor’s degree in therapeutic recreation from the University of Nebraska at Omaha, a 1989 master’s degree in recreational administration from Arizona State University, and a 2007 doctoral degree in health administration from Warren National University, now a defunct, unaccredited on-line program. His academic career has been criticized as being inadequate to prepare him for the top-level positions he has held at both Riverview and Acadia, although neither position requires a doctoral degree.(2)

Repeating the Past

It turns out that similar concerns were raised about Proffitt's performance in his previous position:

Psychiatrists formerly employed at Riverview said this week that both patient care and employee morale eroded under Proffitt’s leadership there.

'Over the course of David Proffitt’s tenure at Riverview, a significant number of long-standing and experienced staff left and were replaced with less experienced or temporary people,' said Dr. Bryan Woods, who was employed at Riverview from 2003 to 2006 and now practices in Portland. “\'In my opinion, this resulted in a decrease in the quality of patient care.'

Woods said Proffitt’s management style was often in conflict with the collaborative 'treatment team' approach commonly used in acute-care psychiatric settings.

'Ultimately, I left, because I simply could not work with him,' Woods said.

Woods’ colleague Dr. Dan Filene, who also worked at Riverview under Proffitt, said direct-care staff at the state hospital were placed at increased risk by a stringent policy that all but eliminated the use of any kind of restraints.

'The staff at Riverview are heroic,' he said. 'It’s not just dangerous; it is emotionally challenging, fatiguing, low-paying work. When they are actively being injured, it can’t help but affect patient care.' Filene stressed that most people with mental illness are not dangerous or violent.

Sen. Stanley Gerzofsky, D-Brunswick, is chairman of the Legislature’s Criminal Justice Committee. The committee oversees the locked forensic unit at Riverview, where criminals with severe mental illness are housed and treated. Proffitt’s policy of doing away with restraints for even the most dangerous patients prompted a number of complaints, he said.

'We heard concerns that staff members were being injured [by patients],' Gerzofsky said in an interview this week. 'Staff were complaining that [Proffitt] didn’t have the right credentials and that he didn’t take the violence very seriously. We had him in front of our committee several times.'

Gerzofsky’s colleague on the committee, Sen. John Nutting, D-Leeds, said he heard from several Riverview patient families and staff members.

'Legislators were called to see if he could be replaced,' he said. 'There was really just one single reason — he was telling doctors how to treat their patients. He was trying to get between the patients and their doctors.

Nutting said parents of patients were especially concerned.

'They wanted their loved ones to get the care their doctors wanted them to receive, not the CEO of the hospital,' he said.(2)

Proffitt's credentials were also questioned before:

Proffitt’s degrees in recreational therapy and his online doctorate, Nutting observed, did little to reassure worried families.(2)

Proffitt's Defenders

The allegations made against Proffitt, which appear to be from clinical professionals and patients' relatives, were countered by support from, perhaps not surprisingly, managers and executives:

Michelle Hood, CEO of the hospital’s corporate parent Eastern Maine Healthcare Systems, says that under Proffitt, Acadia is 'moving in the right direction.' She lauded the progress he has made toward de-stigmatizing mental illness and ramping up Acadia’s outpatient and community services.

Note that Michelle Hood, although she has considerable health care management experience, appears not to have any clinical experience of expertise, from her official biography:

Before arriving at EMHS, Michelle was president and CEO of the Sisters of Charity of Leavenworth Health System, Montana Region, as well as president and CEO of its flagship hospital, St. Vincent Healthcare. She received her Bachelor of Science in 1978 at Purdue University and her Master of Health Care Administration at Georgia State University in 1981. Her early career included roles of associate hospital director at Emory University Hospital in Atlanta Georgia, executive vice president and chief operating officer of St. Vincent’s Hospital (of now Ascension Health) in Birmingham, Alabama and chief administrative officer of Norton Hospital in Louisville, Kentucky.

Somehow, the process that hired Mr Proffitt, presided over by Ms Hood, did not seem to consider his previous work at Riverview:

At EMHS, Michelle Hood said Proffitt’s troubles at Riverview 'did not come up' during his interviews for the position of CEO at Acadia.

One of 16 applicants in a nationwide search to replace outgoing CEO Dorothy Hill, he had appropriate letters of reference from former employers, she said.(2)

By the way, the process involved checking whether his educational credentials were accurate, but apparently was unconcerned with the meaning of an on-line degree from an unaccredited institution (subsequently closed down by state authorities, see here.)

His educational credentials checked out.... (2)

Hood dismissed concerns about losses of experienced staff:

Asked about the loss of key clinical administrators at Acadia, including Vice President for Medical Affairs Dr. Paul Tisher and Chief Nursing Officer April Giard, Hood said 'turnover is normal' with a new administration and that Proffitt has successfully recruited new talent and promoted qualified staff from within the organization.

The board of trustees of Acadia Hospital also supported their CEO

At the end of last week, John Bragg, chairman of the hospital’s board of directors, said the board supports embattled CEO David Proffitt, despite a deluge of concerns raised by current and former employees and unflattering revelations about Proffitt’s educational credentials and his leadership at his previous post.

At its regular meeting last Wednesday, the board went into executive session to discuss the situation, Bragg said Friday.

'We came out supporting Dr. Proffitt and the changes that are in place and the team he has put together,' he said.

As best as I can tell, Mr Bragg is the President of a local industrial firm, N H Bragg.

By the way, here is what George Eaton, chairman of the board of Eastern Maine Healthcare Systems, the parent not-for-profit corporation for Acadia Hospital, said about the executives that are accountable to him:

By making critical decisions, engaging in aggressive fundraising and other activities, 'exceptional senior executives can and should add many multiples of what they cost to the value of the institution,' he said. Eaton said CEO compensation packages within EMHS are determined using information from comparable institutions nationwide.(1)

Also,

The job of the CEO is 'incredibly complex,' working in 'the most regulated environment in any industry,' Eaton said.

'The prudent thing to do is to get the best people you can,' he said, 'and pay them what you need to in order to retain them — so long as they are achieving the performance goals set by their board.'

Note that Mr Eaton appears to be an attorney, according to the EMHS site, "George F. Eaton II, Esq.; Bangor; attorney, Rudman & Winchell."
Summary

This case illustrates much of what has gone wrong with leadership and governance of health care organizations.

We see health care organizations lead by people who have no experience or training in actually giving health care. Yet people who are not doctors, nurses, or therapists make clinical policies and control clinical care, even against the advice of experienced clinicians. In fact, some such leaders seem to regard clinicians as interchangeable widget-makers making interchangeable widgets. The ill-informed leaders of health care organizations often seem sensitive about their lack of knowledge and experience, and hence may be quick to punish any health care professional who protests their ill-informed decisions.  Moreover, the ill-informed leaders of health care seem to band together to support each other, even in the face of criticism from people with real expertise in health care, or from patients and relatives directly affected by health care and how it is delivered.  Higher level executives who are supposed to supervise lower level executives, and boards of directors which are supposed to exercise stewardship and support institutional values may seem more concerned with protecting the prerogatives of all executives rather than than the patient care mission.

As we have said again, again, again, health care desperately needs leadership that understand the context, and believes in the values.  It needs leaders that puts patients first, ahead of the pay and prerogatives of the executive and managerial class, our would-be new aristocracy.

References


1.  Haskell M. Maine's hospitals: big jobs, big pay. Bangor Daily News, March 6, 2009.  Link.


2.  Haskell M. Acadia CEO criticized at previous post.  Bangor Daily News, September 10, 2010.  Link.


3.  Haskell M. Acadia board supports CEO despite claims.  Bangor Daily News, September 20, 2010.  Link. 

Small Hospital System Loses $61 Million Betting on Financial Derivatives, But Pays CEO Nearly a Million Dollars

As we have quoted many times, sunlight is the best disinfectant.  New US Internal Revenue Service requirements for reporting by not-for-profit organizations has resulted in more transparency about the finances of many health care organizations, and this transparency has shown that the culture of perverse incentives and management privilege has spread far and wide.

How far and wide?  Consider this story in the (Harford County, Maryland) Aegis:

Harford County’s Upper Chesapeake Health lost $70 million because of bad bets in the derivatives markets two years ago, but still paid its chief executive more than $900,000 in annual salary and bonuses.

According to figures from their latest tax returns and from the state agency that regulates hospital rates, Upper Chesapeake Medical Center in Bel Air and Harford Memorial Hospital in Havre de Grace, hospitals owned and operated by nonprofit Upper Chesapeake Health Inc., posted huge losses in their fiscal year ending December 2008.

The losses were the result of an increase in non-operating expenses, according to the Maryland Health Services Cost Review Commission.

The hospitals had combined revenue of $254 million for the year, but posted a combined net loss of $61 million.

The two hospitals also paid out some of the highest salaries in Harford County, led by their CEO, Lyle Sheldon, who made more than $900,000 in 2009, a figure which was first reported by The Baltimore Sun on Aug. 29.

Including Sheldon, the hospitals’ top administrators and top medical staff, who are hospital employees, received a combined $5 million in salary, bonuses and other compensation in 2009.

So how did the hospital's management explain the huge loss?

'That was the year the stock market fell, in fiscal year 2008,' Dean Kaster, Upper Chesapeake’s senior vice president of corporate strategy and business development, said Tuesday in explaining the 2008 loss.

'We saw a significant change in terms of how some of the instruments we used in managing our debt service were valued and during that time period what these dollar changes reflected was an accounting loss directly related to the decline in the overall market in 2008,' he said.

Kaster said Upper Chesapeake, like many hospitals, has investment instruments it uses, called derivatives and hedges, to manage its long-term debt. He said the value of those instruments changed in fiscal year 2008.

In simpler terms, like many corporate, institutional and individual investors, Upper Chesapeake got burned by taking risks that backfired when the economy tanked.

Since those markets have come back, Kaster said, Upper Chesapeake has recovered two-thirds, or about $46.7 million, of the $70 million it lost from investments.

Of course, 2008 was the year of the great recession/ global financial collapse, or whatever we may end up calling it, happened. The value of many investments, and many peoples' homes, imploded. The best current  explanation of the collapse had to do with the bets financial institutions made on risky derivatives which their managers often did not understand. In hindsight, these bets seem somewhere between unnecessarily risky and stupid.

Many smaller businesses and organizations were fortunate to be financially conservative enough not to have bet on derivatives. But little Upper Chesapeake Health apparently bet a large chunk of its money on them, and lost badly. Although VP Kaster belabored the obvious in noting that 2008 was the year of the collapse, he did not explain what the stewards of a not-for-profit health care institution were doing when they were betting on risky derivatives.

One thing they were doing was making a lot of money themselves.

At UCH, the highest compensated employee is President and CEO Lyle Sheldon.

Sheldon’s annual compensation for the hospital’s fiscal year 2009, the most recent information available, was $918,957, according to the Form 990 submitted to the IRS.

Sheldon’s base salary for the year was $535,000 and his bonus and incentive compensation was $224,007.

Sheldon’s compensation is nearly $500,000 more than the next highest paid employee for UCH.

Other executives did well too:

Second to Sheldon, the next highest paid employee in UCH’s upper management is Joseph Hoffman III, the senior vice president and CFO, who was paid $420,355 in the hospital’s fiscal year 2009. His base salary was $272,210 and his bonus and incentive compensation was $91,439.

Senior Vice President and COO Kenneth Kozel was paid $352,538, according to Upper Chesapeake’s Form 990. Kozel received additional nontaxable benefits and deferred compensation on Harford Memorial’s form, bringing his total compensation to $396,039.

Kaster, the senior VP for strategy and business development, was paid $281,142, according to Upper Chesapeake’s form. He also has additional nontaxable benefits and deferred compensation on Harford Memorial’s form, bringing his total to $330,598.

Vice President of Human Resources Toni Shivery’s Upper Chesapeake compensation was $204,531, with an additional $33,895 from Harford Memorial, bringing the total to $238,426.

Note that the CFO of this small hospital system, the person who ought to be most directly responsible for the decision to "invest" in derivatives, made over $420,000, and the vice president for strategy and business development, responsible for the simplistic discussion of derivatives above, made over $330,000.

Providing such perverse incentives seems to contradict the hospital system's high-minded statements of values, which includes:

Responsibility: We take responsibility for our actions and hold ourselves accountable for the results and outcomes.

A CEO who truly accepted responsibility for a $61 million loss from risky bets on opaque derivatives would not accept total compensation of over $900,000. A CFO who truly accepted responsibility for these bets would not accept over $400,000.

So in summary, we see that now CEOs of even the smallest community hospital systems seem entitled to make nearly a million dollars a year. We see that even CEOs whose institutions lose millions due to risky investments still receive such compensation. We see that the executives who seem directly responsible for making such money losing investments still earn hundreds of thousands of dollars.

This is an extreme illustration of how perverse incentives permeate health care, how CEOs command pay beyond the dreams of ordinary people, even when their leadership is financially calamitous, and how little health care leaders support their organizations' idealistic values.

Are leaders who are not held accountable for easily measured financial performance likely to be good stewards of clinical performance, which is much harder to measure?

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?

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.

More Examples of US Hospital Market Consolidation: Connecticut and Florida

Two recent stories from two different parts of the US continue the theme of ever increasing concentration of power in our health care system.

Connecticut

The Hartford Business Journal reported on growing interest in mergers among small Connecticut hospitals.

Rising costs and reductions in government reimbursements related to health care reform could lead to consolidation among the state’s 29 acute care hospitals in the coming months and years, industry experts said.

Indeed signs of consolidation in Connecticut are already taking shape. Danbury and New Milford hospitals, for example, recently signed an affiliation agreement that will put both organizations under the control of a single corporate parent.

Meanwhile, the Central Connecticut Health Alliance, which is the parent company of the Hospital of Central Connecticut, has signed a memorandum of understanding to affiliate with Hartford Healthcare. If that deal gets federal regulatory approval, the two organizations would be integrated under the Hartford Healthcare umbrella.

Note that this story suggests the rationale has everything to do with financial issues, and little to do with patient care issues.

In some cases, deals could be fueled by the needs of cash-strapped, independent hospitals to find larger, more stable partners. In other cases, independent hospitals that have remained financially stable may look to form partnerships to gain greater access to capital markets.

'There are a lot of hospitals that are struggling financially and I think the changes that health care reform is going to bring with reimbursements could be the straw that breaks the camel’s back,' said Vincent Capece, the senior vice president and chief operating officer of Middletown-based Middlesex Hospital, which has nearly 300 beds. 'It will force hospitals to either go out of business, or find a partner.'

Mergers or partnerships allow smaller, independent hospitals to leverage the purchasing power of larger institutions — especially with insurance companies — and consolidate backroom or administrative services, among other benefits.

Note also that the recent US attempt at health care reform, later characterized as health insurance reform, is seen as driving, not preventing mergers.

Hospital officials say talks of mergers, or other types of partnerships, are likely to continue as the economy remains on shaky ground and health reform changes the landscape of how the industry does business.

Officials say reform will lead to reduced Medicare reimbursements from the federal government and require significant capital investments as hospitals prepare for larger patient loads and acquire new technology to provide more efficient care.

Florida

The Orlando Sentinel reported on increasing merger hospital merger activity in central Florida.

In health-care circles, the summer of 2010 may be remembered as the end of small, independent hospitals in Central Florida. Three community facilities here have set their course toward consolidation by joining — or announcing plans to join — large systems.

This month, Health Central, the last independent hospital in Orange County, voiced its intention to partner with a hospital chain. In July, the Wuesthoff hospital system in Brevard County was purchased by a for-profit corporation in Naples that owns 60 hospitals across the country. And on July 1, a partnership between Bert Fish Medical Center and Florida Hospital took effect, giving the system the option to buy the New Smyrna Beach facility.

The latter case could apparently lead to quite a substantial local concentration of power:

In Orlando, two major hospital chains dominate: Orlando Health, which owns all or part of eight hospitals, and Florida Hospital, which owns or operates 13 hospitals in Central Florida and 18 throughout the state.

Both are likely suitors for Health Central, which operates a 171-bed hospital, a nursing home and other health-care services in west Orange County.

Officials from Orlando Health did not respond to requests for interviews.

Florida Hospital system already is involved in a partnership with Bert Fish Medical Center that could lead to a purchase of the facility in 2015. As part of the agreement, Florida Hospital, which is owned by Winter Park-based Adventist Health System, would provide $24 million in capital improvements for Bert Fish in the next five years, pay off the hospital's debt and prop up an underfunded pension plan. In addition, residents in the hospital's taxing district were told their tax rates would go down.

The partnership cements Florida Hospital's dominance in Volusia and Flagler counties, where it already owns hospitals in DeLand, Orange City, Daytona Beach, Ormond Beach and Palm Coast. Its sole remaining competitor is Halifax Health, which owns hospitals in Daytona Beach and Port Orange.

This story contained some protestations from hospital leaders that it is all about the patients:

Florida Hospital officials say their goal is not to create health-care monopolies.

'We're a church-sponsored, church-related organization,' said Florida Hospital Vice President Richard Morrison. 'It's our mission to serve people — and if we can come to other communities and bring what we think is a distinctive approach to health care, then we'll do that.'

On the other hand,

'Hospitals today are like mom-and-pop grocery stores were 40 years ago,' said Dr. Kevin Schulman of Duke University's Fuqua School of Business. Before there was a Publix in every neighborhood, there were small grocery stores. Today, like the grocers, hospitals are joining forces or selling out to regional chains.

For the hospitals, there's strength in numbers, Schulman said. A large hospital system has more leverage when negotiating with insurance companies. Likewise, there's power in purchasing.

But these widespread hospital mergers 'have led to more market power for hospitals. Another word for that is 'monopoly,'' Schulman said.

Furthermore, just as history tells us, monopoly may be good for monopolists but not for everyone else.

A single small hospital doesn't have much clout to bargain with insurance companies. On the other hand, a hospital system that dominates a market is more likely to be able to charge higher rates to insurers — and their customers, say experts.

'There may be some efficiencies in being larger,' said Dr. Robert Berenson, a health-policy expert at the Urban Institute, a think tank in Washington. 'More to the point, however, it gives a hospital much more leverage in negotiating with health plans.'

And although there are many forces driving hospitals to join larger systems, Berenson says the results have been clear to health-care economists.

'There's some theory that [consolidation] improves quality,' he said, 'but the reality is, it drives up prices.'

While at least the folk wisdom among doctors is that the federal authorities will jump on any two doctors who informally discuss their prices, in the laissez faire, let the good times roll era of the 1980s through 2000s, there seemed to be little governmental concern about hospital (or health care in general) consolidation of power:

'Because many hospitals are not-for-profit entities, we seem to have given them a lot more latitude from an antitrust perspective, [Dr Kevin] Schulman said. 'Yet they act like the worst of the for-profit monopolies.'

Summary

As we just noted, advocates of laissez faire commercialized health care often trumpet the advantages of competitive markets as a rationale for deregulation. While there are theoretic, and possibly empiric reasons to think that competitive markets are the optimal way to distribute goods and services, we recently discussed aspects of health care that make it extremely hard for health care markets to be ideally competitive.

In the 1960s, it became recognized that physicians' professionalism, hospitals' devotion to their missions, and sometimes even (gasp) government regulation might partially compensate for distortions in the health care market. However, as supposed free market advocates became more powerful, they pushed for the commercialization of medicine and hospitals, reducing professionalism and mission support, and the hollowing out government regulation. (However, why did the people who attacked medical societies' codes of ethics as monopolistic have no interest in attacking market domination by insurers or hospital systems? Inquiring minds want to know.)

As we said last time, true health care reform would help physicians and other health care professionals uphold their traditional values, including, as the AMA once stated, "the practice of medicine should not be commercialized, nor treated as a commodity in trade." True health care reform would put health care "delivery" back in the hands of mission-focused, not-for-profit organizations, which put patients' health, safety and welfare first.

St. Vincent's Goes Bankrupt, Executives Earn Millions

St. Vincent's Hospital in the Greenwich Village section of New York City was a landmark institution which filed for bankruptcy in April, 2010, and then closed its doors. 

Background

A New York Times article written earlier this year described an institution "threatened with extinction" because it stuck to its mission of "compassionate care" in a health care environment that values "fancy equipment and celebrity doctors."  Thus, "officials blamed a high rate of poor and uninsured patients as well as cuts in Medicare and Medicaid and the hospital's inability to negotiate favorable contracts with health insurance companies...." 

Painting Another Picture

However, a story this week in the grittier New York Post painted a different picture:

St. Vincent's Hospital was looted by execs and consultants in the two years before it closed, then grossly exaggerated its debt, according to blockbuster papers set to be filed tomorrow in Manhattan Supreme Court.

The filing, a petition that seeks to force the state Health Department to turn over documents on the closing, says the defunct medical center blew through millions in 'highly questionable' expenses, including $278,000 for a golf outing, while paying its top 10 executives a combined $10 million a year.

It also shelled out $17 million for 'management consultants,' $3.8 million on 'professional fund-raising' and a staggering $104 million on unspecified costs it listed simply as 'other' on its federal tax returns, the petition says.

But even with all that money going out, St. Vincent's wasn't nearly as cash strapped as it claimed, say the court papers, prepared by a law firm working for doctors and nurses formerly employed there and the hospital's West Village neighbors.

Its crushing debt of about $1 billion, which the hospital blamed for having to close its doors in April, was bloated by hundreds of millions of dollars in loans dumped on St. Vincent's from other medical entities run by the Archdiocese of New York, starting in 2001, after the other institutions merged with the hospital, the papers say.

'The debt of the hospital was specifically exaggerated by numerous factors, including the transfer of debt from other Catholic medical centers and mismanagement by the board of directors,' the documents say. 'These transfers . . . remain undisclosed to the public.'

Historical Parallels
These accusations parallel themes that appeared towards the end of the February, 2010, NY Times piece. First, regarding the transfer of debt:

To remain competitive, in 2000 St. Vincent’s merged with several other Catholic hospitals to form St. Vincent Catholic Medical Centers.

Along with the flagship hospital in the Village, it ran seven other hospitals: Bayley Seton and St. Vincent’s on Staten Island; Mary Immaculate, St. John’s and St. Joseph’s in Queens; St. Mary’s in Brooklyn; and St. Vincent’s Westchester, in Harrison, N.Y. It was also affiliated with St. Vincent’s Midtown, formerly St. Clare’s, in Midtown Manhattan.

The merger was conceived as a way to streamline management and give the hospitals pricing leverage, but it was troubled from the beginning. After closings and sales, the network was left with just one New York City hospital, the flagship; a psychiatric and substance abuse treatment hospital in Westchester; and several nursing homes and other outpatient facilities. Some of St. Vincent’s debt was inherited from the closed hospitals.

Second, regarding mismanagement:

In 2004, St. Vincent’s turned over management to Speltz & Weis, the first in a series of turnaround consultants. It paid the firms millions of dollars a year to run the hospital and hired their officials as hospital executives. The system filed for Chapter 11 bankruptcy protection in early July 2005, when it appeared, according to court papers filed by hospital creditors, that it would be unable to make its payroll.

In a lawsuit filed in 2007, some of the hospital’s creditors painted a picture of a hospital system trapped between unscrupulous consultants and a passive or gullible board. The lawsuit accused David E. Speltz and Timothy C. Weis, the hospital system’s former chief executive and chief financial officer, of delaying the bankruptcy organization while they and their consulting firm collected millions of dollars in fees.

The lawsuit accused them of hiring high-priced contractors and padding their fees, instead of using hospital employees to do work. And it says they leveraged their positions with the hospital to negotiate the sale of their consulting company to Huron Consulting Group, in Chicago, also a defendant in the case.

The outcome of that earlier lawsuit was unclear.  It does suggest that St. Vincent's may have been chronically bled by greedy managers and consultants.

Contrasting Financial Health and Executive Compensation

Of course, as one of our unofficial legal consultants noted, anyone can file a lawsuit. However, perusal of the latest 990 form filed with the Internal Revenue Service by St Vincent Catholic Medical Centers for calendar year 2008 did reveal a disquieting contrast.

That form stated that the the hospital lost over $65 million in 2008, and over $34 million in 2007. However, in 2008, here were the compensation of its highest paid managers

- Brian Fitzsimmons, Executive Director, $2,135,401
- Bernadette Kingman-Bez, Senvior Vice President, CCO (?), $1,520,841
- Paul Rosenfeld, Executive Director, CC, $1,196,458
- Henry Amoroso, CEO, $1,081,592

In addition, seven current and former executives at the Senior Vice President of Vice President level earned over $500,000 that year, and another 13 earned over $250,000.

Summary

So clearly, while the hospital was hemorrhaging money, and a little more than a year away from bankruptcy, this not-for-profit hospital whose mission emphasized serving the poor served a large corps of  executives very large amounts of money.  So we see again the pattern of top managers rewarding themselves disproportionately (here, grossly so) given the mission and financial status of their organizations.  The picture is of pay entirely independent of performance, and leaders who are ultimately only in it for the money.

How many more examples like this do we need until there is resolve that real health care reform will make top health care leaders accountable for their performance, and provide them incentives that are fair and rational, rather than perverse?

Post-Script

Of course, if we regard the fall of institutions whose mission was to do good as inevitable in our Darwinian world, an explanation that earlier coverage of this story suggested, all we can do is to throw our hands up.  However, the inevitability argument is often made by those who are benefiting from the current way of doing things.  A more skeptical view of this case, and related health policy issues, may suggest a different approach.