Wall Street Journal Defends Hired WellPoint Executives' Lack of Accountability to the Company's Owners

The lack of accountability of the hired managers (or executives or bureaucrats) of health care organizations came into sharper focus thanks to a bizarre, in my humble opinion, Wall Street Journal editorial from last week. 

Background: Shareholder Campaign for Oversight of Hired Executives Use of Corporate Money for Political Purposes

In the background is the campaign by some of the owners, that is, shareholders of giant publicly held for-profit insurance company WellPoint to make its executives' attempts to involve the company in politics more transparent and accountable.  (See our previous post here.)  As noted more recently in Fortune (by way of CNN),

shareholders and major U.S. companies have been meeting behind the scenes to discuss improvements in oversight and disclosure practices. 'Companies need to remember that shareholders have a right to know how their money is being spent,' wrote Eric Sumberg, spokesperson for New York State Comptroller Thomas P. DiNapoli, representing the New York State pension fund, in an email. 'Transparency and full disclosure will help to deter high risk political spending that could hurt shareholder value.'

Aetna and WellPoint are two companies contending with shareholder proposals on political spending disclosure this year.

The Center for Public Accountability (CPA) rates the disclosures at Aetna and WellPoint as having 'room for improvement.' Both WellPoint and Aetna have disclosure practices that 'leave significant room for serious misrepresentation of the company's political spending through trade associations,' according to the Center's Political Accountability and Transparency Reports. According to the Center reports, both companies gave money to AHIP (American Health Insurance Plans). And $86 million in funds from AHIP were allegedly funneled to the Chamber of Commerce to lobby against health care reform, according to reports from Bloomberg and the National Journal.

Note that this money was supposedly used by WellPoint executives to undermine the Obama administration's health care reform proposals while the company was publicly supporting aspects of these proposals.

The Wall Street Journal Says Hired Executives Not Accountable to Shareholders

The Wall Street Journal's editorial page's denunciation of this campaign by corporate owners to assert their rights, and the accountability of hired managers opened thus,

The campaign to intimidate companies from exercising their free-speech rights is in high gear as shareholder proxy season arrives, and the most prominent early target is health-insurer WellPoint. The arc of this attack will be one of the election year's political leitmotifs, and it should be on the radar of every corporate boardroom.

In the favored new tactic of the left, unions and activists are using politicized shareholder resolutions to send a message to corporations: Drop support for free-market and conservative causes, or you'll take a political beating.

The Journal conveniently ignored that the campaign is not from outside the corporation, but from its very owners, and that the people they are supposedly trying to intimidate are actually supposed to be responsible to them.  In addition, it begged the question of how political spending by hired corporate bureaucrats unaccountable to the people who own the company could possible have anything to do with free markets.

If some owners do not think that executives should be spending company money on political causes (especially presumably causes that the executives favor, or that reflect the executives' self-interest), they have a perfect right to think so, and to act on their thoughts.


Then the  Journal went on to assail the shareholders' challenge to some members of the WellPoint board of directors.  After first defining Change to Win as a "union front group," -

Change to Win is now targeting WellPoint's annual meeting on May 16 when it will demand that shareholders vote against board members Julie Hill and Susan Bayh (wife of former Indiana Democratic Senator Evan Bayh) because the company has refused to disclose or stop all of its political spending. Among the company's crimes? Corporate funding of, you guessed it, ALEC.

Now let us back up a minute. This is about a campaign by stockholders, that is, people who are owners, albeit fractional owners of WellPoint. It is some shareholders who want to vote against the particular board members.  WellPoint directors are supposed to have a fiduciary duty to represent the stockholders', that is, the owners' financial interests. If stockholders think members of the board of directors are not representing the stockholders' interests, the stockholders have a perfect right to vote against them. 

However, the Journal fulminated,

The union attack on WellPoint is notable for targeting two board members by name and the effort to make extra hay out of Susan Bayh's political profile. (Added frisson: Evan Bayh has worked as a consultant to the Chamber.) The ad hominem attack is right out of the Saul Alinsky playbook and is intended as a warning to other corporate directors that their personal reputation will be damaged if they don't force companies to stop donating to industry groups.

Note further that all stockholders are owners, whether they are also union members, or have green hair. Note further that the owners again have a perfect right to criticize or vote against board members who they believe are not properly exercising their fiduciary responsibilities to stockholders, that doing so has nothing to do with the ad hominem fallacy, and that this right is not nullified for stockholders with particular political opinions, or stockholders whom the Wall Street Journal does not like.

Summary

So we see the Wall Street Journal, supposed defender of capitalism, attacking a fundamental part of capitalism, the right of ownership, corporate ownership in this case. Instead, presumably, the Journal editorialists thinks that hired corporate executives ought to be completely unaccountable to the stockholders, and able to do whatever they want, including to do what is in their self-interest but not the owners' interests.

So this is how far the coup d'etat by hired executives/ managers/ bureaucrats has progressed. Supposed defenders of capitalism are now defending the rule of hired corporate insiders, completely disregarding the rights of owners. All we are lacking is a catchy name for rule by the hired managers/ bureaucrats/ executives. I am open to suggestions.

We have long criticized leaders of health care organizations who are ill-informed, unaware or hostile to health care professionals' core values, self-interested, or even corrupt.  We have discussed how bad leadership has advanced as leaders have become less accountable.  It appears that the lack of accountability of health care leaders, and their tendencies to put their own interests first, is part of a larger problem.  This is the take-over by most of society's important organizations by the managers, bureaucrats, and executives who were hired to run them.  For profit corporate hired leaders have become unaccountable to the corporations' owners.  Non-profit organizations' hired leaders have become unaccountable for the mission, or for their organizations' stakeholders. 

If we want health care, and democratic society to survive, we need to counter the managers' coup d'etat and make leaders accountable once again. 

An Example of How the Complex Takes Control - A Board Dominated by Hired Managers Levitates Its Hired CEO's Pay

The Indianapolis Star published the latest story about anti-gravity health care executive compensation.  The report emphasized how the largest hospital systems in the metropolitan area raised CEO pay faster than any reasonable metric:

CEO pay is up, sharply in some cases, at Indianapolis' four large hospital groups, as the systems have grown and dumped more responsibilities on their top leaders.

Total pay for those CEOs rose anywhere from 15 percent to 53 percent from 2008 to 2010. While experts say the pay is in line with executive compensation at other large hospital groups, the rate of the increases far outpaces the minimal wage gains that area health-care workers (1.7 percent) and hourly workers (3.1 percent) have seen over the same time.

The rising CEO pay comes at one of the shakiest financial periods ever for hospitals, as they struggle with cuts in reimbursements for care from federal Medicare and Medicaid programs and private insurers.

CEO Pay Up More than Revenue

Pay at specific health care systems also rose faster than revenue. At the Indiana University Health System:

At the top of the best-paid list: IU Health's President and Chief Executive Daniel F. Evans Jr., who pulled down $2.08 million in compensation in 2010, up 17 percent from 2008. Subtracting Evans' retirement payouts, which vary year to year, his base pay jumped 19 percent since 2008.

However,

From 2008 to 2010, IU Health has seen revenue grow 10 percent to $2.46 billion,...

At St Vincent Hospital and Health Care

Close behind comes Vincent Caponi, CEO of St. Vincent Hospital and Health Care Center, who took in $1.86 million in 2009-10, a two-year jump of 44 percent, or 64 percent when retirement is removed.

However,

Revenue over the two years rose 28 percent at St. Vincent,...

At Franciscan Alliance,

Robert Brody of Franciscan Alliance earned $1.27 million in 2010 (53 percent more than in 2008),...

However, over that period revenue only rose 17%.

At Community Health Network,

Bryan A. Mills, the relatively new CEO of Community Health Network, received $1.35 million, or 15 percent more than his predecessor, William Corley, collected in 2008. (Corley retired in 2009.)

while revenue only rose 4%.

The Usual Talking Points

At this point, it should come as no surprise that hospital leadership trotted out the same old talking points to account for the ever upward trajectory of CEO pay as used in other areas and to account for the pay of leaders of other kinds of health care organizations (look here). These included...

We Pay What Everyone Else Pays

It was easy to find a professional compensation consultant to repeat this one:

Jim Otto, senior principal in Atlanta for the Hay Group, a consultant on executive benefits, said pay to top hospital CEOs in Indianapolis appears in line with rising compensation, including retirement benefits and bonuses, being paid nationally to most large-system hospital executives.

CEOs Work Hard and Are Brilliant

So we read:

At IU Health, formerly Clarian Health Partners, where Evans has been CEO since 2002, 'The system's grown significantly. It makes us think twice about the difficulty of running such a system. We literally cover the entire state of Indiana. And much of that has been under Dan's oversight,' said Charles Golden, an IU Health board member and chair of its compensation committee.

Also,

Golden says Evans 'has done a really superb job. Almost everything favorable to our system has been positive in his time.'

Here is the version pertaining to St Vincent's

Caponi 'is on an airplane and out of town a good bit, running a much bigger area' for Ascension, said Bill Estes, chairman of St. Vincent's board. 'That's the way we justify (higher CEO pay) and feel comfortable with that.'

High Pay is Needed to Attract Competent, if not Brilliant People

From Mr Otto, the compensation consultant:

Large hospital groups make certain they pay similar to their peers to remain competitive.

One reason for rising pay, Otto says: 'These aren't easy jobs. They are not easy to fill. The candidate pool isn't terribly large.'

Furthermore, Mr Golden, from the IU Board, added,

'Unless you want to default to mediocrity, I suppose you can do that (cut CEO pay),' he said. 'But I don't think that's where we are going. I don't think these (hospital) systems will get any easier to manage.'

Talking Points Sans Justification

As in previous cases, no one that reporter Jeff Swiatek could find provided any specifics to back up these talking points. It is striking that those who stewarded all the major hospital systems in this one area
felt the need to raise executive pay substantially faster than the rate of rise of revenue, that is from 1.7 times to 3.75 times the rate of revenue rise.

Why Are Hospital Boards So Nice to CEOs?

In the interests of full disclosure, I noticed this article because reporter Jeff Swiatek chose yours truly, plus fellow blogger Dr Howard Brody (look here) to comment for it.

'Whenever the nonprofit sector starts acting more like the for-profit sector, I start to get worried,' said Dr. Howard Brody, director of the Institute for the Medical Humanities. 'It just becomes crony capitalism. If one executive gets paid $3 million instead of $1 million, then every executive wants $3 million. It just becomes a vicious cycle of inflation of CEO benefits.'

Also, I suggested:

Put more noncorporate members on hospital boards because they'd be less inclined to endorse large compensation packages that are more typical of for-profit companies.

'Boards are populated by wealthy executives, who themselves are getting increasing compensation, rather than by community representatives or patient representatives,' Poses said.

Could the Composition of the Board Explain Excess Deference to the CEO?

I made the above comments after hearing approximations of the compensation given out by the hospital systems, but without any knowledge of the composition of the boards that approved that compensation. I am guessing that Dr Brody also was not told anything about board composition when he suggested the possibility of crony capitalism.

However, now that the article is out, I think it makes sense to look at the composition of at least one of the boards involved. I chose IU Health, since it is the largest of the systems, paid the most to its CEO, and was kind enough to list board members' brief biographies on a web-page.  Here they are, listed with their primary affiliations, and some notable other affiliations.

- Judge Sarah Evans Barker, former federal district court judge.
- Dr D Craig Brater, "dean of the Indiana University School of Medicine and director of IU Medical Center." Also on  the Board of Advisors of Spring Mill Venture Partners, "an early stage venture capital firm focused on investing in high-growth information technology and life sciences companies;" recipient of consulting and travel money from Pfizer (per ProPublica); and who was listed as having "a financial interest/relationship or affiliation in the form of: Consultant for AstraZeneca Pharmaceuticals; BioGen, Inc.; Forest Laboratories; Merck & Co., Inc.; Pfizer Inc.; and Pharmacia and Upjohn Company" per CMECorner.
- William R Cast, "CEO of NoMore Clipboard, an online, patient-controlled personal health record management system."
- Thomas W Chapman, "president and CEO of The HSC Foundation in Washington, DC, the parent corporation for two subsidiaries, The HSC Pediatric Center and Health Services for Children with Special Needs. He was previously senior associate vice president for Network Development and Professor of Health Services Management and Policy at George Washington University Medical Center in Washington, DC."
- Bishop Michael J Coyner, "Bishop of the Indiana Area United Methodist Church"
- J Scott Davison, "chief financial officer for OneAmerica and its affiliated companies," and member of the board of directors for Indiana Bond Bank."
- Daniel F Evans Jr - CEO of IU Health, also member of the board of Lakeland Financial Corp, (per Bloomberg)
- Charles E Golden, "retired from Eli Lilly and Company in 2006 as executive vice president and CFO and a member of the board of directors. He was previously a corporate vice president of General Motors...." He is also currently on the boards of Unilever, which makes health care related products, and Hill-Rom, which makes medical devices and supplies.
- David W Goodrich, "retired in 2005 as president and CEO of Central Indiana Corporate Partnership, Inc."
- V William Hunt, "chairman of Hunt Capital Partners, LLC, a venture capital and consulting firm based in Indianapolis. Until August 2001, he was the vice chairman and president of ArvinMeritor Inc...."
- Dr James E Lingeman, "long-standing member of the IU Health Methodist Hospital medical staff," but also according to a 2009 American Urologic Association Education and Research paper, Consultant or Advisor to, and Meeting Participant or Lecturer for Boston Scientific Corp and Lumenis, scientific investigator for Boston Scientific and Olympus, investor in Beck Analytical Laboratories and Midstate Mobile Lithotripsy, and having "Other" financial relationships with Beck and Midstate.
- Angela Barron McBride, " distinguished professor and university dean emerita at Indiana University School of Nursing"
- Michael A McRobbie, "Indiana University President," also on the board of OneAmerica (look here).
- Anne Nobles, "senior vice president for Enterprise Risk Management and chief ethics and compliance officer for Eli Lilly and Company."

When considering the composition of this board, note that members of non-profit organizations' boards generally are said to have three duties, as per BoardSource:
- The Duty of Care: "a board member owes the duty to exercise reasonable care when he or she makes a decision as a steward of the organization."
- The Duty of Loyalty: "a board member must give undivided allegiance when making decisions affecting the organization. This means that a board member can never use information obtained as a member for personal gain, but must act in the best interests of the organization."
- The Duty of Obedience: "The duty of obedience requires board members to be faithful to the organization's mission. They are not permitted to act in a way that is inconsistent with the central goals of the organization."

The Duties of Care and Obedience require board members to exercise prudent and reasonable supervision over hired managers, and provide these managers reasonable pay and incentives.  However, boards dominated by hired managers may put the interests of such managers ahead of their organizations' missions. 

So of the 14 members of the IU Health board, 8 are current or retired top level corporate executives or corporate board members, 4 of which have such leadership positions at financial service companies, (two at OneAmerica). In addition, 5, including 4 apparently ex-officio members, had or have top leadership positions in academic institutions. The board also included one Methodist Bishop and one federal judge. All but two board members are thus current or former top level hired managers of for-profit corporations or non-profit organizations.

Thus this board is largely populated by executives who are likely to be wealthy. Thus it is similar to many other boards of health care corporations (e.g., look here and here) and non-profit organizations  (e.g., look here,  here, and here) which we have discussed.  It stands to reason that boards dominated by hired managers will feel comfortable with and look kindly on the hired managers whom they are supposed to supervise, and view their compensation sympathetically.  Thus such boards may not exercise the Duties of Care and Obedience.

Furthermore, the Duty of Loyalty requires boards not to be affected by conflicts of interest. 
 
However, many of the IU Health board members have financial relationships that could be considered conflicts of interest. Two have or had executive positions at the same pharmaceutical company, Eli Lilly, one of whom also was on the board of medical device and supply company. In addition, both of the doctors on the board have or had significant disclosed financial relationships with drug, device, or biotechnology firms.  Again, it is like other boards affected by such conflicts that we have discussed.  Again, such boards may not exercise the Duty of Loyalty.
 
Summary
 
Combined with other examples of the composition of boards of for-profit health care corporations, and non-profit health care organizations, the latest example suggests the complex has taken control.  Nearly every board we have scrutinized is dominated by hired managers of other companies, and salted with conflicts of interest.  It seems likely that such boards will put the interests of hired managers ahead of those of the shareholders of for-profit corporations, and ahead of the missions of non-profit organizations. 
 
The complex that has taken control looks like a confederation of hired managers.  In 2003, five years before the fall of Lehman Brothers ushered in the global financial collapse, John C Bogle warned of the "grotesque transformation" of capitalism into an oligarchy of hired managers:

The root causes of the disease in our system are deep, and the remedies that are required to cure it will not be easy to come by. For what we have witnessed in the failure of corporate governance in America has been, as journalist William Pfaff described it, 'a pathological mutation in capitalism.' He was right on the mark. The classic system—owners capitalism—had been based on a dedication to serving the interests of the corporation’s owners, maximizing the return on their capital investment. But a new system developed—managers capitalism—in which 'the corporation came to be run to profit its managers, in complicity if not conspiracy with accountants and the managers of other corporations.' Why did it happen? 'Because,' in Mr. Pfaff’s words, 'the markets had so diffused corporate ownership that no responsible owner exists. This is morally unacceptable, but also a corruption of capitalism itself.'

This plague of managers' capitalism seems not to have spared health care, and to have infected the non-profit as well as public for-profit sphere.

To stave off the coming dystopia, we must return the control of for-profit corporations, including health care corporations, to their owners, and stewardship of non-profit organizations to those who will put their missions ahead of self-interest.

"Conspiracy Theory" Proven - Taking UCSF Private

Students and faculty at the University of California have come up with a vivid, and prescient example of how the hired executives and bureaucrats have taken over higher and health care education. 

"Run in the Interests of the Administration"

Two weeks ago, the Orange County Register reported:

Over the past few months, the University of California has raised undergraduate tuition by 18 percent, awarded raises of as much as 23 percent to a dozen high-ranking administrators and announced a possible 81 percent tuition increase over the next three years.

Students haven't taken the news well.

At campus rallies across the state, thousands of students and their faculty supporters have decried the actions, staging raucous rallies and 'Occupy'-style sit-ins that in some cases have ended in clashes with law enforcement. They've also descended en masse on UC regents' meetings, disrupting proceedings and even forcing officials to retreat to a private room.

Behind the angry chanting and acts of civil disobedience is a growing sense that the 10-campus UC system is no longer a public institution accessible to the middle class, but rather a sprawling bureaucracy of hospitals and auxiliary research institutions buffeted by an ever-expanding roster of administrators.

The problem, as the student activists see it, is that none of these functions translates directly into expanded course offerings or improved student-to-faculty ratios, even as their tuition dollars help sustain the system.

'The university is now being run in the interest of the administration,' said UC Irvine student activist Anne Kelly, a Ph.D. candidate in earth system science. 'They're promoting their own internal growth, asking us to sacrifice with higher tuition – but administrators have had raises.'

In higher education, as well as in health care education and in health care in general, the pattern is the same: rising costs without any obvious increase in quality or quantity of services. As in health care, however, the pain never seems to extend to administrators/ managers/ bureaucrats/ executives. Worse, as their numbers grow, these insiders seem to run organizations more for their own benefit, and less for the mission.

One Manager Per Faculty Member

Furthermore, UC faculty have data:

The students' growing frustration is fueled by UC employment data that show that almost three-fourths of UC's 152,500 employees last year were designated 'non-academic personnel,' according to an annual UC employment report.

In the report, UC characterizes the growth in its non-academic staff as the inevitable byproduct of 'an increasingly complex university system that 'requires greater professionalization of its staff, who must meet higher technical and competency standards.' Non-academic personnel includes everyone from custodians and food-service workers to accountants and plant operators. [The question begged is whether it was the managers and executives that caused this complexity - Ed.]

UC Davis horticulture researcher Richard Evans, who has independently analyzed UC personnel data, offered a different take on the data, publishing a tongue-in-cheek piece for UC faculty in 2010 entitled 'Soon every faculty member will have a personal senior manager: Is this a good way to spend money?'

'Data available from the UC Office of the President shows that there were 2.5 faculty members for each senior manager in the UC system in 1993,' Evans wrote in his piece. 'Now there are as many senior managers as faculty. Just think: Each professor could have his or her personal senior manager.'

In his analysis, Evans compared the number of UC employees classified as either 'senior management' or 'managers and senior professionals' with the number of tenure-track UC faculty members.

As of spring 2011, UC employed 8,144 senior managers, managers and senior professionals, and 8,521 tenure-track faculty members, according to the latest available UC data.

This pattern is similar to that seen in some data we discussed a long time ago about the ever rising numbers of administrators/ managers/ bureaucrats/ executives in health care.  In 1988, Alain Enthoven advocated in Theory and Practice of Managed Competition in Health Care Finance, a book published in the Netherlands, that to decrease health care costs it would be necessary to break up the "physicians' guild" and replace leadership by clinicians with leadership by managers (see 2006 post here). Thus from 1983 to 2000, the number of managers working in the US health care system grew 726%, while the number of physicians grew 39%, so the manager/physician ratio went from roughly one to six to one to one (see 2005 post here). Health care went from being controlled by clinicians to controlled by a growing volume of managers.  Most of these managers were generic, in that they had little if any knowledge of, experience in, or sympathy to the values of health care. These generic managers have used the same techniques advocated for the management of supermarkets or automobile manufacturers to manage health care organizations, despite all the obvious differences in context, goals, values, and people involved.

A "Conspiracy Theory" About the Privatization of the University

At the University of California, the Register reported that there is a "conspiracy theory" about the next step to increase the domination of the managers:

The salaries and size of UC's administrative staff, in particular, have fueled conspiracy theories among students and faculty that the system has deliberately sought to 'privatize' itself – in other words, to compete with private universities on all fronts, from the scope of its non-instructional programs to executive compensation to the amount of tuition that students pay.

Three years ago, the head of a UC faculty group advanced the privatization theory in a multi-part series called 'They Pledged Your Tuition.'

Of course, the administrators denied, sort of, anything so far-fetched:

For its part, UC denies all such allegations, saying that while the university has arguably become privatized, outside influences beyond its control are entirely to blame.

"It is not something we advocate, not something we want,' Klein said. But, 'he added, 'times have changed; the economic model has changed.'

Not Just a "Conspiracy Theory" - UCSF Chancellor Advocates Privatization

It only took two weeks, however, for the notion of administrators taking the university private to go from "conspiracy theory" to official plan. Yesterday, the San Francisco Chronicle reported,

UCSF Chancellor Susan Desmond-Hellmann told the regents, delicately, that she wants out.

Under her proposal, UCSF's medical school, hospital, clinics and research facilities would remain a public university connected to UC, the chancellor assured the regents. But the tendrils connecting the two entities should be thinner than they are today.

Desmond-Hellmann said she envisions a relationship like those of UC Hastings College of the Law, Lawrence Livermore National Laboratory and Lawrence Berkeley National Laboratory, which contract with UC for health and pension services. While ultimately accountable to the regents, they are autonomous with their own boards of directors.

Referring to 'alternative governance models' and 'examining UCSF's financial relationship with UC,' the chancellor and campus executives talked of their ambition to become the world's leading innovator in the health field - a goal better achieved, they hinted, without the rest of the university weighing it down.

To Health Care Renewal readers, that UCSF would be proposed as the first part of the University of California to privatize should not come as a shock. After all, Chancellor Desmond Hellmann came not from academia, but from the world of for-profit biotechnology. She was a former president for drug development for Genentech.

Two and one half years ago I suggested that "hiring a lavishly compensated top executive from a biotech firm known for its high drug prices to run a public health sciences university does considerably blur the line between academic medicine and the health care industry." Furthermore, three months ago I noted that Dr Desmond Hellmann seemed be advocating that the university's focus turn to product development, so that it would start to emulate a contract research organization. Now it appears that Dr Desmond Hellmann wants to traverse the line between government and the private sector, so that the organization could "make a ton of money," and "focus on spinning innovations into business deals," according to the San Francisco Chronicle.

What any of this has to do with the university's fundamental mission to discover and disseminate knowledge, and with this health care university's mission to take the best possible care of its patients is not clear.

Summary

Turning UCSF into a private, quasi contract research organization might conceivably yield some good research and drug development. Why a formerly academic organization would be better at this than a purpose-built CRO is hardly proven. Whether UCSF recast as a CRO would yield better research, leading to better patient outcomes than would have resulted if it continued as a state government sponsored health care university is also hardly proven.

Turning UCSF into a quasi CRO, however, would likely be very much in the self-interest of its administrators/ managers/ bureaucrats/ executives who would be freed from any constraints on their incomes, and the disclosure of same that were previously obligated by the messy representative democracy to which they formerly had to answer.

On the other hand, it is hard to conceive of how such a privatization would be good for students or patients. In fact, it is not the least bit clear why a medical, nursing, or other health professional student would want to study within what would basically be a contract research organization. It is also unclear whether patients seeking care from such an organization could trust it to put their interests, rather than the organization's revenue and the self-interest of its administrators/ managers/ bureaucrats/ executives first.

We are now a good 30+ years into our ill-fated American experiment about the effects of turning medicine commercial and making health care a commodity. So far, it has yielded the highest costs in the world, but declining access, mediocre quality, and demoralized professionals. Turning one of our once proud and  prestigious state government sponsored academic medical institutions into a private contract research organization would be a powerful symbol of our final national health care decline.

Let us hope that the students and faculty whose "conspiracy theory" about privatization proved true will now mount a more effective protest before UCSF falls into the muck.

Hospital Executives - What Will They Think of Next?

Health care organizations are now most often run by people with management, not clinical backgrounds.  It seems like business schools have taught managers to sign on to whatever the latest management fashions are.  So what are the latest fashions in hospital management?  Here are a few hot items.

Retreading Pharmaceutical Representatives

My jaundiced reading of the business news suggests that most executives think that marketing is the most important part of their organizations, and that clever marketing can sell any product or service. For example, the pharmaceutical industry spends about twice as much on marketing as it does on research and development (despite pharma executives' protestations that they run research driven businesses) (see this post). So it should be no surprise that now hospitals are using "hospital representatives" to market referrals to their institutions to doctors.

From last week's USA Today:

n northwest Indiana, Carrie Sota visits five or six doctors' offices every workday as part of her new sales job.

But Sota isn't selling the physicians on a prescription drug or a medical device. She's promoting her hospital — the University of Chicago Medical Center.

Sota, 30, is one of four employees the academic medical center has hired in recent months to make 'sales calls' on physicians in the hope that they will send more patients to the hospital. 'We are trying to build meaningful relationships,' said Sota, who was previously a saleswoman for a small medical device company.

The University of Chicago Medical Center is one of a growing number of hospitals nationwide hiring former drug and device sales reps to visit doctors' offices to persuade them to use their services over competing facilities.

Rather than handing out samples of prescription drugs, the sales reps call on doctors armed with the latest information on how their facility is reducing hospital-acquired infections and improving patient-satisfaction scores.

In visits that can last five to 20 minutes, reps try to win doctors' loyalty by helping them get better times on operating room schedules or easier patient referrals to hospital-based specialists. The sales reps can also carry messages back to the hospital, such as a doctor's request for a new medical device to be available in surgery.

The article suggested a few problems with this approach. First, the point of the marketing is not to improve the match between patients' needs and the services the hospital provides. Rather, it is to generate referrals that have the potential to provide the maximum revenue:

While hospitals have always tried to woo doctors to refer patients to them, the institutions are growing more direct in their efforts. The hospitals mine data to see which doctors have the most profitable, well-insured patients, and then they assign those doctors to a sales rep.

So in particular,

Many of the physician liaisons focus on specialists, who bring in patients for services with the highest profit margins, including orthopedics, cardiac care and cancer care, [Duke University Health System physician liaison manager Christine] Perry said.

Second, the hospital reps have incentives based on revenue, not on value to the patient:

About two-thirds of Tenet's liaisons are former drug and device sales reps, and they can make tens of thousands of dollars in bonuses if doctors increase their referrals to the hospitals.

Third, across the system, the revenues generated may be much less than the costs incurred, since most of the marketing will only succeed in moving patients from one hospital to another:

Paul Ginsburg, president of the non-partisan Center for Studying Health System Change, said, 'When you look at the health system, this is a waste of resources. It's a zero-sum game.'

He added: 'The net results of changing physician-referral patterns is that one hospital gains at a cost of others, and all the hospitals burn resources to pay (sales)people who take up the doctor's time.'

Of course, the reps could succeed in persuading doctors to refer patients to specific hospitals for services the doctors originally did not think the patients needed. That would be good were the patients to need those services, but bad if they were not.
Fourth, we have discussed (for example, here and here) how pharmaceutical representatives use sophisticated psychological and emotional manipulation, despite claims that all they do is provide unbiased information and educational, to influence physicians to prescribe drugs. Again, this may result in patients getting drugs whose benefits do not outweigh their harms. It is possible that hospital representatives will do something similar:

'These people are really good and really assertive and very sophisticated,' said Stephen Newman, Tenet's chief operating officer.

Unbundling Payments

The airlines decided a while ago that they could make more money by charging passengers for each checked bag, and even for those little meals on plastic trays. It looks like hospital executives have discovered a new way to unbundle.

As reported last month by the St Louis Post-Dispatch, hospitals have begun charging often hefty "facility fees" for patients seen as outpatients in hospital clinics or hospital owned practices, even for very minor procedures or just office visits, and even for Medicare patients. (Private physicians who see patients in their own offices cannot charge such fees to Medicare patients, and most private insurance companies will not cover such fees.):

A few weeks after Allison Zaromb took her 4-year-old son Meir to see a dermatologist in an outpatient office at the SSM Cardinal Glennon Children's Medical Center campus, she received separate bills from the doctor and the hospital.

The cost for a 3-minute procedure to treat Meir's warts totaled $538, which included a $220 bill for physician services - and a separate bill for a $318 hospital 'facility fee.'

Zaromb, a periodontist who lives in University City, is now suing SSM Health Care Corp. and Cardinal Glennon Children's Medical Center in a proposed class action lawsuit on behalf of other patients

More generally,

With the proliferation of hospital-owned outpatient centers and hospital-owned physician practices, hospital 'facility fees' have become increasingly common. Such hospital facility fees often involve greater dollar amounts than the fees charged by physicians.

Technically, it all appears to be legal:

Under federal regulations, health systems are permitted to charge a hospital facility fee for an outpatient service if it's done in a clinic that is 'hospital-based' - meaning that the clinic is owned and operated as part of a hospital or health system, regardless of whether the clinic is physically located on the hospital grounds.

This technique does seem to be a way to increase revenue. But one person's revenue is another person's cost, so it also seems to be a great way to further increase the already high cost of US health care. It is not obvious, however, that these increased costs will lead to increased quality of care or value for the patient:

'From a consumer's perspective, when you go see your doctor, you go see your doctor - whether it's in an office inside a larger hospital complex or right across the street,' [Zaromb's lawyer John] Phillips said. 'The doctor's practice remains the same. ... They're making the doctor's office a ‘hospital-based' clinic for one reason: to make money by charging a facility fee, not to improve consumer service.'

Negotiating the Costs of Medical Devices

One of the favorite topics on Health Care Renewal, at least before we found even more outrageous subjects, was the stratospheric cost of medical devices. For example, look at posts from 2005 here, here, here, and here. So last month we found out that hospital executives have come up with a revolutionary idea to combat the high cost of devices. They will actually try to see what prices the device companies charge other hospitals, and then negotiate the prices down, as Reuters reported as big news in late November:

Implantable devices make up a sizable chunk of typical hospital budgets, and administrators are devising new ways to limit that cost as they brace for cuts to government reimbursement and treat more patients who can't pay for care.

That means methodically working through each category of device, from heart valve replacements and stents to spinal products, to see where they can negotiate lower prices. It also means creating databases of shared information on pricing between hospitals.

Imagine that! Of course, the notion that buyers ought to bargain with sellers to get the best price goes back a few years. However, only in 2011 did it apparently occur to hospital executives that they ought to negotiate the prices of one their most expensive purchases. This suggests that there has been something profoundly wrong with the basic assumptions underlying the commonly accepted wisdom that making the health care system more of a market will lead to more financially efficient care. 

Summary

In 1988, Alain Enthoven advocated in Theory and Practice of Managed Competition in Health Care Finance, a book published in the Netherlands, that to decrease health care costs it would be necessary to break up the "physicians' guild" and replace leadership by clinicians with leadership by managers (see 2006 post here). Thus from 1983 to 2000, the number of managers working in the US health care system grew 726%, while the number of physicians grew 39%, so the manager/physician ratio went from roughly one to six to one to one (see 2005 post here). Health care went from being controlled by clinicians to controlled by a growing volume of managers.  Most of these managers were generic, in that they had little if any knowledge of, experience in, or sympathy to the values of health care. These generic managers have used the same techniques advocated for the management of supermarkets or automobile manufacturers to manage health care organizations, despite all the obvious differences in context, goals, values, and people involved.

So these generic managers have brought us such "innovations" as the "hospital (marketing) representative," and the "facility fee" for outpatient visits, but only thought to negotiate device prices in 2011. But that is why we pay them the big bucks.

How many more arguments do we need that health care organizations ought to be lead by people who understand the health care context, share its core values, and are accountable for how these organizations affect patients' and the public's health?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

More California Medical Centers Plagued by Quality Problems While Their Executives Get Bonuses for "Improved Patient Care"

Earlier this week, we noted that while executives at one University of California medical center were getting large bonuses supposedly for "improved patient health," the hospital was being cited for serious health care quality deficiencies.  Now, more stories have appeared that raise questions about the rationale for the generous bonuses handed out to multiple top hospital executives at University of California hospitals. 

University of California - San Diego

First, in alphabetical order by city, the San Diego Union-Tribune reported on penalties for poor quality care announced by the California Department of Public Health:

UCSD Medical Center in San Diego was fined $50,000.... The state said the hospital staff failed to follow its surgical policies and procedures, which resulted in a patient having to have a second surgery to remove a foreign object — a guide wire that was left in the patient when a central venous catheter was inserted into the patient’s right femoral vein in the groin area in January 2009. The wire migrated into a chamber of the patient’s heart.

The procedure was done by a first-year intern and supervised by a third-year resident.

This marks the third time the state has penalized UCSD, with the first penalty issued in May 2008 and the second in May 2009.

However, a few days earlier, the Union-Tribune had reported:

Despite criticism from union leaders and rank-and-file employees, University of California regents yesterday overwhelmingly approved $3.1 million in incentive payouts to 38 medical center executives.

The payouts mean, for instance, that former UC San Diego Medical Center CEO Richard Liekweg will receive $136,174 in performance pay for the last fiscal year, added to his base of $660,500.

Regents justified the payments by noting that incentive programs are common in the health care industry, and necessary to compete for top talent.

'It’s the way this industry works,' said Regent William De La Pena, an ophthalmologist and medical director of eye clinics throughout Southern California.

At UCSD Medical Center, 10 senior managers will receive a combined $754,650 for surpassing goals set in areas ranging from improved patient safety to increased revenue. The bonuses amount to 14 to 23 percent added to executives’ salaries.

University of California - San Francisco
Meanwhile, the San Francisco Chronicle reported that a major University of California - San Francisco teaching hospital was also cited by the state Department of Public Health for quality problems:

San Francisco General was fined $25,000 for leaving a piece of surgical gauze in a patient who underwent an eight-hour operation for two types of cancer in September 2008. The foreign object was discovered about three months later and was removed without surgery during an office visit.

The Chronicle also reported a possibly major breach in the confidentiality of patient records at the UCSF Medical Center:

Medical records for about 4,400 UCSF patients are at risk after thieves stole a laptop from a medical school employee in November, UCSF officials said Wednesday.

The laptop, which was stolen on or about Nov. 30 from a plane as the employee was traveling, was found in Southern California on Jan. 8.

There is no indication that unauthorized access to the files or the laptop actually took place, UCSF officials said, but patients' names, medical record numbers, ages and clinical information were potentially exposed.

The security breach is UCSF's second in recent months. Last month, UCSF officials revealed that a faculty physician responding to an Internet 'phishing' scam potentially exposed the personal information of about 600 patients.

However, despite these obvious quality problems, the San Francisco Business Times reported

University of California regents approved $500,000 in bonuses to six top officials at the UC San Francisco Medical Center, part of a package of $3.1 million in payments to 38 hospital executives across the UC system.

In an interview last week with UCSF Chancellor Susan Desmond-Hellman, she said that the executive bonuses were tied to meeting specific performance goals, such as reducing clinical infections and increasing satisfaction ratings by patients. She also pointed out that additional payments of $14.3 million to the UCSF Medical Center’s 6,600-strong workforce were approved earlier.

The UCSF officials awarded bonuses were:

* Mark Laret, chief executive officer, $181,227;
* Ken Jones, chief financial officer, interim chief operating officer, $89,162;
* Larry Lotenero, chief information officer, $66,045;
* John Harris, chief strategy and business development officer, $63,196;
* Susan Moore, finance director and interim chief financial officer, $53,261; and
* Sheila Antrum, chief nursing/patient care services officer, $49,280.

Summary

So, in summary, multiple executives at three major University of California medical centers received generous bonuses.  The rationale for these bonuses, given out at a time when the university system was under major financial constraints, was that they were incentives for exemplary performance and patient care. 

Yet almost simultaneous with announcement of the bonuses were news reports indicating serious patient care problems at the same medical centers.  The point I am NOT trying to make is that the care at any of these medical centers is bad.  The examples of quality problems were limited.  I am sure that many other major medical centers hae had such quality problems as well.  However, the cases cited above were sufficient to argue that the care at these medical centers was not outstanding, not exemplary.  Yet, the bonuses were awarded not for acceptable performance or average quality.  Their rationale was exceptional performance and quality.  Thus, the rationale for the performance bonuses seems at best naive, if not foolish. 

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

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

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