How Managerialsm/ Generic Management Damaged the American Red Cross

executive compensation generic management generic managers managerialism managers' coup d'etat marketing Red Cross

How Managerialsm/ Generic Management Damaged the American Red Cross

Unknown 12/17/2015 Komentar

The American Red Cross is a storied non-profit organization.  It provides disaster relief, provides a major part of the US blood supply, and has important public health teaching functions, such as teaching cardio-pulmonary resuscitation (look here).  Nonetheless, its operations have become increasingly controversial.  ProPublica has been investigating them for years.  The latest ProPublica report, entitled "The Corporate Takeover of the Red Cross," showed how this renowned organization has suffered under generic management/ managerialism, providing another case study showing how bad generic management and mangerialism are for health care and public health.

We have frequently posted about what we have called generic management, the manager's coup d'etat, and mission-hostile management. Managerialism wraps these concepts up into a single package.  The idea is that all organizations, including health care organizations, ought to be run people with generic management training and background, not necessarily by people with specific backgrounds or training in the organizations' areas of operation.  Thus, for example, hospitals ought to be run by MBAs, not doctors, nurses, or public health experts.  Furthermore, all organizations ought to be run according to the same basic principles of business management.  These principles in turn ought to be based on current neoliberal dogma, with the prime directive that short-term revenue is the primary goal (sometimes in the for-profit sphere called the shareholder value principle, look here.)

The ProPublica article showed how the leadership of the American Red Cross was given over to generic managers; how they ran the organization based on generic business management principles; and how the results were bad for the organization's mission.  I will address each point with quotes from the article, and add the commentary that was lacking in a straight investigative journalistic report.

The New Leaders were Generic Managers

The New CEO is a Generic Manager who Specialized in Marketing

Gail McGovern became Red Cross CEO in 2008.  Her academic background was in the "quantitative sciences."  Her first job was as a computer programmer. Then,

McGovern climbed steadily through the ranks at AT&T. By the mid-1990s, she was head of the company’s consumer markets division....

Next,

McGovern left AT&T in 1998, then spent four years at Fidelity Investments, where she was promoted to be the head of the retail mutual fund and brokerage business. Then came six years as a marketing professor at Harvard Business School....

On the other hand, she apparently had no specific experience, training or expertise relating to the mission of the Red Cross, and specifically no experience, training or expertise in public health, health care, blood banking, or disaster relief.

She Believes in the Primacy of Marketing

Her academic writings spell out her theory of corporate leadership. 'In many organizations, marketing exists far from the executive suite and boardroom,' she and her coauthors wrote in an article for the Harvard Business Review. Companies that make this mistake are doomed to 'low growth and declining margins.'

One could argue that perhaps in the long run, a good product that sells itself might be better for a manufacturing firm than a temporarily persuasive marketing campaign.  Even so, the mission of the Red Cross is not first to grow and make more money, or even to sell products, but instead it is

The American Red Cross prevents and alleviates human suffering in the face of emergencies by mobilizing the power of volunteers and the generosity of donors.

She was Hired by the Red Cross to Promote Generic Management with Emphasis on Marketing

Ms McGovern was hired at a time when the dogma that business managers ought to run everything was becoming very prominent.

McGovern, selected after a global search by a headhunting firm, was seen as a candidate who would bring private-sector methods to the nonprofit. 'Isn’t it great that we have someone that really has had that business expertise in developing and working with a brand and recognizing the power of it?' [Red Cross Board Chairwoman Bonnie] McElveen-Hunter told the Washington Post at the time.

Note that the Chairwoman of the Board of Governors herself was

a wealthy Republican donor appointed by President George W. Bush in 2004

According to Wikipedia, she is a businesswoman whose undergraduate degree was in business, who worked for Bank of America and then founded Pace Communications, and who also has no discernable experience or expertise in health care, public health, or disaster relief.

The ProPublica article did not suggest that Ms McElveen-Hunter or anyone else really thought through how a generica manager practicing managerialism would actually benefit the mission of the Red Cross.

The CEO Recruited Other Generic Managers

Soon after she joined the Red Cross, McGovern recruited executives who had worked with her at AT&T and Fidelity....

Furthermore, 

As part of her effort to run the Red Cross more like a business, McGovern recruited more than 10 former AT&T executives to top positions. The move stirred resentment inside the organization, with some longtime Red Cross hands referring to the charity as the 'AT&T retirement program.'

Again, one would expert a generic manager to feel most comfortable amongst others of her ilk.  Again, any consideration of whether running the Red Cross "more like a business" would improve its success as a charity was not evident.

The New Generic Managers Relied on Generic Management Dogma

The new generic managers conceived of their job as "a corporate turnaround that would touch every aspect of the charity's finances and operations."

They Established Centralized Control

The work of the Red Cross was traditionally done by local chapters. The new generic managers sought to decrease their independence from "corporate."  So,

Each of the Red Cross’ more than 700 chapters had its own bank account, tracked its own volunteers, and ran its own computer system. McGovern hoped to realize considerable savings by consolidating these back-office functions, creating what she dubbed 'One Red Cross.'

The notions that different chapters might face different challenges, and hence that flexible local control might do better addressing these challenges than would centralized top-down command were not apparently considered.

They Cut Costs, Particularly Through Cutting Employee Benefits and Laying Them Off

and hence tried to enhance short-term revenue:

She also got to work cutting costs: there was a round of layoffs; she killed the charity’s generous pension program and suspended matching contributions to employees’ retirement accounts.

Also,

When McGovern was hired as CEO, there were over 700 Red Cross chapters across the country. Today, there around 250, though some former chapter offices stayed open even as they were folded into other chapters. The Red Cross declined to say how many offices it closed.

Over the course of McGovern’s tenure, the number of paid employees fell from around 36,000 to around 23,000 and the Red Cross today spends several hundred million dollars less a year than it did in 2008. (Most of the staff cuts were from local chapters, not the blood business, though the Red Cross declined to provide a breakdown.)

Cost-cutting, especially by cutting compensation to and benefits of line employees, is a central mantra of current business management.  The effects these cuts have on the morale and performance of the remaining employees, and the downstream effects on the organization are generally ignored.  The specific implications for a charity meant to uphold a mission were not discussed.  

They Focused on Marketing and Public Relations

Early on,

McGovern laid out a vision to increase revenue through 'consolidated, powerful, breathtaking marketing.'

'This is a brand to die for,' she often said.

In addition,

The Red Cross’ chief of fundraising, a former colleague of McGovern’s from Fidelity, told the assembled officials that the organization should attract far more than the $520 million in donations it was bringing in annually. 'Strength of brand,' his PowerPoint said, 'justify results in $1-2 billion range.'

Also, CEO McGovern chose Jack McMaster to run the public health training operation,

 praising McMaster to Red Cross staff as a master marketer and a trusted former colleague [at AT&T].

As an aside, actually,

After leaving AT&T, he took a job in 1999 as CEO of a Dutch telecom company called KPNQwest. In just a few years, he had run it into what Reuters called a 'spectacular collapse,' prompting a bankruptcy, a storm of lawsuits, and comparisons to Enron. Just months before the company went under, McMaster publicly boasted that it was poised for dramatic growth.

This suggests that McGovern placed far more priority on hiring "master marketers" than finding trustworthy leaders.   Of course, a CEO who is mainly a professional marketer may see marketing as central to whatever organization she is running.  The notion that the Red Cross had such a wonderful brand because it used to do wonderful things did not apparently occur to the new generic marketers.  Furthermore, the notion that even "master marketing" may not hide the undermining of the organization's mission also did not occur.   

They Suppressed Opinions They Did Not Want to Here

As discontent among staff rose (see below), leading to anguish expressed on social media,

critical posts later disappeared from the Facebook page. Moderator Ryan Kaltenbaugh reminded participants that the group was intended to be 'a POSITIVE forum sharing ideas, stories, pictures, links, videos and more across our great country.'

'[P]lease (please) refrain from posting your negative personal views,' he continued.

To a leadership obsessed with marketing, appearance may have seemed to be everything.  Yet again, suppressing the bad news does not make what generated it disappear.

They Paid Themselves Very Well 

We have often discussed how executive compensation in health care now seems to rise beyond any level that could be justified by the executives' actions and performance.  A central problem with managerialism seems to be that now top managers can virtually set their own pay.  Thus, they have become value extractors, more focused on their own enrichment than their organizations' ultimate success.  The ProPublica article did not explicitly discuss executive compensation except after the failure of the expansion plans by the "master marketer" McMaster,

Amid layoffs in the division last year, bonuses given to McMaster and his team raised eyebrows within the Red Cross, a former headquarters official said.

In a statement, the Red Cross said the bonuses were appropriate because the division hit 'strategic milestones' including establishing 'a national tele-service platform and national sales and service delivery models.'

Regardless, the division failed to reach its real goal, expansion of its business.

Furthermore, there is evidence that during the reign of McGovern, the top managers as a group have been very well paid, especially given that they were running a charity whose good works are largely supported by contribuations and the taxpayers.  We noted in a 2011 post that

In 2009, then CEO Gail McGovern received over a million in total compensation, $1,032,022 to be exact. Its President for Biomedical Services got $850,489. Its Executive VP for Biomedical Services got $596,309. Twelve other executives got more than $250,000. Of those, ten got more than $350,000.

Since then, while Ms McGovern's compensation has actually declined, the number of very well paid managers has actually grown.  According to the organization's latest available IRS Form 990 filing, for 2013, Ms McGovern had total compensation of over $597,000, and 15 managers had total compensation over $250,000, of these, 10 were over $400,000.

So despite all the problems afflicting the Red Cross (see below, and the larger ProPublica series), the top managers still managed to pay themselves very well.

The Results were Bad

The Marketers' Best Laid Plans Led to Declining Contributions

The "master marketer" did not do so well.

McMaster laid out how the CPR unit would attract more customers while at the same time hiking prices for classes and training materials in CPR, swimming, and babysitting. He believed the Red Cross brand justified higher prices than were being charged around the country.

Customers voted with their wallets. When prices rose, many simply switched to lower-cost providers.

'We thought if we raised prices, American Heart [Association] would probably raise prices, and life would be good,' McGovern said at a 2013 employee town hall meeting, referring to the Red Cross’ competitor in the CPR class business. 'Didn’t happen.'

Also,

 'A halfway competent market analysis would have told you that the bulk of our business was in selling to small businesses who viewed us as a business expense,' recalled one former chapter executive director. 'When the massive price increases arrived, it was too much and customers bailed.'

This illustrates that the generic managers did not even achieve their business goal, increasing sales and increasing revenue.  What did they care, though, if the bonuses still rolled in? 

Centralized Control, Benefit Cuts, Layoffs, and the Marketing Focus Wounded Employee Morale and Discouraged Volunteers

Those who push generic management practices often seem blind to their adverse effects.  So,   

 Many of those who taught classes — including volunteers who did the work for free — quit after being turned off by headquarters’ poor communication and insistence on centralized control.

Also,

But much like the organization’s paid staff, many of its volunteers appear deeply disillusioned. An internal survey obtained by ProPublica found volunteers around the country had a satisfaction rate of 32 percent this year — down 20 points from last year.

Furthermore,

Driving the alienation, longtime employees and volunteers say, is a gulf that has opened up between McGovern’s executive suite and the rank and file who have spent decades in the mission-focused nonprofit world.

She has surrounded herself with a tight-knit group of former telecom colleagues, they say. 'They’re all people from the period when AT&T imploded,' said one former senior official. 'The priorities seem to be a reflection of what that team is comfortable with: sales and marketing.'

An internal assessment previously reported by ProPublica and NPR said national headquarters’ focus on image slowed the delivery of relief aid during Hurricane Isaac and Superstorm Sandy. Officials engaged in 'diverting assets for public relation purposes,' according to the assessment. 

The Red Cross depends on its staff and volunteers to do the work.  What did the brilliant generic managers and master marketers think would happen if they fired lots of staff, drove volunteers to quit, and disillusioned those who remained?

Layoffs and Cutback Reduced Capacity to Respond to Disasters

One example was the response in West Virginia
 

In West Virginia, where several chapters have been shuttered, emergency management officials said the group’s response to recent disasters has been anemic. After a recent water shortage caused by a chemical leak, the charity declined to provide any help to residents, the Register-Herald of Beckley reported. Local officials described that as business as usual for the charity. When a tornado hit in the southern part of the state, the Red Cross’ inadequate response left scores of victims without enough food, according to the newspaper.

Another was the response in northern California,

In Northern California last year, the Red Cross shuttered the Napa County chapter and laid off disaster relief staff, according to an internal PowerPoint presentation. Then, in September, a drought-fueled fire swept through the area, consuming more than 75,000 acres and 1,200 homes.

Because of the issues with the Red Cross’ shelter, nearly all of 1,000 displaced people at the Napa County Fairgrounds — including the elderly, new mothers and children, and anyone with a pet — ended up sleeping outside in tents, cars or RVs. The problems were first reported by the Press Democrat newspaper.

Also,

Local officials were furious. They say the Red Cross showed up lacking basic supplies such as Band-Aids, portable toilets, and tarps to protect against the rain. Instead the group’s volunteers handed out Red Cross-branded bags of items that weren’t urgently needed like lip balm and tissues.

The Red Cross responders were inexperienced and, according to residents, not enough of them spoke Spanish, the language of many of the fire victims.

In general, as told by former Red Cross volunteer Becky Maxwell, a self-described "die-hard Red Cross person for 25 years," who quit after becoming increasingly frustrated,

'McGovern has fired almost all of the trained and experienced volunteers and staff,' Maxwell told ProPublica, replacing them 'with people who have absolutely no knowledge of what the Red Cross is or does in a disaster. Not only is she setting these people up to fail but she is compromising the service delivery that is so important to the clients.'

Summary

The Red Cross Board of Governors, largely composed of well paid business managers (e.g., a former Vice Chairman of Goldman Sachs, a senior vice president of Eli Lilly, the chief financial officer of Home Depot, the executive vice president of Target), decided that a generic manager using a managerialist approach could cure the organization's perceived ills.  The new CEO, who lacked any obvious experience or training relevant to the Red Cross mission, hired her former cronies at AT&T and Fidelity as managers.  The new team cut costs, laid off employees, centralized management, and focused on marketing.  The apparent results were fewer, less experienced, upset staff; fewer volunteers; declining interest in public health training products; and worsening disaster response.

Thus, once again, generic managers and managerialism have laid low a formerly proud charity.  Unfortunately, this one also happens to have vital public health and disaster relief roles that have now been severely compromised.

Based on previous experience, it should come as no surprise that generic managers who do not know much or care much about public health and health care, and who rely on a one-size fits all management dogma uninformed by the public health or health care context or public health or health care values will end up undermining patients' and the public's health.

The real surprise is that the generic managers have up to now had no problem maintaining the managers' coup d'etat, that is, their iron grip on the leadership of most public health and health care organizations.

To prevent our ongoing downward spiral, we need to reverse the managers' coup d'etat, and return leadership to those who understand health and health care, support their values, and are willing to be accountable for doing so. 

ADDENDUM (17 December, 2015) - This post was republished on the Naked Capitalism blog. 

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"The Scourge of Managerialism" - Generic Management, the Manager's Coup D'Etat, Mission-Hostile Management Rolled Up, as Described by Some Men from Down Under

economism generic managers global health managerialism managers' coup d'etat market fundamentalism Medical Journal of Australia neoliberalism

"The Scourge of Managerialism" - Generic Management, the Manager's Coup D'Etat, Mission-Hostile Management Rolled Up, as Described by Some Men from Down Under

Unknown 10/21/2015 Komentar

I just found an important article that in the June, 2015 issue of the Medical Journal of Australia(1) that sums up many of ways the leadership of medical (and most other organizations) have gone wrong.  It provides a clear, organized summary of "managerialism" in health care, which roughly rolls up what we have called generic management, the manager's coup d'etat, and aspects of mission-hostile management into a very troubling but coherent package.  I will summarize the main points, giving relevant quotes.

Recent Developments in Business Management Dogma Have Gravely Affected Health Care

Many health practitioners will consider the theory of business management to be of obscure relevance to clinical practice. They might therefore be surprised to learn that the changes that have occurred in this discipline over recent years have driven a fundamental revolution that has already transformed their daily lives, arguably in perverse and harmful ways.

These Changes Have Been Largely Anechoic

these changes have by and large been introduced insidiously, with little public debate, under the guise of unquestioned 'best practice'.

See our previous discussions of the anechoic effect, how discussion of facts and ideas that threaten what we can now call the managerialist power structure of health care are not considered appropriate for polite conversation, or public discussion

Businesses are Now Run by Professional Managers, Not Owners

The traditional control by business owners in Europe and North America gave way during the 19th century to corporate control of companies. This led to the emergence of a new group of professionals whose job it was to perform the administrative tasks of production. Consequently, management became identified as both a skill and a profession in its own right, requiring specific training and based on numerous emergent theories of practice.

These Changes Were Enabled by Neoliberalism (or Market Fundamentalism, or Economism)

Among these many vicissitudes, a decisive new departure occurred with the advent of what became known as neoliberalism in the 1980s (sometimes called Thatcherism because of its enthusiastic adoption by the Conservative government of Margaret Thatcher in the United Kingdom). A reaction against Keynesian economic policy and the welfare state, this harshly reinstated the regulatory role of the market in all aspects of economic activity and led directly to the generalisation of the standards and practices of management from the private to the public sectors. The radical cost cutting and privatisation of social services that followed the adoption of neoliberal principles became a public policy strategy rigorously embraced by governments around the world, including successive Liberal and Labor governments in Australia.

Note that this is a global problem, at least of English speaking developed countries.  The article focuses on Australia, but we have certainly seen parallels in the US and the UK.  Further, note that we have discussed this concept, also termed market fundamentalism or economism.

Managerialism Provides a One-Size Fits All Approach to the Management of All Organizations, in Which Money Becomes the Central Consideration

The particular system of beliefs and practices defining the roles and powers of managers in our present context is what is referred to as managerialism. This is defined by two basic tenets: (i) that all social organisations must conform to a single structure; and (ii) that the sole regulatory principle is the market. Both ideas have far-reaching implications. The claim that every organisation — whether it is a mining company, a hospital, a school, a professional association or a charity — must be structured according to a single model, conforming to a single set of legislative requirements, not so long ago would have seemed bizarre, but is now largely taken for granted. The principle of the market has become the solitary, or dominant, criterion for decision making, and other criteria, such as loyalty, trust, care and a commitment to critical reflection, have become displaced and devalued. Indeed, the latter are viewed as quaint anachronisms with less importance and meaning than formal procedures or standards that can be readily linked to key performance indicators, budget end points, efficiency markers and externally imposed targets.

Originally conceived as a strategy to manage large and increasingly complex organisations, in the contemporary world, no aspect of social life is now considered to be exempt from managerialist principles and practices. Policies and practices have become highly standardised, emphasising market-style incentives, devolved budgets and outsourcing, replacement of centralised budgeting with departmentalised user-pays systems, casualisation of labour, and an increasingly hierarchical approach to every aspect of institutional and social organisation.

We have frequently discussed how professional generic managers have taken over health care (sometimes referred to as the manager's coup d'etat.)  We have noted that generic managers often seem ill-informed about if not overtly hostile to the values of health care professionals and the missions of health care organizations.

Very Adverse Effects Result in Health Care and Academics

In the workplace, the authority of management is intensified, and behaviour that previously might have been regarded as bullying becomes accepted good practice. The autonomous discretion of the professional is undermined, and cuts in staff and increases in caseload occur without democratic consultation of staff.   Loyal long-term staff are dismissed and often humiliated, and rigorous monitoring of the performance of the remaining employees focuses on narrowly defined criteria relating to attainment of financial targets, efficiency and effectiveness.

The principles of managerialist theory have been applied equally to the public and the private sectors. In the health sector, it has precipitated a shift in power from clinicians to managers and a change in emphasis from a commitment to patient care to a primary concern with budgetary efficiency. Increasingly, public hospital funding is tied to reductions in bed stays and other formal criteria, and all decision making is subject to review relating to time and money. Older and chronically ill people become seen not as subjects of compassion, care and respect but as potential financial burdens. This does not mean that the system is not still staffed by skilled clinicians committed to caring for the sick and needy; it is rather that it has become increasingly harder for these professionals to do their jobs as they would like.

In the university sector, the story is much the same; all activities are assessed in relation to the prosperity of the institution as a business enterprise rather than as a social one. Education is seen as a commodity like any other, with priority given to vocational skills rather than intellectual values. Teaching and research become subordinated to administration, top-down management and obsessively applied management procedures. Researchers are required to generate external funding to support their salaries, to focus on short-term problems, with the principal purpose being to enhance the university's research ranking. The focus shifts from knowledge to grant income, from ideas to publications, from speculation to conformity, from collegiality to property, and from academic freedom to control. Rigid hierarchies are created from heads of school to deans of faculties and so on. Academic staff — once encouraged to engage in public life — are forbidden to speak publicly without permission from their managers.

Again, we have discussed these changes largely in the US context.  We have noted how modern health care leadership has threatened primary care.  We have noted how vulnerable patients become moreso in the current system, e.g., see our discussions of for-profit hospices.  We have discussed attacks on academic freedom and free speech, the plight of whistle-blowers, education that really is deceptive marketing, academic institutions mired in individual and institutional conflicts of interest, and the suppression and manipulation of clinical research.  We have noted how health care leaders have become increasingly richly rewarded, apparently despite, or perhaps because of the degradation of the health care mission over which they have presided.

The Case Study

The article provided a case study of the apparent demise of the Royal Australasian College of Physicians as a physician led organization, leading to alleged emphasis on "extreme secrecy and 'commercial in confidence," growth of conflicts of interest, risk aversion on controversial issues.  When members of the organization called for a vote to increase transparency and accountability, the hired management apparently sued their own members.

Authors' Summary

Whether the damage done to the larger institutions — the public hospitals and the universities — can be reversed, or even stemmed, is a bigger question still. The most that can be said is that even if the present, damaging phase of managerial theory and practice eventually passes, its destructive effects will linger on for many years to come.

My Summary

I now believe that the most important cause of US health care dysfunction, and likely of global health care dysfunction, are the problems in leadership and governance we have often summarized (leadership that is ill-informed, ignorant or hostile to the health care mission and professional values, incompetent, self-interested, conflicted or outright criminal or corrupt, and governance that lacks accountability, transparency, honesty, and ethics.)  In turn, it appears that these problems have been generated by the twin plagues of managerialism (generic management, the manager's coup d'etat) and neoliberalism (market fundamentalism, economism) as applied to health care.  It may be the many of the larger problems in US and global society also can be traced back to these sources.

We now see our problems in health care as part of a much larger whole, which partly explains why efforts to address specific health care problems country by country have been near futile.  We are up against something much larger than what we thought when we started Health Care Renewal in 2005.  But at least we should now be able join our efforts to those in other countries and in other sectors.   

ADDENDUM (30 October, 2015) - This post was republished on the Naked Capitalism blog.  See the comments, which are particularly interesting and important.  

Reference

1.  Komesaroff PA, Kerridge IH, Isaacs D, Brooks PM.  The scourge of managerialism and the Royal Australasian College of Physicians.  Med J Aust 2015; 202: 519- 521.  Link here.

Musical Diversion

We have to leaven this dismal post with the 1980 live version of "Down Under" by Men at Work

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The $5.3 Million a Year Government Bureaucrat - The Top Administrator, or CEO of a "Government Entity," Charlotte-Mecklenburg Hospital Authority, "Doing Business as" Carolinas Healthcare Gets a Raise

Carolinas HealthCare Charlotte-Mecklenburg Hospital Authority executive compensation government managers' coup d'etat public hospitals

The $5.3 Million a Year Government Bureaucrat - The Top Administrator, or CEO of a "Government Entity," Charlotte-Mecklenburg Hospital Authority, "Doing Business as" Carolinas Healthcare Gets a Raise

Unknown 2/12/2015 Komentar

The pay given to top managers of health care organizations continues its seemingly inexorable rise, and the justifications for it seem to be increasingly perfunctory.  However, a closer look at individual cases can generate even more questions about how we got to this pass.  Our latest example arises from a recent news article about the compensation of top managers at Carolinas Healthcare.  

CEO Pay Levitating Since 2009

In 2011, we started following executive compensation at the hospital system now known as Carolinas Healthcare. Our posts in 2011, 2012, and 2013 all fit the same pattern.The total compensation given to its CEO, Michael C Tarwater, was
- $3.4 million in 2009
- $3.7 million in 2010
- $4.2 million in 2011
- $4.76 million in 2012
- $4.9 million in 2013 (per the Charlotte Observer)


In February, 2014, per Karen Garloch reporting in the Charlotte Observer, we have the newest figure:
- $5.3 million in 2014

The details were

the system’s CEO Michael Tarwater received $5.3 million in total compensation in 2014, an increase of 7.7 percent over the previous year.

Tarwater, 61, who has led the $8 billion nonprofit system since 2002, received a salary of $1.3 million, two bonuses totaling $3.3 million, and other compensation, including retirement and health benefits of $690,280,...

In addition, other top managers also were paid in the millions:

• Joseph Piemont, president and chief operating officer: $3,558,907, 6.3 percent increase
• Greg Gombar, chief financial officer: $2,340,613, 4.7 percent increase
• Laurence Hinsdale, executive vice president: $1,918,371, 2.2 percent decrease
• Paul Franz, executive vice president: $1,721,104, 2.9 percent decrease
• Dr. Roger Ray, chief physician executive: $1,619,584, 5 percent increase
• John Miller, chief executive officer, AnMed Health: $1,598,205, change not available
• John Knox, chief administrative officer: $1,434,112, 2.5 percent increase
• Dennis Phillips, executive vice president: $1,391,918, 3.3 percent decrease
• Debra Plousha Moore, chief human resources officer: $1,269,022, 5.2 percent increase

Not unexpectedly, those who are supposed to be exerting stewardship over Carolinas Healthcare provided just another version of the standard talking points to justify this largesse.

'Having talented leaders capable of managing one of the nation’s most comprehensive health care systems in a very complex environment allows Carolinas HealthCare System to maintain its mission and provide the best care to all of our communities,' said board Chairman Edward Brown, president of Hendrick Automotive Group.

As we have repeated far more often than I would like (most recently here)

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

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

For the most recent update on Carolinas Healthcare, the board chairman only bothered with the last point.

So far, the case of compensation of top hired managers at Carolinas Healthcare looks very similar to many other cases at other big health care systems.  But this case has a big twist.

A Public Authority Whose Mission is to Serve the Poor

In 2012, we posted, based on another article that year by the indomitable Ms Garloch, how Carolinas Healthcare really is the Charlotte-Mecklenburg Hospital Authority, a public hospital authority created by North Carolina state law to serve the poor.  But faced with declining revenues in the 1980's, hospital management decided to try to attract paying patients, which allowed the Charlotte-Mecklenburg Hospital Authority to transform into a big hospital system.  Charlotte-Mecklenburg Hospital Authority managers came up with the idea of using a snappy new name, so the public hospital authority began "doing business as" Carolinas Healthcare, never mind whether a public hospital authority should really be considered as "doing business."

Yet the organization is still a public health authority.  Its charter and governance have never been changed.  Since the 1980s, however, Charlotte-Mecklenburg Health Authority bureaucrats have represented the organization as "government entity" when that is advantageous to them, or as a "non-profit hospital system" at other times.  

For example, it still gets to raise capital through directly issuing tax exempt municipal bonds.  For example, see this MunicipalBonds.com summary of a recent bond issue.

Also, at least through 2011, it was financed directly by Mecklenburg county to serve the poor, which, again was the Charlotte-Mecklenburg Hospital Authority's original mission.  In a 2012 article in the Charlotte Observer, Karen Garloch wrote,

last June, county commissioners voted to stop paying Carolinas HealthCare $16 million a year to care for the uninsured. With a profit of $428 million in 2010 and nearly $2 billion in reserves, the system no longer needed taxpayers’ help, commissioners concluded.

County Manager Harry Jones said the subsidy was important at one time, 'but circumstances have changed.' He cited a 1994 county committee report that raised this question:

'Given the current profitability of the hospitals, is it not reasonable to suggest that the hospitals become marginally less profitable by absorbing greater indigent care costs?'

Again, in 2011, the US Department of Labor began investigating Carolinas Healthcare about its provision of health benefits to its employees via Medcost, an entity whose ownership it shared with NC Baptist Hospital.  US federal law (ERISA) in general bans companies from providing health benefits to employees via subsidiaries.  NC Baptist settled similar charges in 2013.  The investigation of Carolinas Healthcare is not complete, but ironically a point of contention is its argument that it is a "government entity," and hence the law does not apply to it.  (See this article in the Winston-Salem Journal.)

On the other hand, Charlotte-Mecklenburg Hospital Authority bureaucrats have maintained that the organization, under the new name they chose, does not have the obligations to be transparent that other public entities have.  As Ms Garloch wrote in 2012,

It’s a public organization with a private attitude – open to 'all God’s children,' as hospital officials like to say, but not as open and transparent as other government agencies.

Then,

Basic facts about the hospital system can be hard to get.

For this series, Observer reporters asked Carolinas HealthCare to disclose total administrative expenses for 2010. A corresponding figure was publicly available from Novant through audited financial statements.

Several months after the question was posed, Carolinas HealthCare spokeswoman Gail Rosenberg

responded: 'We do not have the information … on a system-wide basis.'

Mecklenburg officials have criticized the system for lack of transparency.

Last year, [County Manager Harry] Jones declared the system in breach of contract because it failed to share data about the county-owned psychiatric hospital that is managed by Carolinas HealthCare.

'As a governmental entity, (the hospital system) should be more than willing to account to the taxpayers on how they spend … its money,' Jones wrote to Michael Tarwater, the hospital system’s CEO.

In fact, the argument that Carolinas Healthcare is Charlotte-Mecklenburg Hospital Authority, and hence is as a government agency obligated to a degree of transparency was confirmed by a judge in December, 2014, as again reported by the Charlotte Observer.  A lower court had dismissed a lawsuit that contended that Carolinas Heathcare had "violated state public record laws" by keeping confidential a legal settlement it had made with the former Wachovia bank.  However, the lawyer appealed, and

Hospital lawyers had argued that the state public records law doesn’t cover settlements arising from litigation by a government agency.

But in Wednesday’s ruling, a three-judge panel of the appeals court unanimously rejected that argument. The public records act doesn’t specifically exempt such settlement documents, the court concluded.

Disproportionate Pay for Non-Profit Hospital Executives, Much Less Government Bureaucrats

Thus there is a very good argument that the CEO and other top "executives" of Carolinas Healthcare are really the top government bureaucrats at Charlotte-Mecklenburg Health Authority.  But these executives' pay seems out of line even if they were the managers of a non-profit health care system.  In particular, the rising compensation given top management does not square with top management's recent layoffs of middle management.  In 2014, the Charlotte Observer reported,

Carolinas HealthCare System has eliminated more than 100 management positions – including two jobs that paid a total of about $3 million – as part of a goal to trim $110 million in expenses from next year’s budget, hospital officials announced Tuesday.

Cutbacks are necessary, in part, because of federal and state budget cuts in Medicare and Medicaid reimbursement for seniors, low-income and disabled patients, CEO Michael Tarwater said.

Furthermore, despite the board chairman's assertion that the "executives'" pay is deserved for fulfilling the mission, officially the mission of the Charlotte-Mecklenburg Health Authority is still to serve the poor, as far as I can tell.  Yet, in recent years, there have been questions raised about how well the organization serves the poor.  In 2012, we noted that the system had become known for its aggressive attempts to get payment from indigent patients.  In 2013, we noted that the system had pursued legal action against tens of thousands of patients.


Summary

The public discussion about Charlotte-Mecklenburg Hospital Authority, "doing business as" Caroloinas Healthcare, has been confusing.  However, it seems clear, in my humble opinion, that it is still a public, that is government entity.

This raises huge questions.  One is why has it not been more subject to the appropriate political leadership?  In fact, Ms Garloch's 2012 article noted that

The 1943 hospital authority law intentionally kept elected officials and politics out of operations. The link is that the commissioners’ chairman must sign off on hospital board nominees.

It has been a rubber stamp.

County officials remember once in 30 years that a proposed board member was rejected. That was in 2008 when nominees included Gloria Pace King, who had been ousted as CEO of the United Way of the Central Carolinas because of public outcry over her $2 million pension package.

So it appears political leadership could have been exerted, at least to the extent of vetoing the board's proposed new candidates for board membership, but that has never been done, for unclear reasons.

Other questions are how did the bureaucrats in charge of this entity get away with massively changing the nature of its operations de facto without being subject to any political oversight, and without having to change its charter and governance to correspond to these changes?  Finally, how did its top hired bureaucrats (whether they are called managers, or executives really is immaterial) get to pay themselves at least an order of magnitude more than any government bureaucrat of whom I am aware, to pay themselves according to the current outrageous standard for executives of for-profit corporations?

I do not have the capacity to do the investigations necessary to answer these questions.  Hopefully, not only will reporters like Ms Garloch continue to dig deeper, but given this case's implications, it will become subject of more official investigations.

Meanwhile, it has become not merely a great example of how top hired management pay in health care continues to rise past any levels that can be rationally justified, but of what I once called the managers' coup d'etat.  It shows how hired bureaucrats, absent adequate supervision and accountability, have managed to transform health care organizations into instruments of their own enrichment.  To repeat,  true health care reform would put in place leadership that understands the health care context, upholds health care professionals' values, and puts patients' and the public's health ahead of extraneous, particularly short-term financial concerns. We need health care governance that holds health care leaders accountable, and ensures their transparency, integrity and honesty.

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

    

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