Still No Questions Asked - Journalists Fail to Challenge Talking Points Used to Justify Million Dollar Plus Executive Compensation at New York Non-Profit Hospitals

boards of trustees conflicts of interest executive compensation hospital systems hospitals perverse incentives

Still No Questions Asked - Journalists Fail to Challenge Talking Points Used to Justify Million Dollar Plus Executive Compensation at New York Non-Profit Hospitals

Unknown 6/29/2016 Komentar

It's deja vu all over again. I even get to reuse the introduction of a post from one month ago.  As I wrote in May, 2016,...

 The problem of ever rising, amazingly generous pay for top health care managers is a frequent topic for Health Care Renewal.  We have suggested that the ability of top managers to command ever increasing pay uncorrelated with their organizations' contributions to patients' or the public's health, and often despite major organizational shortcomings indicates fundamental structural problems with US health, and provides perverse incentives for these managers to defend the current system, no matter how bad its dysfunction.

In particular, we have written a series of posts about the lack of logical justification for huge executive  compensation by non-profit hospitals and hospital systems.  When journalists inquire why the pay of a particular leader is so high, the leader, his or her public relations spokespeople, or hospital trustees can be relied on to cite the same now hackneyed talking points.

As I wrote last year,  and last month,

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).

Yet as we discussed recently, these talking points are easily debunked.  Additionally, rarely do those who mouth the talking points in support of a particular leader provide any evidence to support their applicability to that leader.

Bit at least most journalists who inquire into hospital executive compensation used to make an attempt to be "fair and balanced" by also quoting experts who question the talking points.

But not so much lately,...

Million Dollar Plus Hospital CEOs in New York

The Journal News, based in the northern New York City suburbs, ran a series of articles about executive pay and perks at NY hospitals and hospital systems.  The main aricle in the series is here.  A listing of the five highest paid hospital officials is here.  A listing of executive perks, and conflicts of interests affecting the hospitals' and hospital systems' board members is here.  The main article began,

New York's nonprofit hospitals paid millions in bonuses to executives and doctors despite a high-stakes battle to reduce health care spending.

As patients struggled to afford rising medical bills, incentive packages for top hospital executives reached seven figures and approached payouts at Wall Street banks, The Journal News/lohud has found.

Perks at the nonprofit hospitals included first-class plane tickets, chauffeurs and country club memberships. Severance and retirement payments mirrored golden parachutes awarded to for-profit corporate executives.

The article noted that 112 people who worked for non-profit hospitals in the Lower Hudson valley earned more than $1 million.  The biggest pay went to the top executives of the biggest systems:

Bonuses and payments spiked the highest among executives at the helm of major hospital consolidations, data show.

North Shore University Hospital’s President/Chief Executive Officer Michael Dowling topped the list in 2014. He was paid $10.1 million in salary, bonuses and other pay. That is compared to $3 million in 2010.

Dowling’s payments came as the Long Island hospital and its affiliated organization, then North Shore-LIJ, began its ongoing expansion.

The health system, now Northwell Health, has pushed into the Lower Hudson Valley, partnering with Northern Westchester Hospital in Mount Kisco and other regional providers.

Also,

Dr. Steven Safyer, president and CEO of Montefiore Medical Center in the Bronx, was paid nearly $4.9 million in 2014, including a bonus of $1.3 million.

That's an $800,000 increase from the $4.1 million he was paid in 2010. It came as Montefiore bought bankrupt hospitals in Mount Vernon and New Rochelle, and pushed its expansion northward into Westchester County, which now includes a partnership with White Plains Hospital.

Note that Dr Sayfer also was given a hospital-paid car and driver.  

An accompanying article noted the three other highly paid CEOs in New York state, Warren Hern, CEO of Unity Health Systems in Rochester, $7,490,213;  Mark Clement, CEO of Rochester General Hospital, $5,323,856; and Dr Steven Crowin, CEO, New York Presbyterian Hospital, $4,591,728 [who also benefited from a policy allowing first-class or business airfare for flights over 6 hours, and some form of housing allowance.)

Other million dollar plus CEOs in the Lower Hudson valley included John Federspeil, president, Hudson Valley Hospital Center, $2,055,377; Joel Seligman, CEO, Northern Westchester Hospital, $2,043,289; Dr Cary Hirsch, CEO, Bon Secours Charity Health System (Good Samaritan Hospital in Suffern), $1,170,575; Keith Safian,  CEO, Phelps Memorial Hospital Center, Sleepy Hollow, $1,494,760; Lawrence Levine, CEO, Blythedale Children's Hospital, $1,701,471, Edward Dinan, CEO, Lawrence Hospital Center, $1,707,780; Dr Craig Thompson, CEO, Memorial Sloan-Kettering Cancer Center, $2,944,926 (who also got first-class or coach airfare for flights over 6 hours, and some form of housing allowance); and Jon Schandler, CEO, White Plains Hospital, $1.799,952.

The Usual Talking Points to Justify Executive Compensation

The Journal News article also included justifications for this munificent pay by hospital officials that used the usual talking points. 

We have to pay competitive rates

We have to pay enough to retain at least competitive executives


The spokesman for Northwell Health asserted,

The fact that we're located in the New York market ... only increases the competitive pressures on compensation.

Then,

Julius Green, a partner at Baker Tilly, a New Jersey-based accounting firm advising 100 hospitals in the Northwest, attributed expansions and higher pay to growing competition nationwide.

Also, from Blythedale Children's Hospital,

As the [Affordable Care Act] mandates take effect, and the number of insured individuals rise, the need for skilled healthcare workers will surely increase as will the competition for that talent.

Our executives are brilliant

Said Michael West, senior attorney for the New York Council of Nonprofits,

If you're running an organization that has a $500 million budget, you have to have someone with the wherewithal to run it and you have to pay for that.

Said Rachael McCallen, a Montefiore spokeswoman,

Our executives navigate a complex healthcare environment making appropriate investments to ensure a forward-thinking, innovative and responsive care model that provides higher value, lower cost integrated care services.

Furthermore, the next week the Journal News publised an op-ed by William Mooney, CEO of the Westchester County Association, which was devoted to defending the pay of his fellow CEOs.  It started with indignation against anyone who would question the pay of our fearless leaders,

While it is fashionable to cast aspersions on high-income earners, the arguments set forth about the compensation levels of area health-care CEOs are misguided and erroneous.

Then Mr Mooney again hit the talking points.

We have to pay competitive rates

We have to pay enough to retain at least competitive executives

Given that a hospital is a community organization, the compensation of their executives is decided by boards made up of community members who base their decisions on research, competitive market analyses and responsible financial projections.

Our executives are brilliant

Running a hospital is a business unlike any other. First and foremost, hospitals are complex organizations that are about protecting and promoting health, and saving lives.

Also,

A hospital CEO is responsible for overseeing and guiding his or her staff through a maze of financial and regulatory challenges while making sure safety and performance standards are at the highest possible levels.

Third, the technology and infrastructure enhancements that today’s hospital CEO must manage are vast and rapidly changing. The staffing required to support all of these disparate functions encompasses a wide range of skill sets and education. A hospital CEO must understand and manage all of those roles, and must keep an eye on the demands and responsibilities of maintaining new technology.

In addition, the op-ed concluded with the argument:

your readers would be better served by reporting on the qualitative and quantitative benefits our community derives from having the best health-care leaders in the nation at the helm of our local hospitals.

And these leaders to more than manage finances. The op-ed implied that hospital CEOs are personally responsible for savings lives. This can be seen in the quote above under the brilliance argument, and later:

Non-profit status is conferred upon an organization that does something for the public good. Saving lives clearly is in the public’s best interests!

This despite the fact that the majority of CEOs in the article above, and indeed the majority of top managers of hospitals and hospital systems are not health care professionals, and cannot take any direct responsibility for patient care.  This also despite the assertion by Mr West, the senior attorney for the New York Council of Nonprofits, that "hospitals are run like a business,..."suggesting that the people running them might put money, not "doing something for the public good," first.

Also, note that while Mr Mooney extolled the community based boards whose members made such discerning decisions about executive pay, he did not address these members' numerous conflicts of interests.  For example, re some of hospitals and hospital systems with the most highly paid CEOs,

Stephen Friedman was a board member of Memorial Sloan-Kettering in 2014 when the cancer center paid $10.5 million for architectural services from Perkins/Eastman. Friedman’s brother-in-law, identified as Mr. Perkins, is affiliated with the firm, tax filing show. Bradford Perkins is listed as the co-founder and chairman of Perkins/Eastman, according to its website.

Jamie Nicholls was a Memorial Sloan-Kettering board member in 2014. Her spouse was a co-founder of King Street Capital Management, which the hospital paid nearly $700,000 for management fees, tax filings show.

And,

White Plains Hospital disclosed one business transaction involving an interested person. The filing has few details. It reported the name of the interested person as 'Donor #24' and the relationship with the hospital as a 'substantial contributor.' The amount of the transaction was $15,350,345, and the description is 'BUS TRANS.'

And,

New York-Presbyterian paid $440,225 for investment management fees to Coatue Management, which listed its founder and chief executive officer as Philippe Laffont, a hospital trustee, tax filings show.

And,

Kaleida Health in Buffalo paid $121,660 to the Greater New York Hospital Association for participation dues in 2014. James Kaskie, former president and chief executive officer at Kaleida, was also a board member at the association, tax filings show.

Finally, note that neither the main article nor Mr Mooney's op-ed cited any evidence, even anecdotal, that these particular leaders are so brilliant, or that their hospitals are better than average, even in terms of finance, much less actual care of patients.   

No Challenges to the Talking Points

The main article did not include any dissenters who questioned expansive executive pay.  An accompanying editorial in the Journal News could only muster some anemic concern.  It called multi-million dollar compensation for local non-profit hospital system executives "unsettling."  It did contrast ever rising executive pay with the difficulty patients have paying their bills.  But it could only muster conclusions that mirror the talking points:

Hospitals are quick to defend their executives' rising compensation, and their arguments are good ones. Chief among them is that hospitals must compete for the best top officials, including with for-profit hospitals across the U.S. They say they need to attract and keep leaders who can competently oversee growing health-care systems, meet ever-changing government regulations and improve patient care and satisfaction.

So, all they called for was disclosure of compensation:

Hospital executives deserve fair pay for hard work; taxpayers deserve to know that resources are being used to attain quality care for all.

Although Mr Mooney seemed to see "aspersions" in the article,  and thought "the article implies that hospital CEO compensation is somehow responsible for the continued rise in healthcare costs," and argued that "hospitals do not deserve to have nonprofit status," I could find no such challenges in the Journal News series to the notion that top non-profit hospital managers deserved every penny they got.

Conclusion

Sadly, the ever rising compensation of top health care managers seems to inspiring less, rather than more skepticism in the media.  No more is it true that  nearly all articles that try to delve into executive compensation at all at least quote some experts who are skeptical of current practices.

The Journal News series included no such attempts at balance.  In my humble opinion, while it reported on useful facts, the opinions it contained leaned towards propaganda for managers' current privileged position in health care. 

Despite all the blather about how top hospital executives deserve millions of dallars, there are real reasons to be skeptical.  As we discussed here, there is a strong argument that huge executive compensation is more a function of executives' political influence within the organization than their brilliance or the likelihood they are likely to be fickle and jump ship for even bigger pay.  This influence is partially generated by their control over their institutions' marketers, public relations flacks, and lawyers.  It is partially generated by their control over the make up of the boards of trustees who are supposed to exert governance, especially when these boards are subject to conflicts of interest and  are stacked with hired managers of other organizations. 

While Mr Mooney was indignant that high executive pay may be considered a reason that hospital charges and health care costs are rising, he did not even discuss the argument that the current method of determining such pay may provide perverse incentives to grow hospital systems to achieve market domination, raise charges, and increase administrative bloat.  As an op-ed in US News and World Report put it about executive pay in general,

But the executive pay decisions made inside corporate boardrooms have an enormous impact in the outside world. Outrageous pay gives top executives an incentive to behave outrageously. To hit the pay jackpot, they'll do most anything. They'll outsource and downsize and make all sorts of reckless decisions that pump up the short-term corporate bottom line at the expense of long-term prosperity and stability.

So I get to recycle my conclusions from my last post in this series....

We will not make any progress reducing current health care dysfunction if we cannot have an honest conversation about what causes it and who profits from it.  In a democracy, we depend on journalists and the news media to provide the information needed to inform such a discussion.  When the news media becomes an outlet for  propaganda in support of the status quo, the anechoic effect is magnified, honest discussion is inhibited, and out democracy is further damaged.

True health care reform requires ending the anechoic effect, exposing the web of conflicts of interest that entangle health care, publicizing who benefits most from the current dysfunction, and how and why.  But it is painfully obvious that the people who have gotten so rich from the current status quo will use every tool at their disposal, paying for them with the money they have extracted from patients and taxpayers, to defend their position.  It will take grit, persistence, and courage to persevere in the cause of better health for patients and the public. 

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No Questions Asked - Journalist Parrots the Talking Points in Support of Hospital Executive Compensation

boards of trustees Catholic Health Initiatives executive compensation hospital systems hospitals Lancaster General Health perverse incentives

No Questions Asked - Journalist Parrots the Talking Points in Support of Hospital Executive Compensation

Unknown 5/20/2016 Komentar

The problem of ever rising, amazingly generous pay for top health care managers is a frequent topic for Health Care Renewal.  We have suggested that the ability of top managers to command ever increasing pay uncorrelated with their organizations' contributions to patients' or the public's health, and often despite major organizational shortcomings indicates fundamental structural problems with US health, and provides perverse incentives for these managers to defend the current system, no matter how bad its dysfunction.

In particular, we have written a series of posts about the lack of logical justification for huge executive  compensation by non-profit hospitals and hospital systems.  When journalists inquire why the pay of a particular leader is so high, the leader, his or her public relations spokespeople, or hospital trustees can be relied on to cite the same now hackneyed talking points.

As I wrote last year,  and last week,

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).

Yet as we discussed recently, these talking points are easily debunked.  Additionally, rarely do those who mouth the talking points in support of a particular leader provide any evidence to support their applicability to that leader.

Bit at least most journalists who inquire into hospital executive compensation make an attempt to be "fair and balanced" by also quoting experts who question the talking points.

Hospital Executive Compensation in Central Pennsylvania

However, we just found an ostensibly journalistic survey of local hospital executive compensation in the Reading (PA) Eagle which seemed designed to encourage the public to welcome their ever more highly paid corporate health overlords.  This started with its title:

Nonprofit health care organizations pay for the best executives

And its opening paragraph

At first blush, the leaders of area hospitals are handsomely compensated. But a Reading Eagle analysis finds that their compensation is in line with hospital administrators in other areas.

The author was not shy about documenting the munificent pay of local hospital executives, seven of whom received more than $1 million as documented by their organizations' most recent financial reports.

 Harold Paz, CEO of Hershey Medical Center (Penn State University) topped the list in 2014, at $1.57 million.
+++
Second was Thomas E. Beeman, former president and CEO of Lancaster General Health, at $1.5 million.
+++
Third was Clint Matthews, president and CEO of Reading Health System, at $1.44 million in 2014, the most recent year information was available.

Then,

Fourth place in total compensation went to Ronald W. Swinfard, trustee and CEO of the Lehigh Valley Health Network, at $1.32 million in 2014.

Fifth place in total compensation was Kevin Mosser, director and CEO, WellSpan Health at Ephrata Community Hospital, at $1.29 million.

Sixth place was Rod Erickson, former president, Hershey Medical Center, Penn State, $1.28 million.

Seventh place was Richard Seim, president, WellSpan Specialty Services, WellSpan Health, $1.01 million.

In eighth place was Michael F. O'Connor, CFO. WellSpan, Ephrata Community Hospital, $993.618.

Ninth was Charles Chodroff, president, South Central Preferred, WellSpan Health, $906,582.

Tenth was Rodney Kirsch, senior VP, development, Hershey Medical Center Penn State, $860,445.

Eleventh was John Morahan, chair, president and CEO, Bornemann Health Corp. and St. Joseph Regional Health, at $841, 246. Bornemann is an affiliate of St. Joseph Regional Health, and compensation came from Catholic Health Initiatives.

Parroting the Talking Points

But the public should fear not, because, as the talking points say....

We have to pay competitive rates

This was invoked early in the article.

The Reading Eagle review also found that leaders of hospitals in Berks County are compensated in line with their counterparts at other medical centers in Pennsylvania.

Also,

Overall, the compensation of medical nonprofit leaders in Berks County is on par with leaders of similar locations elsewhere, said Chester Mosteller, founder and president of Mosteller and Associates, a human resource professional services firm in Reading.

We have to pay enough to retain at least competitive executives

To support both the first and this talking point, the article cited a local expert,

 Nonetheless, people are sometimes surprised at high compensation levels at nonprofit hospitals, said Tish Mogan, standards for excellence director at the Pennsylvania Association of Nonprofit Organizations in Harrisburg. But, Mogan noted, if the leaders of nonprofit hospitals were not well compensated, they could be poached by for-profit medical centers.

'They have to be competitive,...

Doubling down, the article also cited  "Anna Valuch, director of marketing for Reading Health System," whose CEO, her boss, pulled down $1.44 million. She said

the system's board of directors takes seriously its responsibilities in terms of creating an executive compensation plan that is fair, competitive and consistent with the system's mission to provide the highest quality health care.

Later, the reporter quoted Ms "Cindy Bergvall, co-owner of accounting firm Bee Bergvall and Co in Bucks County and its affiliate, the Catalyst Center for Nonprofit Management," as saying

nonprofit health care organizations are competing with for-profit organizations for talent, so they must offer competitive wages.

Our executives are brilliant

Ms Morgan immediately segued into a claim that executives

have to make sure that somebody's in charge that has the capability to make sure that, if I'm on that procedure table, things are in place to take care of me,

Mr Mosteller had a different version of the brilliance argument.

'It's been extremely challenging with the Affordable Care Act and Medicare, and that all results in some very big challenges within the health care arena,' he said. 'It is by no means an easy nonprofit to run and manage. It's become increasingly complex to operate and fulfill your mission in those environments.'

Similarly, "J Andrew Weidman, chairman of the board of directors for Penn State Health St. Joseph," put all three talking points into one sentence,

'To be in the best position to recruit and retain vital and talented employees, we must pay competitive wages,' Weidman said.

So did "Brian Downs, director of media relations for Lehigh Valley Health Network," who worked for CEO Ronald W Swinfard, who pulled down $1.32 million,

'To attract and retain the highest caliber health care professionals needed to sustain the quality of care LVHN provides to our community, and to oversee the operation of a nearly $2 billion organization, we must offer compensation that is competitive with organizations we compete with for talent in the job market,' Downs said.

Note that several of these experts/ commenators worked directly for the very well compensated hospital system CEOs of interest, and the others apparently worked for firms that got financial support from these CEOs' hospital systems. 

No Questions Asked

While the Eagle quoted multiple proponents of high executive pay repeating all the talking points, the reporter apparently did not challenge any of them to justify any of the talking points in the context of interest.  In particular, no one provided any evidence that any of the particular executives are so brilliant, or as the article implies, why ALL local executives are brilliant.  How can there not be a single average one in the bunch?

In fact, a quick Google search reveals reasons to questions the brilliance of at least some of them.  For example, Hershey Medical Center, whose CEO was the highest paid of the group, has proposed a controversial merger which is the subject of strong opposition by the US Federal Trade Commission (FTC).  (See articles in Modern Healthcare and PennLive.  Per Modern Healthcare, the FTC is claiming that the merger would lead to "higher prices and diminished quality [of care]." Especially given that the FTC seemingly has a high threshold to challenge a hospital system merger, its opposition certainly suggests questions about current hospital management.  Also, Lancaster General Health, whose CEO was the second best paid of the group, had to pause a big expansion project because of cost overruns (see this article in Lancaster Online), and suffered a major outage of its electronic health record (EHR) system (see this article in Lancaster Online).  

Yet the Reading Eagle reporter did not raise these incidents, nor question anyone about the supposed brilliance of the leaders at the institutions that suffered them.

Furthermore, many of the points made on behalf of high executive pay raised obvious questions that were not asked.  For example,  Ms Morgan was not asked whether any executives actually have been recently "poached."  Ms Bergvall was not asked to name the for-profit organizations with which the hospital systems was competing for talent.   Strikingly, Ms Bergvall also was not asked to justify the assertion that it is the responsibility of hospital managers, not physicians, to make sure that "when I am on the procedure table, things are in place to take care of me."

Even more strikingly, Ms Bergvall was apparently not questioned further after she suggested that CEOs may command more pay simply because  they may feel entitled to a big dollop of all the money flowing throught he health care system

when nonprofit organizations bill for services, like hospitals do, they usually have the financial resources to compensate people well.  

'In the health care industry, you have an income stream that allows you to pay better,' Bergvall said.

Of course, many of the media reports on high executive compensation in health care do not report any cross-examination of its supporters.  Perhaps these advocates refused to respond to such questions, or the reporters felt too intimidated to challenge them.

But nearly all articles that try to delve into executive compensation at all at least quote some experts who are skeptical of current practices.  And there are real reasons to be skeptical.  As we discussed here, there is a strong argument that huge executive compensation is more a function of executives' political influence within the organization than their brilliance or the likelihood they are likely to be fickle and jump ship even bigger pay.  This influence is partially generated by their control over their institutions' marketers, public relations flacks, and lawyers.  It is partially generated by their control over the make up of the boards of trustees who are supposed to exert governance, especially when these boards are subject to conflicts of interest and  are stacked with hired managers of other organizations. 

This article included no such attempts at balance.  So it ended up more like propaganda for managers' current privileged position in health care than journalistic inquiry.  It is sad to see reporting about important health policy issues devolve into propaganda to support the status quo, and those who personally profit the most from it.  But perhaps those who work at the Reading Eagle hesitate to offend those who are making the most from the current system.  It appears that the newspaer is owned by the Reading Eagle Company, and this, in turn is owned by the Barbey family, which according to Politico also

controls the publicly-traded lifestyle clothier VF Corporation (Nautica, Jansport, Wrangler, Timberland, Lee, Vans, etc.) and is ranked no. 48 on Forbes' list of America's richest families.

Discussion

We will not make any progress reducing current health care dysfunction if we cannot have an honest conversation about what causes it and who profits from it.  In a democracy, we depend on journalists and the news media to provide the information needed to inform such a discussion.  When the news media becomes an outlet for  propaganda in support of the status quo, the anechoic effect is magnified, honest discussion is inhibited, and out democracy is further damaged.

True health care reform requires ending the anechoic effect, exposing the web of conflicts of interest that entangle health care, publicizing who benefits most from the current dysfunction, and how and why.  But it is painfully obvious that the people who have gotten so rich from the current status quo will use every tool at their disposal, paying for them with the money they have extracted from patients and taxpayers, to defend their position.  It will take grit, persistence, and courage to persevere in the cause of better health for patients and the public. 

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Who Benefits? - Rising Generic Drug Prices and the Case of Mylan's Conflicted Property Purchases

boards of directors conflicts of interest executive compensation mission-hostile management Mylan perverse incentives

Who Benefits? - Rising Generic Drug Prices and the Case of Mylan's Conflicted Property Purchases

Unknown 7/09/2015 Komentar

Rising Generic Drug Prices

Health care costs in the US continue their seemingly inexorable rise.  Even the parts of health care that used to seem reasonably priced now are affected.  As Ed Silverman discussed on PharmaLot

prices for many generic drugs have been climbing, prompting concerns that a low-cost staple of the U.S. health care system might soon strain budgets.

Generic drugs, like practically every other part of US health care, have become big business.  As a Forbes article pointed out, the industry is becoming more consolidated, and more likely to suffer from manufacturing and regulatory issues.  However, there may be other reasons for increasing generic drug costs.

Case: Mylan Purchased Properties Developed by its Own Board Vice Chair

A recent Wall Street Journal scoop on the big generic pharmaceutical company Mylan suggested that maybe such companies are now suffering from the same leadership and governance ills we have been finding throughout US - and indeed global - health care.  Furthermore, to understand the impacts of such health care dysfunction, one must consider the incentives that underlie them, that is, who benefits?

The story concentrated on some dodgy deals involving the company and firms linked to the Vice Chairman of its board of directors.  The first part of the story was:

Generic-drug maker Mylan NV moved into new headquarters in December 2013 after buying vacant land in an office park near Pittsburgh and erecting a five-story building for about 700 employees.

The company hasn’t publicly disclosed that the office park’s main developer is Rodney Piatt, Mylan’s vice chairman, lead independent director and compensation-committee chief. The new headquarters was a big boost for the mixed-use real-estate development, called Southpointe II, where all the land has been sold and some of the last buildings are now rising.

Securities regulators require public companies to tell shareholders about any significant transactions with directors, executives or other 'related persons.' Members of boardroom compensation committees have special duties under securities and tax laws to avoid dealings that compromise their independence.

Mylan, now fighting a three-way takeover battle in the pharmaceutical industry, says there was no need to disclose Mr. Piatt’s connection to the $60 million real-estate project because he and the company avoided any direct dealings with each other.

The day before Mylan announced plans to build the new headquarters, a company managed and partly owned by Mr. Piatt sold a 7-acre site for $1 to an entity owned by a business partner in Southpointe II, according to property records reviewed by The Wall Street Journal. The partner’s firm sold the same land to Mylan for $2.9 million later the same day.

Also,

Real-estate records show a similar transaction in May. Mylan paid $9.2 million to buy an adjacent 11 acres from Mr. Miller, whose firm previously bought the land for $10 from a company partly owned by Mr. Piatt.

'Mr. Piatt was not a party to either transaction' involving Mylan and 'had no direct or indirect material interest in the transactions,' says a Mylan spokeswoman.

She adds that Mr. Piatt didn’t make a profit on either sale to Mylan because Mr. Miller separately arranged to buy out Mr. Piatt at cost and then sold the land directly to Mylan. Mr. Piatt didn’t return calls seeking comment.

Note however that

Securities rules require disclosure of any transaction of more than $120,000 where a related person will have a direct or indirect material interest, regardless of whether the person makes a profit.

In the case of compensation-committee members, related-party transactions can jeopardize the independence required of them under tax and securities rules. That can threaten the tax-favored status of some executive-pay programs and require executives to disgorge some of their gains on stock sales.

Some securities-law and corporate-governance experts say Mylan should have been more transparent about the real-estate transactions or handled them differently.

'The optics are terrible,' says Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware and a director at HealthSouth Corp. and Bob Evans Farms Inc. 'Pittsburgh is a big town with no shortage of real estate. Either they could have gone somewhere else, or [Mr. Piatt] could have relinquished the directorship and eliminated the conflict.'

Just to emphasize the questions about Mr Piatt's independence,

The new headquarters is named the Robert J. Coury Global Center, after Mylan’s executive chairman. Mr. Coury, 54, was chief executive from 2002 to 2012.

A few months after the project’s approval by local officials, Mr. Piatt signed a pension amendment that increased the value of Mr. Coury’s promised benefits by 40%. His overall pension of $48.8 million is 11th-largest among executives at U.S. publicly traded companies, according to Standard & Poor’s ExecuComp.

Further muddying the waters,

During construction, Mylan hired project-management firm RIZ Consulting & Management Inc. to oversee the general contractor and architect. RIZ has the same business address and phone number as Mr. Piatt’s real-estate company, and he is listed as the contact person for RIZ in the local chamber of commerce’s membership directory.

RIZ’s president also is a top executive at Mr. Piatt’s company, and some employees of Mr. Piatt’s company worked for RIZ on the project, according to state records, construction documents and the minutes of permit meetings. RIZ’s president didn’t return calls seeking comment.

'They set it up that way because [Mr. Piatt] sits on the board of Mylan,' says Jeff Yates, a project manager with PJ Dick Inc., the general contractor for the Mylan headquarters project. 'It was kind of a conflict of interest, [so] RIZ was a separate company set up to be the owner’s rep.'

We often discuss how health care is tangled in a vast web of conflicts of interest.  The kinds of apparent conflicts of interest in play in this case are somewhat different from those we frequently discuss, but still seem part of this web.

In the last few days, other Pittsburgh newspapers have jumped into the fray, and found their own experts to question these deals.  Per the Post-Gazette,

'It doesn’t pass the smell test'” said Mel Fugate, a management professor at Southern Methodist University.  Mr. Fugate said that while the SEC places legal requirements on which transactions must be disclosed, the legal obligations are 'the lowest hurdle of them all.'

'This smells bad … even if they can prove legally there are no conflicts' he said.

Again, as noted above the law in certain instances may define conflicts of interest more narrowly than ethical definitions.  For example, the Institute of Medicine defined conflicts of interest in medicine: occurring "when an individual or institution has a secondary interest that creates a risk of undue influence on decisions or actions affecting a primary interest."

The Tribune weighed in,

'The whole thing stinks,' said Douglas Branson, a University of Pittsburgh law professor and an expert in corporate governance. 

Board members'have to serve the best interest of the corporation,' he said. 'You can't be both a seller and buyer — that's the classic definition of conflict of interest.

So here we see serious allegations of conflicts of interest affecting the Vice Chair of the Mylan board, and perhaps affecting another board member and former CEO.  These conflicts suggest that company operations could have been manipulated for these individuals' benefits.

Other Questions about Mylan's Leadership and Governance

Yet these are not the only examples of questions about Mylans' leadership and governance, questions which suggest that managers and board members may have been putting personal gain ahead of the larger interests of the corporation, its shareholders, and the patients who take its drugs


A Pittsburgh Business Journal article noted the "allegations of impropriety" raised by the current case, but also hinted at larger problems with the leadership and governance of Mylan.


Current CEO's Invalid MBA

Per the Pittsburgh Business Journal

Mylan (Nasdaq: MYL) has had ethics questions in the past. An MBA awarded to CEO Heather Bresch was withdrawn in 2008 following an investigation that found she didn’t complete the necessary course credits.

However, that finding did not apparently affect her ongoing career trajectory at Mylan

Former CEO's Use of Company Jet to Help Son's Rock Music Career

The Pittsburgh Business Journal also stated,

And in 2012, the Wall Street Journal found that [former CEO] Coury transported his son to rock concerts on the corporate jet, which was allowed as part of his employee benefits package.

That WSJ article emphasized,

 Nina Devlin, a spokeswoman for Pittsburgh-based Mylan, said Mr. Coury's employment contracts have allowed outside personal activities, 'including those related to his son Tino's career.' She said Mr. Coury isn't required to use the corporate jets but his employment contracts for the past decade have allowed personal use by him and his family.

Thus these contracts apparently allowed valuable Mylan resources to be expended in support of the former CEO's son's career, even though Tino did not apparently have any direct role in the company. Note that these revelations also apparently did not affect Mr Coury's career trajectory with the company, nor did those below.

Transactions Between Former CEO's Brothers and Mylan

That same WSJ article also found,

 This wasn't the only business relationship between the elder Mr. Coury and his brothers. Coury Investment Advisors, a company in which two of his brothers, Gregg and Paul, are principals, has served as a broker for Mylan's employee-benefit plans. Various insurers paid them $597,000 in the past three years for Mylan-related business, according to U.S. Labor Department filings.

That appeared to be another conflict of interest, benefiting different members of the former CEO's family.

However, that is still not the whole story.  A quick look through our magic files, and Google, revealed some other pieces.

Mylan Settled Allegations of Inflated Pricing

In 2010, we briefly posted about a settlement by Mylan of charges it falsely inflated prices for several drugs.
As is usual in such settlements, none of the people who authorized, directed or implemented the actions leading to this settlement apparently suffered any negative consequences, including the top managers on whose watch they occurred. 

Mylan Fired Executive Allegedly for Filing Whistleblower Lawsuit Against Another Company

In June, 2014, the Pittsburgh Tribune reported,

 When Mylan Inc. learned that its vice president of marketing had filed a whistleblower lawsuit against his previous employer, it fired him, the man alleged in a federal lawsuit filed Tuesday.

Note that the lawsuit was against Cephalon, not Mylan.  Rocking the boat, or blowing the whistle apparently are not rewarded at Mylan.

Current CEO Named US Patriot of the Year, then Moved Mylan to Netherlands

In 2014, some wondered how Heather Bresch, still the Mylan CEO, could have claimed to be ultra-patriotic while she was planning to move her company out of the US.  In 2011, Esquire listed Ms Bresch in an article on "Americans of the Year: Patriots." They were apparently particularly impressed that she had called for more inspections on foreign drug companies whose products are imported into the US. However, in 2014, per Ron Fournier in the National Journal.

This story is about a gilded class of people and corporations enriched by the new American economy while the rest of its citizens pay the tab. The protagonists could be any number of institutional elites, but this column happens to be about a Democratic senator from West Virginia, Joe Manchin, and his daughter, Heather Bresch, the chief executive of Mylan, a giant maker of generic drugs based outside Pittsburgh.

Her company's profits come largely from Medicaid and Medicare, which means her nest is feathered by U.S. taxpayers. On Monday, Bresch announced that Mylan will renounce its United States citizenship and instead become incorporated in the Netherlands – leaving this country, in part, to pay less in taxes.

This is the sort of story that makes blood boil in populists – voters from the Elizabeth Warren wing of the Democratic Party to libertarians who follow Rand Paul and including tea party conservatives. These disillusioned souls, growing in numbers, hate hypocrites who condemn the U.S. political system while gaming it.

Later, Ms Bresch's father, Senator Manchin, said what his daughter did should be illegal, again per another Ron Fournier article in the National Journal, whose title says it all:

Senator Manchin: What My Daugher Did Should be Illegal

Nonetheless, late in 2014, Bloomberg reported that not only would Mylan go ahead with the inversion, but it would pay the excess taxes personally incurred by its own executives due the transaction.  Such taxes were meant as a negative incentive to discourage such maneuvers.  Even so, top managers seemed to be able to pay themselves to avoid the effect of these incentives, and of course any resulting personal financial losses.


Summary

 The latest story about Mylan seemed to show a leading board member financially benefiting from transactions between the company over which he was supposed to exercise stewardship and his own company.  Other stories showed Mylan executives seeming to gain outsized benefits for themselves or their family members from Mylan beyond conventional salaries and corporate benefits packages. Of course, since Mylan is not just any company, but a very large generic drug company, putting top hired managers and boards of directors first may mean putting patients second.  The cost of these managers' and boards' interests may be at the expense of patients, and the public at large.

Thus perverse incentives enable mission-hostile management and ultimately health care dysfunction.

So once again, when considering how US, and global health care has become so dysfunctional, it makes sense to think about who is benefiting from the current dysfunction.  It very often is organizational insiders, particularly top hired managers, and sometimes those who are supposed to keep an eye on them. 

 Thus, like hired managers in the larger economy, health care managers have become "value extractors."  The opportunity to extract value has become a major driver of managerial decision making.  And this decision making is probably the major reason our health care system is so expensive and inaccessible, and why it provides such mediocre care for so much money. 

One wonders how long the people who actually do the work in health care will suffer the value extraction to continue?
As we have said far too many times - without much impact so far, unfortunately - 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.

As Robert Monks said in a 2014 interview,

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

So I 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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Once More, the Hospital CEO as Scrooge - Cape Cod Healthcare CEO Collected Millions in Severance After Laying Off Hundreds of Health Professionals, and Being Sanctioned by the State Medical Board

boards of trustees Cape Cod Healthcare executive compensation perverse incentives

Once More, the Hospital CEO as Scrooge - Cape Cod Healthcare CEO Collected Millions in Severance After Laying Off Hundreds of Health Professionals, and Being Sanctioned by the State Medical Board

Unknown 1/08/2015 Komentar

The theme of non-profit hospital CEO as Scrooge seems to be persisting in the media even beyond the holiday season.  (Our last post on this theme was in December, 2014).  The previous cases we discussed (also here) involved  marked contrasts between how well top hired managers of non-profit hospitals were doing, and how their institutions were doing.

Turning Around the Hospital, but Turning Away Employees

The background to this story comes from an article in the Cape Cod (MA) Times from January, 2014.  Cape Cod Healthcare, a regional non-profit hospital system, hired Dr Richard Saluzzo as CEO to turn around the system's troubled finances.

Cape Cod Healthcare had 'a pretty significant economic turnaround' under Salluzzo's stewardship, as well as accolades for quality of care, [board chairman Thomas] Wroe said.

'We were really in trouble. He was the architect and foundation of turning that around,' Wroe said.

In this case, the turn around seemed to be strictly financial,

During his tenure Cape Cod Healthcare's bond rating improved from one grade above junk status to BBB with a favorable outlook.

However, the turn around also involved turning away employees,

The financial turnaround came in part from cost-cutting measures such as layoffs for about 200 employees and improved billing.

More details about these layoffs were in a Cape Cod Times article from 2008,

A hospital chaplain and several psychiatric nurses are among the cuts emerging from Cape Cod Healthcare's announcement last month that it is eliminating 169 positions.

In particular,

the hospital's largest union is expected to begin the process of 'bumping' later this week, which allows employees with more years of service to move into jobs of junior colleagues.

Most of the layoffs announced last month are at Cape Cod Hospital.

Union jobs scheduled for elimination are going through a process of negotiation with management.

Seventy-six positions held by members of the 1199SEIU United Healthcare Workers East are slated for elimination.

Also still in negotiation is the fate of seven members of the Massachusetts Nurses Association, several of whom are employees of the psychiatric center located across the parking lot from Cape Cod Hospital in Hyannis.

Some of the nurses work part time, said Marilyn Rouette, president of the Cape Cod Hospital chapter of the association.

But the psychiatric services help 'a very vulnerable population,' she said.

So the hospital apparently did improve its financial performance during the reign of Dr Saluzzo, but at the expense of quite a few employees, including health professionals serving vulnerable patients.

CEO Compensation as the Gift that Keeps on Giving

CEO Dr Saluzzo earned pretty good pay during his last full year, as reported by the Cape Cod Times in 2014,

In fiscal 2010 — his last full year of employment at Cape Cod Healthcare — Salluzzo earned under $1 million, garnering $835,609 in salary and $23,967 in other compensation. He also received a benefit plan worth $78,618.

He did much better than did the previous CEO,

Salluzzo's most recent salary stands in striking contrast to that of his predecessor, retired Cape Cod Healthcare CEO Stephen Abbott, whose salary came to $621,225 in fiscal 2008, his last full year on the job. That year he also had a benefit plan worth $111,544.

However, CEO Dr Saluzzo's compensation did not stop when he left.  The 2014 article in the Cape Cod Times included,

Even as Dr. Richard F. Salluzzo abruptly left his CEO position at Cape Cod Healthcare more than three years ago, he was due to receive more than $2 million in compensation.

Reports filed with the state attorney general's office for fiscal 2012 and 2011 show that Salluzzo remained Cape Cod Healthcare's highest-paid employee those years, despite the fact that he left just two months into fiscal 2011.

Salluzzo earned $1,309,308 for fiscal 2011 and $1,095,342 for fiscal 2012, according to forms filed with the attorney general's nonprofit/public charities division. Cape Cod Healthcare's fiscal year starts Oct. 1.

This week, the January 5, 2015 Cape Cod (MA) Times updated the figures,

Three years after he abruptly left Cape Cod Healthcare, former CEO Dr. Richard Salluzzo continued to be one of its highest-paid employees, according to new financial reports filed with the state attorney general’s office.

Since departing the nonprofit organization in November 2010, Salluzzo has taken in more than $3 million in compensation, including $857,953 for the most recent fiscal year on file, 2013.

The compensation made Salluzzo the fourth-highest-paid employee at Cape Cod Healthcare for that period, which started Oct. 1, 2012, according to forms recently filed with the attorney general’s nonprofit/public charities division. The payout is less than what Salluzzo earned in fiscal years 2011 and 2012, which came to $1,309,308 and $1,095,342.

The Board Continues its Defense of the Seemingly Endless CEO Compensation

According to the 2015 Cape Cod Times article, the new board chairman continued the defense of the continuing payment of a CEO who departed over three years ago,

This was a commitment made by the board years ago,' said William Zammer, chairman of the Cape Cod Healthcare Board of Trustees. 'The system was hemorrhaging money, and we were in a terrible position.'

'Salluzzo came onboard and did the job' of shifting the health care system from the red to the black,' Zammer said.

Never Mind the Questions Raised about the CEO Since 2008

This defense, admittedly not as strident as some other defenses by hospital board members of CEO compensation that we have discussed, was maintained despite some pretty significant questions about former CEO Dr Saluzzo since he was hired back in 2008.

Dr Saluzzo's Leadership of Wellmont Health System

This concern goes all the way back to 2009, as reported again by the Cape Cod Times,

Amid the good news, however, comes word from the Wellmont Health System in Kingsport, Tenn., that profits under Salluzzo were significantly less than first reported. A recent audit by a new firm found the system overstated its net earnings for fiscal years 2006 and 2007 by nearly $20 million and lost $4.6 million in 2008. The financial restatement came as a shock to Salluzzo, who said audits during his tenure always came back clean.

'This is a disagreement between auditors,' he said. 'I know my team and I did nothing wrong.'

Wellmont officials, who have not returned phone calls, said in a prepared statement that the audit turned up no evidence of criminal acts. The press release referred to errors in recording expenses, receivables and assets and said the system was imposing a new set of controls to reconcile accounts and strengthen internal auditing.

At that time, the board of Cape Cod Healthcare just seemed relieved that the issue was not criminal,

'There's no indication of fraud, manipulation of funds or personal gain,' [board chairman Thomas Wroe] ... said. 'They changed auditors. Any time you do that, you have a different translation of financial results. We have strong confidence in Dr. Salluzzo. He's been doing a great job for us.'

Saying that there is no indication that a person is a criminal seems like rather faint praise.  Never mind that it was still on CEO Dr Saluzzo's watch that these results, which now appear less than stellar, were produced, and that the belief, not apparently wrong, that CEO Dr Saluzzo produced stellar results at Wellmont was a reason to hire him as CEO of Cape Cod Healthcare.  Never mind that it was on CEO Dr Saluzzo's watch that the Wellmont hospital systems accounting was full of errors, yet it was Dr Saluzzo's financial leadership at Wellmont that apparently endeared him to the Cape Cod board.

Dr Saluzzo Sanctioned by the Massachusetts State Medical Board

In 2011, after Dr Saluzzo left his position as CEO, the Falmouth (MA) Enterprise reported,

Dr. Richard F. Salluzzo, former CEO of Cape Cod Healthcare, was disciplined by the state Board of Registration in Medicine this week for using drugs prescribed to others for his own use and prescribing drugs to family members without keeping proper records.

In particular,

Among the allegations in the board’s investigation of Dr. Salluzzo are that in 2008, before he started at Cape Cod Healthcare, he wrote four prescriptions for Valium for an employee working under him and then asked the employee to fill the prescriptions and give him the drugs. In 2009, while holding the top job at Cape Cod Healthcare, he wrote prescriptions for Zoloft for a friend and filled the prescriptions for his own use.

According to the board’s allegations, he also wrote prescriptions for controlled substances for his wife, his two adult children and his father but did not keep medical records for the family members.

In disciplining Dr. Salluzzo for those actions, the board cites the American Medical Association’s Code of Medical Ethics that 'physicians should not treat themselves or family members as professional objectivity may be compromised and issues of patient autonomy and informed consent may arise.'

In a consent order, Dr. Salluzzo agreed to the ruling and punishment, signing the document on November 1.

At that time, the Cape Cod Healthcare board of trustees responded to the disciplinary measures taken for unprofessional actions by the system's former CEO thus,

Cape Cod Healthcare’s board of directors, in a press release, stated, 'We became aware of a complaint and followed our established policies to ensure that the licensing board was involved in this matter on a timely basis. We then cooperated fully with the Board of Medicine’s investigation.'

The board notes that the Board of Medicine discipline concerns Dr. Salluzzo’s private practice and not his management performance.

'No complaint was ever reported or filed by any patients or physicians here regarding the quality of the clinical care provided by Dr. Salluzzo during his tenure on the medical staff of both CCHC hospitals,' according to the statement.

The board reiterated its statement last year about Dr. Salluzzo’s tenure at the hospital. 'He achieved the goals set for him as witnessed by our financial turnaround and improved relationships with our physicians, then decided to pursue other career challenges and professional interests.'

By the way, the January, 2014, Cape Cod Times article also noted,

On the basis of the Massachusetts disciplinary actions, Salluzzo also was fined and reprimanded in 2012 by medical boards in New York, Tennessee and Pennsylvania — all states where he has practiced medicine in the past.

I would guess that this means that actions uncovered by the Massachusetts board of medicine included some that took place in these other states.  

The real issue raised was not whether Dr Salluzzo's professional actions harmed patients, but whether a physician so sanctioned for unprofessional conduct deserved continuing payments, amounting to millions of dollars, for his previous employment as CEO of  Cape Cod Healthcare. 

The usual justification for extremely high compensation of hired health care managers is their brilliance. Recall that in 2014, well after CEO Dr Saluzzo departed from Cape Cod Healthcare, then chairman of the board of trustees Thomas Wroe gave him accolades for "quality of care."  It seems that one could question the quality of care produced by the leadership of a physician who wrote used subterfuges to obtain controlled substances for himself and his family.  Such questions did not occur to the former chair of the system's board of trustees even by 2014.

Summary

Note that the 2014 Cape Cod Times article quoted W. Michael Hoffman, executive director of the Center for Business Ethics at Bentley University, who called CEO Dr Saluzzo's cumulative compensation "outrageously lucrative."  The 2015 Cape Cod Times article quoted David Schildmeier, spokesman for the Massachusetts Nurses Association, who called it "obscene," and furthermore,

We're paying this failure of a CEO millions of dollars.

Nevertheless, heaven forfend that a hospital board of trustees would try to withhold pay for a CEO, even pay provided years after that CEO's departure, that might violate a previously written contract, even new information discovered might now provide reasons to challenge that contract.

So here is an amazing example in which a former hospital system CEO continues to be rewarded with millions of dollars after he actually left his employment as CEO.  These rewards started even though the financial turnaround he supposedly engineered required layoffs of health care professionals serving vulnerable patients  The hospital system board of trustees continued to authorize, and failed to question these payments even after subsequent revelations that the CEO's initial hiring was apparently based on a false impression of the financial performance of his previous hospital system generated by accounting problems within that system, and that the CEO had behaved unprofessionally in obtaining prescriptions of controlled substances for his family and for himself.

As we have said before, in US health care, the top managers/ administrators/ bureaucrats/ executives - whatever they should be called - continue to prosper ever more mightily as the people who actually take care of patients seem to work harder and harder for less and less. This is the health care version of the rising income inequality that the US public is starting to notice.

 Thus, like hired managers in the larger economy, non-profit hospital managers have become "value extractors."  The opportunity to extract value has become a major driver of managerial decision making.  And this decision making is probably the major reason our health care system is so expensive and inaccessible, and why it provides such mediocre care for so much money. 

One wonders how long the people who actually do the work in health care will suffer the value extraction to continue?

So 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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