Should a "Phenomenal" $1 Million CEO be Accountable for "Errors that Caused Severe Injury or Death?"

A recent story with some local color once again illustrates the cognitive dissonance evoked by current patterns of compensation of health care leaders.

Let me start chronologically.

The Stratospheric Compensation of the CEO, and Its Justification

In 2009, the compensation given to the CEO of the Palomar Pomerado Health, a public health system in the vicinity of San Diego, California, provided some headlines. As reported then by the San Diego Times-Union,

Palomar Pomerado Health CEO Michael Covert has received a 26 percent � or $154,000 � pay raise.

The increase, approved by the hospital district�s board of directors last month, is retroactive to July 1, the beginning of the fiscal year, board Chairman Bruce Krider said.

The increase brought Covert�s pay from $582,000 a year to $736,000 a year.

Not unexpectedly, the hospital system board chair had an explanation:

Krider said Covert has done a 'phenomenal job' of improving the quality of care and charting the district�s future, but is underpaid compared with five California hospitals that generate gross revenues of $357 million to $457 million a year.

By 2010, it was apparent that Mr Covert's compensation was even larger than it appeared above. As reported then by the San Diego Times-Union:

The top official at Palomar Pomerado Health, a public agency serving health-care needs in Poway and Escondido, receives in excess of $1 million in compensation per year.


Michael Covert, who has run the North County hospital district since 2003, receives a base salary of $736,000 a year. Retirement, bonuses and other benefits push Covert�s total pay past $1.1 million.

The compensation package is in the median range of his private and nonprofit counterparts and places Covert among the elite among public employees.

At that point, the system's board chairman gave a similar justification:

Bruce Krider, the health-care district chairman, said Covert does an excellent job managing a complex enterprise that includes two major hospitals. Covert juggles the interests of staff, physicians, patients, volunteers, board members and other stakeholders, he said.

'A million dollars sounds pretty good to anybody, but my view is, pay a lot and expect a lot,' said Krider, a management consultant who also is a former hospital executive. 'You can�t have some mediocre public servant. You need somebody that has got vision, that can see the issues that are most important and put it all together.'

Later in 2010, when it turned out that Mr Covert was the second most highly paid government official in California (and the most highly paid official was facing criminal charges), the Times-Union reported:

'We have to compete for talent with all of the for-profit and nonprofit health systems,' said Theodore Kleiter, a former hospital administrator who is now chairman of the Palomar Pomerado Health board of directors. 'If you want the top management, that�s what you have to pay.'

Kleiter said Covert is one of the nation�s leading health care administrators and noted only 3 percent of the district�s $480 million budget comes from taxpayers.

'The people in our area expect the best and we�re trying to provide that,' Kleiter said

Also, per the Los Angelest Times a few weeks later:

Officials at the hospital strongly defended his pay.

"There's this notion that because you're a public agency you should hire less-talented people than private companies, and if we followed that idea, PPH would not be where it is today," hospital spokesman Andy Hoang said. "We must compete for the best physicians, nurses and executives to provide the highest level of care. The community deserves that."

So, do we see a pattern here? According to one board chairman, Mr Covert had "vision," was doing an "excellent job," a "phenomenal job."  Furthermore, the chairman gave Mr Covert credit, apparently sole credit, for improving quality of care within the system, and noted how he was responsible apparently for all that was done by everyone who worked in or was associated with the hospital.  That board chairman was a "management consultant", and "former hospital executive."  The next chairman thought Mr Covert was "top management." and one of "the nation's health care administrators."  That chairman was "a former hospital administrator."  Finally, a paid hospital spokesman insisted Mr Covert is one of the "best executives."

Celebrity Endorsements and Fines for Medical Errors

On the other hand, once more reported by the Times-Union, some community residents, including hospital nurses, were not convinced that Mr Covert's performance was so unequivocally brilliant:

More than 200 community residents signed petitions raising questions about the salary paid to the chief executive at Palomar Pomerado Health and other business practices at the medical organization.

'Your highest priorities should be improving the health of our residents ... Out of control executive pay, costly celebrity spokespeople endorsements and out-of-district clinics (are) a waste of public funds,' the petition states.

The signatures were collected by nurses concerned about the compensation package and other issues over the past months.

By the way, concerning the issue of celebrity endorsements:

The district signed former San Diego Chargers running back LaDainian Tomlinson to a $2 million promotional contract before he signed with the New York Jets, a marketing plan that was criticized by some employees.

And this week, there was more reason to think that all is not so "phenomenal" at Palomar Pomerado.

The San Diego Union-Tribune just reported about California hospitals fined by the state for serious errors affecting patient care. 

Five San Diego County hospitals were fined a total of $300,000 for errors that caused serious injury or death to patients, state regulators announced Thursday.

The penalties were levied for leaving a retractor inside one patient and a 28-inch guide wire inside another after surgery, giving two deadly drug overdoses, and leaving a patient unattended who fell and then died from a fractured skull.

Palomar Medical Center in Escondido, Pomerado Hospital in Poway and Scripps Memorial Hospital in La Jolla were each fined $75,000, the highest fines among 12 California hospitals penalized by the state on Thursday. All three had been cited at least twice before, prompting the higher penalty.

Note that the previous citations came in 2010, the year in which Mr Covert's compensation exceeded $1 million.
Of course, medical errors are unfortunately not rare. I suspect that while we may be able to reduce them, they cannot always be avoided. I do not mean to condemn these hospitals, nor the people who work there.

In one sense, it would be silly to expect Palomar Pomerado Health to be perfect, for errors and mistakes never to be made there. It also would be silly to blame the system's CEO for everything that went wrong there.  It would be silly, except that the justifications given for the comparatively stratospheric compensation given to the CEO of this government funded health care organization implied that he was nearly perfect, and he was responsible for all the good that went on within the organization.

Summary

So here again we see an example of a health care leader who is nearly god-like, is responsible for all the wonderful things that his organization does, and is therefore worthy of pay sufficient to make him rich, at least according to the board of directors to whom he is supposed to report.  On the other hand, there seems to be no real evidence of the CEO's near divinity, and if he is supposed to be responsible for all the wonderful things his organization does, he also ought to be responsible for its errors and mistakes. 

In fact, comparatively high executive compensation justified by hyperbole seems more likely to indicate a board that is not sufficiently independent to exert stewardship than an executive who is truly exceptionally brilliant.  Lack of such stewardship, in turn, may lead to lack of executive accountability and hence poor rather than brilliant outcomes for the health care organization. 

So here is the latest example of CEO disease.  As it becomes more prevalent, health care leadership becomes more disconnected, unaccountable, and self-interested.  The increasing prevalence of CEO disease in health care may explain why costs keep increasing, access keeps declining, and quality and safety are stagnant.


As I have said before,.... health care organizations need leaders that uphold the core values of health care, and focus on and are accountable for the mission, not on secondary responsibilities that conflict with these values and their mission, and not on self-enrichment. Leaders ought to be rewarded reasonably, but not lavishly, for doing what ultimately improves patient care, or when applicable, good education and good research.

 If we do not fix the severe problems affecting the leadership and governance of health care, and do not increase accountability, integrity and transparency of health care leadership and governance, we will be as much to blame as the leaders when the system collapses.


We need to launch a crash program to prevent CEO disease and cure existing cases, before it kills off our health care system.

Million Dollar Plus Hospital CEO Compensation: "It Is What It Is" or What the Board Says It Is?

Health care leaders' compensation has again been in the news. Below are highlights from stories about four medical centers, emphasizing the magnitude of executive compensation, how it is related, or not to hospital and executive performance, and whether and how the organizations' boards chose to justify it. The medical centers are in alphabetical order.

University of Pittsburgh Medical Center

Compensation
According to the Pittsburgh Post-Gazette:

In tax documents released Friday, Jeffrey Romoff, president and CEO of the University of Pittsburgh Medical Center, received $4.01 million in salary, bonuses and benefits that year.

Also,

Other top earners at UPMC include neurosurgeons Ghassan Bejjani, $2.37 million in salary and benefits, and Richard Spiro, $2.23 million; cardiothoracic surgeon James Luketich, $1.96 million and executive vice president Elizabeth Concordia, $1.88 million.

In summary, UPMC has a four plus million dollar CEO, and a nearly two million dollar executive vice president.

Hospital/ Executive Performance

None of the articles I found on these executives' pay juxtaposed information on their or their institutions' performance.

A Pittsburgh Business Times article summarized the medical center's recent financial results:

Strength in outpatient revenue, insurance premiums and hospital admissions helped drive operating income to $313 million for the third quarter at the University of Pittsburgh Medical Center, a 75 percent increase from $179 million a year earlier, according to financial results released Friday.

However,

UPMC�s operating margin still trails the 4.1 percent of other institutions with an AA bond rating....

However, there have been recent concerns about ethics and quality at the institution.

Another Post-Gazette article revealed how relatives of top leaders seem to gain well-paid positions within the system:

particularly at UPMC, gainful employment extends to other branches of the family tree.

Mr. Romoff's daughter, Rebecca Kaul, was paid $388,659 in fiscal year 2010 for her work as president of UPMC's Technology Development Center. The center "is helping develop the next generation of information technology at UPMC," said spokeswoman Susan Manko.

Ms. Kaul's salary jumped from the $264,274 reported for the fiscal year ending June 30, 2009, an increase that Ms. Manko said was the result of a sale of a computer-assisted coding product joint venture 'at a substantial return on investment at which time Ms. Kaul received certain compensation based on the terms of the sale of the company.'

She added that, 'Mr. Romoff was not involved in the decisions pertaining to this transaction.'

According to the tax document, Mr. Romoff's former son-in-law by another daughter, Scott Gilstrap, was paid $236,347. He worked with grants and services contracts before leaving UPMC in December 2009.

Kathleen Pietragallo, sister-in-law of UPMC board member and attorney William Pietragallo, received $88,646 working in a laboratory at UPMC Presbyterian Hospital. Mr. Pietragallo's brother, Louis Pietragallo, is a medical oncologist for UPMC who was paid $613,082, according to the tax return.

And Scott Cindrich, son of UPMC's former chief legal officer, Robert Cindrich, received $138,618 as legal counsel for UPMC, according to Ms. Manko.

Also listed on the UPMC return is Anna Roman ($288,696), senior vice president for the University of Pittsburgh Physicians, who is the wife of University of Pittsburgh Physicians board member and UPMC pathologist George Michalopoulos.

The University of Pittsburgh Physicians is a multispecialty practice plan that employs UPMC physicians who are on the faculty of the Pitt School of Medicine and also care for patients and train residents in UPMC facilities, Ms. Manko said.

Note that we discussed questions of favoritism towards relatives of top leaders at UPMC here.

Also, Dr Scot Silverstein just posted on a major quality problem at UPMC, the transplantation of an organ from a hepatitis C positive donor.

To summarize, the medical center is making a lot of money, but its operating margin may not be has high as some of its peers. There are questions about nepotism amongst the leadership, and there is a current serious concern about the medical center's transplant program.

The Board's Justification

There was no recent reporting on this.

Valley Medical Center

This hospital is in Renton, Washington.

Compensation

Per King5 News:

The chief executive officer of the hospital, Rich Roodman, is the highest paid public employee in the state of Washington. Last year he made a base salary of $615,000. He also collected a bonus of $201,201 for meeting performance goals. On top of that he was paid $263,335 in a retention payment.

In total, Roodman earned $1,134,837 in 2010 to run Valley Medical Center, which is part of King County Hospital District No. 1.

Note that

Roodman makes about 40 percent more than the chief executive officer of University of Washington Medicine and more than double what the executive director of the University of Washington Medical Center earns.

Also,

The reporters found it's not just the CEO, but all top managers at Valley Medical Center who pack home healthy paychecks.

Paul Hayes, the executive vice president, made $588,249 last year, which included a bonus of $154,275 for meeting performance goals.

The senior vice president of medical affairs, Kathryn Beattie, made $489,479. Those figures outpace the top boss at renowned Harborview Medical Center, which is also funded by tax dollars.

The in-house attorney for Valley Medical Center, David Smith, pulled in $352,196 in 2010, which makes him the highest paid public lawyer in the state. Smith makes about two-and-a-half times what Attorney General Rob McKenna is paid.

In summary, the CEO of a relatively small, public hospital made over $1 million, and several executives made over $350,000.

Hospital/ Executive Performance

Controversy over money isn't new to Valley Medical Center. Four years ago the Washington State Public Disclosure Commission (PDC) fined CEO Roodman $120,000 after they found the hospital illegally spent tax dollars on mailings, postage and consultants to sway voter opinion on ballot measures in 2005 and 2006.

The PDC called it the biggest case ever involving a public agency misusing taxpayer dollars for a campaign. Valley Medical Center called it a misunderstanding.

In 2009 the Washington State Auditor�s Office found Roodman collected a troubling $1.7 million retirement payment that year, on top of the $900,000 salary he earned in 2009. The auditor found the commissioners authorized this payment 'without explanation or public benefit.' The auditor also recommended Valley Medical Center should 'avoid including similar provisions in future contracts.'

State authorities have questioned the ethics and legality of actions apparently authorized by the hospital's top leadership.

The Board's Justification

Board president Sue Bowman did speak with KING 5 by telephone. She said the compensation levels are important to stay competitive. They don�t want to lose top talent to other hospitals.

'I don�t know why Rich�s [CEO] pay is an issue? Commissioner Hemstad brings it up over and over again. I told him, 'Anthony, it is what it is,'' said Bowman. 'I don�t think the five-member board needs to keep focusing on compensation. What are we doing for the community? That�s what�s important.'

Bowman also said the board carefully considers research presented to them by outside consultants and attorneys before voting on CEO compensation. Milliman, a healthcare compensation consulting firm, provides the hospital with a full analysis of market comparative data every other year. They consistently find Valley Medical Center�s pay structure is right on target.

John Hankerson, principal and strategic rewards practice leader of Milliman, wrote a memo about his findings to Roodman and Bowman dated February 9, 2011.

'We have consistently found that base pay and total cash compensation have been well aligned with [hospital goals] and that the magnitude of the incentive plan is consistent with other healthcare organizations that are striving to improve performance and quality patient care,' wrote Hankerson.

'We defined the appropriate market [comparable salaries] as �where VMC [Valley Medical Center] might recruit executive talent from or where it might lose executive talent to.� In that light we have included such local organizations as Evergreen, Overlake, Virginia Mason to name just a few,' wrote Hankerson. 'In our opinion, the current levels of incentives used at VMC are appropriate and consistent with best practice as well as smart management.'

However, note that:

Senator Cheryl Pflug, the ranking minority on the Senate Health & Long-Term Care Committee, doesn�t think public hospitals should be basing salaries on what non-profit and for-profit institutions pay.

'They pick and choose who they compare themselves to. A much more appropriate comparison would be the University of Washington,' said Pflug.

Note that the chair of the hospital board first tried to give the impression that the executives' compensation was a natural phenomenon ("it is what it is,") rather than set by the board. Then it appeared that the compensation was set partially by referring to pay at clearly dissimilar institutions which generally pay more than public hospitals. Finally, although the implication was that high levels of compensation were justified by the performance of the executives, no specifics about that performance was provided, and certainly the recent questions about the ethics and legality of the executives' decisions were ignored.

Wake Forest Baptist Medical Center

Compensation

The Winston-Salem Journal reported:

Dr. John McConnell, the system's chief executive, was paid $1.68 million in total compensation for fiscal 2009-10, compared with $764,797 for fiscal 2008-09. McConnell took over as chief executive � a new position � in October 2008.

McConnell was paid $831,288 in salary for fiscal 2009-10, as well as $266,667 in bonuses and incentives, and $115,661 in other reportable compensation. He also received $441,589 in retirement and other deferred compensation.

In fiscal 2008-09, McConnell was paid $133,333 in salary, $140,000 in bonuses and incentives, $38,564 in other compensation and $440,105 in deferred compensation.

Donny Lambeth, the president of N.C. Baptist Hospital, had a 29 percent increase in total compensation to $849,521. His salary was raised 20 percent to $604,495, while his bonus and incentive compensation decreased 37 percent to $70,030. He had $136,459 in retirement and other deferred compensation.

Edward Chadwick, the system's chief financial officer, received $734,282 in total compensation, including $294,218 in salary and $350,000 in bonus and incentive compensation. He took over in his role in July 2009.

Besides McConnell, the top executives listed for Wake Forest University Health Sciences were Dr. William Applegate, president of the division and dean of its medical school; Dr. Thomas Sibert, its president and chief operating officer; and Doug Edgeton, president of the Piedmont Triad Research Park.

Applegate, who is retiring from both posts June 30 to focus on his geriatrics practice and research, received a 38 percent increase in total compensation to $996,706. His salary was raised 4 percent to $534,843 in salary, while his bonus and incentive compensation rose from $115,000 to $378,900.

Sibert received $974,188 in total compensation, including $266,654 in salary, $550,000 in bonus and incentive compensation and $112,390 in other reportable compensation. Sibert took over his role in September 2010.

Edgeton received a 44 percent increase in total compensation to $906,202. His salary was raised 7 percent to $491,391, while his bonus and incentive compensation rose from $102,200 to $361,600.

In summary, the CEO made over $1.5 million, and other leaders made from just under three-quarters to just under $1 million.

Hospital/ Executive Performance

There was nothing in the article above or in the news media about the performance of the executives or the hospital.

The Board's Justification

Per the Winston-Salem Journal:

Wake Forest Baptist said in a statement that it has a 'very rigorous system' to determine and approve its executive compensation packages. It has an external compensation consultant provide comparable data from similar health-care institutions, such as Duke University Health System, UNC Health Care and the University of Chicago Medical Center.

The Wake Forest Baptist system said that as one of 130 academic medical centers in the United States, 'there are few executives with the required skill set to manage and provide leadership for an integrated (center) such as ours.'

'Wake Forest Baptist's executive-compensation packages are fiscally responsible, appropriate for the marketplace and an essential part of the effort to recruit and retain skilled executives and visionary leaders for the medical center,' the statement said.

According to the Triad Area Business Journal:

'Recruitment and retention of the capably skilled executives is key to keeping Wake Forest Baptist fiscally sound and appropriately managed so we can continue to be a primary medical resource for patients in our community and our region,' the health system said in a prepared statement.

Again, much was made of process that compared the executives' compensation to that of other institutions. Their compensation was apparently based on the assertion that they were all "skilled and visionary," without any specifics provided to back it up.


West Penn Allegheny Health System

Compensation

Again, according to the Pittsburgh Post-Gazette

Christopher Olivia, ... at West Penn Allegheny Health System, received total compensation worth $1.91 million.

Also,

At West Penn, neurosurgeon Hae Dong Jho received $1.39 million in compensation in 2009 and Roy Santarella, executive vice president and chief administrative officer for the health system, received $1.25 million.

In summary, the CEO received nearly $2 million, and the executive vice president $1.25 million.

Hospital/ Executive Performance

Per the Pittsburgh Tribune-Review:

The region's No. 2 hospital network is losing money, but West Penn Allegheny Health System's board of directors gave its CEO a 40 percent bonus, according to tax documents released on Friday.

More specifically,

West Penn Allegheny Health System reported an operating loss of $89.9 million in the fiscal year that ended June 30. From July to December, it lost an additional $26.8 million, a drop officials attributed to $12 million in employee severance packages, extra consulting fees and falling inpatient volumes.

In a bid to improve its financial position, the system is consolidating many of its services at Allegheny General Hospital in the North Side. Last year, it shut down its emergency room at Suburban General Hospital in Bellevue and plans to do the same at West Penn Hospital in Bloomfield on Dec. 31.

The system's officials have said they expect to lay off up to 400 workers this year.

In summary, the hospital is losing a lot of money, and likely will be laying off a lot of workers.

The Board's Justification

Kelly Sorice, a hospital system spokeswoman, declined to comment on the bonus.

Summary

CEOs at even small medical centers in the US can now expect to receive more than $1 million a year in compensation.  Those at larger institutions may get several millions a year.  Other top executives can now expect proportionately high compensation.  Thus, being a top executive at a medium or large hospital now practically guarantees becoming rich. 

Worse, there seems to be no correlations among compensation and performance of the executives or the hospitals.  Executives at hospitals that are losing money, having quality problems, or criticized for unethical behavior still can make this much.

The boards that are supposed to exercise stewardship over these institutions do not seem to feel the need to justify the money they hand to executives in any detail.  They almost never seem to feel that their own executives are anything less than above average, despite facts that might cast doubt on this assumption, and almost always seem to feel that their executives are entitled to be paid at least as well as their peers.  This suggests at best a lack of critical thinking by board members, and at worst, crony capitalism.

Making hospital leaders feel entitled to make more and more regardless of their or their institutions' performance seems to be a recipe for "CEO Disease," leading to disconnected, unaccountable, self-interested leaders.  The increasing prevalence of CEO disease in health care may explain why costs keep increasing, access keeps declining, and quality and safety are stagnant. 

So, as I have said before,.... health care organizations need leaders that uphold the core values of health care, and focus on and are accountable for the mission, not on secondary responsibilities that conflict with these values and their mission, and not on self-enrichment. Leaders ought to be rewarded reasonably, but not lavishly, for doing what ultimately improves patient care, or when applicable, good education and good research. On the other hand, those who authorize, direct and implement bad behavior ought to suffer negative consequences sufficient to deter future bad behavior.


If we do not fix the severe problems affecting the leadership and governance of health care, and do not increase accountability, integrity and transparency of health care leadership and governance, we will be as much to blame as the leaders when the system collapses.

Will a Pharmaceutical CEO Finally Be Held Accountable for Misbehavior on His Watch?

It appears there may be a move afoot to have the leader of a large health organization suffer some negative consequences for the misbehavior of his organization.  As reported by the St Louis Post-Dispatch,

For the past 34 years, Howard Solomon has presided over Forest Laboratories Inc., a midsize pharmaceutical company that runs its national sales operations from Earth City.

Solomon, 83, took home $8.3 million last year as the company's chairman, president and chief executive officer. But his company's marketing arm also fell into trouble, pleading guilty to federal charges that its sales force illegally marketed the antidepressants Celexa and Lexapro to children and adolescents, even though these drugs had not been approved for minors.

Now, the federal Department of Health and Human Services is attempting to oust Solomon from his job. According to the company, the agency's Office of Inspector General advised Solomon, a Yale Law School alum, last week that it planned to exclude him from doing any business with federal Medicare and Medicaid programs.

The move � similar to the government's exclusion of KV Pharmaceutical's former chairman, Marc Hermelin � is part of a new effort by regulators to use this enforcement tactic to root out 'untrustworthy individuals' who knew or should have known that health care fraud was being committed on their watch.

This appears to be big news. As we have discussed ad infinitum, there has been a parade of legal settlements by large health care organizations of charges of various kinds of wrong-doing. Some of these settlements have involved apparently large monetary penalties. However, the settlements have almost never been accompanied by any negative consequences for the people who authorized, directed or implemented the bad behavior.

The concern all along has been that monetary settlements may just be regarded as a cost of doing business, and as long as misbehavior is lucrative, such settlements have no deterrent effect. In fact, the current practice seemed to grant impunity to corporate leaders. Actually barring a corporate executive from Medicare, which could result in the collapse of his company were he or she not to resign, would be a significant step towards accountability.

Note that the St Louis Post-Dispatch article documented the rarity of imposing any negative consequences on corporate health care executives:

Prosecutors have long been criticized for seldom filing charges against individuals associated with drug companies that are convicted of criminal conduct. Huge fines in recent years against Pfizer Inc. and Eli Lilly & Co., for example, did not stop their chief executives from continuing in their jobs.

Also,

Solomon, who joined the company in 1977, would become the second drug company executive barred from doing business with federal health care programs under a specific provision of the law that authorizes the exclusion of individuals who have not been convicted of a crime.

In October, the agency's Office of Inspector General posted 'guidance' saying that, when there is evidence that an owner/operator or company officer "knew or should have known" of his organization's criminal conduct, the agency 'will operate with a presumption in favor of exclusion.'

Hermelin, an owner/operator of KV Pharmaceutical, was excluded in November from federal health care programs for 20 years � and stepped down from the company's board of directors. He pleaded guilty last month to two criminal misdemeanors connected with his firm's shipment of oversized morphine tablets, and was sentenced to 30 days in the County Jail.

In addition, three executives of the Connecticut-based pharmaceutical company Pardue Frederick were excluded for 15 years from federal health programs under a different provision of the law, after their guilty pleas in 2007 in connection with the misbranding of the painkiller OxyContin.

Meanwhile, it seems that health care corporate CEOs can find academics who will defend their actions no matter what.  It was instructive to see one such defense of Solomon described in the Post-Dispatch article:

Jackson Nickerson, a professor of organization and strategy at Washington University's Olin Business School, said the agency's 'underlying model' for exclusion appeared to be an example of over-regulation.

'It's predicated on the assumption that if a company has done something wrong, it must mean the senior executives have done something wrong,' he said. 'You are branded as being unethical if a subordinate makes a decision that turns out to be a bad one.'

Nickerson said that to encourage innovation, company executives needed to delegate certain responsibilities to employees lower down in the organization. 'The dilemma is, how do you engage in global competition and decentralize, while at the same time be held accountable as an individual leader?'

It does seem that it would be hard for top corporate executives to keep their eyes on the actions of all subordinates. On the other hand, it also seems that top corporate executives have justified their out-sized compensation by taking personal credit for everything good that happens to their organizations. If they want such credit, why should they escape responsibility when some actions go wrong?

Note that Prof Nickerson played the "innovation" card. A common justification for many corporate health care practices is that they enable innovation. This argument is thrown around so often I begin to suspect it comes from corporate public relations' talking points. (See this post about the development of such talking points.) Of course, the more a corporation is truly decentralized to support innovation, the less it can argue that the top executives deserve huge salaries because of their close involvement in everything that goes on at that corporation.

Furthermore, while Forest Laboratories' previous marketing practices might have been innovative, that did not make them ethical. As we noted in an earlier post, the company was accused of marketing anti-depressants to children when they had only previously been approved for adults. Their marketing tactics allegedly included suppressing negative studies, and paying physicians to prescribe the drugs. The company pleaded guilty to obstruction of justice for lying to the FDA during a plant inspection, and to misdemeanor charges of misbranding and distributing an unapproved drug contrary to an FDA directive.

In addition, an earlier post summarized memos made public by a congressional investigation about Forest Laboratories' marketing of Lexapro. These included coopting medical education, "key opinion leaders," and medical associations for marketing purposes:
- The marketing plan from the marketing department paid for medical education as a "promotional objective," that is, to market, not to educate.
- Thought leaders and consultants were again paid by marketing to market, and sometimes to provide opinions about "promotional strategies" and "commercial development."
- Medical associations are funded by marketing "for commercial and policy activities."

So the facts in the Forest Laboratories case make protests that holding corporate leaders accountable for misbehavior on their watches will stifle innovation seem disingenuous. Furthermore, it makes no sense to pay top corporate leaders outrageous amounts for everything good that happens on their watch without similarly holding them accountable for everything bad that happens then.

If the US government is really going to hold one corporate leader responsible for misbehavior by his subordinates on his watch, that would be a step forward.  As we have said again and again, we will not deter unethical behavior by health care organizations until the people who authorize, direct or implement bad behavior fear some meaningfully negative consequences. Real health care reform needs to make health care leaders accountable, and especially accountable for the bad behavior that helped make them rich.

"Health Professionals for a New Century": Calling for "Ethical Conduct," a "New Professionalism," and Improved "Stewardship" and "Social Accountability"

A major article just published in the Lancet urged global reform of health care education  [Frenk J, Chen L, Bhutta ZA, Cohen J, Crisp N, Evans T et al. Health professionals for a new century: transforming education to strengthen health systems in an interdependent world.  Lancet 2010; 376: 1923-1958.  Link here.]

The problems it recognized included

• "Pitifully modest" spending for health professional education, compared to overall health spending
• Health care systems that are "dysfunctional and inequitable," due in part to "commercialism in the professions," leading to "breakdown ... especially noteworthy within primary care, in both poor and rich countries."
• For profit medical education leading to "a so-called de-Flexnerisation process ... in which low-quality professional schools might be proliferating...."
• Health care corruption, e.g., "the Indian press has reported illegal payments by new private schools seeking accreditation...."

The solutions it advocated included
- Fostering "ethical conduct" by professionals, developing a "new professionalism," earning trust "steered by ethical commitment and social accountability."
- Improving "stewardship mechanisms, including socially accountable accreditation"

It is nice to be in such good company.  While the report was written in the subtle, diplomatic language of international public health, it was the only such authoritative report to appear in a widely circulated, highly respected medical journal that I can recall that was this direct about the seriousness of such problems.

In fact, not only is little spent on actual medical education within academic medical institutions, but faculty members are valued more for the money they bring in than for their teaching.  Commercialism in health care has been institutionalized in the last 30 years (for discussion of its history in the US, look here, here, and here.)  The Transparency International Global Corruption Report of 2006 asserted "the scale of corruption is vast in both rich and poor countries," yet has gotten almost no notice in medical, health care research, and health care policy circles.  In 2009, the US Institute of Medicine published a detailed report including fairly strong recommendations on Conflict of Interest in Research, Education and Practice.  The anechoic effect, however, has dictated that discussion of striking examples of mission-hostile management, conflicts of interest, and outright crime and corruption is simply not done, especially in medical, health care, or health policy venues and journals.  The 2006 TI and 2009 IOM reports have infrequently been cited, and their recommendations have widely been ignored.

I do hope that the appearance of a publication as authoritative as the article by Frenk et al leads to some soul-searching by the leaders of health care around the world.  They need to realize that despite the article's measured tones, the problems really are severe, and even more broad than the article implied.  We have discussed in detail how health care education (and all of health care) are hurt by concentration and abuse of power, by governance that lacks accountability, integrity, and transparency; by leadership that ignores the context, core values and mission, promotes self-interest and conflicts of interest, and sneers at ethics; and by results such as suppressed and manipulated research, deceptive and dishonest education (look here, here, and here for examples), stifling of academic freedom and whistle-blowers, then dissatisfied, burned out faculty (here), and finally the final common pathway of rising costs, declining access, and poor quality.  

It is heartening that the importance of our concerns has been corroborated in such a notable venue.  I hope this report gathers less dust than the 2006 Transparency International Global Corruption Report and the 2009 Institute of Medicine conflict of interest report.

I suggest that to truly reform health care education (and health care itself), we will have to attend to the sorts of problems we write about on Health Care Renewal.  On one hand, we will need to improve the stewardship, governance, and leadership of health care education itself, and reduce the pervasive conflicts of interest that ensnare the faculty.  On the other, we will need to make sure education prepares students to deal with these problems in health care at large.

It would be nice if the appearance of the Lancet article signifies that help will soon be at hand to tackle the huge amount of work that needs to be done, in the face of likely withering opposition from those who have enriched themselves from the dysfunctionality of the current system.  We at Health Care Renewal will continue to try to draw attention to these issues, accompanied I am sure by our fellow bloggers (as are listed in the right hand column).  However, a small group of voluntary "citizen journalists," and health care professional curmudgeons cannot solve this problem on our own. I hope we will soon have some more support.

ADDENDUM (14 December, 2010) - See also comments by Paul Levy on the Running a Hospital blog.

"This is Really Going to Set People's Hair on Fire" - the Justice Department Indicts a Pharmaceutical Company Vice President and Associate General Counsel

We have been posting nearly every week about the parade of legal settlements, sometimes including guilty pleas to criminal charges, made by health care organizations.  The settlements have involved charges of kickbacks, fraud, conspiracy, and other colorful offenses. Most of these settlements entailed fines or other payments by the organizations that may seem huge, but were fractions of the amounts made by the practices that lead to the charges that were settled.  Almost never have the cases involved penalties for any individuals who authorized, directed, or implemented the misbehavior.  We have also been saying (seemingly endlessly, but most recently here) that such settlements may be viewed by organizations as merely the costs of doing business, and so until the actual people who were involved in the bad behavior suffer some negative incentive or penalty, expect the behavior to continue. 

Maybe things are changing.  In the New York Times, Duff Wilson wrote:

In a rare move, the Justice Department on Tuesday announced that it had charged a former vice president and top lawyer for the British drug giant GlaxoSmithKline with making false statements and obstructing a federal investigation into illegal marketing of the antidepressant Wellbutrin for weight loss.

Specifically,

The indictment accuses the Glaxo official, Lauren C. Stevens of Durham, N.C., of lying to the Food and Drug Administration in 2003, by writing letters, as associate general counsel, denying that doctors speaking at company events had promoted Wellbutrin for uses not approved by the agency. Ms. Stevens 'made false statements and withheld documents she recognized as incriminating,' including slides the F.D.A. had sought during its investigation, the indictment stated.

An Associated Press story provided more detail about the allegedly false statements:

The Department of Justice alleges that in 2002, Lauren Stevens of Durham, N.C., signed several letters to the Food and Drug Administration denying that her company had promoted an antidepressant drug for unapproved uses. But Stevens knew that the company had paid numerous physicians to give talks touting unapproved uses of the drug, including weight loss,....

Also,

In one instance, prosecutors say Stevens withheld slides used by physicians promoting the company's drug, even though the FDA had asked specifically for the materials. Stevens claimed that the company's response to the FDA was 'final' and 'complete,' according to the indictment.

Stevens also falsely denied that Glaxo had paid doctors to attend special sessions where medical experts discussed unapproved uses of Wellbutrin, according to the Department of Justice.

'Attendees were not paid, reimbursed or otherwise compensated to attend these events,' Stevens wrote in a 2003 letter to the FDA. But prosecutors say attendees received gifts, entertainment and other compensation in return for attending the events.

During 2001 and 2002, Glaxo paid two expert physicians to speak about 500 times each about Wellbutrin, including how to use the drug to treat obesity.

In addition, a CBS News story suggested that Ms Stevens was made aware of the nature of the information withheld:

In March of 2003, the indictment alleges, Stevens received a memo from other lawyers at GlaxoSmithKline analyzing the pros and cons of turning over the slides to the FDA. One of the cons listed in that memo was that turning over the slides would provide 'incriminating evidence about potential off-label promotion of [the drug] that may be used against [the corporation] in this or in a future investigation.'

An indictment of an individual, particularly a high-ranking corporate executive, seems to have gotten people's attention, e.g., as Duff Wilson wrote in the Times:

The indictment grabbed the attention of pharmaceutical executives who have been bracing for a long-promised government crackdown on company officials � rather than the corporations themselves � in drug-fraud cases that have resulted in billions of dollars in fines and payments.

'This is absolutely precedent-setting � this is really going to set people�s hair on fire,' said Douglas B. Farquhar, a Washington lawyer who recently presided at a panel on law enforcement during a drug industry conference where federal officials warned they were focusing on individuals. 'This is indicative of the F.D.A. and Justice strategy to go after the very top-ranking managing officials at regulated companies.'

My response is, of course, that the threat of this sort of action is absolutely what is needed to deter future bad behavior by health care organizations. As long as health care leaders could act with impunity, the fraud, kickbacks, conspiracy etc were continuing. Worse, given their impunity, why would anyone but an idealistic fool attempt to swim against the tide of rising sleaze in health care?  How could skeptics and critics of the status quo in health care gain any traction?

Now maybe this sort of action may finally lead self-satisfied, unreflective health care executives to think about what they are doing and its ethical and moral aspects. The NY Times article included this statement in defense of Ms Stevens:

Brien T. O�Connor, a lawyer with Ropes & Gray, said in a statement, 'Lauren Stevens is an utterly decent and honorable woman. She is not guilty of obstruction or of making false statements. Everything she did in this case was consistent with ethical lawyering and the advice provided her by a nationally prominent law firm retained by her employer specifically because of its experience in working with F.D.A.'

I actually would guess that Ms Stevens believes she did nothing wrong. I would guess that most of the numerous health care leaders who have been caught up in bad behavior also thought they did nothing wrong. After all, they were all very well paid, lived in nice houses in nice neighborhoods, drove fancy cars (when they did not have a paid car and driver), were respected in their communities, did charitable works, etc. How can fine people who look so respectable do anything wrong? But, of course, the veneer of respectability does not prevent unethical or immoral behavior. Making one's numbers, getting one's bonuses, all from doing the big boss' wishes do not certify one's actions as ethical or moral. Perhaps making corporate health care leaders actually accountable for their actions will lead them to think about whether their actions are really as upstanding as their accoutrements of social status make them feel.

My final comment is that it may be significant that this case involved a lawyer. On one hand, attorneys have been at the forefront of what little movement there is to improve the accountability, integrity, and transparency of health care organizations. On the other hand, the leadership of many health care organizations have lawyered up to defend their actions. Organizational lawyers have been known to sweet-talk, obfuscate or intimidate those who dare to criticize the organizational leaders' actions. Anyone who is a vocal skeptic of the powers that be in health care must know there is a constant risk of some corporate counsel or hired firm threatening a libel, slander, or tortious interference action. Any individual who dares to be skeptical must be worried that the leaders of large health care organizations can use a lot of other peoples' money to pay for lawyers to push such actions, while individual skeptics facing threats of suits for huge amounts of damages are not likely to have enough money of their own to keep fighting. So I hope that the current case will also push attorneys who make a lot of money protecting the status quo in health care to reflect on the ethics and morality of what they are doing.

ADDENDUM (10 November) - Also see comments by Prof Margaret Soltan on the University Diaries blog.

BLOGSCAN: Florida Doctors Endorse Ex- Columbia/ HCA CEO for Governor

Rick Scott was the CEO of for-profit hospital chain Columbia/ HCA.  The company ended up settling civil and criminal charges for $1.7 billion.  Like many other examples in the march of legal settlements about which we have often posted, no individual who authorized, directed, or implemented the relevant bad behavior suffered any sort of negative consequence or paid any penalty.  Rick Scott left the company, but with a golden parachute.  Now he his running for Governor of Florida, using a substantial amount of his own money (but money that probably mostly came from Columbia / HCA). (See post here.)  He may be in the lead.  And the Florida Medical Association has just endorsed him.  In the Health Beat blog, Maggie Mahar is all over this story.  Read it and weep.  Remember another good reason for the people who lead health care organizations to be truly accountable for their actions.

An Attempt to Hold Health Care Leaders Accountable for Their Organizations' Bad Behavior?

We have frequently noted how health care organizations accused of kickbacks, fraud, and other unethical and sometimes illegal behavior involving how they produce or market health care products or services often are allowed to settle the charges only with a fines to the companies, and sometimes with corporate integrity agreements.  Almost never are the people who authorized, directed, or implemented the unethical behavior required to pay any sort of penalty.  We recently commented on a case in which an executive of a medical device company accused of exaggerating the performance of a diagnostic test in development was charged, not with misleading doctors or patients by the US Food and Drug Administration (FDA), but with misleading investors by the US Securities and Exchange Commission (SEC).  That executive lost her job, and will be barred from leading any public company.

So up to now, a corporate executive responsible for misleading doctors or patients about issues that could affect clinical decisions or outcomes likely would never pay a penalty, but one responsible for misleading  investors about similar issues could lose his or her job and livelihood.

Now, per an article in Fortune, it appear the situation may be changing,

The federal government is fed up with the amount of fraud, especially recurring fraud from the same companies, happening in the pharmaceutical industry. So regulators have decided that when it comes to punishments, it's time to get personal.

From now on, individual executives risk being ejected from their jobs -- and perhaps even barred from the industry -- for fraud their companies commit, even if they did not participate or even know about the crimes.

Furthermore,

The new approach, emerging from the unusually powerful Inspector General's office in the Department of Health and Human Services, reflects frustration with corporate recidivism even in the face of ramped-up fines, penalties and disgorgements.

'We are going to start to use that authority in the appropriate circumstances to get high level executives out of companies, so that the company has a better shot at changing its behavior, so that it does not become a recidivist,' explains Lewis Morris, chief counsel to the Inspector General.

The article noted some cases in which even large fines and corporate integrity agreements seemingly failed to deter future bad behavior by the companies which paid these penalties. For example,

In the government's most recent major settlement -- in which AstraZeneca agreed to pay $520 million -- the fine represented 16.5% of the $8.6 billion income (between 2001-2006) from U.S. sales of Seroquel, a powerful anti-psychotic. AstraZeneca (AZN) turned this narrowly approved drug into a cash cow by marketing it for much wider use, including by the elderly and children, even though they are particularly vulnerable to 'serious and debilitating side effects.'

All the while, AstraZeneca was operating under a corporate integrity agreement (CIA) with the Inspector General, imposed after a 2003 off-label marketing case.

We discussed the AZ settlement here in October, 2009. We asked then, "Does anyone really still believe that integrity agreements, and settlements assessed against huge corporations deter such profitable bad behavior?"

Another example:

Drug company Pfizer (PFE, Fortune 500), which was fined $2.3 billion just last September, is now on its third CIA. Steeper fines and harsh individual penalties should help put more teeth into these agreements and keep companies from flouting them.

We discussed the repeated lack of effect of settlements by Pfizer here in September, 2009. We concluded, "So will even a $2,300,000,000 settlement and yet another corporate integrity agreement make Pfizer or any other health care corporation act more ethically? I doubt it."

The Fortune article quoted Peter Rost, former Pfizer executive turned whistle-blower and ethics advocate (and to whose blog I offer a hat tip for first mentioning the Fortune article), on aspects of corporate culture and corporate incentives that foster repeated unethical behavior by management,

'Usually by the time someone becomes a senior executive they are very aware of the pitfalls in the organization, and they have become masters at not doing something wrong or not getting caught doing something wrong,' explains Peter Rost, a former senior Pfizer executive turned industry gadfly.

Incentive-based compensation systems -- typically 40% to 50% of salespeople's income comes from hitting their numbers -- are one weak point. 'They are going to work real hard to increase those numbers and do whatever it takes, and if they think somebody gave them a wink about doing this or that, they are going to run with it.' says Rost.

Booting senior executives out for any fraud under their watch might end the wink-and-nod system, giving hope to critics.

In my humble opinion, the government's new approach looks like real progress. Giving corporate executives personal impunity was a recipe for increasing unethical, and sometimes criminal behavior. The sorts of marketing fraud they authorized or directed certainly lead to increasing costs, and overuse of unnecessary and sometimes harmful tests and treatments. While there have years of complaints about health care's increasing costs and decreasing quality in health policy circles, it is just amazing that until now, there has been so little action against the bad behavior that was undoubtedly responsible for much of these problems.

So three cheers for making health care organizations' leaders accountable for the bad behavior of their organizations.

After cheering, however, there ought to be some serious inquiry about why they were not held accountable much sooner.  It turns out that there has been legal justification for holding leaders so accountable available for a long time:

All that's required for the government to flex this remarkably broad authority -- embedded in the Responsible Corporate Officers Doctrine -- is that the executives were in a position to have stopped the fraud that resulted in a criminal conviction or plea.

Note that the Responsible Corporate Officers Doctrine apparently derives from a US Supreme Court case about the selling of misbranded or adulterated drugs into interstate commerce under the US Food and Drug Act, decided in 1943.

However, it looks like in the hyper laissez faire climate of the last 20 or more years, no one wanted to bother to invoke it. After all, the formerly highly regarded leader of the US Federal Reserve believed there was no need for regulators to punish fraud, because the magic of the market would take care of it. US health care has paid a heavy price for such breathtaking naivete (see the PBS Frontline show, "The Warning." )

The Stewards of an Elite University, or a "Politburo" of "Shadow Bankers?"

We have postulated that one of the key reasons US health care has become so dysfunctional is that the leaders of some of the most august health care institutions have strayed from, if not totally abandoned their organizations' fundamental missions.  There are many possible reasons for this phenomenon, but one is that the ultimate stewards of not-for-profit health care organizations, their boards of directors or trustees, have become uninterested in the mission, or impotent to uphold it.  So, we have tried to figure out what has happened to these boards that has lead to this sorry state.

Dartmouth College: the Packing of the Board of Trustees

One example we have come frequently discussed (beginning here) is that of Dartmouth College, despite its name, really a university, and one of the elite American universities which includes a well-regarded medical school.   For a long time, Dartmouth had one of the more accountable and representative systems of governance found in US universities.  Recently, however, this accountability and transparency was challenged by some of the College's own leaders. 

Most boards of trustees are self-elected.  When an old member leaves, the new members elect his or her successor.  Dartmouth alumni, however can elect eight members of the board of trustees. Until recently, eight others were "charter trustees," who were individually chosen by the other charter trustees, and two were ex-officio. Although the College's Association of Alumni traditionally nominated alumni to run for trustee positions, candidates could be nominated by petition, and starting in 2004, four such petition candidates were elected.

As described by FIRE, the Foundation for Integrity and Responsibility in Medicine, this more open process fostered change in how the university was lead, and seemed to foster renewed attention to the institution's mission:

These trustees spoke out when they perceived their alma mater as not living up to its mission, and Dartmouth students benefited. In May 2005, the college repealed its speech code, and it immediately moved from FIRE's 'red-light' rating and became a 'green-light' institution.

As might be expected, the reigning leadership was not pleased.

Some campus officials viewed the propensity of petition candidates to voice their opinions on illiberal policies as detrimental to the school's image. The Wall Street Journal profiled T.J. Rodgers, a petition-nominated trustee, who explained the criticisms leveled at the 'divisive dissidents.'

'If 'divisive' means there are issues and we debate the issues and move forward according to a consensus, then divisive equals democracy, and democracy is good. The alternative, which I fear is what the administration and [Board of Trustees Chairman] Ed Haldeman are after right now, is a politburo-one-party rule.'

In 2007, in apparent response to the "divisiveness" of the petition trustees, the Charter Trustees proposed increasing their own numbers. Chairman Ed Haldeman's rationale for this, as we discussed here, was to ensure that the board "has the broad range of backgrounds, skills, expertise, and fundraising capabilities needed," and that the board members would possess "even more diverse backgrounds."

Charter Trustees or "Shadow Bankers"?

Yet when we examined the backgrounds of the current charter trustees, we found that they exhibited little diversity. Remarkably, three-quarters (6/8) were in leaders of the finance sector. The board chairman, Ed Haldeman, was then the leader of Putnam Funds.  Now, he is the CEO of "Freddie Mac."  In 2007, the significance of this kind of lack of diversity were not clear.  However, it did seem strange that those accused of seeking to form a "politburo" came from the Wall Street, the street that the left once loved to hate.

However, by late 2008, the world economy descended into an unprecedented financial collapse. Many concluded that the global economic collapse was caused by arrogance, greed, and corruption within the financial sector. This suggested that leadership of academia, and academic medicine in particular, by leaders of the finance sector might not, in retrospect, have been a such a good idea. When we reexamined the composition of the now enlarged cohort of Charter Trustees, however, we found nine of 13 "charter" trustees were leaders in finance, now including three in asset management, two in private equity, one in the field formerly known as investment banking, one in venture capital, one in mutual funds, and one in strategic consulting and investment. Of the remaining four, one was the CEO of a large diversified corporation that has a major finance subsidiary. The remaining three were two physicians and a pharmaceutical corporate CEO.

Given the ongoing financial chaos at the time, we again suggested that a board dominated by business leaders in the finance sector might not be a good idea. Last week, a report came out suggesting why we were right.

Charter Trustees as Dartmouth's Own "Shadow Bankers"

"Educational Endowments and the Financial Crisis: Social Costs and Systemic Risks in the Shadow Banking System," published by the Center for Social Philanthropy, Tellus Institute, focused on how prominent educational institutions, including Dartmouth College, came to invest much of their endowments in risky, illiquid "alternative" investments, the sort provided by the "shadow banking system." The report noted that this change lead to greater financial risks, leading to recent losses and consequent sharp cutbacks in spending, programs, and employment at the affected institutions. In particular, however, it focused on leadership and governance problems at the institutions that lead to this state of affairs.

Although the emergence of the high-risk Endowment Model of Investing has taken place against the backdrop of powerful forces of financial globalization and the influence of Modern Portfolio Theory, its consolidation and influence today at colleges and universities depend vitally on college leaders: senior administrators, trustees, and investment managers, especially the increasingly prominent role of chief investment officer, or CIO. The financial crisis has in many ways been a crisis of leadership. The precipitous declines endowments have suffered during the credit crisis need to be understood as the logical outcome of the Endowment Model�s high risk strategies, but behind the model stand those who are ultimately responsible for its execution: whether as professional money managers, investment officers, affiliated investment management companies, outside managers, or investment consultants, or as the fiduciaries sitting on governing boards and investment committees.

At Dartmouth, in particular, the report focused on conflicts of interest among the board of trustees:

When it comes to weakened endowment oversight, the most glaring problem arises from trustees from the finance industry whose firms provide investment management services. One of the most disconcerting cases in this respect is that of Dartmouth College, where the sudden departure of CIO David Russ in 2009 created a leadership vacuum over endowment management. The college�s investment committee chair and trustee Stephen Mandel has played the CIO role on a voluntary, part-time basis since last summer and will continue to do so until he becomes chair of the board of trustees later this year. At the same time, Mandel�s firm, Lone Pine Capital LLC, a well known hedge-fund complex he founded in 1997, has also managed an investment mandate from the college�s endowment valued originally at $10 million. Although the college has a conflict-of interest policy and is required to disclose such 'pecuniary benefit transactions' with the state of New Hampshire, it would seem difficult for fellow trustees to provide proper oversight of investments managed by a fellow trustee serving as the de-facto CIO. Additionally, if Mandel recuses himself from committee or board deliberations related to his firm, then the investment committee must function without its chair.

However, the problem is magnified because Mandel is only one of more than half a dozen Dartmouth trustees whose firms manage multimillion-dollar investments for the endowment, according to the college�s filings with Charitable Trusts Unit of the New Hampshire Department of Justice. Leon Black�s firm Apollo Management has reportedly managed at least $40 million in Dartmouth investments. Russell Carson�s private equity firm[Welsh, Carson, Anderson and Stowe] has reportedly received at least $45 million in commitments of capital from Dartmouth. William Helman, IV�s venture capital firm Greylock Partners, has reportedly received $10 million investment mandates from the college, while R. Bradford Evans� firm Morgan Stanley has done multiple transactions
with the college, varying from investments in international real estate and hedge funds to bond issuances, all at undisclosed levels. P. Andrew McLane [T A Associates] and Jonathan Newcomb [Leeds Weld and Co] have also had reported interests in college investments at undisclosed levels. For an endowment of its size� Dartmouth�s endowment fell to less than $3 billion in fiscal year 2009�the deep dependence on trustees� own businesses for endowment management seems disproportionate.

Thus, one half of the membership of Dartmouth's Charter Trustees were also being paid by Dartmouth to manage its endowment investments.  However, as the Tellus Institute report noted,

Leading experts on nonprofit board governance, such as Richard Chait at Harvard University, stress that colleges should simply not do business with the companies of their board members, in order to avoid inevitable distractions and the sense of divided loyalties that arise, to say nothing of appearances of self-dealing and personal enrichment

Another "Missing Link": Board Members Doing Business with the Organizations They are Supposed to Steward

We have frequently discussed the web of conflicts of interest that now permeates health care.  Most of the conflicts we have discussed up to now involve physicians or academicians who have financial ties to pharmaceutical, biotechnology, and device companies.  Health care organizational leaders also do business  with the organizations they lead have not until recently been a topic of discussion, mainly because such conflicts of interest have rarely been disclosed.

It looks like this is going to change.  The US Internal Revenue Service sought disclosure of such conflicts of interest affecting hired executives and boards of trustees of not-for-profit organizations beginning in 2009.  These disclosures, reported on IRS form 990, are just beginning to be made public.  We just posted about members of the board of directors of a large academic health care system who also lead or owned companies that did substantial business with the system.  Now we see that a substantial portion of the board of trustees of Dartmouth lead financial firms that managed a major portion of the College's endowment, perhaps to the overall detriment of the endowment's performance.  No wonder the Charter Trustees got nervous about petition trustees poking about their business.

 As summarized by BoardSource, there are three traditional duties of members of boards of trustees of not-for-profit organizations:

Duty of Care

The duty of care describes the level of competence that is expected of a board member, and is commonly expressed as the duty of "care that an ordinarily prudent person would exercise in a like position and under similar circumstances." This means that a board member owes the duty to exercise reasonable care when he or she makes a decision as a steward of the organization.

Duty of Loyalty

The duty of loyalty is a standard of faithfulness; a board member must give undivided allegiance when making decisions affecting the organization. This means that a board member can never use information obtained as a member for personal gain, but must act in the best interests of the organization.

Duty of Obedience

The duty of obedience requires board members to be faithful to the organization's mission. They are not permitted to act in a way that is inconsistent with the central goals of the organization. A basis for this rule lies in the public's trust that the organization will manage donated funds to fulfill the organization's mission.

Letting a board member's firm manage millions of dollars worth of the institution's endowment portfolio seems an obvious violation of the duty of loyalty. (Letting a board member's legal firm handle the institution's legal issues, or having a board member's advertising firm do its marketing, as described in our earlier post, also seem to be obvious violations of this duty.) A board member who sees nothing wrong with doing business with the organization he or she is supposed to steward would likely see nothing wrong in allowing the organization's mission to become a casualty of the means used to protect that business relationship.

I suspect we are soon to see many more examples of hired executives and board members of revered not-for-profit organizations who have been doing business on the side with the organizations of which they are supposed to be leaders or stewards.  These sorts of conflicts of interest may be another "missing link" explaining why the leadership and governance of health care organizations has gone so far astray. 

As disclosure continues, maybe enough outrage will ensue so that improved leadership and governance will become possible. 

$19 Million Means Never Having to Say You Are Sorry?

Johnson and Johnson, the giant diversified health care company, recently shut down a factory that manufactured non-prescription childrens' medication, and recalled its products.  The findings from a US Food and Drug Administration (FDA) inspection of the plant were striking.  As described by Reuters,

The company recalled 40 widely used children's pain and allergy medications, saying some may have a higher concentration of their active ingredients, while others may be contaminated. J&J has had four recalls in the past year of over-the-counter medicines.

In an FDA report issued on Tuesday, inspectors said they found thick dust, grime and contaminated ingredients at the J&J plant that produces Children's Tylenol and dozens of other products recalled last week.

This infuriated the member of Congress who chairs a sub-committee which oversees the FDA:

Democratic Representative Rosa DeLauro sent a letter to the Food and Drug Administration asking questions about how the agency can respond to recalls and quality control lapses.

'I am concerned that the agency does not possess the authority to take appropriate action to address potentially criminal behavior by a corporation,' DeLauro wrote in the letter to FDA Commissioner Margaret Hamburg.

Furthermore,

DeLauro, in her letter, said the company's 'disregard' for manufacturing standards was 'both unnerving and unethical.'

'The corporate oversight observed at this facility appears to be symptomatic of reckless behavior that is clearly unacceptable,' she wrote.

The Reuters report then noted:

J&J has called the manufacturing problems unacceptable and vowed to fix them. The company has suspended production at the Pennsylvania plant where the recalled children's products are made.

Moreover, the company CEO took to the blogsphere (via the company's JNJ BTW blog) to give his response (below in its entirety).

To All Who Use Our Products,

We have a responsibility at Johnson & Johnson to provide you with the highest-quality products possible, and we have worked hard to fulfill that responsibility day-by-day for over a century.

The recent recalls of some over-the-counter medicines from our McNeil Consumer Healthcare operating company are a matter of great concern. They are a disappointment to me, and to the employees of the Johnson & Johnson Family of Companies. You can be confident that we will make whatever changes are needed at McNeil to fully restore the quality of its manufacturing.

As reported, McNeil has suspended all manufacturing operations at its facility in Fort Washington, Pa., until we can be sure that they are operating under the standards we demand of ourselves, and which our customers expect of us. McNeil has also retained independent quality experts to assist in this regard and is re-evaluating quality systems and manufacturing processes across the organization.

I have been assured that the chance of a serious medical event from the recalled products is remote. Even so, this does not give us comfort; one of our companies has let you down.

For now, please check your infants� or children�s forms of TYLENOL�, MOTRIN�, ZYRTEC� or BENADRYL� and discard any medicines that are being recalled. You can check the list of recalled lots, apply for refunds, and get more information about the recall at McNeil�s dedicated website (http://mcneilproductrecall.com), or by calling 888-222-6036.

We will work hard to earn back your confidence.

Sincerely,

Bill Weldon

This seems like a very important case, because it involves a pharmaceutical company apparently violating its most fundamental responsibility, to provide pure, unadulterated medicine to the public.  While the current case did not apparently lead to major health consequences to patients (as did the case of the contaminated heparin), it still suggests very basic flaws with Johnson & Johnson's operations.

Thus, what is striking about the CEO's message is its remote tone.  He characterizes the problems at the factory as a reason for "great concern" and "a disappointment."  Such language seems designed to reduce the CEO's own connection to the problems at the factory.  This is the language one might use to describe someone else's conduct.  (For example, Politician X's vote on the bill "caused me great concern," and "was a disappointment.")

On the other hand, although the CEO wrote about collective responsibility, ("we have a responsibility at Johnson and Johnson,"), he never suggested he had any responsibility or was accountable for what happened. 

Of course, we have frequently seen language like this when health care organizations are accused of practices that violate their fundamental responsibilities, or could threaten health and safety.  Rather than embracing responsibility, often leaders use language that suggests a fear of admitting anything that could create legal liability.

However,  supposedly the rationale for entrusting so much power, and providing so much compensation to CEOs and other top executives, including those of health care organizations, is the tremendous responsibility they undertake.  In fact, the Johnson & Johnson 2010 proxy statement provides this justification for the executives' stratospheric pay:

Pay for Performance �All components of compensation should be tied to the performance of the individual executive officer and his or her specific business unit or function and/or the Company overall.
� Credo Values� The manner in which financial and strategic objectives are achieved is important. While not always quantifiable, the manner in which employees achieve results should also be a key element of the individual performance review process. During the performance review process, the Company�s set of core values�trustworthiness, respect, responsibility, fairness, caring and citizenship�as set forth in Our Credo should be used to assess how objectives are achieved.
� Accountability for Short- and Long-Term Performance � Annual performance bonuses and long term incentives should reward an appropriate balance of short- and long-term financial and strategic business results, with an emphasis on managing the business for the long-term.

It then goes on the emphasize the company's Credo:

Importance of Credo Values

For more than 65 years, the Johnson & Johnson Credo has guided the actions of the Company and its executive officers in fulfilling their responsibilities to the Company�s customers, employees, community and shareholders. In assessing the executive officers� contributions to the Company�s performance, the Committee not only looks to results-oriented measures of performance, but also considers how those results were achieved� whether the decisions and actions leading to the results were consistent with the values embodied in the Credo� and the long-term impact of an executive officer�s decisions. Credo based behavior is not something that can be precisely measured and, thus, there is no formula for how
Credo-based behavior can, or will, impact an executive�s compensation. The Committee and the Chairman/CEO use their judgment and experience to evaluate whether an executive�s actions were aligned with the Company�s Credo values.

Thus, last year Mr Weldon's total compensation was $19,847,026. Such an amount ought to pay for a vast amount of responsibility and accountability. (Also, the total compensation of Ms C A Goggins, the Worldwide Chairman of the Consumer Group, who I presume to the the executive just below the CEO who is responsible for products made by the factory which had to be closed, was $5,345,737.)

So again the rules for the executives of big health care organizations seem to be heads they win, tails we lose.  They are paid enough to turn them into a new aristocracy supposedly because of the tremendous responsibility and accountability they assume.  However, when things go wrong, responsibility and accountability vanish in a haze of concern and disappointment (with other peoples' actions.)

On Health Care Renewal we continue to be concerned with and disappointed about our dysfunctional health care system, and its worsening problems with costs, quality and access as long as it is lead by people who can become rich without any responsibility or accountability for their actions.  The robber barons that arose in the late 19th century lead our country and the world into the great depression.  The new health care robber barons will soon lead us into the great health care depression. 

A "Very Well Paid Boob" on the Harvard Corporation?

The ongoing investigation of the global financial collapse may also shed some indirect light on what has gone wrong with health care.  Consider the recent testimony by two leaders of the nearly failed, then bailed out global financial giant Citigroup, as reported by the New York Times. One of the leaders was Robert Rubin,

Robert E. Rubin, the former Treasury secretary, faced withering questions from the panel, the Financial Crisis Inquiry Commission, for his spare expressions of remorse. Repeatedly playing down his role as chairman of the executive committee of Citigroup�s board, he was met with anger and disbelief.

'You were either pulling the levers or asleep at the switch,' Philip N. Angelides, the committee�s chairman, told him.

Mr. Rubin stopped short of accepting personal responsibility. He grudgingly conceded that a few savvy investors saw the crisis coming, asserting that nearly everyone in the financial services industry had failed to see a dozen powerful forces � from excessive debt levels to trade imbalance � come together in a perfect storm.

'We all bear responsibility for not recognizing this, and I deeply regret that,' Mr. Rubin said.

Mr. Rubin�s stance left several members of the panel angry. Mr. Rubin earned more than $100 million during a decade at Citigroup.

Mr. Angelides, a former California state treasurer and a fellow Democrat, did not buy it. 'You were not a garden-variety board member,' he said. 'I think to most people chairman of the executive committee of the board of directors implies leadership. Certainly $15 million a year guaranteed implies leadership and responsibility.'

Attempts by Mr Rubin (and to some extent, former Citigroup CEO Charles O Prince III) to disavow responsibility met with more derision. For example, yesterday, see a New York Times editorial:

The latest public hearings of the Financial Crisis Inquiry Commission, held last week, made headlines for eliciting more apologies from financiers who presided over the market collapse.

You may recall a similar flurry last year, when Lloyd Blankfein, the chairman and chief executive of Goldman Sachs, was widely credited for having apologized for his firm�s role in the financial crisis.

We did not buy it then; Mr. Blankfein never said what he was sorry for or to whom he was apologizing. And we are not buying it now.

Mr. Prince says he 'could not' foresee the impending collapse, when he could have and should have seen it coming. Certainly, others did. Mr. Rubin has said that under his employment agreement, he was not responsible for the bank�s operations. But he was a towering figure at Citi, a source of its credibility and prestige. That implies responsibility, no matter what his contract said. Add all that to the 'I wasn�t the only one' context of both men�s comments, and their regret translates as, 'We feel bad about an accident we were powerless to prevent.'

Except that the financial crisis was not an accident and they were not powerless. The crisis was the result of irresponsibility and misjudgments by many people, including Mr. Prince and Mr. Rubin. Citi, under their leadership, epitomized the financial recklessness that ruined the economy.

A Seattle Times columnist was even more harsh, calling Rubin a "very well paid boob," and:

Rubin was barely contrite and went back to his meme of 'who knew?,' adding the unintended comedic line about how leaders shouldn't be responsibility for the 'granularity' of little things -- such as $40 billion in essentially fraudulent collateralized debt obligations. Rubin was being paid more than $100 million as a senior adviser to Citi while it headed toward collapse and a $45 billion taxpayer rescue. So 'granularity' is in the eye of the beholder.

Commission vice chairman Bill Thomas said, 'Apparently you get to the top without having had to experience anything the people underneath you do. You don't have a comprehension. You're not informed, but you get to make all this money on the upside, but there's no downside.'

Indeed. Rubin and Citigroup epitomize the public policies and the corporate practices that brought the economy to the brink of a new depression.

As Bill Clinton's Treasury Secretary, Rubin championed financial deregulation and the financialization of the economy as manufacturing was hollowed out. Among other things he helped keep derivatives from being regulated and encouraged the creation of 'too big to fail' institutions such as Citi. Rubin led the battle to dismantle Glass-Steagall, so Citi and its giant siblings could gamble in investment banking, while also doing commercial banking and insurance. An alum of Goldman Sachs, Rubin was fine with big compensation for executives, even if their leadership wrecked the bank (Prince walked away with $120 million). Funny how Rubin was offered the lucrative Citi position after he left such 'government service.'

So what does this tell us about health care? As we noted before, while Robert Rubin is no longer on the board of Citigroup, he has been a member of the Harvard Corporation since 2001. The Corporation is ultimately responsible for the US' oldest and most prestigious university, its equally prestigious medical school and teaching hospitals. Yet under Rubin's stewardship, Harvard's endowment has fallen a prodigious amount, and Harvard and its Partners Healthcare hospital system have faced charges of conflicts of interest and various sweetheart deals. Perhaps this is to be expected when the ultimate steward may be a "very well paid boob."

While Rubin's impressive resume and wealth in 2001 may have provided a rationale for his appointment to the Corporation, what would be the rationale for his continuing service?

As we have pointed out, as the world economy was driven to near ruin by "masters of the universe," some of the same also became leaders of academia and academic medicine in their spare time. Maybe this made sense 10 or 20 years ago, but why does it still make sense? On the other hand, now that we understand how bad the leadership of finance really was, it is a little easier to understand why the leadership of health care has become so bad.

What Me Worry? - Leaders Prosper Despite Questions About Their Organizations' Ethics and Performance

There were two examples in the recent news about how the leaders of health care organizations seem to prosper no matter what questions are raised about their organizations' ethics or performance.

WellPoint

It seemed that anger over a rate increase by a subsidiary of the huge insurance company/ managed care organization WellPoint was one reason for the revival of efforts in the US to enact some sort of health care reform legislation.  In our comment on this controversy, we noted that questions about the ethics of WellPoint's actions have appeared again and again.  Wellpoint...

• settled a RICO (racketeer influenced corrupt organization) law-suit in California over its alleged systematic attempts to withhold payments from physicians (see post here).
• subsidiary New York Empire Blue Cross and Blue Shield misplaced a computer disc containing confidential information on 75,000 policy-holders (see story here).
• California Anthem Blue Cross subsidiary cancelled individual insurance policies after their owners made large claims (a practices sometimes called rescission).  The company was ordered to pay a million dollar fine in early 2007 for this (see post here).  A state agency charged that some of these cancellations by another WellPoint subsidiary were improper (see post here).  WellPoint was alleged to have pushed physicians to look for patients' medical problems that would allow rescission (see post here).  It turned out that California never collected the 2007 fine noted above, allegedly because the state agency feared that WellPoint had become too powerful to take on (see post here). But in 2008, WellPoint agreed to pay more fines for its rescission practices (see post here).  In 2009, WellPoint executives were defiant about their continued intention to make rescission in hearings before the US congress (see post here).
• California Blue Cross subsidiary allegedly attempted to get physicians to sign contracts whose confidentiality provisions would have prevented them from consulting lawyers about the contract (see post here).
• formerly acclaimed CFO was fired for unclear reasons, and then allegations from numerous women of what now might be called Tiger Woods-like activities surfaced (see post here).
• announced that its investment portfolio was hardly immune from the losses prevalent in late 2008 (see post here).
• was sanctioned by the US government in early 2009 for erroneously denying coverage to senior patients who subscribed to its Medicare drug plans (see post here).
• settled charges that it had used a questionable data-base (builty by Ingenix, a subsidiary of ostensible WellPoint competitor UnitedHealth) to determine fees paid to physicians for out-of-network care (see post here). 
• violated state law more than 700 times over a three-year period by failing to pay medical claims on time and misrepresenting policy provisions to customers, according to the California health insurance commissioner (see post here).

But a few days ago, according to the Indianapolis Star:

Large stock awards helped boost total compensation to top executives at WellPoint by 51 percent to 75 percent last year over 2008.

The big jumps in take-home pay are detailed in the Indianapolis health insurer's annual proxy report to shareholders filed Friday.

Angela Braly, who is chair of the board, president and chief executive, saw her 2009 total compensation rise 51 percent, to $13.1 million. That compares with $8.67 million in 2008 and $14.8 million in 2007.

Braly's salary of $1.14 million barely budged from 2008, but she earned a $6.2 million stock award, almost triple the award she got in 2008.

Total compensation to other top executives:

Wayne DeVeydt, chief financial officer, $7.25 million, up 75 percent from 2008.

Ken Goulet, executive vice president, $4.43 million, up 62 percent.

Dijuana Lewis, executive vice president, $4.46 million, up 64.5 percent.

So whatever top WellPoint executives are paid for, it is not insuring that the company avoids ethical questions about its conduct, or controls health care costs or mdoerates premiums, for that matter. 

Boston Scientific, and Zimmer Holdings

We just commented on the generous compensation given the new and former CEOs of Boston Scientific, despite a series of ethical questions about that company's conduct, culminating in a guilty plea by the company to charges that it concealed information about important and potentially dangerous defects in its products.

A few days ago, I found a reminder, buried in an article in the Minneapolis Star-Tribune about a dispute between Boston Scientific and St Jude Medical, that current Boston Scientific CEO Ray Elliott has a track record of collecting generous compensation despite ethical questions about the companies he has lead.

Elliott is certainly familiar with the potential ethical minefield surrounding the relationships between sales reps and doctors. He was CEO at orthopedic devicemaker Zimmer Holdings Inc., which paid (along with four other companies) $311 million in 2007 to settle a Department of Justice investigation into the consulting fees paid to doctors.

As we discussed back in 2007, Zimmer Holdings Inc was one of four medical device companies which submitted to deferred prosecution agreements in response to charges that the companies implemented criminal conspiracies to violate federal anti-kickback laws. We posted several times about one aspect of this settlement, the mandate that the companies make public the payments (often huge) to orthopedic surgeons, academic institutions, and medical associations. (See posts here, here, here, here, here.) At the time, I did not think to look into what happened to the leadership of these companies thereafter.

According to the 2008 proxy statement by Zimmer Holdings, Ray Elliott conveniently retired in 2007, just before the deferred prosecution agreement was announced. Since he had been President of Zimmer since 1997 and CEO since 2001, according to the 2007 proxy statement, he appeared to have been in the top leadership of the corporation during the time the actions were performed that resulted in the deferred prosecution agreement. Nonetheless, again according to the 2008 statement, for the part of 2007 during which he served as CEO, his total compensation was $7,987,158. For 2006, his total compensation was $11,998,121. In 2007, the present value of his two pension plans were $269,764 and $5,302,050. In 2007, he owned 1,235,859 shares of stock (now worth $72,952,757 at the current price of $59.03 /share), and had the right to acquire 1,169,987 more within 60 days.

And of course, as we posted earlier, Boston Scientific paid him over $30 million for working part of 2009.

So Mr Elliott prospered mightily from his leadership of ethically challenged Zimmer Holdings, and was then further rewarded by ethically challenged Boston Scientific.

Summary

We have commented again and again that while numerous health care organizations have been charged with unethical, and sometimes illegal behavior, the people who oversaw, directed, or implemented the behavior almost never have had to suffer any negative consequences.  Now we see that while some large health care organizations have been subject to penalties for unethical and illegal behavior, the leaders of these organizations have been compensated so well as to make them rich, rich beyond the dreams of most people.  So the problem is not merely that captaining an organization onto the ethical rocks costs one nothing, but that it can make one very rich.

Clearly we see examples of both profoundly perverse incentives and a complete lack of accountability and responsibility affecting the leadership of major health care organizations.  Is it any wonder that these organizations continue to act unethically, and that the costs of the goods and services they provide rise continuously?

If we truly want health care that is accessible, of high quality, at a fair price, and more importantly, if we want health care that is honest and focused on patients, we need to provide health care leaders with clear, rational incentives in these directions, and make them fully accountable for their actions, and the courses of their organizations under their leadership.