healthy4u: community health centers

When Does Lavish Executive Compensation Become "Embezzlement?"

A <a href="http://www.miamiherald.com/2012/08/03/2930352/miami-beach-health-center-says.html">single article</a> in the Miami Herald raises the question of when is excessive executive compensation in health care too excessive.  To set up the question, I will be quoting from the story in an order quite differently from how the story was presented. Background The story is about the executives of the Miami Beach Community Health Center, described thus: <blockquote>Headquartered on Biscayne Boulevard in North Miami, the Miami Beach Community Health Center is one of the oldest and most well-respected public health clinics in Florida. It opened more than three decades ago, and now includes four locations, three on the Beach, including two sites that care for people with mental illness. The center employs more than 280 people, with a monthly payroll of around $1.2 million. The health center’s annual budget is about $36 million — about one-third of which comes from private insurance, Medicaid, the state and federal health insurance for needy people, Medicare, the federal insurer for elders, and private payments.</blockquote> The CEO's Compensation Previous stories, and public records suggested that the Center's CEO, Kathryn Abbate, was very well compensated. First, <blockquote>an October 2010 Miami Herald business story ..., relying on federal tax documents, reported Abbate’s compensation package as $824,000 in 2008. In the article, Abbate said the compensation package was inflated by cashed-out sick time, vacation time and a retirement account.</blockquote> She did even better in subsequent years, <blockquote>The Miami Beach Community Health Center’s federal tax report for 2010 indicates Abbate’s base salary was $261,165 — but includes an additional $956,584 in 'bonus and incentive' dollars that pushed her total compensation to more than $1.2 million. The center’s IRS disclosure for the prior year reported Abbate’s base salary as $970,532, and total compensation of $987,902. In 2008, Abbate’s total reported compensation was $824,686, records show.</blockquote> The CEO got very generous compensation given the size of her organization.  This compensation was documented on forms the organization submitted to the IRS that were in the public domain. However, as we have discussed many times before (look <a href="http://hcrenewal.blogspot.com/search/label/executive%20compensation">here</a>), many leaders of health care organizations, including non-profit organizations, have been collecting very generous compensation. The Role of the Board of Trustees As we have discussed before, e.g., <a href="http://hcrenewal.blogspot.com/2012/05/more-rising-compensation-for-executives.html">here</a>, exceptional compensation for top hired managers is often justified by the governing boards, that is, boards of trustees or directors, to whom the hired managers nominally report.  These governing board members often seem to be working off a common set of "talking points."  In this case, there was a difference. The Herald reported that the Centers board of trustees "never agreed to pay Abbate more than $300,000, [Center Chief Medical Officer Dr Mark] Rabinowitz said." The board seemed totally unaware of what their organization was paying its CEO. <blockquote>Rabinowitz and a health center spokeswoman, Alia Faraj-Johnson, said that board members they spoke to had not seen the [2010] newspaper story [about the CEO's 2008 compensation]until just recently, and acknowledged its content would have raised significant red flags. 'That would have tripped everybody’s light,' Rabinowitz said.</blockquote>Why the board had never thought to look at the organization's own reports (990 forms) to the US Internal Revenue Service which detailed the executives' compensation, reports that were in the public domain, and are easily available online (look<a href="http://www.guidestar.org/organizations/59-1829984/miami-beach-community-health-center.aspx"> here)</a>, is unknown. The article implied that the board was somehow not up to this task even though it has fiduciary responsibilities to oversee the top hired managers, oversee the overall budget, and try to maintain both the organization's mission and fiscal stability did not seem up to the task. The article noted, <blockquote>board members remained unaware until last spring. Under federal law, at least half of the board members of federally subsidized health centers such as Miami Beach’s must be consumers of the clinic, and some of the clinic’s board members were simply ill-equipped to detect what the center calls a sophisticated financial crime.</blockquote> The board members seemed to think that it was the job of the CEO's subordinates to keep tabs on her compensation, <blockquote>'One of the sad things about this, regrettably, is that if the gatekeeper in this case, the chief financial officer, had done his job, a large portion of this would have been discovered a long time ago,' said Bill Dillon, a Tallahassee-based healthcare lawyer who is advising the center.</blockquote> The Chief Financial Officer contended that he would not have been able to successfully blow the whistle: <blockquote>[CFO Stanley] DeHart, who lives in Coral Springs, said he was aware of many of Abbate’s activities, but declined to alert the board of directors. 'The board of directors was very close to her, and I really thought they would not believe me,' DeHart said. 'They held her in very high esteem.' DeHart and members of his staff 'discussed whistle-blowing,' he said, but they all agreed taking such an action was more likely to result in their firing than Abbate’s. 'I felt at the time, and I still feel, that I had no proof that the board of directors would accept.' And, DeHart added, blame for the scandal should include outside auditors, who failed to raise any objections when Abbate wrote dozens of checks to herself for 'community development' — a department that regularly generated an enormous amount of 'abnormal activity.' DeHart said he told auditors he suspected something was amiss in the community development department. 'The external auditors had to have known about this,' DeHart said, 'because I laid it out to them in plain view. I did not hide anything.'</blockquote> In fact, the CEO's total compensation, plus a variety of other payments she seemed to direct to herself, were not made clear until <blockquote>May, after a routine audit required by federal funders turned up irregularities, said Mark Rabinowitz, an obstetrician and gynecologist who is the center’s chief medical officer. Abbate had written a check for $5,000 to herself, and cashed it, labeling the expenditure a 'community development' expense....</blockquote> Only after that, <blockquote>Calling the actions of their former administrator an 'outrageous betrayal of trust,' authorities with the Miami Beach Community Health Center are investigating what they call the theft of almost $7 million in taxpayer money by the center’s longtime chief executive. Members of the health center’s board of directors fired Chief Executive Officer Kathryn Abbate, saying she diverted the nearly $7 million in money intended to provide healthcare for the needy to her personal use beginning in 2008.</blockquote> Summary So let me backtrack a bit. The board of a moderately big, non-profit community health center seemed to make no attempt to monitor the organization's finances, did not even review the organization's own filings with the US government, and therefore had no idea what they were paying their CEO. Nonetheless, they seemed to assume that the organization's finances would be kept in order by an executive who reported to that same CEO. When an audit ordered externally ordered revealed that the CEO was being paid much more than the board had assumed, they charged "embezzlement," again even though a good chunk of such payments were in the form of compensation reported to the US government. The real distinction between this case and many other cases of huge <a href="http://hcrenewal.blogspot.com/search/label/executive%20compensation">executive compensation</a> we have discussed is that in this one the board seemed to be trying to maintain "plausible deniability" of any knowledge of the CEO's compensation, even though supervising that compensation was its direct responsibility. In other cases, board seem fully aware of enormous compensation, but blithely dismissive of any concerns about it.  So does this case could represent "embezzlement, " why were all the other cases of hired managers lavishly compensated not so regarded, even when their compensation was completely out of proportion to their known accomplishments, their organizations' financial performance, much less their organizations' fulfillment of their missions and positive impact on patients' and the public's health?  In many of those cases, the money paid out in executive compensation was also partially derived from taxpayers, and also was partially meant to "provide healthcare for the needy." As I have said many times 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.

When Does Lavish Executive Compensation Become "Embezzlement?"

A single article in the Miami Herald raises the question of when is excessive executive compensation in health care too excessive. To set up the question, I will be quoting from the story in an order…

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14 Aug 2012

Making a Community Health Agency into the Leaders' Private Sand-Box

As we <a href="http://hcrenewal.blogspot.com/2010/06/more-hospitals-hiring-ceos-children.html">predicted</a>, it seems that the US Internal Revenue Service's (IRS) increased reporting requirements for not-for-profit organizations are leading to more examples of the coziness now prevalent among the top leaders of such organizations.  The latest entry in this new parade comes from a <a href="http://www.bradenton.com/2010/08/23/2520884/rural-health-execs-pay-tops-in.html">story</a> in the Bradenton (Florida) Herald about a not-for-profit community health agency whose mission is to provide health care to the poor and disenfranchised: <blockquote>Providing medical services to the indigent and uninsured in Manatee and Sarasota counties has financially benefitted some of Manatee County Rural Health Services Inc.’s officers, board members and their families, records show. The nonprofit agency has paid nearly $2 million in recent years to businesses owned by board members, officers, employees or their relatives, according to tax documents obtained by the Bradenton Herald. And its chief executive officer, Walter “Mickey” Presha Sr., has long been the highest-paid CEO of any such agency in Florida: His salary last year was $433,000 — $140,000 more than that of his closest counterpart, records show.</blockquote> The article listed multiple examples self-dealing by the top leaders of Rural Health Services. <blockquote>According to tax returns filed since 2004, Rural Health has paid: - $558,121 to John Lewis, a board member, for optometry services. - $536,591 to The Pinnacle Group of West Coast Florida Inc. for construction, maintenance and repair work. One of its principals is Trina Presha-Rosier, Presha’s daughter. - $344,766 to The Lawn Authority of Manatee County Inc. for lawn care maintenance at the agency’s facilities. Wardell Jackson, the agency’s vice president of support services, is a principal in the business. - $387,673 to A to Z Complete Property Management Inc. for janitorial cleaning and maintenance services. It is owned by Chris Mullinex, the agency’s facilities director. - $96,000 to R & L Healthcare Advisors, whose principals include Marc Lazarus, a board member, for consulting services. - $44,242 to More Power Properties and Investments LLC, co-owned by board Chairman J. Garry Lowe, for storage of agency files and equipment and the purchase of a modular building.</blockquote> Leaders of rural health offered mostly the usual explanations: >>As long as we say it is not a conflict, it is not a conflict<< <blockquote>According to a conflict of interest statement that board members are required to sign, Rural Health prohibits them, management and their families from having any 'beneficial interest or substantial obligation to' any entity engaged in business with the agency. But some have been able to bypass that prohibition because of this loophole: 'Unless it has been determined by the board, on the basis of full disclosure of facts, that such interest does not give rise to a conflict of interest.'</blockquote> >>We, our relatives, and our firms are the best possible source of the services<< <blockquote>Jackson, Mullinex and Presha-Rosier’s businesses won competitive bids, which are reviewed by a board committee and approved by the full board, Lazarus said. Presha said he is not involved in reviewing bids for construction projects that his daughter might seek. The agency chose to do business with the three board members’ companies because of special circumstances, agency officials said. Lewis is one of Manatee Rural Health’s founders and has overseen its optometry services since the beginning. Lowe offered the storage space for less than what commercial storage facilities charged, then sold one of the storage buildings to Manatee Rural Health for a reduced price. And Lazarus has 36 years’ experience in the health care field, including as an executive at Sarasota Memorial Hospital. They were hired because they provide needed services at a lower cost, thus allowing the agency to spend more money on patient care, officials said.</blockquote> >>Trust us, because we are wonderful people<< <blockquote>'It’s always disclosed to the board, so we always have the opportunity to not do it,' said Juanine Lowery, a board member since 1984. 'It hasn’t been a problem. It’s always been competitive.'</blockquote> And a slightly more coherent version of that: <blockquote>'Everything’s checked out and vetted,' Lazarus said. 'The arrangements are as good as or better than what we could get on the open market.'</blockquote> The explanation for the CEO's out-sized salary should come as no surprise. He got that high salary because >>I am a wonderful CEO and I deserve it<< <blockquote>Rural Health board members also defend Presha’s $433,000 salary, which makes him the highest-paid chief executive officer of any federally qualified community health center in Florida. His job performance, managerial skills and the organization’s complexity and size are all reasons he makes the top salary, board members say.</blockquote> Of course, the CEO himself thinks he is a wonderful CEO and deserves it: <blockquote>'I know what I do,' said Presha, who said he took a pay cut to take the Manatee Rural Health job in 1984 and has turned down job offers with higher salaries since then. 'If I could do it for free, I would do it for free. But I earn my keep.'</blockquote> So here we have another case of the cozy leadership of a not-for-profit health care organization, who all think they are doing just a wonderful job, who never seem to question their own actions, and who all believe all their buddies are also doing just a wonderful job. So naturally, since they are all such wonderful people doing a wonderful job, we should not begrudge them a few dollars here and there. Of course, if they were the leaders of a privately held company that made widgets, it would be their own money that they are spending, and maybe no on else should care. Even if the amounts involved seem relatively small relative to some of the cases that appear on Health Care Renewal, we should care particularly about how the leaders of Manatee County Rural Health Care Services throw around money (to each other), because of the nature of the organization's mission, as <a href="http://www.mcrhs.org/presidents_message.php">described</a> by CEO Presha himself: <blockquote>MCRHS has served the poor and underserved in our communities with the mentality of a 'provider of choice.' Our group is not only compassionate, but also innovative,....</blockquote> It is truly unseemly for a not-for-profit community health care organization dedicated to serving "the poor and undeserved" lead by people so complacent about their own entitlement. So to repeat what I have written before, in my humble opinion, this sort of coziness, this sort of fuzziness at the boundaries of institutional duties and personal interests, may be a fundamental reason that our current health care system has become so solicitous of the interests and prerogatives of its leaders, and so cold to the needs of patients and the values of professionals. The need for more transparent, accountable leadership of health care who explicitly are subject to clear ethical rules was never more apparent. Stay tuned as more and more cases like this appear....

Making a Community Health Agency into the Leaders' Private Sand-Box

As we predicted, it seems that the US Internal Revenue Service's (IRS) increased reporting requirements for not-for-profit organizations are leading to more examples of the coziness now prevalent amon…

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23 Aug 2010