The Adventures of the Purloined Bequest, the Resident Heiress, and the Hidden Hospital System

The game is afoot again.  A series of recent articles in the media described a series of cases whose mysterious interrelationships Sherlock Holmes might have appreciated.<br /><br /><b>The Purloined Bequest</b><br /><br />A singular <a href="http://online.wsj.com/article/SB10001424127887324324404579045331810905304.html">article </a>in the Wall Street Journal, entitled "Judge Rules in Case of Fortune Tied to Buffett," first made this case explicit, but some background is required to understand it.<br /><br />The story focused on Long Island College Hospital, in Cobble Hill, Brooklyn, New York.  [Full disclosure: this story got my attention particularly because I grew up nearby in Brooklyn, and was born at that hospital, which was also the local hospital my parents often used.]   LICH has long been the major community hospital for downtown Brooklyn.<br /><br />The story appeared to begin in 2011, per the WSJ,<br /><br /><blockquote class="tr_bq"> In 2011, Judge [Carolyn] Demarest a<i>pproved the merger of LICH and SUNY Downstate on the condition it would keep the charitable hospital going.</i> As part of the deal, the hospital transferred properties to Downstate estimated to be worth as much as $1 billion collectively, according to a previous court order.</blockquote><br />The merger was supposed to keep LICH in operation as a community hospital and provider of acute care to the poor.  However, things did not work out.<br /><br /> This year, however, Downstate announced plans to shut the hospital, leading to protests from Brooklyn residents and local politicians.<br /><br /><blockquote class="tr_bq">'It is clear that the premise upon which this Court authorized the transfer of assets has been defeated,' Justice Demarest wrote in her Aug. 20 decision, adding that Downstate had breached its contractual obligations. She cited a 'legal and moral responsibility' to correct her earlier error in approving the merger.<br /><br />She directed Downstate to return all assets to the hospital's previous owner, Continuum Health Partners Inc., which subsequently said it couldn't take the reins. The court is expected to review other proposals. </blockquote><br />The judge also discovered that hospital management had been raiding an large endowment fund intended for other purposes,<br /><br /><br /><blockquote class="tr_bq">A New York state judge ruled this week that a struggling Brooklyn hospital <i>must repay tens of millions of dollars it borrowed from an endowment set up by early investors with billionaire Warren Buffett</i>.<br /><br />The ruling aims to rectify the previous use of the money by Long Island College Hospital, which is hurting financially and was scheduled to close. Mr. Buffett in July told The Wall Street Journal that his late friends, Donald and Mildred Othmer, would have felt 'betrayed' at the way the funds were spent.</blockquote><br /><br /><br />Apparently,<br /><br /><blockquote class="tr_bq"> The Othmers, natives of Omaha, Neb., who later lived in Brooklyn, were longtime friends of Mr. Buffett's, and each invested $25,000 with the billionaire in 1961.<br /><br />When they died—he in 1995 and she in 1998—they gave away a fortune estimated at $780 million, including <i>the $135 million permanent endowment for the hospital. The Othmer wills stipulated the interest on the endowment could be used for operating expenses but the principal should be held 'in perpetuity.'</i><br /><br />In a series of <i>court-approved transactions that began in 2000, the hospital borrowed from the funds repeatedly to meet short-term obligations and cover debts.</i><br /><br />The hospital argued that the money was necessary to keep the hospital afloat, which it said the Othmers would have wanted. The transfers depleted most of the endowment, a result that came to light after the Journal wrote about the situation in July.</blockquote><br /><a href="http://www.nytimes.com/2013/08/21/nyregion/judge-rejects-long-island-college-hospitals-ownership-deal.html">New York Times</a> and <a href="http://www.brooklyneagle.com/articles/dead-lich-could-net-suny-100-million">Brooklyn Daily Eagle</a> articles focused on the question of whether SUNY/ Downstate intended to close the hospital so it could sell its apparently valuable real estate assets in a now fashionable neighborhood, but not on how the hospital fell into these dire straits.<br /><br /><br />There seem to be some lingering questions -<br /><br />-  If the losses and borrowing began in 2000, or earlier, who was responsible for them, given the current owners have only been in place since 2011?<br /><br />Note that the phrasing in the article above ("the hospital argued that the money was necessary to keep the hospital afloat") suggested that before SUNY took over, the hospital was independent.  However, the article mentioned, albeit only briefly in passing, that the hospital had a previous owner, Continuum Health Partners Inc.<br /><br />-  How were the losses explained when they occurred, and what was the rationale for  borrowing from restricted endowment as a response, instead of, for example, direct efforts to minimize losses or increase capital and revenue?<br /><br />Note that the article implied that when SUNY acquired LICH, it acquired some very valuable real estate.  Why did the previous management of LICH not consider selling off some of this real estate to resolve its debts? <br /><br />-  Did mismanagement of the hospital lead to excess losses, and did borrowing funds from the principle of the hospital's endowment to offset these losses amounted to more mismanagement?<br />  <br /><br />Meanwhile, a second even more bizarre story about another New York City hospital almost simultaneously got media attention.<br /><br /><b>The Resident Heiress</b><br /><br />The case first made it into the media in 2012, when the tabloid New York Post <a href="http://nypost.com/2012/09/02/beth-israel-medical-center-shook-down-heiress-huguette-clark-for-13-million-relatives-say/">reported</a>, <br /><br /><blockquote class="tr_bq"><i>Beth Israel Medical Center milked reclusive copper heiress Huguette Clark for more than $13 million in fees, donations and even a priceless painting during her 20-year stay as a patient — and greedy executives angled for $125 million more, her relatives allege</i> in shocking new court filings over Clark’s estate.<br /><br />The alleged shakedown was illuminated in an e-mail in which <i>hospital board member and former CEO Dr. Robert Newman referred to Clark as 'the biggest bucks contributing potential we’ve ever had,'</i> according to court papers.<br />He told a colleague her 'potential has been overwhelming[ly] unrealized.'<br /><br />At one point, he <i>suggested to Clark that she pay nearly one-third of her estimated $400 million fortune to keep the now-shuttered Beth Israel North on the Upper East Side open so she could keep living in the room she had refused to leave for 15 years despite being in good physical health</i>, the papers allege.<br /><br />But instead of addressing Clark’s crippling anxiety, <i>hospital honchos played on her fears, engaging in 'a concentrated effort, orchestrated at the highest board and executive levels,' to get her money, court documents obtained by The Post allege.</i><br /><br />Clark’s death last year at age 104 set off a battle over her estate. Her distant relatives claim lawyer Wallace Bock, accountant Irving Kamsler, <i>private-duty nurse Hadassah Peri and the Beth Israel administrators manipulated the feeble Clark for her money.</i><br /><br />The nurse, who received cash and gifts from Clark, stands to inherit nearly $34 million and Clark’s priceless doll collection in the now-disputed will. Beth Israel is to get $1 million.<br /><br />The Paris-born Clark inherited her money from her father, William, a rail and mining baron and former US senator whose wealth rivaled the Rockefellers’.<br /><br /><i>She went to Beth Israel North in 1991</i>, when she was 85, after a doctor found her emaciated and ill in one of her three sprawling Fifth Avenue apartments. <br /><br /><i>She spent the last two decades of her life in dismal hospital rooms with the shades drawn and door shut even though there was 'no medical basis for keeping her' past the first few months, documents show.</i><br /><br />Clark was 'the perfect patient' for the hospital, her relatives charge, noting, <i>'She required no medical care, possessed enormous wealth, paid over $800 a day for her room, and became progressively more dependent on the hospital.'</i><br /><br />'Beth Israel had a plan to subtly, but ever so persistently, court Huguette for the purpose of garnering gifts and ultimately do a will in favor of the hospital,' court papers claim.</blockquote><br />This case also seems to be about wealthy donors and hospital executives.  Yet what makes it most bizarre are the circumstance of Ms Clark's hospital stay.  As a former intern, resident, fellow, and teaching hospital attending, I can attest that most hospital administrators are concerned, if not obsessed, with discharging patients quickly.  Hospital stays are currently paid by most insurers according to the patients' diagnoses, but not their length of stay.  Long stays cost hospitals money.  Furthermore, unnecessarily long stays use up resources that could better serve acutely ill and injured patients.  Yet Ms Clark stayed an astounding <i>20 plus years</i>, without any obvious medical rationale.  No hospital official contested the fact that Ms Clark stayed that long in the NY Post article. <br /><br />Furthermore, in a 2013 New York Times <a href="http://www.nytimes.com/2013/05/30/nyregion/hospital-caring-for-an-heiress-pressed-her-to-give-lavishly.html">article,</a> the hospital's lawyer, defending a parallel attempt to recover the money donated to the hospital, wrote<br /><br /><blockquote class="tr_bq"> <i>Beth Israel had provided Mrs. Clark with 'a well-attended home </i>where she was able to live out her days in security, relative good health and comfort, and with the pleasures of human company.' Besides, he said, the amount of money she gave to Beth Israel was “not very large considering her vast wealth.”</blockquote><br />Furthermore, a member of the Beth Israel fund-raising staff wrote in a memo disclosed during litigation,<br /><br /><blockquote class="tr_bq"> She was well enough by then to go home to her spacious apartment at Fifth Avenue and 72nd Street, overlooking Central Park, Ms. [Cynthia L] Cromer said, but '<i>she asked if she might stay in the hospital longer: she feels comfortable and safe, and her apartment is being renovated.'</i></blockquote><br />Never mind that the fundamental mission of the hospital is to provide acute care for the sick and injured, not to provide comfortable retirement housing. But hospital managers are apparently on record acknowledging that the hospital was basically providing Ms Clark with services that are normally available in a retirement community, not services that acute care hospitals normally provide anyone   There is no evidence that the hospital ever provided similar services to any other patients.  <br /><br />The obvious mystery, then, is<br /><br />- why no one at the hospital, no doctor, nurse, or manager, or no visitor, regulator, accrediting agency, insurer ever questioned why the hospital was providing a long-term residence to a former patient?<br /><br />No answer to the question has appeared in any coverage I have seen of this case, including a September, 2013,.NY Times followup <a href="http://www.nytimes.com/2013/09/15/nyregion/the-two-wills-of-the-heiress-huguette-clark.html">article</a> on the occasion of the case nearing trial.  <br /><br />In the absence of a creditable explanation for this strange distortion of the hospital mission,<br /><br />- is there any other conclusion than that its purpose was to extract a large amount of money from a vulnerable, rich, but no longer acutely ill former patient?<br /><br />This would suggest an unusual but monumentally unethical kind of hospital mismanagement.<br /><br />So we have two recent stories about major, unusual, apparently severe mismanagement by hospital executives.  These stories were reported as if they were independent. <br /><br />However, buried in the original NY Post article, but unmentioned in either of the major NY Times articles, however, was a hint of how this case and that above of the purloined inheritance appeared to be linked. <br /><br /><b>The Hidden Hospital System</b><br /><br />The NY Post article referred thus to the Beth Israel CEO who allegedly pushed Ms Clark for contributions,<br /><br /><blockquote class="tr_bq"> Newman, <i>former CEO of <b>Continuum Health Partners, Beth Israel’s parent organization</b>,</i> took the unusual step of offering to help Clark complete a will so 'some faceless bureaucrat of the government' wouldn’t get his hands on her estate, court papers say.</blockquote><br />Quick Watson, did you see that?<br /><br />Continuum Health Partners was the "parent organization" of Beth Israel Hospital during at least some of the time Ms Clark was in residence there.  Continuum Health Partners also was the "previous owner" of Long Island College Hospital during at least some of the time it apparently was suffering large losses and its endowment was being depleted.  So were both these stories really about the same organization, the same hospital system? <br /><br />Digging a little further, per its <a href="http://www.linkedin.com/company/continuum-health-partners/products">own LinkedIn page</a>,<br /><br /><blockquote class="tr_bq"> <i><b>Continuum Health Partners, Inc.</b> was formed in <b>1997</b> as a partnership of three venerable institutions — <b>Beth Israel Medical Center, </b></i>St. Luke's Hospital, and Roosevelt Hospital.</blockquote><br />So while the hospital system did not exist when Ms Clark first entered Beth Israel Hospital, the heiress' "care" was under the control of the organization apparently from 1997 to the day she died.<br /><br />Furthermore, as noted in a 2011 Chronicle of Higher Education article, <a href="http://www.innovativeresourcesgroup.com/archive/89-latest-and-greatest/314-from-mergers-that-didnt-stick-lessons-emerge-for-other-charities">available from </a>Innovative Resources Group Inc,<br /><br /><blockquote class="tr_bq"> If there was a honeymoon after <i>the merger of <b>Long Island College Hospital</b>, in Brooklyn, with <b>Continuum Health Partners</b>, in New York in <b>1998</b></i>, few remember it. The bickering began early and dragged on for years, but divorce didn’t seem inevitable until the doctors went public.</blockquote><br />So the hospital system called Continuum Health Partners took over Long Island College Hospital in 1998 and held it for 13 years.  Furthermore, apparently LICH was part of Continuum Health Partners during the time when its losses rose and the Othmer bequest was depleted.  For example, from the CHE article,<br /><br /><blockquote class="tr_bq">  Several physicians told a crowd gathered outside the hospital’s entrance in 2008 that <i>Continuum had withheld money from the 150-year-old institution, needlessly cutting patient services and endangering the hospital’s future.</i></blockquote><br />Also in 2008, the Brooklyn Heights Blog <a href="http://brooklynheightsblog.com/archives/3845">reported</a> this response to a question about finances from the Continuum Health Partners CEO, Stanley Bazenoff,<br /><br /><blockquote class="tr_bq"> LICH faces an <i>immediate fiscal crisis. </i>Unless action is taken quickly, he said, LICH will not have cash on hand to meet payrolls and other current expenses. He ascribed LICH’s problem to three factors. First, <i>the hospital carries a heavy debt burden–approximately $150 million in long-term bonds financed through the New York State Dormitory Authority and $25 million in short-term commercial paper–</i>which results in annual debt service (including interest and amortization) cost of approximately $22 million. Second, LICH has an operating deficit, presently about $40 million on an annual basis,...</blockquote><br />Denis Hamill, a columnist for the New York Daily News, made this accusation in a February, 2013, <a href="http://www.nydailynews.com/new-york/hamill-lich-merged-death-article-1.1266344">editorial</a>:<br /><br /><blockquote class="tr_bq">Under Continuum, <i>the once-profitable LICH ran up $300 million in debt from pure administrative malpractice.</i> And then Brezenoff brokered the smelly SUNY Downstate merger, with state taxpayers absorbing the $300 million debt.</blockquote><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;"><br />So it certainly looks like there is an argument that Continuum Health Partners, under its CEO, Stanley Bazenoff, was responsible for the manipulation of pseudo-patient and rich heiress Hughette Clark to secure a large donation, and the nearly simultaneous depletion of Long Island College Hospital's finances, including a large bequest that was supposed to be untouchable.</div><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;"><br /></div><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;">Not surprisingly, Mr Bazenoff, described by Mr Hamill as<br /><br /><blockquote class="tr_bq">a ruthless powerbroker ... whose nickname at LICH is Darth Vader </blockquote><br />and<br /><br /><blockquote class="tr_bq">a quintessential member of what muckraker Jack Newfield called The Permanent Government of New York  </blockquote><br />also seems to have gotten rich in his position as leader of Continuum Health Partners, along with his other top managers.   The blog LICH Watch <a href="http://lichwatch.blogspot.com/2011/03/salary-scandal-at-hospitals.html">found</a> these results from the system's 2009 IRS 990 report,</div><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;"><br /></div><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;"><blockquote class="tr_bq">here are some highlights, figures for Continuum employees who, hm, earned more than a million dollars for the year:<br /><br />Chandra Sen, MD, $2,109,204<br /><i>Stanley Brezenoff, <b>$2,014,413</b></i><br />Kathryn C. Meyer, Esq. $1,049,807<br />John Collura, $1,307,556<br />Gail Donovan, $1,365,354</blockquote><br /> A 2011 New York Post <a href="http://nypost.com/2011/03/16/nonprofit-hosp-bigs-megabucks/">article</a> stated,</div><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;"></div><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;"><blockquote class="tr_bq"><i> Stan Brezenoff, CEO of Continuum Health Partners, overseeing such hospitals as Beth Israel, St. Luke’s and Roosevelt, pulled in about <b>$3.5 million. </b></i></blockquote><br /> So this leads to yet more mysteries, first about the individual cases when viewed as occurring within one large hospital system:</div><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;">-  Why were Long Island College Hospital's finances addressed as if it were an independent entity, when it was in fact just a subsidiary of Continuum Health Partners? </div><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;"><br /><br />-  Why was Continuum Health Partners role in the hospital's enlarging debt and depleting endowment not discussed?</div><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;"><br />Similarly,</div><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;"><br />-  Why was the bizarre treatment of Hughette Clark attributed to "Beth Israel executives," but not Continuum Health Executives, when Beth Israel was also just a subsidiary of Continuum Health? </div><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;"><br /></div><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;">Then there is the larger mystery,</div><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;"><br />-  Why have these two cases been discussed as completely independent, when they appear to be part of a pattern of conduct by Continuum Health Partners management?<br /><br /></div><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;"></div><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;"></div><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;"><b>Summary</b></div><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;"><br /></div><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;">While we continue to see cases, some amazingly bizarre, suggesting mismanagement and unethical management of hospitals and hospital systems, there seems to be an amazing lack of curiosity about how they occurred and what their implications may be.  This lack of curiosity is so profound that no one seems to have noticed that two vivid and strange cases getting prominent media notice in the same city and the same time involved the same large hospital system. </div><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;"></div><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;">Health care organizations seem to become ever larger.  Such enlarging organizations can concentrate their power, dominate their "markets," and hence increase their revenues and the compensation of their top hired managers.  Without any countervailing force, they push seemingly inexorably towards oligopoly and then monopoly.</div><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;"></div><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;">Furthermore, the cases of the purloined bequest and the resident heiress show that ever larger organizations with ever more complex structures are ever better at hiding the accountability of their top hired managers.  We have previously noted, e.g. <a href="http://hcrenewal.blogspot.com/2010/10/glaxosmithkline-subsidiary-pleads.html">a case</a> in which a subsidiary of GlaxoSmithKline pleaded guilty to crimes involving production of adulterated drugs, thus shielding GSK and its management from responsibility, how subsidiaries of large corporations may plead guilty to crimes, thus absolving their parent organizations and its managers of any blame.<br /><br />In the current cases, it seems that somehow a large health care system was able to avoid accountability by letting its component hospitals appear to be independent.  Yet it is the larger system that was booking the revenue and making millionaires out of its hired managers.  This seems to show how concentration of power into ever more complex organizations can be used to enhance the <a href="http://hcrenewal.blogspot.com/search/label/anechoic%20effect">anechoic effect</a>, making mismanagement and those accountable for it ever more obscure. <br /><br /></div><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;"></div><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;">As we have said until blue in our collective faces, if we do not hold the real leaders of health care accountable for their actions and the actions of their organizations on their watches, we can expect continued misbehavior, and hence continued health care dysfunction.   </div><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;"></div><br />It's appropriate to conclude with this, a video of Jeremy Brett in A Scandal in Bohemia, from the first season of the show as first shown on PBS.<br /><br /><br /><br /><iframe allowfullscreen="" frameborder="0" height="315" src="//www.youtube.com/embed/shLYcUVOMb4?list=PL2VjH97HFEqmNfN8aQ5qiv90kPM7ncZ7U" width="560"></iframe>

The Adventures of the Purloined Bequest, the Resident Heiress, and the Hidden Hospital System

The game is afoot again.  A series of recent articles in the media described a series of cases whose mysterious interrelationships Sherlock Holmes might have appreciated.The Purloined BequestA singula…

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55 of Medtronic's Best Hospital Friends, Including HCA, Settle for $34 Million

The case of the over-marketing of Kyphon's kyphoplasty device (look <a href="http://hcrenewal.blogspot.com/2008/05/corporate-integrity-agreement-for.html">here</a>) just got more complicated, and now appears to have involved an amazing number of players.<br /><br /><b>The State of Play </b><br /><br /> As reported by the AP (<a href="http://www.washingtonpost.com/business/justice-department-55-hospitals-reach-34-million-settlement-over-medicare-fraud-claims/2013/07/02/3d3d2356-e34e-11e2-bffd-37a36ddab820_story.html">via</a> the Washington Post),<br /><br /><blockquote class="tr_bq"> <i>Fifty-five hospitals in 21 states have agreed to pay $34 million to the U.S. government to settle allegations that they used more expensive inpatient procedures rather than outpatient spinal surgeries to get bigger payments from Medicare,</i> the U.S. Justice Department said Tuesday.<br /><br />The settlement involves kyphoplasty procedures used to treat spinal fractures usually caused by osteoporosis. It can be done as an outpatient procedure, but he Justice Department said the hospitals performed the surgeries as inpatient procedures to increase Medicare billings.</blockquote><br />The current media reports provided little detail about the allegations, but did note that this case has been litigated for a while,<br /><br /><blockquote class="tr_bq"> A similar settlement was reached last year, when 14 hospitals agreed to pay a settlement of more than $12 million. And in 2008, the Justice Department agreed to a $75 million settlement with Medtronic Inc.’s spine business. The government was investigating allegations that Kyphon, a company that had been acquired by Medtronic Spine in 2007, advised hospitals to do inpatient kyphoplasties to bulk up their Medicare payments.</blockquote><br /><b>The Players</b><br /><br />Per the AP, there were quite a few<br /><br /><br /><blockquote class="tr_bq">In the latest settlement, the largest payments are being made by Atrium Medical Center of Middletown, Ohio, which will pay $4.2 million; Mount Sinai Medical Center in Miami, $1.8 million; Altru Health System of Grand Forks, N.D., $1.5 million; Cedars Sinai Medical Center in Los Angeles, $1.5 million; Wayne Memorial Hospital in Goldsboro, N.C., $1.3 million; Trover Health System of Madisonville, Ky., $1.2 million; The Queen’s Medical Center in Honolulu, $1.1 million; and Des Peres Hospital in suburban St. Louis, $900,000.<br /><br />Several multi-hospital organizations agreed to settlements, including:<br />—Twenty-three hospitals with <a href="http://hcrenewal.blogspot.com/search/label/HCA">HCA Inc</a>. of Nashville, Tenn., paying a total of $7.1 million.<br />—Six hospitals with Lifepoint Hospitals Inc. of Brentwood, Tenn., $2.5 million.<br />—Five hospitals with Trinity Health of Livonia, Mich., $3.9 million.<br />—Four hospitals with Morton Plant Mease BayCare Health System of Clearwater, Fla., $2.4 million.<br />—Three hospitals with Baptist Memorial Hospital-Golden Triangle of North Columbus, Miss., $1.8 million.<br />—Two hospitals with Bayhealth Medical Center of Newark, Del., $1.1 million.</blockquote><br /><br />A Modern Healthcare <a href="http://www.modernhealthcare.com/article/20130702/NEWS/307029967/55-more-hospitals-settle-in-kyphoplasty-overpayment-cases">report</a> noted that the leadership of HCA, the hospital system with the largest liability, made it out to all be a misunderstanding,<br /><br /><blockquote class="tr_bq">Hospital executives say the allegations are prompted by  <i>unclear Medicare rules on when spinal-surgery patients should be held overnight.</i> And they note that even though the whistle-blowers and the government are targeting hospitals, t<i>he decision to admit patients is usually dictated by the treating physician.</i><br /><br />'We are pleased to see new clarification of industry care standards, which help physicians make decisions regarding kyphoplasty patients,' HCA spokesman Ed Fishbough said in an e-mailed statement Tuesday. 'We are confident as a result that this issue has been resolved.'</blockquote><br />However, the case appears to be more complicated than that.<br /><br /><b>What Really Happened, and Who Benefited?</b><br /><br />In fact, we <a href="http://hcrenewal.blogspot.com/2008/05/corporate-integrity-agreement-for.html">discussed</a> the Medtronic settlement in 2008.  At that time, a New York Times <a href="http://www.nytimes.com/2008/05/23/business/23device.html">article</a> described the government's allegations about what went on this way,<br /><br /><blockquote class="tr_bq"><i>A unit of Medtronic defrauded Medicare of hundreds of millions of dollars</i>, according to a civil lawsuit that was unsealed Thursday and simultaneously settled with the Justice Department.<br /><br />Two insiders had said Kyphon, which Medtronic acquired in 2007, <i> improperly persuaded hospitals to keep people overnight for a simple outpatient procedure to repair small fissures of the spine. Medicare then reimbursed the hospitals much more generously than it otherwise would have </i>for the procedure, which was developed as a noninvasive approach that could usually be done in about an hour.<br /><br />By marketing its products this way, <i>Kyphon was able to artificially drive up demand among hospitals, bolstering its revenue and driving up its stock price. Medtronic subsequently bought the company, its competitor, for $3.9 billion, greatly enriching Kyphon’s senior executives. </i></blockquote><br />Furthermore,<br /><br /><blockquote class="tr_bq"> The scheme at Kyphon was <i>based on Medicare’s practice of reimbursing hospitals more for complex inpatient back surgery than for outpatient care.</i> The two whistle-blowers, Charles M. Bates and Craig Patrick, said Kyphon had <i>deliberately urged doctors to admit patients overnight, knowing the admissions were unnecessary.</i><br /><br /><i>Hospitals saw the overnight admissions as a way to raise revenue,</i> the two said, and <i>bought Kyphon’s products, even though they were expensive, starting at $3,500 to repair one spinal fissure.</i> The hospitals could recover the cost through the improper reimbursements for overnight stays.<br /><br />Kyphon sold so much equipment this way that at one point it <i>enjoyed a 90 percent profit margin,</i> according to the two insiders, both of whom worked in sales positions.<br /><br />The former employees said the <i>scheme began in 1999</i>, when Kyphon’s products first came to the market. Kyphon’s rapid sales growth and profitability eventually gave rise to a patent dispute with Medtronic, which was dropped when Medtronic acquired it. The acquisition richly rewarded Kyphon’s shareholders, particularly its top executives. <i>The company said its top 15 executives stood to receive about $145 million by cashing in their options and restricted stock.</i></blockquote><br />Note that at that time, Medtronic leadership, whose decision to purchase of Kyphon would end up so enriching Kyphon executives, seemingly had no worries,<br /><br /><blockquote class="tr_bq">A  spokeswoman for Medtronic, Marybeth Thorsgaard, said the company had <i>known Kyphon was under investigation</i> when it made the acquisition. She said it knew that Kyphon’s marketing strategy was being challenged, and took the risk of litigation into account. <i>'There were no surprises,'</i> she said.</blockquote><br />I can find no public record that any individual who authorized, directed, or implemented the arrangements above that lead to huge overcharges to Medicare, and huge revenues to Kyphon and the hospitals was subject to any negative consequences.  As noted above, it appears that the executives who lead Kyphon at the time it was acquired by Medtronic made substantial amounts of money apparently attributable to this scheme to allegedly "defraud Medicare of hundreds of millions of dollars" (as it was described above in the New York Times).  <br /><br />Using the public record available on the internet, I tried to see how the top three Kyphon executives are doing now.  It appears they are not doing badly, and remain influential in health care.  According to its <a href="http://www.sec.gov/Archives/edgar/data/1123313/000119312507096257/ddef14a.htm">2007 proxy statement</a>, just before Kyphon was bought out, its CEO was Richard W Mott.  As best as I can tell, <a href="http://people.equilar.com/bio/richard-mott-alfred-university/salary/525993#.UdRnh6zNrrI">per Equilar,</a> he currently runs a consulting firm (Walkabout Consulting LLC), and was previously chairman of <a href="http://www.linkedin.com/company/photothera">PhotoThera</a>, which just went out of business.  Kyphon's chief science officer was  Karen D Talmadge, PhD, who is now on the <a href="http://www.diabetes.org/about-us/board-of-directors/karen-d-talmadge.html">board of directors of the American Diabetes Association,</a> and is also "Chair of the Board of Directors of Gynesonics, and serves on the Boards of Directors of Amplyx Pharmaceuticals, Velocity Pharmaceutical Development and Venous Health Systems."  Kyphon's chief operating officer was Arthur T Taylor, who is now on the <a href="http://www.providencemt.com/board-directors">board of directors of Providence Medical Technology</a>.<br /><br />The CEO of Medtronic at the time it bought out Kyphon, and the CEO of HCA at the time the arrangements began appear not to be doing badly either.  The CEO of Medtronic at the time it acquired Kyphon was Arthur D Collins Jr, who is now on the boards of directors of Boeing, Alcoa, and US Bancorp, also, according to his <a href="http://www.boeing.com/boeing/corp_gov/board_directors.page?">Boeing biography,</a> he is a senior adviser to Oak Hill Capital Partners, and is on the Board of Overseers of the Wharton School.  The CEO of HCA at the time of its arrangement with Kyphon began was Dr Thomas Frist Jr, who is currently <a href="http://www.forbes.com/profile/thomas-frist-jr/">on the Forbes list of billionaires</a> at number 262 in the world, with a total worth estimated at $4.3 billion. <br /><br /><b>Summary</b><br /><br />In retrospect, this case allegedly involved arrangements between Kyphon, a device company, and multiple hospitals to increase the revenue of all parties by billing the US government for unnecessary hospitalizations occurring after the use of a device made by Kyphon.  The arrangements appeared to have been particularly lucrative for Kyphon's executives after a larger device company, Medtronic, chose to buy Kyphon. Medtronic ultimately paid a large fine and entered into a corporate integrity agreement nine years after the arrangements began.  Now fourteen years after the arrangements began, at least some of the hospitals involved have also paid fines.  The former Kyphon executives who benefited the most seemingly paid no penalties, nor seemingly did any managers of Medtronic or the hospitals who might have gotten larger compensation because of all the revenue that these arrangements generated.     <br /><br />So initially, the big losers from this complex dance were the US government, and ultimately US tax payers.  Some patients may have also paid out of pocket for unnecessary services and thus lost money too.  Whether some patients suffered due to adverse effects of unneeded procedures was not clear.  Much later, Medtronic and some of the hospitals involved did pay big fines and thus lost some money.  However, it does not appear that they paid anything like what they made from the original scheme, and their payments were delayed for years.  However, the insiders who personally made a lot of money never apparently paid anything later.  So, this case appears to be a vivid example of how such insiders can walk away with piles of money from the misbehavior of their own corporations, while others pay the price.<br /><br /><br />Many of those of us of a certain age were brought up on myths that ultimately the good guys win and the bad guys lose.  We would all like to believe that the "arc of the moral universe ... bends toward justice."  History and this recent example suggest that it may not do so without our active intervention.  <br /><br />In health care, as we have said many times (look <a href="http://hcrenewal.blogspot.com/search/label/legal%20settlements">here</a> for examples), when bad behavior occurs within a large health care organization, rarely are the insiders who authorized or directed it, and who had the most to gain from the behavior ever made to suffer any negative consequences.  As long as health care leaders have such impunity, expect them to continue to personally profit from unethical behavior.  As a result, expect health care costs to continue to rise as quality and access get worse and worse.<br /><br />True health care reform.needs to make health care leaders accountable, and especially accountable for the bad behavior that helped make them rich.

55 of Medtronic's Best Hospital Friends, Including HCA, Settle for $34 Million

The case of the over-marketing of Kyphon's kyphoplasty device (look here) just got more complicated, and now appears to have involved an amazing number of players.The State of Play  As reported by the…

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Broken Promises: Latest HCA Settlement Suggests Skepticism about the Next Big Thing in Health Care

A long time ago in the US, most people got care from physicians who were self-employed, or part of physician partnerships.  If they had to be hospitalized, it was at hospitals that were community or academic non-profit organizations.   If they had health insurance, it was likely from a non-profit Blue Cross Blue Shield affiliate.  However, with the rise of market fundamentalism, we have heard the promises of increased efficiency and innovation from for-profit health care.  So hospitals, insurance companies, and now increasingly physicians' practices have been bought up by for profit corporations.<br /><br />Many politicians and policy-makers seemed to believe the promises, and often joined the cheering sections for the latest and greatest for-profit conversions.  Should they have done so?  Let us look at a case that recently hit the news again and think about it..<br /><br /><b>Background - HCA Acquired Health Midwest</b><br /><br />Way back in 2002, large for-profit hospital chain HCA, formerly Columbia/HCA, acquired a sizable non-profit hospital system, Health Midwest.  As the Los Angeles Times then <a href="http://articles.latimes.com/2002/oct/17/business/fi-tenet17">reported</a>,<br /><br /><br /><blockquote class="tr_bq"><div class="area" id="area-article-first-block"><div class="mod-latarticlesarticletext mod-articletext" id="mod-a-body-first-para">In a setback for Tenet Healthcare Corp., rival hospital giant HCA Inc. said Wednesday that it has agreed to buy Health Midwest, a 14-hospital chain based in Kansas City, Mo., for $1.13 billion.<br /><br />Santa Barbara-based Tenet and HCA were the two finalists in a rare opportunity to acquire, in one swoop, a dominant hospital system in a growing urban market. The 20-member board of Health Midwest, a nonprofit company that has been struggling financially, said it voted unanimously to go with HCA.</div></div></blockquote><br />The biggest factor in the decision by the Health Midwest board to accept the HCA offer was apparently the almighty dollar.<br /><br /><blockquote class="tr_bq"> '<i>HCA's bid was much higher</i>,' [Tenet spokesperson Harry] Anderson said, noting that he could not disclose Tenet's offer because of a confidentiality agreement. </blockquote><br />But in addition to cash, HCA made some promises that sounded attractive to the board.<br /><br /><blockquote class="tr_bq"> In addition to the cash price,<i> HCA said it would spend $450 million for capital improvements over the next five years.</i></blockquote><br />That promise came from the top of HCA, as <a href="http://nashvillepost.com/news/2003/4/1/hca_closes_health_midwest_deal_finally">reported</a> by the Nashville post,<br /><br /><blockquote class="tr_bq"> HCA Chief Executive Jack Bovender said: 'This has been a comprehensive, thorough process with a lot of community participation. We are ready to get to work to <i>improve these hospitals through significant capital infusion</i> and by making long term operational improvements.'</blockquote><br /> Furthermore, as the Los Angeles Times also <a href="http://articles.latimes.com/2002/oct/17/business/fi-tenet17">reported</a><br /><br /><blockquote class="tr_bq">Health Midwest spokesman Chris Whitley said <i>price was not the only factor in the decision</i>.<br /><br />'As important to the board was to find a party that would offer <i>a strong commitment to maintain and honor the various religious, cultural and charitable traditions,</i>' he said.</blockquote>There were objections by people who did not have decision making authority, but they apparently did not carry much weight<br /><br /><blockquote class="tr_bq">Labor and community activists in Kansas City have opposed a takeover of a nonprofit health system by an investor-owned corporation, raising concerns that such a conversion would lead to cuts, hurting employees and consumers.</blockquote><br />In retrospect, why Health Midwest was so trusting of HCA at the time was unclear.  HCA, after all, did not have a track record then that should have inspired trust.  The HCA acquisition of Health Midwest was approved only a few years after what was then Columbia/ HCA settled allegations of extensive Medicare fraud.  the $1.7 billion the company paid made it the largest Medicare fraud case settled up to that time (and was larger than the amount it later spent on this acquisition.    See <a href="http://hcrenewal.blogspot.com/2010/05/how-did-ceo-who-presided-over-company.html">this post</a> for some details and sources.)  This certainly could have raised a "red flag" before the deal was concluded.  But it did not. <br /><br />This deal was typical of many deals in which for-profit corporations, some backed by <a href="http://hcrenewal.blogspot.com/search/label/private%20equity">private equity firms</a>, took over sometimes struggling non-profit hospitals, while promising great things for their communities.  For example, see our posts about the take-over of a health care system called <a href="http://hcrenewal.blogspot.com/search/label/Caritas%20Christi">Caritas Christi</a>, by <a href="http://hcrenewal.blogspot.com/search/label/Cerberus">Cerberus Capital Management</a>.  Caritas Christi was given the reassuring name of <a href="http://hcrenewal.blogspot.com/search/label/Steward%20Health%20Care">Steward Health Care</a>, and then proceeded to take over, or try to take over additional hospitals. (Click the links for this long story.)   <br /><br /><b>Broken Promises - the New HCA Settlement </b><br /><br />A new legal settlement by HCA suggests that such takeovers of non-profit hospitals by for-profit corporations ought to be regarded with much greater skepticism.  This time, <a href="http://www.nytimes.com/2013/01/25/business/hca-must-pay-kansas-city-foundation-162-million.html">per the New York Times</a>, <br /><br /><blockquote class="tr_bq"><i>HCA, the nation’s largest profit-making hospital chain, was ordered on Thursday to pay $162 million after a judge in Missouri ruled that it had failed to abide by an agreement to make improvements to dilapidated hospitals</i> that it bought in the Kansas City area several years ago. </blockquote><br />Thus the new HCA settlement suggested that those fine promises made by HCA executives and their cheer leaders when HCA was seeking to take over Health Midwest were broken.<br /><br /><blockquote class="tr_bq"><div itemprop="articleBody">The trouble in the Kansas City area began a year after HCA acquired a dozen hospitals from Health Midwest in 2003 for $1.125 billion. As part of the deal, <i>HCA agreed to make $300 million in capital improvements in the first two years and an additional $150 million in the following three. The hospital chain also agreed to maintain the levels of care that had been provided to low-income individuals and families in the area for 10 years. </i></div><div itemprop="articleBody"><br /></div><div itemprop="articleBody">But when the members of the Health Care Foundation of Greater Kansas City, a nonprofit created from the proceeds of the sale of the hospital, received their first report from HCA in 2004 they discovered the hospital was already way behind. </div><div itemprop="articleBody"><br /></div><div itemprop="articleBody">Of the $300 million it was supposed to spend in the first two years, its own documents showed it had spent only about $50 million, according to Mark G. Flaherty, one of the founding members of the foundation and its general counsel. </div><div itemprop="articleBody"><br /></div>HCA’s reports to the foundation also indicated that the level of charitable care it provided at the system’s large inner-city hospital had fallen while charitable care provided at the more affluent suburban hospital had risen sharply, Mr. Flaherty said. </blockquote><blockquote class="tr_bq"><div itemprop="articleBody">'That was a big red flag to us,' he said.</div><div itemprop="articleBody"><br /></div><div itemprop="articleBody">After repeatedly asking HCA executives for explanations but receiving none, the foundation sued HCA in 2009. The case went to trial for several weeks in 2011. </div></blockquote><br /> Note that there were alleged violations of two key provisions of the original deal, improvements to existing hospitals and guarantees of charitable care.  So here is at least one case, involving the largest US for-profit hospital corporation, showing violation of the sorts of promises that those promoting for-profit take-overs tout as showing at least the goodwill of the new corporate owners.<br /><br /><b>Should the HCA Track Record Have Led to Questions About Trustworthiness? </b><br /><br />It is unclear how often anyone has bothered to check whether similar promises made in other deals were fulfilled.  It appears that such inquiries might actually involve a lot of bother.  Note that in this case it took almost six years for the community foundation to obtain enough information to conclude that HCA had not met its obligations and file a lawsuit, and another almost four years to get the case resolved.<br /><br />The New York Times hinted that there was at least one other inquiry about a contemporaneous HCA deal.  While "a judge ruled in HCA's favor, deciding that Portsmouth Regional Hospital [in New Hampshire] would remain part of HCA after community leaders tried to regain control," the court proceedings did produce<br /><br /><blockquote class="tr_bq"> testimony in a 2011 trial, [in which] a former hospital official claimed he had <i>difficulties getting HCA to pay for what he and others described as critical equipment and facility upgrades</i>. </blockquote><br />Meanwhile, there have been other recent events that should raise further questions about the trustworthiness of HCA going forward.  Last year extensive reporting suggested that HCA hospitals put short-term revenue ahead of patients' welfare through overuse of lucrative cardiac procedures and and undertreatment of poor patients in emergency departments and debilitated patients with bed sores (see <a href="http://hcrenewal.blogspot.com/2012/08/paging-doctor-ebdita-how-private-equity.html">this post</a>).   Also last year HCA settled allegations it provided kickbacks to physicians at some of its hospitals to refer patients to its hospitals (see <a href="http://hcrenewal.blogspot.com/2012/09/just-latest-legal-settlement-for-hca.html">this post</a>).      <br /><br />Moreover, the record over the long term raises a big question as to why the good people of Missouri, the "show me" state, trusted HCA sufficiently for hospital acquisition deal to go forward in 2003.  As we wrote above, HCA was only a few years out of making the biggest settlement for federal health care fraud known at that time. <br /><br /><b>Summary </b><br /><br /> In 2010, we <a href="http://hcrenewal.blogspot.com/2010/04/more-doubts-about-private-equity-taking.html">suggested</a> that the take-over of non-profit hospitals by for-profit firms owned by private equity ought to be viewed with extreme skepticism.  In 2010, in<a href="http://wendellpotter.com/deadlyspin/"> <i>Deadly Spin</i></a>, former CIGNA public relations chief Wendell Potter showed how the conversions of non-profit Blue Cross Blue Shield health insurance plans to for-profit corporations were justified by the need to gather more capital to provide services comparable to new for-profit competitors, but were really motivated by the greed of executives who "would earn bigger pay packages for managing larger businesses, and if they could convert them to for-profit companies, they stood to earn even more." <br /><br />I submit that if anyone were able to look carefully at the results of the various deals that allowed for-profit corporations to take over hospitals, other organizations that directly take care of patients, health insurance companies, and now even physicians' practices, they would likely find that a lot of fine sounding promises made were broken and assurances made were false.   <br /><br /><br />From now on, I can only hope that health care professionals, policy-makers, politicians, but mainly the public at large will be appropriately skeptical of the fluffy promises made by those who stand to personally gain from the latest big thing in health care.  In particular, we all should be acutely skeptical the next time someone promises lower costs, better care, innovation, etc, etc by converting a community non-profit hospital to a subsidiary of a big for profit corporation.  

Broken Promises: Latest HCA Settlement Suggests Skepticism about the Next Big Thing in Health Care

A long time ago in the US, most people got care from physicians who were self-employed, or part of physician partnerships.  If they had to be hospitalized, it was at hospitals that were community or a…

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Huge Insurance Company WellPoint Settles Once Again, Providing a Window On the Ethical Questions Its Birth Presented

Another month, another question about the ethical conduct of for-profit insurance giant WellPoint.  <br /><br /><strong>WellPoint Settles Allegations its Predecessor Anthem Cheated its Former Policy-Holders</strong><br /><br />This time the issue was how the company treated people insured by its now Anthem subsidiary a long time ago.  Here is the Reuters <a href="http://www.reuters.com/article/2012/06/15/us-wellpoint-settlement-idUSBRE85E1F020120615">version</a>:<br /><blockquote><em>Health insurer WellPoint Inc has agreed to pay $90 million to settle a class-action lawsuit against its Anthem unit over accusations the company did not fairly compensate former members when Anthem was converted from a mutual company into a stock company.</em></blockquote><br />The Indianapolis Star <a href="http://www.indystar.com/article/20120616/BUSINESS03/306160003/WellPoint-settles-former-Anthem-policyholders-90M">noted</a>:<br /><blockquote>WellPoint had fought the lawsuit for seven years in court.<br /><br />The lawsuit alleged that <em>WellPoint's Anthem subsidiary underpaid policyholders</em> who opted to receive cash instead of stock when the Blue Cross-Blue Shield franchisee converted in 2001 into a stock company.</blockquote><br />Of course, a WellPoint spokesman denied the company had done anything wrong, per Reuters,<br /><blockquote>Anthem spokeswoman Kristin Binns said in an e-mailed statement.<br /><br />'We continue to believe that in all ways the company acted appropriately and in the best interests of its former members,...' </blockquote><strong>The Historic Context: the Conversion of Non-Profit Health Insurers into For-Profit Corporations</strong><br /><br />This may seem very dry and only of historical interest, but consider the historical context. Per <a href="http://wendellpotter.com/deadlyspin/">Wendell Potter's <em>Deadly Spin</em></a>, after the Clinton administration's failed attempt at health reform, leaders of previously non-profit Blue Cross and Blue Shield insurance plans saw a new opportunity. In the mid-1990s, <br /><blockquote>the Blue Cross and Blue Shield Association took a little-noticed but monumental step. The trade group, a bastion of non-profit health insurers that included the founders of the modern health insurance system, <em>modified its bylaws to permit members to convert into public-stock companies.</em></blockquote><br />Potter opined about the executives' main motivation for conversion to for-profit status, and then consolidation of the resulting companies,<br /><blockquote>They would <em>earn bigger pay packages for managing larger businesses, and if they could convert them to for-profit companies, they would earn even more</em>.</blockquote><br />So,<br /><blockquote>Fourteen Blue Cross plans, most of which dominated their state-wide markets, converted from nonprofits to for-profits, and by 2004 all fourteen wound up as wholly owned subsidiaries of WellPoint.... </blockquote><strong>The Anthem Demutualization as a Step to WellPoint Executives' Enrichment</strong><br /><br />Anthem began as a non-profit insurance company, Blue Cross/Blue Shield of Indiana. Its hired managers first converted it into a mutual insurance company, a company that was owned by its policy-holders, and hence somewhat a non-profit in spirit. Then the executives started to acquire other formerly non-profit Blue Cross and Blue Shield plans. Then they converted the mutual insurance company into a pure for-profit. The for-profit Anthem eventually acquired WellPoint, taking that company's name. The resulting company then had become the biggest for-profit US health care insurer. In 2003, as the acquisition of WellPoint was pending, the Indianapolis Star <a href="http://www2.indystar.com/articles/2/135877-3402-031.html">reported</a>:<br /><blockquote><em>The top executive at Anthem Inc. will receive a <strong>$42.5 million</strong> stock-and-cash award for guiding the company as it became the state's largest firm and now stands to become the nation's largest health benefits company</em>.<br /><br />Larry C. Glasscock will receive the merit-based performance award over the next three years on top of his salary, bonus and other compensation of $3.73 million last year. It's the most compensation Glasscock has received since he became the company's chief executive in 1999 and <em>helped convert it to a publicly traded concern in 2001</em></blockquote><br />Furthermore,<br /><blockquote><em>Award amounts of <strong>$16 million</strong> each went to Glasscock's two highest-ranking associates: executive vice presidents David R. Frick, an attorney and former Indianapolis deputy mayor, and Michael L. Smith, a former chief executive of moving company Mayflower Group</em>.<br /><br /><em>In addition, the president of Anthem Midwest, Keith R. Faller, will get a stock-and-cash award of <strong>$11.9 million</strong>, while Anthem Southeast President Thomas G. Snead Jr. got <strong>$4.36 million</strong></em>.</blockquote><br />The allegation that the company's hired managers failed to adequately reimburse policy-holders for the policy-owners' ownership interests in the mutual version of Anthem was the basis of the law-suit that was just settled. The Anthem demutualization was a key step in the formation of the WellPoint behemoth. Its creation was the rationale to make the executives listed above rich. The allegations made in the lawsuit just settled suggest that they earned these huge windfalls on the backs of the policy-holders who at one point thought it was their company, and formerly thought that their insurer was a benign non-profit organization.<br /><br /><strong>A Continuing Record of Ethical Misadventures</strong><br /><br />Thus, the lawsuit just settled suggests that WellPoint was born in ethically questionable circumstances, and that its creation served more to enrich its hired executives, who may have started as hired leaders of mission-oriented non-profit organizations. So in retrospect maybe it is not so surprising that WellPoint's leadership has continued to generate a series of ethical questions. <br /><br />Since we began <a href="http://hcrenewal.blogspot.com/">Health Care Renewal</a>, we have noted that the company:<br /><br /><ul><li><em>settled a RICO (racketeer influenced corrupt organization) law-suit</em> in California over its alleged systematic attempts to withhold payments from physicians (see 2005 post <a href="http://hcrenewal.blogspot.com/2005/07/wellpoint-settles-rico-law-suit.html">here</a>).</li><li>subsidiary New York Empire Blue Cross and Blue Shield<em> misplaced a computer disc containing confidential information </em>on 75,000 policy-holders (see 2007 story <a href="http://www.nytimes.com/2007/03/14/business/14insure.html">here</a>).</li><li>California Anthem Blue Cross subsidiary <em>cancelled individual insurance policies after their owners made large claims</em> (a practices sometimes called rescission).  The company was ordered to pay a million dollar fine in early 2007 for this (see post <a href="http://hcrenewal.blogspot.com/2007/03/wellpoint-fined-1-million-for-canceling.html">here</a>).  A state agency charged that some of these cancellations by another WellPoint subsidiary were improper (see post <a href="http://hcrenewal.blogspot.com/2007/07/more-than-half-of-wellpoints-policy.html">here</a>).  WellPoint was alleged to have pushed physicians to look for patients' medical problems that would allow rescission (see post <a href="http://hcrenewal.blogspot.com/2008/02/wellpoint-halts-attempts-to-have.html">here</a>).  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 <a href="http://hcrenewal.blogspot.com/2008/07/wellpoint-settles-but-has-it-become-too.html">here</a>). But in 2008, WellPoint agreed to pay more fines for its rescission practices (see post <a href="http://hcrenewal.blogspot.com/2008/07/fines-re-statements-and-more-fines-just.html">here</a>).  In 2009, WellPoint executives were defiant about their continued intention to make rescission in hearings before the US congress (see post <a href="http://hcrenewal.blogspot.com/2009/06/managed-care-executives-will-not-limit.html">here</a>).</li><li>California Blue Cross subsidiary allegedly attempted to <em>get physicians to sign contracts whose confidentiality provisions would have prevented them from consulting lawyers</em> about the contracts (see 2007 post <a href="http://hcrenewal.blogspot.com/2007/11/physicians-and-contracts-cautionary.html">here</a>).</li><li>formerly acclaimed <em>CFO was fired</em> for unclear reasons, and then <em>allegations from numerous women of what now might be called Tiger Woods-like activities surfaced</em> (see post <a href="http://hcrenewal.blogspot.com/2008/01/more-managed-care-management-mumbo.html">here</a>).</li><li>announced that its <em>investment portfolio was hardly immune from the losses</em> prevalent in late 2008 (see post <a href="http://hcrenewal.blogspot.com/2008/10/if-this-is-how-wellpoint-has-managed.html">here</a>).</li><li>was sanctioned by the US government in early 2009 for <em>erroneously denying coverage</em> to senior patients who subscribed to its Medicare drug plans (see 2009 post <a href="http://hcrenewal.blogspot.com/2009/01/wellpoint-sanctioned.html">here</a>).</li><li><em>settled charges that it had used a questionable data-base</em> (built by Ingenix, a subsidiary of ostensible WellPoint competitor UnitedHealth) to determine fees paid to physicians for out-of-network care (see 2009 post <a href="http://hcrenewal.blogspot.com/2009/02/wellpoint-settles.html">here</a>).  </li><li><em>violated state law more than 700 times over a three-year period</em> by failing to pay medical claims on time and misrepresenting policy provisions to customers, according to the California health insurance commissioner (see 2010 post <a href="http://hcrenewal.blogspot.com/2010/02/argument-over-insurance-rate-hikes.html">here</a>). </li><li><em>exposed confidential data from about 470,000 patients</em> (see 2010 post <a href="http://hcrenewal.blogspot.com/2010/06/wellpoint-dont-know-much-about-computer.html">here</a>) and settled the resulting lawsuit in 2011 (see post <a href="http://hcrenewal.blogspot.com/2011/10/still-more-ehr-chaos-pandemonium-bedlam.html">here</a>).</li><li><em>fired a top executive who publicly apologized for the company's excessively high charges</em> (see 2010 post <em>here</em>).</li><li>California Anthem subsidiary was fined for <em>systematically failing to make fair and timely payments</em> to doctors and hospitals (see 2010 post <a href="http://hcrenewal.blogspot.com/2010/12/health-insurers-sanctioned-fined.html">here</a>).</li><li>management was accused of <em>hiding the company's political contributions from the company's own stock-holders</em> (see 2012 posts <a href="http://hcrenewal.blogspot.com/2012/04/some-of-wellpoints-owners-stockholders.html">here</a> and <a href="http://hcrenewal.blogspot.com/2012/05/wall-street-journal-defends-hired.html">here</a>).</li></ul>Meanwhile, top hired managers have continued to draw bloated compensation from the company.  For example, as we noted <a href="http://hcrenewal.blogspot.com/2012/04/some-of-wellpoints-owners-stockholders.html">here</a>, current WellPoint CEO Angela Braly got $13.2 million compensation, and received an additional $6.9 million from newly vested restricted stock units in 2011, despite falling company earnings.<br /><br /><strong>Summary: A Company Too Big to Manage Except to Enrich Its Executives</strong><br /><br />Thus, we have seen an amazing string of incidents suggesting that company leadership has consistently put short-term revenues, and the resulting exaggerated management compensation, before stock-holders' interests, and before patients' interests.  Yet this pattern, so plain above, has largely not been assembled from its component pieces in public other than on Health Care Renewal.  Lack of perception of this pattern may explain why this incredible compilation of ethical missteps has failed to generate any calls for massive revisions in how this company is lead and governed, or perhaps calls to dismantle such a large for-profit company as unmanageable except as a source of nearly unlimited dollars for the enrichment of its top insiders.<br /><br />True health care reform would require the leaders of health care organizations to uphold the health care mission ahead of their own self-interest, and to be accountable to the organizations' owners, when they exist, and to patients and the public at large.

Huge Insurance Company WellPoint Settles Once Again, Providing a Window On the Ethical Questions Its Birth Presented

Another month, another question about the ethical conduct of for-profit insurance giant WellPoint.  WellPoint Settles Allegations its Predecessor Anthem Cheated its Former Policy-HoldersThis time the …

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A New Low - A Hospital CEO Got a "Golden Parachute" for A Merger that Never Occurred

We recently <a href="http://hcrenewal.blogspot.com/2011/11/ceos-first-to-benefit-from-for-profit.html">posted</a> about how top hospital managers are often the first to benefit from mergers and acquisitions, which once again have become fashionable in management circles.  Now it appears that top executives can benefit even from failed mergers, as <a href="http://www.news-journalonline.com/news/local/east-volusia/2011/11/12/ideas-run-the-gamut-on-future-of-bert-fish-medical-center.html">reported</a> by the Daytona Beach (Florida) News-Journal,<br /><blockquote><em>Five months after Bert Fish Medical Center's failed merger, one board member said he was surprised to learn payments are still being made toward the $1 million buyout of the former hospital CEO</em>.<br /><br />Hospital board member Joe Benedict said he didn't know <em>former hospital Chief Executive Officer Bob Williams, who steered the board into the illegal deal with Adventist Health System, is due to receive his $289,000-a-year salary until 2014</em> –– paid through the publicly owned hospital.<br /><br />At the time the merger was announced, a memorandum of understanding with Williams became public and showed <em>the deal had triggered a three-year buyout clause in Williams' contract. Starting July 1, 2010, the Adventist agreement paid him his salary for three years, as his contract required, plus seven months and eight days –– a deal worth $1 million and benefits</em>.<br /><br />'That man has got away with a lot more than he should have,' said Benedict, a former County Council member, explaining that he considers Williams as responsible for the failed merger as Jim Heekin, the board's former attorney. </blockquote><br />These payments were made to the former CEO despite the cost of the failure of the merger:<br /><blockquote><em>The hospital district incurred $3.4 million in administrative and legal fees</em> as a result. </blockquote><br />Apparently, there are allegations that the merger failed because former CEO Williams agreed to keep the board meetings of this public hospital secret, which was illegal:<br /><blockquote>The hospital board has voted to pursue a legal malpractice lawsuit against Heekin, of the Orlando firm Lowndes, Drosdick, Doster, Kantor & Reed, for his advice to keep the public out of talks about merging the New Smyrna Beach hospital with a partner. <em>The 21 closed meetings that were held over 16 months were called 'so much darkness for so long' they couldn't be cured, according to a ruling earlier this year from Circuit Judge Richard Graham, who threw out the merger. </em></blockquote><br />Also,<br /><blockquote>Williams is quoted in transcripts of the closed meetings<em> telling board members not to tell anyone Adventist had been chosen as Bert Fish's partner</em></blockquote><br />Other contractual provisions for golden parachutes exist, but have yet to be activated:<br /><blockquote>Benedict said he's still hopeful he can undo other buyout clauses in hospital contracts he believes obligate the hospital to pay more than is allowed, under state law, for the departure of Bert Fish Medical Center administrators. According to the current contracts, provided to the News-Journal, the hospital's current CEO, chief financial officer and chief of nursing must be paid 24 months' salary should they be dismissed from their positions through no fault of their own. Their departures could be a possibility if Bert Fish were to seek another merger partner who doesn't want to keep them on.<br /><br />The contracts were executed June 30. On July 1, a new state law went into effect that limits the buyout of public employees to 20 months. </blockquote><br /><strong>Summary</strong><br /><br />So, a hospital CEO had a contract that made him eligible to begin receiving "golden parachute" payments just because a merger was in process, and these payments could not be stopped even though the merger was declared illegal, and hence never occurred. We noted recently that CEOs and other top officials of health care organizations are often the first to benefit financially from mergers and acquisitions, even when such transactions to not prove so beneficial to the affected institutions, much less patients' and the public's health in the long run. Here is a case in which a CEO could get extra money just because a merger was contemplated. This is some sort of new record for health care leaders personally profiting from their insider positions. <br /><br />There has been growing public outrage about how ordinary people who play by the rules are disadvantaged in today's economy, while insiders profit from their positions. There ought to be equal outrage in health care over its version of this pheonomenon. <br /><br />As long as health care leaders can continue to put their self-interest ahead of the health care mission in this way, is it any wonder that health care costs continue to rise while access and quality suffer? When will would be health care reformers realize that to truly reform health care, we will have to reform health care leadership? We need health care leaders who understand and uphold the mission, are accountable for how well they do so, and whose incentives depend on how they do so. We do not need leaders who put their self-interest first. Right now, however, that seeems to be the leadership we have.

A New Low - A Hospital CEO Got a "Golden Parachute" for A Merger that Never Occurred

We recently posted about how top hospital managers are often the first to benefit from mergers and acquisitions, which once again have become fashionable in management circles.  Now it appears that to…

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CEOs First to Benefit from For-Profit Takeovers of Non-Profit Hospitals

Last year, we <a href="http://hcrenewal.blogspot.com/2010/03/now-private-equity-jumps-into-health.html">noted</a> concerns about the againy fashionable practice of for-profit corporations taking over previously not-for-profit hospitals and hospital systems. Two examples we cited were the planned acquisitions of Detroit Medical Center (DMC) by Vanguard Health, which was owned by the Blackstone Group, and of Caritas Christi Health Care by Cerberus Capital Management. <br /><br />At the time, we noted, "for-profit leaders tend to expect even larger compensation than not for-profit CEOs. Their decisions tend to be driven by their short-term compensation, rather than the good of the organization." So we asked, "will making a not-for-profit health care organization into a for-profit corporation really lead to more efficiency and lower costs?" In a <a href="http://hcrenewal.blogspot.com/2010/04/more-doubts-about-private-equity-taking.html">later post</a>, we worried about "ever-increasing executive compensation while making money becomes the overwhelming priority for the organization, completely eclipsing such quaint concepts as quality of care, reasonable costs, or adequate access."<br /><br />About one and one-half years later, we have some follow-up from the media about the results of these deals, especially as they pertain to executive compensation.<br /><br /><strong>Detroit Medical Center, Vanguard Health Systems, Blackstone Group</strong><br /><br />Our <a href="http://hcrenewal.blogspot.com/2010/03/now-private-equity-jumps-into-health.html">post</a> last year quoted then Mike Duggan, then CEO of DMC, that "We were being choked to death by the nonprofit business model."<br /><br />This month, the Detroit Free Press <a href="http://www.freep.com/article/20111103/BUSINESS06/111030446/DMC-CEO-Mike-Duggan-make-2-41-million-pay-bonuses-stock-options">reported</a>,<br /><blockquote><em>Detroit Medical Center CEO Mike Duggan's total compensation this year from Vanguard Health Systems, the private health care company that bought the DMC, is <strong>$2.41 million</strong> in pay, bonuses and several years of stock options, up from the $1.98 million in 2009 when DMC was a nonprofit,</em> according to public documents.<br /><br />About $1.3 million of Duggan's total compensation is in stock options that he would start receiving next year through 2019, the documents show. </blockquote><br />Note also that,<br /><blockquote>The package also calls for Duggan to get $1 million if he's fired or $5 million if Vanguard sells the DMC to another company -- fairly common conditions in contracts, experts said.<br /><br />Duggan's new compensation package puts him<em> in the top tier of local health care executives</em>. </blockquote><br />It seems like Mr Duggan is no longer being "choked to death." <br /><br />Cursory review of the media reveals that since the acquisition, DMC has some major construction projects planned. However, I saw nothing yet about whether the acquisition has decreased costs, increased access, or improved the quality of care.<br /><br />I should note that Mr Duggan appears just a bit uncomfortable with his generous compensation in this era of anger about the power of the one percent:<br /><blockquote>Duggan said he agreed with Occupy Wall Street protesters who point to the growing gap between the poor and rich: "I do believe people should be able to work hard and earn a lot of money. (But) <em>the gap between the top and the bottom is not fair in this country</em>," he said. "I don't have the ability to fix the world, but my wife and I are making a gesture that's appropriate for us. If people say we get paid a lot of money, I think they are right. I'm trying to do something to share some of the benefit."</blockquote><br />The gesture mentioned above would be<br /><blockquote>he and his wife plan to create a foundation next year to hold the stock earnings, after taxes, for scholarships for children of DMC employees.</blockquote><br />Whether it is carried out, of course, remains to be seen.<br /><br /><strong>Caritas Christi Health Care, Steward Health Care, Cerberus Capital Management</strong><br /><br />The initial <a href="http://www.boston.com/business/healthcare/articles/2010/03/25/equity_firm_set_to_buy_caritas/">story</a> about the proposed take-over in the Boston Globe noted that one rationale was how:<br /><blockquote>Caritas has long struggled financially, but since coming to the chain two years ago, [CEO Dr Ralph] de la Torre has worked to strengthen its financial position by aggressively cutting costs and boosting revenue from medical care. It posted operating income of $30.5 million for the fiscal year ending last Sept. 30 compared with a $20.5 million loss the prior year.</blockquote><br />The aim would be:<br /><blockquote>to provide quality community-based care at a reasonable cost.</blockquote><br />Some specific goals of the proposed take-over would be<br /><blockquote>Under the agreement, Cerberus will invest $430 million to $450 million immediately to pay off Caritas debt, finance renovation projects, and provide working capital, while also assuming its pension liability.</blockquote><br />To pursue all this,<br /><blockquote>While de la Torre and other senior executives will retain their current salaries and benefits, they <em>would be eligible for additional compensation from Cerberus</em> based on the financial performance of the hospitals, Caritas officials said. They said the details of those financial incentives have yet to be worked out.</blockquote><br />Last month, a Boston Globe <a href="http://articles.boston.com/2011-09-15/yourtown/30160931_1_compensation-hospital-executive-teaching-hospital">article</a> provided a little more clarity about these compensation arrangements:<br /><blockquote><em>Ralph de la Torre, former chief executive of Boston-based Caritas Christi Health Care, drew a total pay package of <strong>$2.2 million</strong> from the Catholic hospital system in 2009, making him the best-compensated hospital executive in Boston that year</em>, according to documents filed with the state attorney general’s office.<br /><br />The package, which included base salary, a performance bonus, and incentive compensation linked to improving finances at the hospital chain, <em>marked an increase from the $1.2 million de la Torre earned from Caritas in 2008.</em></blockquote><br />Note that after the take-over, the Caritas Christi system was renamed as Steward Health Care.<br /><br />So prior to the actual take-over by Cerberus, but presumably while initial negotiations about it were going on, Dr de la Torre had already become the best paid hospital CEO in Boston. <br /><br />Becker's Hospital Review <a href="http://www.beckershospitalreview.com/compensation-issues/caritas-christis-2010-form-990-shows-executive-pay-before-for-profit-conversion.html">noted</a> that De la Torre's 2010 total compensation was exactly <em><strong>$2,270,076</strong></em>. The Caritas Christi 2010 <a href="http://www.beckersasc.com/media/CC_2010Filing.pdf">IRS form 990 </a>also listed 19 executives who received more than $400,000. Of these, 11 received more than $600,000. Meanwhile, according to this form, the system's losses were accelerating, going from -$6,583,625 in 2008 to -$23,858,733 in 2009.<br /><br />So, it seems that Dr De la Torre became significantly richer in anticipation of the proposed (and now accomplished) take-over of Caritas Christi by Cerberus Capital Management, even though his hospital system's hemorrhaging of money was increasing at that time.<br /><br />Again, I was not able to find any clear evidence whether the take-over had decreased costs, increased access, or improved quality of care. I did find one report suggesting that some Steward Health nurses did not think that it had stabilized their pensions as promised. <a href="http://www.bizjournals.com/boston/news/2011/10/28/steward-employees-to-protest-today.html">According to </a>the Boston Business Journal,<br /><blockquote>Nurses and other health care workers from several of the hospitals owned by the for-profit Steward Health Care, plan to protest outside the company's Boston headquarters today at 1:30. They include nurses from St. Elizabeth’s Medical Center, Brighton, Norwood Hospital, Good Samaritan Hospital in Brockton, Morton Hospital in Taunton, Quincy Medical Center Carney Hospital in Dorchester, Holy Family Hospital in Methuen and Merrimack Valley Hospital in Haverhill.<br /><br />Nurses argue that Steward, owned by New York private equity firm Cerberus Capital Management, <em>has not honored agreements to the workers, including a commitment to create a defined-benefit pension plan. They also say that Steward has threatened to eliminate essential services in retaliation for the nurses demand for the pension plan</em>.</blockquote><br /><strong>Summary</strong><br /><br />Two acquisitions by private equity firms of non-profit hospital systems have resulted in increased compensation for the systems' CEOs, and perhaps other top executives.  These increases predated any recognizable improvements in quality or access, or decreases in health care costs.<br /><br />Acquisitions of non-profit hospitals and hospital systems by for-profit entities, including private equity firms, is one of the newly fashionable ways our health care leaders have promised to improve care, increase access and control costs. The evidence about whether this tactic accomplishes these aims is not yet in. However, it appears that this tactic may be another, and a rapid way for top health care executives to increase their personal incomes. <br /><br />Health care professionals, patients, and the public at large ought to be increasingly skeptical of the latest fashions in health care management, especially those that have potential to further enrich managers.<br /><br />As we recently <a href="http://hcrenewal.blogspot.com/2011/11/health-care-also-needs-to-challenge.html">noted</a>, more people in the US and other countries are frustrated that their attempts to work hard and follow the rules of the economic system yield less rewards. Meanwhile, it appears that well-connected insiders are increasingly gaming the system for their personal profit. We have noted how health care executives' compensation seems independent of their talent, skill, or innovation, much less their ability to uphold the values and fulfill the mission of their organizations. Their compensation often seems to rise inexorably, regardless even of the financial status of their organizations.<br /><br />Now it appears that inflating compensation in anticipation of or due to a merger or acquisition is another mechanism by which insider executives gain, while others in health care lose. <br /><br />Once more with feeling .... true health care reform requires competent, ethical leadership that upholds health care's core values within a governance structure of accountability, integrity, transparency, and honesty. Tackling the deep problems in health care will require tackling the deeper problems in the global political economy which helped to generate them.

CEOs First to Benefit from For-Profit Takeovers of Non-Profit Hospitals

Last year, we noted concerns about the againy fashionable practice of for-profit corporations taking over previously not-for-profit hospitals and hospital systems. Two examples we cited were the plann…

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The Restless Shade of AHERF and the Return of Merger Mania: Highmark Tries to Buy Another Insurance Company, a Hospital System, a Medical School, and Physicians' Practices

Starting in the 1990s, as US health care became more commercialized, a wave of mergers lead to super-sized hospital systems, insurance companies, and pharmaceutical companies.  Not all those mergers, especially involving hospitals, prospered.  Although the mergers were justified as drivers of increased efficiency, health care has become decreasingly accessible, increasingly expensive, and of no better quality.  However, now a whole new wave of mergers seems to be upon us.  <br /><br /><strong>The Proposed Highmark Blue Cross/ West Penn Allegheny Health System Merger</strong><br /><br />The latest example to get national attention is the proposed combination of already large non-profit health insurer Highmark Inc, a Blue Cross Blue Shield plan, and non-profit hospital system Allegheny Health System.  The national attention was in a Wall Street Journal <a href="http://online.wsj.com/article/SB10001424052702303627104576413580875856442.html">article</a> by Anna Wilde Matthews, which described the proposed transaction:<br /><blockquote><em>Pittsburgh insurer Highmark Inc. struck a deal to acquire the second-largest hospital chain in its region</em>, an ambitious, controversial step that would further blur the lines between those who pay for medical care and those who provide it. <br /><br />Under the tentative plan, nonprofit Highmark will pump as much as $475 million into the five-hospital West Penn Allegheny Health System, which has been operating in the red for the past five years. <br /><br />If state and federal regulators sign off on the plan, Highmark officials say the deal will allow them to move away from traditional fee models that reward providers for providing unnecessary procedures and services. <br /><br />Instead they would pay salaries to doctors, offering them incentives to achieve quality and efficiency goals. The integrated model would also rely on primary-care doctors to coordinate patients' care and focus on preventive efforts. <br /><br />Highmark officials said the deal is the best way to keep West Penn in business. 'It brings our expertise as an insurance company into the provider system,' said Kenneth R. Melani, Highmark's chief executive. </blockquote><br />This deal is unusual because it would unite a health care insurance company/ managed care organization with a hospital system. <br /><br /><strong>The Context: An Already Concentrated Health Care Environment</strong><br /><br />The deal appears in the context of and may be in response to an already concentrated health care environment.  Per the WSJ:<br /><blockquote><em>The newly combined Highmark-West Penn will face off against the University of Pittsburgh Medical Center, which is officially known by its acronym, UPMC. The prestigious $8 billion,19-hospital network employs 2,881 doctors and has <strong>about 56% of the inpatient market share</strong> in Allegheny County. It also owns a health plan with about 1.6 million members</em>. <br /><br />UPMC's current contract with Highmark runs out next June. Paul Wood, the hospital system's vice president for public relations, said the network won't sign a new one after the acquisition. 'In effect, Highmark expects UPMC to subsidize our competitor,' he said.</blockquote>UPMC has had its issues, too, as discussed in posts <a href="http://hcrenewal.blogspot.com/search/label/UPMC">here</a>.  <br /><br />The deal is also more extraordinary because it was accompanied by several other proposed deals that would create quite a sprawling health care entity.<br /><br /><strong>The Extended Scope of the Merger</strong><br /><br />First, and as noted in the WSJ article, the proposed deal would involve physicians' practices:<br /><blockquote>Highmark may also <em>buy or invest in other providers, including doctor practices</em>, Dr. Melani said.</blockquote>However not noted in the WSJ article, or in a contemporaneous Pittsburgh Post-Gazette <a href="http://www.post-gazette.com/pg/11179/1156765-100.stm">article</a>, was that since 2010 there has also been a proposal on the table for Highmark to merge with a non-profit Blue Cross Blue plan in neighboring Delaware. The latest discussion of this deal can be <a href="http://www.delawareonline.com/article/20110626/BUSINESS/106260317/Layoffs-would-pay-top-execs-well">found on </a>DelawareOnline, and was just noted in a Philadephia Inquirer <a href="http://www.philly.com/philly/insights/in_money/124837394.html">commentary</a>. <br /><blockquote>In Delaware, a bill that would remove a major obstacle to <em>Highmark's proposed affiliation with Blue Cross Blue Shield of Delaware </em>sailed through the legislature, passing the Senate unanimously Tuesday and the House, 34-5, Wednesday.</blockquote><br />That is not all. It seems that while pursuing the merger with Highmark, West Penn Allegheny Health was also pursuing an arrangement with Temple University to set up a branch of its medical school in Western Pennsylvania. As<a href="http://www.pittsburghlive.com/x/pittsburghtrib/news/health/s_741530.html"> noted </a>by the Pittsburgh Tribune Review:<br /><blockquote>West Penn Allegheny Health System leaders expressed optimism on Friday about their partnership prospects with Highmark Inc. as they announced <em>plans with Temple University to establish a four-year medical school campus in the North Side.</em></blockquote>So it appears that lined up against the UPMC behemoth could be another behemoth combining a large Pennsylvania insurance company, a Delaware insurance company, a good-sized hospital system, physicians' practices, and a branch of a medical school.  So we see a new effort to divide the health care supposed "market" among a few large, vertically-integrated health care systems.<br /><br /><strong>The Eerie Shadow of AHERF</strong><br /><br />Maybe all these simultaneous deals, which would apparently create a conglomerate of Highmark Blue Cross, Delaware Blue Cross Blue Shield, West Penn Allegheny Health System, Temple University Medical School, and possibly a large group of doctors' practices, were all being discussed separately because of how they could be seen as a strange shadow of the spectacularly failed Allegheny Health Education and Research Foundation (AHERF) of the late 1990s.<br /><br />As discussed <a href="http://hcrenewal.blogspot.com/2008/07/10-years-later-eerie-echo-of-fall-of.html">here</a>, AHERF was a large integrated health care system formed out of multiple mergers.  AHERF which went bankrupt in 1998, leading to massive layoffs, hospital closures, and the near dissolution of a medical school (which ended up taken over by Drexel University). The former AHREF CEO, whose high compensation (for the time) was accompanied by an autocratic management style, ended up in the local jail on a plea bargain. Note that West Penn Allegheny Health System was formed from some of the pieces of the failed AHERF, and seems to have never fully recovered from its previous troubles.<br /><br />Despite the fact that the AHERF bankruptcy was the second largest US bankruptcy up to its time, this vivid case was notably <a href="http://hcrenewal.blogspot.com/search/label/anechoic%20effect">anechoic</a>. The lack of echoes it originally produced made it prototypical of the anechoic effect. <br /><br />The link to AHERF was briefly noted in the Post-Gazette <a href="http://www.post-gazette.com/pg/11179/1156765-100.stm">article</a>:<br /><blockquote>'They are well-capitalized, and we're not,' said David L. McClenahan, WPAHS board chairman, speaking of Highmark. 'That's putting it mildly.' In the decade <em>since the collapse of the Allegheny Health Education and Research Foundation, whose bankruptcy eventually bore the West Penn Allegheny Health System, WPAHS has been persistently starved for capital</em>, he said.</blockquote>So far, however, the ominous implications of that previous debacle have not been publicly discussed. <br /><br /><strong>How Some Executives Would Gain</strong><br /><br />Perhaps the executives rushing to make a deal are being distracted by the potential for personal gain. The DelawareOnline article noted that current executives of Delaware Blue Cross Blue Shield may be able to pull the ripcords of their golden parachutes if its proposed merger with Highmark goes through:<br /><blockquote><em>Seven executives at Blue Cross Blue Shield of Delaware, for example, are due a combined <strong>$6 million</strong> in severance pay -- equal to about three years of salary -- if they lose their jobs</em>.<br /><br />Details of Blue Cross severance payout packages have attracted attention recently because top executives at Delaware's largest health insurer are busy pressing for a merger with Pittsburgh-based insurer Highmark Inc., which could mean the elimination of some top positions.<br /><br />Highmark has pledged that Blue Cross President and CEO Tim Constantine will keep his job after the merger's closing, if the deal is approved by state regulators. But Constantine, who has an annual salary of $420,000, would be due a $1.6 million payment if he were to lose his job.<br /><br />Six other top executives, who earn between $245,000 and $330,000 annually, have potential payouts equal to about $4.3 million. Highmark has not discussed the fate of those officers, who range in position from the company's general counsel to its chief medical and financial officers.</blockquote><br />That article further noted:<br /><blockquote>Some observers worry that the <em>prospect of large severance payments could cloud the judgments of executives working to close the deal</em>.<br /><br />Considering the size of the Blue Cross payouts in relation to annual salaries, the payout promises deserve attention, said Ethan Rome, executive director of Health Care for America Now, a Washington consumer advocacy group. Severance agreements are typically in place to provide a cushion between jobs, he said. 'Three years is a long time,' Rome said. 'Three years is not a severance. It's a substantial payout.'</blockquote><br />One wonders which other executives involved in these potential deals may also have prospects for either larger compensation or golden parachutes. This could include executives in particular current executives of West Penn Allegheny.  One also wonders whether the creation of this new conglomerate will produce rationales for big raises for the current executives of all the organizations involved who get to work for the new merged entity.  Perhaps someone should ask them. <br /><br /><strong>Further Implications</strong><br /><br />Of course the various mergers were touted as productive of new efficiencies, as attempts to obtain increased market power usually are. As reported by the Post-Gazette:<br /><blockquote>While the short-term goal of this partnership is to preserve a 'fragile' Pittsburgh hospital system, the long term goal, said Highmark CEO and President Kenneth Melani, is the <em>creation of a new model of health care, one that is outcomes based, with an integrated delivery and financing system.</em><br /><br />;Health care services are becoming less affordable,' he said. <em>'It's important to have choice</em>. It's important to have a second system.'</blockquote><br />And, as we discussed <a href="http://hcrenewal.blogspot.com/2008/07/10-years-later-eerie-echo-of-fall-of.html">here</a>, the former CEO of AHERF pledged "new forms of organization that are more flexible, more adaptive, and more agile than ever before." But common sense and history suggests that increasing market domination will be good mainly for the market dominators, not their customers, or in this case, their patients, clients and students. <br /><br />As Dr Westby Fisher <a href="http://www.medcitynews.com/2011/06/highmarks-hospital-acquisition-a-lose-lose-for-doctors-and-patients/">asserted</a> about how the new conglomerate will likely own physicians' practices:<br /><blockquote>So <em>doctors lose more professional independence and autonomy and have even more chance that clinical decisions will be compromised by bureaucratic dictates</em>. Yet ask patients who they want steering the boat when they get sick: their doctor.<br /><br />It continues to be clear who the winners and losers are as health care reform unfolds. But <em>when doctors lose autonomy, patients lose autonomy.</em><br /><br />It’s that simple.<br /><br />To argue that the only way to control the health care dollar is to bloat the bureaucratic levels of our system is a fool’s game. However, <em>bureaucrats promote bureaucrats – it’s always been this way. Until doctors and the public speak up, there’s simply nothing to stop this train.</em></blockquote><br />So I wonder if this complex merger will get more scrutiny than the many mergers that have preceded it in the last 30 years. Someone who is more likely to get answers than I am should be asking:<br />- What evidence is there that this merger will lead to any benefits to individual patients or to the public health?<br />- How will any efficiencies achieved benefit anyone other than the organizations' current and future managers?<br />- What sorts of management layers will the complexity of the multiple mergers proposed necessitate between current Highmark executives and current management of its new acquisitions?<br />- If the current problem is existing market concentration, why will these mergers be a better solution than a direct approach to that concentration?<br />- How will the current leaders of all the organizations involve personally benefit from this merger?<br /><br />Meanwhile, increasing concentration of power in health care continues to benefit the leaders of the enlarging health care organizations, while reducing the choice of individual patients and the autonomy of health care professionals.

The Restless Shade of AHERF and the Return of Merger Mania: Highmark Tries to Buy Another Insurance Company, a Hospital System, a Medical School, and Physicians' Practices

Starting in the 1990s, as US health care became more commercialized, a wave of mergers lead to super-sized hospital systems, insurance companies, and pharmaceutical companies.  Not all those mergers, …

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Should the President of the University of Michigan be Held Accountable for Johnson and Johnson's Adulterated Drugs and Defective Devices?

We first started to discuss the intense conflicts of interest generated when leaders of academic medicine are also members of boards of directors of for-profit health care corporations <a href="http://hcrenewal.blogspot.com/2006/03/new-species-of-conflict-of-interest-in.html">in 2006</a>.<br /><br />The issue really made the big time in 2010 when the New York Times published a front page <a href="http://www.nytimes.com/2010/08/01/business/01prez.html">article</a> in its Sunday Business section about whether university presidents who also were corporate directors were part of an "academic-industrial complex."<br /><br /><strong>University of Michigan President Mary Sue Coleman as a Director of Johnson and Johnson</strong><br /><br />One such director we<a href="http://hcrenewal.blogspot.com/2010/04/smoke-screen-how-conflict-of-interest.html"> discussed</a> this year is Mary Sue Coleman, President of the University of Michigan, and hence leader of a prestigious medical school and academic medical center, who is also Director of the large health care conglomerate, Johnson and Johnson. This relationship became locally controversial when President Coleman supported a smoking ban on campus, and critics pointed out that Johnson and Johnson is a prominent maker of smoking cessation products. <br /><br />Now President Coleman's role on the Johnson and Johnson board made it into the national media, as the topic of <a href="http://www.detnews.com/article/20100914/OPINION01/9140316/1008/opinion01/Ethics-problems-in-higher-ed">an editorial</a> in the Detroit News:<br /><blockquote>Should public officials moonlight as corporate operatives? This is a question being raised at the University of Michigan in the wake of the administration's decision to ban smoking on campus.<br /><br />While some students have criticized the ban, many take issue with the priorities of the administrators who backed it: Specifically, U-M President Mary Sue Coleman, whose decision-making may have been influenced by her membership on the board of Johnson & Johnson, a private company. The right thing for Coleman to do would be to resign from her corporate position, or, at the very least, refuse to accept payment.</blockquote>(Not to toot my own horn, but I thank the editorial writer for quoting me as a "high-profile" ethicist.)<br />The issue in this editorial, and in the earlier discussion of President Coleman's responsibilities for Johnson and Johnson, was whether the latter could influence specific decisions made in the former role.<br /><br />However, events since our original posts on this case should create a new set of concerns. <br /><br /><strong>Johnson and Johnson's Recall of Over-the-Counter Childrens' Medications</strong><br /><br />Johnson and Johnson has been dealing with a series of crises generated by revelations of problems in how it manufactures many of its marquee drugs and devices.<br /><br />We posted <a href="http://hcrenewal.blogspot.com/2010/05/19-million-means-never-having-to-say.html">here</a> about problems in the manufacture of well known over-the-counter childrens' medications, such as childrens' Tylenol (acetaminophen) and Motrin (ibuprofen), by Johnson and Johnson's McNeil Consumer Healthcare subsidiary. Medications were found to be contaminated, and the plant making them was shut down. <br /><br /><strong>Stringent Cost Cutting, Merger Mania, and Executives Who Don't Understand their Company's Business</strong><br /><br />Since then, investigative <a href="http://money.cnn.com/2010/08/18/news/companies/jnj_drug_recalls.fortune/index.htm">reporting</a> by Fortune suggested that quality control problems were the result of that tactic popular among corporate executives to boost profits and hence their own over-stuffed pay checks, stringent cost cutting:<br /><blockquote>McNeil's quality-control department thrived for a few years. Then, not long after Larsen retired in 2002, it began to slowly weaken. <em>The culprit was a familiar one -- cost cutting</em> -- but in a subtler form. There were no wholesale layoffs in quality control. Instead <em>experienced staffers were repeatedly laid off and replaced with newbies</em> who mostly lacked technical pharmaceutical experience. By 2008 the analytical laboratory, formerly staffed almost entirely by full-time scientists, was <em>half-full of contract workers</em>, according to a former manager there.<br /><br />Once stricter than a schoolmarm, <em>the department grew lax</em>. The team that tested the production lines was dubbed the 'EZ Pass system,' according to a former quality-control employee.</blockquote><br />Quality problems also appeared to be products of another familiar tactic that "brilliant" CEOs use to quickly boost the bottom line, mergers and acquisitions:<br /><blockquote>At the end of 2006, J&J, on the hunt for growth amid slowing sales and profits, <em>completed the $16.6 billion acquisition of Pfizer's (PFE, Fortune 500) consumer health care division</em>....<br /><br />The merger dramatically altered McNeil's position. It had previously been part of the pharma unit, but after the deal it was folded, along with the Pfizer group, into J&J's consumer sector, headed by Colleen Goggins. According to former executives, the difference between divisions was both cultural and financial. 'The people who ran pharma understood the requirements associated with [regulatory] compliance and the investments required to keep that up,' says a former executive. <em>Consumer relied more on marketing, or 'smoke and mirrors,'</em> as an ex-McNeil director scoffs. Perhaps the most striking difference was in profit margins. Companies in the consumer group typically had margins around 10%; McNeil generated more than twice that.</blockquote><br />So,<br /><blockquote>Their new consumer bosses were now in charge of reducing McNeil's spending so that the company could meet the merger targets. <em>Goggins looked to squeeze every cost</em>, former employees say, and her team leaned heavily on McNeil, with its juicy margins, to absorb the cutbacks. <em>'I was given savings goals that were mind-boggling, unheard-of,</em>' says one former executive.</blockquote><br />And the merger brought out another common feature of contemporary management, executives with plenty of power, but almost no knowledge about or experience in the sort of work done by their subordinates:<br /><blockquote><em>Because the consumer executives lacked pharmaceutical experience, former McNeil employees say, they demanded ill-advised operational reductions</em>. One VP remembers arguing with one of Goggins's</blockquote><br /><strong>A Growing List of Recalls and Mistakes</strong><br /><br />While we learned about how Johnson and Johnson executives pursued all the currently fashionable management techniques to make more money, but likely to the detriment of the quality and safety of their products, we also learned that the problems at the company were not limited to a single factory, the specific products listed above, or a single unit of the company.<br /><br />The company also recalled some contact lenses made by Johnson and Johnson Vision Care, as <a href="http://www.google.com/hostednews/ap/article/ALeqM5gKNufIGxLdxRyZ8TPAzFIe83oA1gD9HPEJA01">reported by the Associated Press</a>,<br /><blockquote>Health giant Johnson & Johnson has issued its <em>ninth recall of a consumer health product in a year, this time covering millions of 1 Day Acuvue contact lenses sold in Japan and two dozen other countries in Asia and Europe.</em><br /><br />The affected contact lenses were mostly sold in Japan and none were sold in the U.S. or Canada, the company said.<br /><br />Johnson & Johnson said Monday it had received a limited number of complaints from customers in Japan that they experienced an unusual stinging or pain when inserting the Acuvue TruEye Brand contact lenses.</blockquote><br />Then it recalled prosthetic hips made by its DePuy orthopedic unit, as <a href="http://www.medscape.com/viewarticle/727699">reported by Medscape</a>,<br /><blockquote>An orthopaedic unit of Johnson & Johnson (J&J) is <em>voluntarily withdrawing 2 implant systems for hip replacement after learning that roughly 1 of 8 patients in England and Wales who received the implants needed a second hip replacement operation</em>.<br /><br />The 2 devices under recall are the ASR XL Acetabular System, a metal cup fitted into the pelvis and the corresponding metal ball that replaces the femoral head, and the ASR Hip Resurfacing System, which is similar except that a metal cap is fastened to the femoral head. Both devices are manufactured by DePuy Orthopaedics of J&J. </blockquote><br />Then the US Food and Drug Administration (FDA) warned Johson and Johnson's DePuy unit about its marketing of some different joint replacement products, as <a href="http://online.wsj.com/article/BT-CO-20100824-710295.html">reported by the Wall Street Journal</a>,<br /><blockquote>A Johnson & Johnson (JNJ) unit is <em>marketing joint-replacement products without the required approval from federal regulators</em>, the U.S. Food and Drug Administration said in a warning letter recently made public. <br /><br />In the letter, the FDA said J&J unit DePuy Orthopaedics Inc. <em>is illegally marketing its TruMatch Personalized Solutions system because it hasn't received appropriate clearance to sell the product. Additionally, the FDA found that DePuy is promoting another system--its Corail Hip System--for uses that haven't yet been approved.</em> <br /><br />'A review of our records reveals that you have not obtained marketing approval or clearance before you began offering the TruMatch Personalized Solutions System for sale, which is a violation of the law,' the FDA said in the letter. <br /><br />The FDA added that the <em>Corail Hip System has been misbranded</em> and asked DePuy to immediately stop marketing the Corail system for unapproved uses. </blockquote><br />And a few days ago, the now embattled head of the Johnson and Johnson consumer products unit, which was central to some of the earlier recalls, but not to some of the later problems, announced her resignation, as <a href="http://www.nytimes.com/2010/09/17/business/17tylenol.html">reported by Natasha Singer and Reed Abelson writing for the New York Times</a>,<br /><blockquote>A longtime senior executive at Johnson & Johnson in charge of the consumer products division is<em> leaving the company early next year</em>, signaling a shake-up after a troubling series of recalls, including of children’s Tylenol, tarnished the company’s reputation in the last year. <br /><br />The company said Thursday that the executive, Colleen A. Goggins, who testified this spring before a Congressional committee investigating the recalls, would retire in March. Ms. Goggins, 56, has worked at Johnson & Johnson since 1981 and was a member of the company’s senior leadership. </blockquote><br /><strong>Who Will Be Accountable for a Company in Disarray?</strong><br /><br />Johnson and Johnson was one of the most trusted names in health care for a long time, perhaps partially because of its forthright response to the apparently external contamination of its Tylenol products in the 1980s. Now it appears to be a company in disarray, battered by numerous recalls of apparently contaminated, adulterated, or defective products, both drugs and devices, allegations that its conventional management wisdom lead to these quality and safety problems, and now with at least one key senior manager leaving. <br /><br />All that went wrong is not exactly clear yet. Clearly, however, top managers, and the board of directors to whom they report ought to be accountable.<br /><br />Here is where we return to the case of University of Michigan President Mary Sue Coleman. She is, after all, well-paid to be a director of Johnson and Johnson. Therefore, she ought to be accountable for the type of people hired as top managers, and the general direction of their management. She ought to be accountable for letting Johnson and Johnson CEO William Weldon and consumer products head Colleen Goggins continue in office, and receive outsized compensation, ($19,847,026 and $5,345,737  total compensation respectively last year, see <a href="http://hcrenewal.blogspot.com/2010/05/19-million-means-never-having-to-say.html">here</a>). She also ought to be accountable for the general thrust of their management, including excess cost-cutting, seeking mergers without clear plans for assimilating them, and putting people who did not understand pharmaceuticals in charge of pharmaceutical production.<br /><br />The original controversy about President Coleman's role on the Johnson and Johnson board focused on whether her decision to promote a smoke free campus resulted from her conflict of interest.  Then, one defense mounted by President Coleman's spokesperson was:<br /><blockquote>'It's essential that <em>U-M have a voice and interact with the business world</em>,' said Rick Fitzgerald, a U-M spokesman. 'She thinks it's her duty <em>to understand what the commercial world is doing</em>.'</blockquote><br />Now President Coleman has had a chance to have a voice and interact with Johnson and Johnson, and understand what it is doing by assuming a position that gives her ultimate responsibility for the company's top leadership and the direction they took. Now it appears the leadership may have been faulty, and their direction ill-advised. <br /><br />Will President Coleman take responsibility for that? Maybe some enterprising student journalists at the university should ask her.<br /><br />Meanwhile, this case now illustrates another important facet of the problems created when leaders of academic medicine serve on boards of directors of health care corporations. The mission of the University of Michigan's medical school and academic medical center includes taking the best possible care of individual patients. Taking the best possible care of individual patients cannot be done when the drugs physicians recommend or prescribe in good faith turn out to be adulterated, or when the devices they employ in good faith turn out to be faulty. <br /><br />President Coleman's primary interests and entrusted responsibilities include upholding the best possible care for individual patients. Presiding over a company whose sloppy and ill-informed leadership, and misplaced priorities lead to the production of adulterated medicines and defective devices seems to conflict with this primary interest and entrusted responsibility.<br /><br />Maybe all those academic leaders who accepted apparently cushy jobs on corporate boards will reconsider their decisions when they start being held responsible for their companies' poor leadership and poor decisions leading to poor health care outcomes of the use of their companies' products. They may really start to reconsider when journalists learn that academic leaders are more accessible than the current and ex-CEOs who also populate corporate boards.<br /><br />Meanwhile, academic medicine ought to really rethink whether continuing to defend the "new species of conflicts of interest" will soon become counter-productive.

Should the President of the University of Michigan be Held Accountable for Johnson and Johnson's Adulterated Drugs and Defective Devices?

We first started to discuss the intense conflicts of interest generated when leaders of academic medicine are also members of boards of directors of for-profit health care corporations in 2006.The iss…

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