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How Did the CEO Who Presided Over the Company that Paid a $1.7 Billion Fraud Settlement Become a Credible Candidate for a State Governorship?

This one fits in the "you just can't make this stuff up" category.  Let me provide a <a href="http://articles.sun-sentinel.com/2010-05-20/news/fl-rick-scott-governor-hca-20100520_1_medicare-fraud-case-hospitals-in-el-paso-hospital-giant-columbia">summary</a> from the Fort Lauderdale, Florida Sun-Sentinel, <blockquote>It was and still is the biggest Medicare fraud case in U.S. history and ended with the hospital giant Columbia/HCA paying a record $1.7 billion in fines, penalties and damages. Now the man who ran the company at the time wants to be Florida's governor. Rick Scott was co-founder and CEO of Columbia/HCA in the 1990s, when the FBI launched a massive, multi-state investigation that led to the company pleading guilty to criminal charges of overbilling the government. Today, Scott is a Republican candidate for governor, running his campaign from an office in downtown Fort Lauderdale.</blockquote> Here is the Sun-Sentinel's review of the Columbia/ HCA case from the end of the 20th century: <blockquote>A Dallas lawyer whose clients included health care companies, Scott came from humble Midwestern roots — his father was a truck driver and his mother a JC Penney sales clerk. In 1987, at the age of 34, he started Columbia, investing $125,000 to buy two hospitals in El Paso, Texas. Within a decade, he was running the largest health care company in the country with more than 340 hospitals and $20 billion in annual revenue. Columbia aggressively bought other health care companies, including the Hospital Corporation of America, and became Columbia/HCA. The federal government began investigating in the mid 1990s with the help of whistleblowers including [Jim] Alderson and John Schilling, a Medicare reimbursement supervisor in Fort Myers. Among the fraudulent practices uncovered: billing Medicare and Medicaid for unnecessary lab tests, creating false diagnoses to claim a higher reimbursement and charging for marketing and advertising costs that were disguised as community education. The company even billed the government for tickets to the Kentucky Derby and country club dues, according to news accounts. The government's investigation became public in 1997 and that July, the FBI raided Columbia/HCA offices in seven states, including Florida. Days later, the board of directors announced Scott was out.</blockquote> The St Petersburg Times/ Miami Herald Politifacts Florida <a href="http://www.politifact.com/florida/statements/2010/may/20/alex-sink/rick-scott-healthcare-ceo-faces-questions-a/">web-site </a>included more details about the nature of the offenses alleged: <blockquote>* Columbia billed Medicare, Medicaid, the Defense Department's TRICARE health care program, and the Federal Employees' Health Benefits Program for lab tests that were not medically necessary or not ordered by physicians; * The company attached false diagnosis codes to patient records in order to increase reimbursement to the hospitals; * The company illegally claimed non-reimbursable marketing and advertising costs as community education; * Columbia billed the government for home health care visits for patients who did not qualify to receive them. </blockquote> It also documented the guilty pleas resulting from the charges: <blockquote>Southern District of Florida (Miami) -- Columbia Homecare Group Inc., a subsidiary of Columbia, will plead guilty to one count of conspiracy to defraud the U.S. and to violate the Medicare Anti-kickback Statute involving its fraudulent business in the purchase and operation of home health agencies and fraudulent billing of Medicare for management and personnel costs. The criminal fine is $3.36 million; Northern District of Georgia (Atlanta) -- Columbia Homecare Inc. will plead guilty to one count of violating the Medicare Anti-kickback Statute related to purchase of home health agencies. The criminal fine is $3.36 million; Department of Justice Criminal Fraud Section -- Another subsidiary, Columbia Management Companies Inc., will plead guilty to one count of conspiracy to defraud the U.S. and to make and use false writings and documents in connection with its fraudulent 'upcoding' of bills to Medicare for patients diagnosed with certain types of pneumonia. The criminal fine is $27.5 million. This investigation was based in Nashville, Tennessee; Middle District of Florida (Tampa) -- Columbia Homecare Group will plead guilty to one count of conspiring to defraud the U.S. and one count of conspiracy to violate the Medicare Anti-kickback Statute in connection with the purchase and operation of home health agencies. The criminal fine is $8.4 million. Also, Columbia Management Companies will plead guilty to eight counts of making false statements to the U.S. in connection with the submission of false cost reports to Medicare. The fine amount is $22.6 million; and, Western District of Texas (El Paso) -- Columbia Homecare Group will plead to a conspiracy to pay kickbacks and other monetary benefits to doctors in violation of the Medicare Anti-kickback Statute. The criminal fine is $30.1 million.</blockquote> The case was extensively dicussed in <a href="http://www.moneydrivenmedicine.org/">Money-Driven Medicine</a> by Maggie Mahar, who suggested that the business culture that Scott created lead to these crimes: <blockquote>Scott was obsessed not just with winning, but with money</blockquote> <blockquote>He bullied his subordinates. 'My father owned and operated a millinery factory in the garment district and [even in that tough garmento environment] I never witnessed such an extent of demeaning, debasing, and devaluing behavior as I personally experienced at Columbia,' Mark E. Singer, administrative director for medicine at Michael Reese Hospital in Chicago told The New York Times.</blockquote> <blockquote>Internal records showed that at Columbia/ HCA, just as at many other for-profits, executive salaries hinged not on such criteria as reducing infections or lowering death rates, but on meeting financial targets like 'growth in admissions and surgery cases.'</blockquote> <blockquote>Scott's detractors claimed that his cost cutting threatened patient care and safety: 'Gloves come in only one size and rip easily,' complained hospital workers in Florida. In California, nurses protested 'filty conditions,' and being 'stretched to the limit'....</blockquote> The Sun-Sentinel article included allegations that Scott actually knew about the crimes to which Columbia/ HCA subsidiaries pleaded guilty: <blockquote>Alderson thinks Scott had to know. The hospitals kept two sets of books: One showed the reimbursements actually submitted to Medicare and the other, marked confidential, detailed those charges that would likely be rejected if caught by federal auditors. The company kept funds in reserve to repay the government for those claims and once the timeframe for an audit had passed, the reserves would be reclassified as revenue, Alderson said. 'They had $1 billion in play in these reserves,' said Alderson, who now lives in La Quinta, Calif., and speaks to college students and Rotary clubs about business ethics. 'Anywhere from 25 to 33 percent of their bottom line was these reserves, so you bet he knew about it.''</blockquote> Scott was never charged with a crime. Instead, he "left Columbia/HCA with $10 million in severance and stock valued at $300 million." Now, he "lives in Naples in a $9 million house on the Gulf of Mexico." But, <blockquote>Joe Ford, the FBI agent who led the Columbia/HCA investigation and then took on corporate fraud at Enron, retired from the bureau and lives near San Francisco. He declined to comment for this story article but was quoted in a 2008 book by Schilling as saying that his biggest regret in the Columbia/HCA case was not charging corporate executives. 'After Columbia/HCA, I realized people, individual corporate officers, had to be held ccountable for the actions of their companies,' Ford said in Schilling's book, 'Undercover: How I Went from Company Man to FBI Spy – and Exposed the Worst Healthcare Fraud in U.S. History.' 'Instead of just giving us [the government] money, people need to go to jail,' Ford said in the book. 'I learn from my mistakes, and this was my first big one.'</blockquote> Of course, we have noted a parade of <a href="http://hcrenewal.blogspot.com/search/label/legal%20settlements">legal settlements</a> involving and <a href="http://hcrenewal.blogspot.com/search/label/crime">guilty pleas and criminal convictions</a> by  health care organizations, (or often just subsidiaries conveniently available to take the rap).  As we have noted, resulting fines may be just be treated as costs of doing business by health care leaders.  Almost never have the people who authorized, directed, or implemented wrong-doing almost never suffer negative consequences. Instead, they may just continue to haunt health care and society at large. Mr Scott's campaign web-site noted "mistakes were certainly made at Columbia/ HCA. As CEO I accept responsibility for what happened on my watch." If only.... To conclude, as I have repeated seemingly infinitum, we will not deter unethical behavior by health care organizations until the people who authorize, direct or implement bad behavior fear some meaningfully negative consequences. Real health care reform needs to make health care leaders accountable, and especially accountable for the bad behavior that helped make them rich. ADDENDUM (27 May, 2010) - see comments by Maggie Mahar <a href="http://www.healthbeatblog.com/2010/05/hca-columbias-rick-scott-the-next-governor-of-florida.html">on the Health Beat Blog</a>.

How Did the CEO Who Presided Over the Company that Paid a $1.7 Billion Fraud Settlement Become a Credible Candidate for a State Governorship?

This one fits in the "you just can't make this stuff up" category. Let me provide a summary from the Fort Lauderdale, Florid...

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Genzyme Settles

In late 2009, we <a href="http://hcrenewal.blogspot.com/2009/11/genzymes-remarkable-businessstrategy.html">posted </a>about problems at a Genzyme plant that manufactured some fabulously expensive drugs, e.g. Cerezyme whose cost to patients approximated $160,000 a year.  We thought then that for a drug costing that much, the company ought to have figured out a conservative process to provide pure and unadulterated product.  In a later <a href="http://hcrenewal.blogspot.com/2009/11/was-is-worst-biotech-ceo-worth.html">post</a> we also why a company that could afford to make its CEO very rich could not afford to adequately maintain its manufacturing facilities. Now Genzyme has reached a settlement with the US Food and Drug Administration (FDA) on the matter.  As <a href="http://www.boston.com/business/healthcare/articles/2010/05/25/supervision_of_7_8_years_ordered_for_genzyme/">reported</a> by the Boston Globe, <blockquote>Genzyme Corp will remain under federal oversight for the next seven to eight years as it works to fix quality-control problems that have bedeviled its Allston Landing plant for 15 months. The timetable was spelled out in a consent decree struck between Genzyme and the Food and Drug Administration. Under its terms, Genzyme will pay a previously disclosed $175 million federal fine, the first in its 29-year history. The agreement, filed with the US District Court in Boston yesterday, is subject to court approval. Although the company said last month that it expected to pay the $175 million fine, other terms of the consent decree were not known until yesterday. Among them, Genzyme agreed to move fill-finishing work for its domestic drug shipments out of the Allston site by November. The transfer of fill-finishing for overseas shipments will take place by Aug. 31, 2011. Fill finishing is the process of pouring drugs into vials for shipments to hospitals and clinics, where they are administered to patients. Late last year, inspectors found bits of steel, rubber, and fiber in some drugs during the fill-finishing process in Allston. The work will be moved to a Genzyme operation in Waterford, Ireland, and to subcontractors such as Hospira Inc., subject to approval by federal regulators. The firm faces additional fines if it fails to meet FDA deadlines In all, the Cambridge biotechnology giant will spend two to three years in remediation under the consent decree, and another five years under oversight by a third-party contractor, the Quantic Group, a Livingston, N.J., consulting firm focused on boosting manufacturing quality and safety. Quantic will craft a remediation plan with Genzyme, and the company could be fined $15,000 a day for missing milestones.</blockquote> So now Genzyme is marching in our <a href="http://hcrenewal.blogspot.com/search/label/legal%20settlements">parade of settlements</a>.  While this settlement is of charges related to very fundamental violations, failure to manufacture pure and unadulterated drugs, in one important way its provisions seem similar to many other such settlements we have now seen.  The settlement fines the company as a whole, but results in no penalties for any individuals.  As we have noted before, fines, even fines larger than this one, can be regarded just as a cost of doing business (especially when the business is very lucrative.  The company's <a href="http://www.sec.gov/Archives/edgar/data/732485/000104746910004189/a2198211zdefc14a.htm">2010 proxy statement</a> noted that even in 2009, when production was affected by the plant closure, "sales of Cerezyme were $793 million, compared with $1.2 billion in 2008. Sales of Fabrazyme were $431 million compared with $494 million in the previous year. So the company was fined $175 million for production problems with two drugs that brought in over $1.2 billion in revenue in 2009.)  Furthermore, the fine's impact may be diffused over the whole company, and ultimately comes out of the pockets of stockholders, employees, and customers alike.  It provides no negative incentives for those who authorized, directed, or implemented the behavior in question.  So it is not clear that settlements like this deter future wrong-doing. Additionally, as we noted in the <a href="http://hcrenewal.blogspot.com/2009/11/was-is-worst-biotech-ceo-worth.html">earlier post</a>, the current CEO of Genzyme has gotten quite rich by virtue of his position.  While the <a href="http://www.sec.gov/Archives/edgar/data/732485/000104746910004189/a2198211zdefc14a.htm">2010 Genzyme proxy statement</a> indicates his compensation was affected by the financial impact of the production slowdown, even so he continued to get richer, albeit at a slightly slower pace than he did before.  That statement indicates that in 2009, CEO Henri Termeer's total compensation was a mere $9,507,403, down from $12,699,301 the previous year.  The main difference was that his non-equity incentive plan compensation dropped from $1,962,725 to 0.  While a $3 million plus salary decrement seems sizable, it is hard to conceive of an executive who makes nearly $10 million a year as suffering major financial consequences from the current debacle.  As I have said before, endlessly, we will not deter unethical behavior by health care organizations until the people who authorize, direct or implement bad behavior fear some meaningfully negative consequences. Real health care reform needs to make health care leaders accountable, and especially accountable for the bad behavior that helped make them rich.

Genzyme Settles

In late 2009, we posted about problems at a Genzyme plant that manufactured some fabulously expensive drugs, e.g. Cerezyme whose cost to pat...

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

We have postulated that one of the key reasons US health care has become so dysfunctional is that the leaders of some of the most august health care institutions have strayed from, if not totally abandoned their organizations' fundamental missions.  There are many possible reasons for this phenomenon, but one is that the ultimate stewards of not-for-profit health care organizations, their boards of directors or trustees, have become uninterested in the mission, or impotent to uphold it.  So, we have tried to figure out what has happened to these boards that has lead to this sorry state. Dartmouth College: the Packing of the Board of Trustees One example we have come frequently discussed (beginning <a href="http://hcrenewal.blogspot.com/2007/09/oceania-in-new-hampshire.html">here</a>) is that of Dartmouth College, despite its name, really a university, and one of the elite American universities which includes a well-regarded medical school.   For a long time, Dartmouth had one of the more accountable and representative systems of governance found in US universities.  Recently, however, this accountability and transparency was challenged by some of the College's own leaders.  Most boards of trustees are self-elected.  When an old member leaves, the new members elect his or her successor.  Dartmouth alumni, however can elect eight members of the board of trustees. Until recently, eight others were "charter trustees," who were individually chosen by the other charter trustees, and two were ex-officio. Although the College's Association of Alumni traditionally nominated alumni to run for trustee positions, candidates could be nominated by petition, and starting in 2004, four such petition candidates were elected. As <a href="http://www.thefire.org/index.php/article/10355.html">described</a> by FIRE, the Foundation for Integrity and Responsibility in Medicine, this more open process fostered change in how the university was lead, and seemed to foster renewed attention to the institution's mission: <blockquote>These trustees spoke out when they perceived their alma mater as not living up to its mission, and Dartmouth students benefited. In May 2005, the college repealed its speech code, and it immediately moved from FIRE's 'red-light' rating and became a 'green-light' institution.</blockquote> As might be expected, the reigning leadership was not pleased. <blockquote>Some campus officials viewed the propensity of petition candidates to voice their opinions on illiberal policies as detrimental to the school's image. The Wall Street Journal profiled T.J. Rodgers, a petition-nominated trustee, who explained the criticisms leveled at the 'divisive dissidents.' 'If 'divisive' means there are issues and we debate the issues and move forward according to a consensus, then divisive equals democracy, and democracy is good. The alternative, which I fear is what the administration and [Board of Trustees Chairman] Ed Haldeman are after right now, is a politburo-one-party rule.'</blockquote> In 2007, in apparent response to the "divisiveness" of the petition trustees, the Charter Trustees proposed increasing their own numbers. Chairman Ed Haldeman's rationale for this, as we discussed <a href="http://hcrenewal.blogspot.com/2009/04/hedge-fund-u-version-2.html">here</a>, was to ensure that the board "has the broad range of backgrounds, skills, expertise, and fundraising capabilities needed," and that the board members would possess "even more diverse backgrounds." Charter Trustees or "Shadow Bankers"? Yet when we examined the backgrounds of the current charter trustees, we found that they exhibited little diversity. Remarkably, three-quarters (6/8) were in leaders of the finance sector. The board chairman, Ed Haldeman, was then the leader of Putnam Funds.  Now, he is the <a href="http://www.freddiemac.com/bios/exec/haldeman.html">CEO of "Freddie Mac."</a>  In 2007, the significance of this kind of lack of diversity were not clear.  However, it did seem strange that those accused of seeking to form a "politburo" came from the Wall Street, the street that the left once loved to hate. However, by late 2008, the world economy descended into an unprecedented financial collapse. Many concluded that the global economic collapse was caused by arrogance, greed, and corruption within the financial sector. This suggested that leadership of academia, and academic medicine in particular, by leaders of the finance sector might not, in retrospect, have been a such a good idea. When we reexamined the composition of the now enlarged cohort of Charter Trustees, however, we found nine of 13 "charter" trustees were leaders in finance, now including three in asset management, two in private equity, one in the field formerly known as investment banking, one in venture capital, one in mutual funds, and one in strategic consulting and investment. Of the remaining four, one was the CEO of a large diversified corporation that has a major finance subsidiary. The remaining three were two physicians and a pharmaceutical corporate CEO. Given the ongoing financial chaos at the time, we again suggested that a board dominated by business leaders in the finance sector might not be a good idea. Last week, a report came out suggesting why we were right. Charter Trustees as Dartmouth's Own "Shadow Bankers" "<a href="http://www.tellus.org/publications/files/endowmentcrisis.pdf">Educational Endowments and the Financial Crisis: Social Costs and Systemic Risks in the Shadow Banking System</a>," published by the Center for Social Philanthropy, Tellus Institute, focused on how prominent educational institutions, including Dartmouth College, came to invest much of their endowments in risky, illiquid "alternative" investments, the sort provided by the "shadow banking system." The report noted that this change lead to greater financial risks, leading to recent losses and consequent sharp cutbacks in spending, programs, and employment at the affected institutions. In particular, however, it focused on leadership and governance problems at the institutions that lead to this state of affairs. <blockquote>Although the emergence of the high-risk Endowment Model of Investing has taken place against the backdrop of powerful forces of financial globalization and the influence of Modern Portfolio Theory, its consolidation and influence today at colleges and universities depend vitally on college leaders: senior administrators, trustees, and investment managers, especially the increasingly prominent role of chief investment officer, or CIO. The financial crisis has in many ways been a crisis of leadership. The precipitous declines endowments have suffered during the credit crisis need to be understood as the logical outcome of the Endowment Model’s high risk strategies, but behind the model stand those who are ultimately responsible for its execution: whether as professional money managers, investment officers, affiliated investment management companies, outside managers, or investment consultants, or as the fiduciaries sitting on governing boards and investment committees.</blockquote> At Dartmouth, in particular, the report focused on conflicts of interest among the board of trustees: <blockquote>When it comes to weakened endowment oversight, the most glaring problem arises from trustees from the finance industry whose firms provide investment management services. One of the most disconcerting cases in this respect is that of Dartmouth College, where the sudden departure of CIO David Russ in 2009 created a leadership vacuum over endowment management. The college’s investment committee chair and trustee Stephen Mandel has played the CIO role on a voluntary, part-time basis since last summer and will continue to do so until he becomes chair of the board of trustees later this year. At the same time, Mandel’s firm, Lone Pine Capital LLC, a well known hedge-fund complex he founded in 1997, has also managed an investment mandate from the college’s endowment valued originally at $10 million. Although the college has a conflict-of interest policy and is required to disclose such 'pecuniary benefit transactions' with the state of New Hampshire, it would seem difficult for fellow trustees to provide proper oversight of investments managed by a fellow trustee serving as the de-facto CIO. Additionally, if Mandel recuses himself from committee or board deliberations related to his firm, then the investment committee must function without its chair. However, the problem is magnified because Mandel is only one of more than half a dozen Dartmouth trustees whose firms manage multimillion-dollar investments for the endowment, according to the college’s filings with Charitable Trusts Unit of the New Hampshire Department of Justice. Leon Black’s firm Apollo Management has reportedly managed at least $40 million in Dartmouth investments. Russell Carson’s private equity firm[Welsh, Carson, Anderson and Stowe] has reportedly received at least $45 million in commitments of capital from Dartmouth. William Helman, IV’s venture capital firm Greylock Partners, has reportedly received $10 million investment mandates from the college, while R. Bradford Evans’ firm Morgan Stanley has done multiple transactions with the college, varying from investments in international real estate and hedge funds to bond issuances, all at undisclosed levels. P. Andrew McLane [T A Associates] and Jonathan Newcomb [Leeds Weld and Co] have also had reported interests in college investments at undisclosed levels. For an endowment of its size— Dartmouth’s endowment fell to less than $3 billion in fiscal year 2009—the deep dependence on trustees’ own businesses for endowment management seems disproportionate.</blockquote> Thus, one half of the membership of Dartmouth's Charter Trustees were also being paid by Dartmouth to manage its endowment investments.  However, as the Tellus Institute report noted, <blockquote>Leading experts on nonprofit board governance, such as Richard Chait at Harvard University, stress that colleges should simply not do business with the companies of their board members, in order to avoid inevitable distractions and the sense of divided loyalties that arise, to say nothing of appearances of self-dealing and personal enrichment</blockquote> Another "Missing Link": Board Members Doing Business with the Organizations They are Supposed to Steward We have frequently discussed the web of conflicts of interest that now permeates health care.  Most of the conflicts we have discussed up to now involve physicians or academicians who have financial ties to pharmaceutical, biotechnology, and device companies.  Health care organizational leaders also do business  with the organizations they lead have not until recently been a topic of discussion, mainly because such conflicts of interest have rarely been disclosed. It looks like this is going to change.  The US Internal Revenue Service sought disclosure of such conflicts of interest affecting hired executives and boards of trustees of not-for-profit organizations beginning in 2009.  These disclosures, reported on IRS form 990, are just beginning to be made public.  We just <a href="http://hcrenewal.blogspot.com/2010/05/at-upmc-dealings-with-board-members.html">posted</a> about members of the board of directors of a large academic health care system who also lead or owned companies that did substantial business with the system.  Now we see that a substantial portion of the board of trustees of Dartmouth lead financial firms that managed a major portion of the College's endowment, perhaps to the overall detriment of the endowment's performance.  No wonder the Charter Trustees got nervous about petition trustees poking about their business.  As <a href="http://www.boardsource.org/Knowledge.asp?ID=3.364">summarized</a> by BoardSource, there are three traditional duties of members of boards of trustees of not-for-profit organizations: <blockquote>Duty of Care The duty of care describes the level of competence that is expected of a board member, and is commonly expressed as the duty of "care that an ordinarily prudent person would exercise in a like position and under similar circumstances." This means that a board member owes the duty to exercise reasonable care when he or she makes a decision as a steward of the organization. Duty of Loyalty The duty of loyalty is a standard of faithfulness; a board member must give undivided allegiance when making decisions affecting the organization. This means that a board member can never use information obtained as a member for personal gain, but must act in the best interests of the organization. Duty of Obedience The duty of obedience requires board members to be faithful to the organization's mission. They are not permitted to act in a way that is inconsistent with the central goals of the organization. A basis for this rule lies in the public's trust that the organization will manage donated funds to fulfill the organization's mission. </blockquote> Letting a board member's firm manage millions of dollars worth of the institution's endowment portfolio seems an obvious violation of the duty of loyalty. (Letting a board member's legal firm handle the institution's legal issues, or having a board member's advertising firm do its marketing, as described in our earlier post, also seem to be obvious violations of this duty.) A board member who sees nothing wrong with doing business with the organization he or she is supposed to steward would likely see nothing wrong in allowing the organization's mission to become a casualty of the means used to protect that business relationship. I suspect we are soon to see many more examples of hired executives and board members of revered not-for-profit organizations who have been doing business on the side with the organizations of which they are supposed to be leaders or stewards.  These sorts of conflicts of interest may be another "missing link" explaining why the leadership and governance of health care organizations has gone so far astray.  As disclosure continues, maybe enough outrage will ensue so that improved leadership and governance will become possible.

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

We have postulated that one of the key reasons US health care has become so dysfunctional is that the leaders of some of the most august hea...

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At UPMC: Dealings with Board Members' Firms and Executives' Relatives, a $5 Million Plus CEO, and 8 $1 Million Plus Executives

Last year we <a href="http://hcrenewal.blogspot.com/2009/05/irs-changes-form-990-to-make-not-for.html">noted</a> that the US Internal Revenue Service (IRS) required more detailed reporting starting in 2009 by US not-for-profit organizations.  Many US health insurance companies/ managed care organizations, most hospitals, nearly all medical associations, nearly all disease advocacy organizations, all health care charities, and nearly all medical schools are not-for-profit organizations.  We suggested then that this reporting might lead to more transparency about the leadership and governance of these organizations.  Some of these new 990 forms are now being publicly disclosed, with some interesting findings.  The Pittsburgh Tribune-Review just <a href="http://www.pittsburghlive.com/x/pittsburghtrib/news/pittsburgh/s_682244.html">reported</a> some interesting findings about financial ties between the University of Pittsburgh Medical Center (UPMC) and its board members and hired executives. <blockquote>Health giant UPMC paid more than $10 million last year to companies and individuals with ties to its directors and high-ranking executives, newly released tax records show. The payments include more than $3 million in salaries and contracts to relatives of UPMC CEO Jeffrey Romoff, who earned $5.16 million in fiscal 2009.</blockquote> It was no surprise that a UPMC spokesman pooh-poohed the significance of these relationships. <blockquote>'Given that UPMC is the largest employer in Pittsburgh and attracts talent from across the world, it's easy to understand why there are hundreds of employees with family members who also work at UPMC,' said spokesman Paul Wood. 'We seek to hire the best and brightest in every position, regardless of family relationships, and take appropriate steps to manage any conflicts that those relationships might entail.'</blockquote> The specifics about payments to the relatives of top hired executives were: <blockquote>Tax records show UPMC paid $264,274 to Rebecca Kaul, the CEO's daughter. Wood said UPMC then billed a contractor for her services. Kaul now works for UPMC as executive director of the Technology Development Center, Wood said. UPMC paid $259,488 to Scott Gilstrap, who joined the health care giant before marrying Romoff's daughter. Gilstrap, now divorced, no longer works for UPMC, Wood said. Wood said UPMC's contract for $2.48 million with Paradise Group, an advertising firm owned by the CEO's brother, Douglas Romoff, was not renewed after its March 2009 expiration. 'Jeffrey Romoff was not involved in any of the decisions pertaining to this contract,' Wood said. In addition to Romoff's family connections, the tax records show UPMC paid Scott Cindrich, son of its chief counsel Robert J. Cindrich, $141,599. Wood said the younger Cindrich joined UPMC before his father left a federal judgeship in 2004 to become UPMC's top lawyer. Robert Cindrich was paid $1.86 million. Cindrich did not return telephone calls seeking comment.</blockquote> The specifics about dealings between UPMC and its board members were: <blockquote>Tax records show companies affiliated with board member Anne V. Lewis do the most business with UPMC. Oxford Development Company, where Lewis is board chair, received $4.84 million from UPMC. Lewis is affiliated with Central Securities Services, which received $201,198 from UPMC, and Central Property Services, which received $457,051. Lewis did not return repeated telephone calls from the Tribune-Review. According to the returns, the Downtown law firm of Pietragallo Gordon Alfano Bosick and Raspanti earned $348,616 in legal fees. William Pietragallo is a UPMC board member. The law firm paid $792,215 to UPMC for heath insurance. Pietragallo said he filled out a conflict-of-interest form, as he has in past years. 'It reminds me of how much I pay for health insurance,' he said. IGate Mastech, the tech company founded by UPMC board member Sunil Wadhwani, received $204,215 for computer services. JJ Gumberg and Co., affiliated with board member Ira Gumberg, was paid $103,521, tax records show. Neither Wadhwani nor Gumberg returned telephone calls. Board member John R. McGinley Jr.'s law firm, Eckert Seamans Cherin and Mellott, was paid $804,414 for legal services, according to the returns. McGinley and board member Robert A. Paul and members of their families are affiliated with Pittsburgh Steelers Premium Tickets LP, which was paid $129,425, tax returns show. McGinley said he believed the figures UMPC reported are correct. Paul did not return telephone calls.</blockquote> Also, in a separate article, the Tribune-Review <a href="http://www.pittsburghlive.com/x/pittsburghtrib/news/pittsburgh/s_682217.html">noted</a> transactions between UPMC's insurance subsidiary and its board members' firms <blockquote>Recent federal tax filings show companies associated with some UPMC board members also buy their employee health insurance through the health care giant's insurance arm. The tax returns show that health insurance premiums paid by the companies affiliated with board members totaled about $8 million in the fiscal year ending June 30, 2009. Nine firms affiliated with board members purchased UPMC health insurance. That figure includes nearly $1.8 million by Bank of New York Mellon. UPMC board member Stephen Elliott is affiliated with the bank. Oxford Development paid $2.1 million in premiums. The development firm's chairman is Anne Lewis, a UPMC board member. The law firm headed by UPMC board member William Pietragallo paid $792,215 in premiums, according to the returns. AMPCO-Pittsburgh, which is affiliated with UPMC board member Robert A. Paul, paid a little more than $1 million in premiums.</blockquote> Of course, Mr Wood pooh-poohed that too: <blockquote>UPMC spokesman Paul Wood said the premiums paid by the companies were at "market rates."</blockquote> He also apparently stated that the hospital system follows "strict conflict-of-interest rules. Board members are barred from voting or acting on matters relating to their business interests...."  The standard approach of most not-for-profit organizations to conflicts of interests involving their board members or executives is to have these people recuse themselves from votes or actions that directly affect their own or their families' business interests.  I submit that whether this prevents the conflict of interest from influencing decision making by the organizations is questionable.  I doubt that the board members are unaware of their fellow members' and executives' direct or familial business interests.  The fact that certain individuals need to step out of meetings when votes come up on particular contracts would be a good reminder that they or their relatives have business interests at issue at these times.  Board members tend to keep their seats for a long time, and tend to get to know their fellow members pretty well.  Even if an individual member cannot vote on a contract or action relating to his or her business interests, would it be any surprise that his or her buddies on the board might look favorably on such a contract? Furthermore, would it really be that hard to find development companies, property management firms, advertising agencies, law firms, or information technology companies in a large metropolitan area that are not affiliated with board members or top executives and their families?  Instead, UPMC seems to have found quite a few vendors affiliated with board members which do not seem particularly specialized in their organizational attributes.  Can we be sure that they are run by the best and the brightest? Maybe board members who are too cozy with each other, and too cozy with the hired executives they are supposed to supervise, would be distracted from the attentiveness required to their organization's mission by their buddies' businesses?  Perhaps coziness among board members and hired executives might have something to do with the munificent compensation given to numerous hired leaders of UPMC.  A separate <a href="http://www.post-gazette.com/pg/10135/1058260-28.stm">article</a> in the Pittsburgh Post-Gazette stated: <blockquote>Jeffrey Romoff, president and CEO of the University of Pittsburgh Medical Center, received $3.563 million in salary in 2009, a 24.4 percent decrease from his 2008 salary of $4.711 million.</blockquote>However, <blockquote>In addition to Mr. Romoff's $4.711 million in cash compensation in 2008, he received $428,214 in deferred compensation and $21,671 in nontaxable benefits, for a total package valued at $5.161 million.</blockquote> In addition, <blockquote>Other top UPMC earners include Elizabeth Concordia, executive vice president and president of the Hospital and Community Services Division, $2.139 million; Amin Kassam, the department of neurological surgery chair who resigned in July, $2.083 million; Robert Cindrich, senior vice president and chief legal officer, $1.869 million; neurosurgeon Ghassan Beijani, $1.798 million; neurosurgeon Adnan Abla, $1.620 million. Also, Marshall Webster, executive vice president and chief medical officer, $1.514 million; Diane Holder, president and CEO of UPMC Health Plan, $1.485 million; James Luketich, co-director of surgical affairs at the University of Pittsburgh Cancer Institute, $1.442 million; Daniel Drawbaugh, senior vice president and chief information officer, $1.335 million; and David Farner, senior vice president and chief of staff in the office of the president, $1.253 million.</blockquote>By my count, that was eight executives with yearly total compensation greater than $1 million (in addition to two very well paid neurosurgeons.)  These payments, which most people would say are sufficient to make their recipients rich, were handed out by a not-for-profit organization whose <a href="http://www.upmc.com/aboutupmc/TheUPMCStory/governance/Pages/mission-vision-values.aspx">mission statement</a> includes being "committed to providing premier health care services to our region and contributing to this community" at the end of a bog of business-speak.  I suspect most people would think "contributing to this community" means something in addition to contributing to the wealth of a few top executives, and contributing to the business income of board members and executives' relatives.  Again, are board members who have become cozy with each other and the executives they are supposed to supervise more likely to be distracted from their fiduciary duty to the not-for-profit organization by their buddies' friendships? We often discuss <a href="http://hcrenewal.blogspot.com/search/label/conflicts%20of%20interest">conflicts of interest</a> on this blog.  Many of these involve financial relationships among health care professionals and academics on one hand, and pharmaceutical, biotechnology, device and other health care corporations on the other.  However, I suspect that conflicts involving leadership of hospitals and local businesses and vendors may be more common.  The latter may not always have as much influence on the quality of care, teaching and research as former group of conflicts.  However, they may have more effects on the total costs of health care, and may contribute more to the coziness, sense of entitlement, and inattention to the mission that seem to characterize much of health care leadership.  They may contribute to the perception that health care, like finance, may now be about , <a href="http://hcrenewal.blogspot.com/2009/12/compensation-madness-insiders-hijacking.html">as Prof Mintzberg said</a>, "All this compensation madness is not about markets or talents or incentives, but rather about insiders hijacking established institutions for their personal benefit." The new version of the IRS forms are just beginning to become public, so we expect to see many more juicy stories about the financial and family ties of leaders of health care not-for-profit organizations.  Watch your local newspapers for details about conflicts of interest at your local health care not-for-profit organizations. Maybe as more is revealed, the need for more transparent, accountable, and ethical governance of health care organizations will become apparent.

At UPMC: Dealings with Board Members' Firms and Executives' Relatives, a $5 Million Plus CEO, and 8 $1 Million Plus Executives

Last year we noted that the US Internal Revenue Service (IRS) required more detailed reporting starting in 2009 by US not-for-profit organi...

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A $7.8 Million Golden Parachute for a Not-For-Profit Health Care System CEO Who "Didn't Leave Under Great Circumstances"

These sorts of hits just keep on coming.  This <a href="http://www.baltimoresun.com/business/bs-bz-umms-ceo-pay-20100519,0,5247421.story">story</a> comes from the Baltimore Sun. The Golden Parachute First, let us just review the financial details, <blockquote>Former University of Maryland Medical System CEO Edmond F. Notebaert, who resigned two years ago during a tumultuous time that included infighting and a board shakeup, is again the subject of controversy over his $7.8 million pay package. The package included $2.4 million in severance, about $639,000 in salary for seven months, deferred bonuses and contributions to a retirement plan that instantly vested when he left. </blockquote>By the way, Mr Notebeart did not actually go into retirement after he received this largess, <blockquote>A spokeswoman for Temple University, where Notebaert now heads the health system, said he was not available for comment.</blockquote>The Justification The view from some amongst the local leadership was that the price was reasonable, <blockquote>[Current Board Chairman Stephen A] Burch acknowledged that Notebaert's compensation was large but said it was justified because of Notebaert's experience and accomplishments while working at the medical system. The system added Shore Health System and Chester River Health System to its roster of institutions under Notebaert's tenure. Total profit reached $301 million during Notebaert's tenure, compared with $49 million during the prior five-years, according to the medical system. Revenue was $2.1 billion when Notebaert left in fiscal 2009, Burch said. 'Mr. Notebaert's salary reflected his many years of successful and significant experience at large, complex health systems and was well within the range of comparable executives,' Burch said.</blockquote> The Lack of Disclosure Of course, the golden parachute given to Mr Notebaert did not seem to be something that UMMS wanted to boast about: <blockquote>Notebaert walked away with the compensation — details of which weren't disclosed in filings with the Internal Revenue Service until this week — after he announced his retirement in July 2008. </blockquote> The Process In fact, there were questions raised about the process that lead to the golden parachute, <blockquote>The system's protocol for deciding compensation came under fire in the months after Notebaert's retirement because the pay was awarded without full board approval. Now, the recently detailed pay package is drawing criticism anew. "This is an outrageous case of excessive executive compensation in a public institution," Gov. Martin O'Malley said Wednesday in an e-mailed statement. "This sort of 'golden parachute' has no place in the public sector."</blockquote> Furthermore, <blockquote>[Maryland's Speaker of the House, Michael E] Busch served as interim chairman of the board after Chairman John P. Erickson resigned amid the controversy. Busch said the compensation committee at the time left the rest of the board in the dark about Notebaert's payout.</blockquote>The Questions About Prior Performance In addition, the Baltimore Sun article recounted some major questions raised about Mr Noteabert's leadership: <blockquote>Tensions had arisen between him and physicians over how the system was run. Shortly after his departure, one-third of the board resigned, including the chairman and vice chairman.</blockquote> Also, <blockquote>Under Notebaert, physicians had complained that relations between the medical system and the medical school had deteriorated to a point that jeopardized both institutions. Critics said the system was becoming too focused on profits and less on medicine and research. </blockquote> In addition, <blockquote>Maryland's House Speaker, Michael E. Busch, who serves on the medical system board, said there is little legal recourse to try to recoup any of the compensation and that he thought the severance package was excessive given the dysfunction at the medical system when Notebaert left. 'I think a lot of the members of the board disagree with the payment, considering how he left,' Busch said. 'It's not like he left being hailed by the institution. He didn't leave under great circumstances.'</blockquote> In addition, Maryland Governor Martin O'Malley said, <blockquote>There were quite a few messes that had to be cleaned up over the last four years and leadership dysfunction at UMMS was one of them</blockquote>The Summary So there you have it, a leader noted for his "dysfunction" by the state Governor, and for his bad relationships with health care professionals, who felt he was putting profit ahead of the system's mission, walked off with a $7.8 million golden parachute provided without the approval of the hospital system's full board of directors, and only disclosed two years later. Mr Notebaert seems to be another member of the enlarging group of health care organizational leaders who received enough compensation to make them rich, despite performance that was questionable at best. For other posts about the often outrageous compensation given health care leaders, often seemingly completely at odds with their performance, look <a href="http://hcrenewal.blogspot.com/search/label/executive%20compensation">here</a>.  For a longer discussion of the implications of current executive compensation in health care, look <a href="http://hcrenewal.blogspot.com/2010/05/paying-ceos-of-health-care-not-for.html">here</a>.  I will just conclude, as I have before, with this....  executive compensation in health care seems best described as Prof Mintzberg described compensation for finance CEOs, "All this compensation madness is not about markets or talents or incentives, but rather about insiders hijacking established institutions for their personal benefit." As it did in finance, compensation madness is likely to keep the health care bubble inflating until it bursts, with the expected adverse consequences. Meanwhile, I say again, if health care reformers really care about improving access and controlling costs, they will have to have the courage to confront the powerful and self-interested leaders who benefit so well from their previously mission-driven organizations. It is time to reverse the coup d'etat of the hired managers.

A $7.8 Million Golden Parachute for a Not-For-Profit Health Care System CEO Who "Didn't Leave Under Great Circumstances"

These sorts of hits just keep on coming. This story comes from the Baltimore Sun. The Golden Parachute First, let us just review the finan...

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Paying CEOs of Health Care Not-For-Profit Organizations: "Greed is Good?"

Million dollar plus executives of not-for-profit health care insurance companies seem to be becoming a dime a dozen.  Late in April, Buffalo Business First <a href="http://buffalo.bizjournals.com/buffalo/stories/2010/05/03/story11.html?b=1272859200^3269971">reported</a> the pay of executives of some western New York health insurance companies: <blockquote>The top local executives at the region’s three major nonprofit health plans received nearly $23 million in salaries and bonuses last year. More than 70 people received total compensation of $160,000 or more. That’s the level at which insurers are required to report in annual reports to the state Department of Insurance. When you include executives who work for those three health plans but are located outside Western New York, the total compensation for top-paid execs totaled $46.4 million last year. Among the local executives in the Western New York region, 23 individuals took home more than $300,000 last year. Among the CEO-level executives: • Alphonso O’Neil-White, president and CEO at HealthNow NY Inc./BlueCross BlueShield of WNY earned $1.65 million. • Dr. Michael Cropp, president and CEO at Independent Health, earned $1.3 million. • Univera Healthcare President Art Wingerter, who joined the company part-way through the year, earned $248,348, while David Klein, president/CEO of Univera’s Rochester-based parent Excellus Health Plan, received a total of $2 million. Wingerter says compensation levels are fair and are determined with help from outside consultants based on nationwide industry surveys. They are also adjusted annually based on the organization’s performance: Top officers at Excellus saw salaries decline last year by 20 percent based on the company’s 2008 performance. 'Our compensation levels fall into the midpoint by design,' he says. 'It’s a $5 billion company. If you compared it to any leader of a $5 billion (for-profit) company, I do not believe it would be considered excessive.'</blockquote> Consider that argument while reading <a href="http://www.app.com/article/20100517/NEWS03/5170330/Blue-Cross-boss-took-home-8.7-million-salary-as-premiums-rose">this story </a>from neighboring New Jersey reported by the Ashbury Park Press: <blockquote>William J. Marino, president and chief executive officer of Horizon Blue Cross Blue Shield of New Jersey, received $8.7 million in compensation in 2009, a 59 percent increase from 2008, according to the company's annual financial statement. The salary and bonus were part of a windfall for Horizon's nine highest-paid executives, who received on average 61 percent more than in 2008, the statement, filed with the New Jersey Department of Banking and Insurance, showed. Part of the increase came from compensation that was deferred from previous years, the company said. But the pay sparked anger from consumers and medical professionals who have battled Horizon over rising premiums and declining reimbursements. Newark-based Horizon is the state's biggest health insurance company, writing policies and administering self-funded programs for more than 3 million people. It has 72 percent of the individual market and 52 percent of the small employer market, according to the state. The company is a nonprofit.... Meantime, Horizon's top nine executives took home a total of $24.3 million in salaries and bonuses last year, up from $15.1 million in 2008.</blockquote> <a href="http://www.app.com/article/20100518/BUSINESS/5180339/Horizon-swings-from-loss-to-profit">Another article </a>in the same paper stated that in 2009, Horizon <blockquote>reported net income of $75.1 million last year, compared with a loss of $45 million in 2008. It reported revenue of $8.3 billion, up from $7.9 billion the previous year. The company collected 3.5 percent more in premiums. And it lowered administrative expenses by 3.5 percent, according to the annual report.</blockquote> Let us reconsider the rationale for the pay of the Excellus (NY) CEO. Its basis was the pay given to CEOs of for-profit corporations. Yet the nature of for-profit and not-for-profit corporations are fundamentally different. The former exist to make money. The latter exist to fulfill their missions. For example, this statement is <a href="https://www.excellusbcbs.com/wps/portal/xl/our/compinfo/corpoverview">on</a> the Excellus web-site: <blockquote>As New York state's largest nonprofit health plan, the company remains committed to three core principles: * We exist to assure, in the communities we serve, that as many people as possible have affordable, dignified access to needed, effective health care services, including long-term care. * We recognize the need, and our responsibility, to reach out to all segments of the communities we serve, particularly the poor and aged and others who are underserved, to enhance quality of life, including health status. * We are committed to being a nonprofit health insurer. </blockquote> The devotion that a not-for-profit organization is supposed to have to its mission suggests that working for such an organization, particularly in a leadership capacity should be calling, rather than just a way to make money. Equating leadership of such an organization to leadership of a for-profit corporation of comparable financial size provokes cognitive dissonance. So the notion that the leader of Excellus, an organization supposedly devoted to serving the "poor and aged," is entitled to make as much money as the leader of a for-profit corporation with similar revenues likewise provokes cognitive dissonance. However, let us assume, just assume, that the $2 million pay of the CEO of Excellus Health Plan was fair for a $5 billion not-for-profit company. Horizon is an $8.3 billion company, roughly 60% larger, but its CEO got $8.7 million, 330% more. Furthermore, the Horizon CEO saw his pay go up 59% while company revenue rose 3.5%. What possible argument could there be to justify these even more extreme levels of compensation? Here was the Ashbury Park Press' <a href="http://www.app.com/article/20100518/OPINION01/5190320">editorial reaction</a>: <blockquote>If truth be told, when it comes to the American health insurance system, the Hippocratic Oath — 'First, do no harm' — is too often trumped by Gordon Gecko's 'Wall Street' axiom: 'Greed is good.' There's no better example than the shameful $8.7 million in compensation paid last year to William J. Marino, president and chief executive officer of Horizon Blue Cross Blue Shield of New Jersey.... How tone-deaf could Horizon be to bestow this kind of compensation on its executives? The only decent thing for Marino and his cohorts to do is to return the bonuses. The disconnect between these well-heeled executives and the customers their non-profit company — that's right, nonprofit — are supposedly serving is staggering. </blockquote> We have <a href="http://hcrenewal.blogspot.com/search/label/executive%20compensation">discussed</a> numerous examples of compensation of health care organizations' leadership that seems orders of magnitude above that which would be rationally justified.  These latest examples of the wealth being accumulated by leaders of supposedly mission-centered not-for-profit organizations are a product of the current management culture that has been infused into nearly every health care organization in the US. That culture holds that managers are different from you and me. They are entitled to a special share of other people's money. Because of their innate and self-evident brilliance, they are entitled to become rich. This entitlement exists even when the economy, or the financial performance of the specific organization prevents other people from making any economic progress. This entitlement exists even if those other people actually do the work, and ultimately provide the money that sustains the organization. Although the executives of not-for-profit health care organizations generally make far less than executives of for-profit health care corporations, collectively, hired managers of even not-for-profit health care organizations have become richer and richer at a time when most Americans, including many health professionals, and most primary care physicians, have seen their incomes stagnate or fall. They are less and less restrained by passive, if not crony boards, and more and more unaccountable. In a kind of multi-centric coup d'etat of the hired managers, they have become our new de facto aristocracy. Or as we wrote in our previous post, executive compensation in health care seems best described <a href="http://hcrenewal.blogspot.com/2009/12/compensation-madness-insiders-hijacking.html">as Prof Mintzberg described </a>compensation for finance CEOs, "All this compensation madness is not about markets or talents or incentives, but rather about insiders hijacking established institutions for their personal benefit." As it did in finance, compensation madness is likely to keep the health care bubble inflating until it bursts, with the expected adverse consequences. Meanwhile, I say again, if health care reformers really care about improving access and controlling costs, they will have to have the courage to confront the powerful and self-interested leaders who benefit so well from their previously mission-driven organizations. It is time to reverse the coup d'etat of the hired managers.

Paying CEOs of Health Care Not-For-Profit Organizations: "Greed is Good?"

Million dollar plus executives of not-for-profit health care insurance companies seem to be becoming a dime a dozen. Late in April, Buffalo...

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Reading Between the Lines: "Scrappy" WellPoint as an Illustration of Contemporary Health Care's Flaws

Giant US for-profit insurance company/ managed care organization WellPoint has provided numerous examples of problems with the current way health care organizations are lead.  <a href="http://hcrenewal.blogspot.com/2010/04/pay-for-hypocrisy-for-health-insurance.html">Here</a> we discussed charges that recent rate increases by its Anthem subsidiary may have violated previous agreements not to directly fund from premiums the golden parachutes of executives who left after the merger of Anthem and WellPoint; that WellPoint used magical accounting to make administrative costs appear to be from patient care; and that WellPoint investigated patients who developed cancer to find minor errors in their policy applications, and  used these as excuses for post-hoc cancellations (rescissions) of their policies.  And <a href="http://hcrenewal.blogspot.com/2010/04/what-me-worry-leaders-prosper-despite.html">here</a> we discussed a long list of WellPoint's previous ethical issues. Recently, Reed Abelson penned a <a href="http://www.nytimes.com/2010/05/16/business/16well.html">discussion</a> of WellPoint's leadership in the New York Times, entitled "A Scrappy Insurer Wrestles With Reform."  Reading between the lines suggests some fundamental flaws in our current model of leadership for health care organizations. The Halo Effect Over long years of service in the last century, many health care organizations built up sterling reputations. Blue Cross and Blue Shield health insurance plans, which were all originally not-for-profit, regionally (state-wide) based organizations, became known for paying for care rather generously and with little fuss. (However, in retrospect, this may have certainly contributed to rising health care costs.)  However, their reputation was clearly for good service leading to generous care. However, in the last 20 years, many of these plans converted to for-profit corporations, and/or were bought out by for-profit corporations. WellPoint is now a for-profit corporation that operates many subsidiaries that still do business as "Blue Cross" and "Blue Shield." <blockquote>Over the last decade, WellPoint has become one of the nation’s largest insurers by buying up the Blue Cross plans that dominate the individual and small group markets in their states. </blockquote> So, <blockquote>[WellPoint CEO] Ms. [Angela] Braly argues that WellPoint is well positioned because of its size and the strong appeal of the Blue Cross name. 'We have a lot of historical strengths,' she said in an interview </blockquote> However, it is likely that the "strong appeal" of many of these Blue Cross plans is based on a halo effect. Many individuals and small businesses may still think that the plans are relatively local, not-for-profit organizations. If not, they may still believe the plans are run as mission-driven organizations, not subsidiaries of a massive for-profit corporation. Thus many health care organizations may so profit by an outdated "halo effect." People may not realize that leadership of these organizations is no longer a calling, but a way to become very rich.  The strong appeal of the Blue Cross name may, in fact, be misleading.  Such confusing, if not deceptive marketing has become a hallmark of our era of commercialized health care. Market Domination and Health Care Costs Prior to almost every merger, one hears an argument that larger organizations and corporations are more efficient, and hence will charge lower prices and lead to lower costs. Mr Abelson wrote, <blockquote>WellPoint now has about 34 million customers, putting it ahead of the UnitedHealth Group in membership, and $60 billion in revenue, second behind UnitedHealth. While UnitedHealth and the other national companies tend to focus on providing services to large employers with workers in multiple locations, WellPoint’s focus has been on the local markets. Its strong presence allows it to demand the lowest prices from doctors and hospitals, while still offering customers a broad network of providers from which to choose. </blockquote> I doubt there is any good data to show that such market power has resulted in lower premiums or lower health care costs. In fact, Mr Abelson also wrote, <blockquote>Because of its dependence on the higher profit margins of its traditional business, WellPoint has also not been as adventurous in trying new approaches,.... </blockquote> If WellPoint really meant to use its market dominance to force down its costs, it appears that the main beneficiary of this has been the company's profit margin, not its policy-holders. Furthermore, <blockquote>Starting in 2014, WellPoint and its competitors will have to offer coverage to anyone who wants it, including people with potentially expensive pre-existing conditions, rather than carefully selecting the people they are willing to cover. As soon as next year, insurers will also have to spend at least 80 cents of every dollar they collect in premiums on providing health care to individual customers.</blockquote> So WellPoint used its market power to "carefully select" the people it insured so as to avoid anyone who might get sick, thus making a mockery of the concept of health insurance. Furthermore, the implication is that WellPoint spent more than 20% of premiums on management and administration (including the breathtaking compensation of its top leaders), and less than 80% on actually paying for health care. As Mr Abelson noted, (as we did <a href="http://hcrenewal.blogspot.com/2010/04/what-me-worry-leaders-prosper-despite.html">here</a>), just how personally remunerative WellPoint's market power has been for its top leader: <blockquote>Ms. Braly, ... received $13.1 million last year in compensation....</blockquote> In fact, as we should have learned in this country more than 100 years ago, market domination leads to higher profits for the dominant company, higher compensation for its employees, and higher prices. However, in health care, for some reason people still believe that concentration of power leads to efficiency. Health Care Leaders Who Know Little About Health Care Ms Braly appears to have no direct experience, training, or expertise in health care, medicine, public health, or biologic science. <blockquote>Ms. Braly, 48, a native of the Dallas area who received a law degree from Southern Methodist University, worked as a lawyer before she became general counsel to a small Blue Cross insurer in Missouri. She eventually ran that company, which is now part of WellPoint. Before being picked for WellPoint’s top job in June 2007, Ms. Braly worked as both a corporate executive and the company’s general counsel. Her selection as C.E.O. surprised many analysts and investors. While some believed that she would bring a warmer touch to the company, others worried that she did not have enough years as a manager to navigate a highly regulated and often highly political environment. In the last year, WellPoint became a favorite example of Congress and the administration for why health care overhaul was needed. Even people inside the industry say the company has been painfully slow to recognize consequences of some of its controversial actions, whether canceling a sick patient’s coverage or raising premiums on policies that lawmakers already call too expensive. And some say that Ms. Braly’s quickness to argue with WellPoint’s critics, revealing her training as a lawyer, is not always productive. 'WellPoint is the most incredibly tone-deaf insurance company in an industry full of deaf executives,' says Mr. Laszewski, the Virginia consultant. He criticizes Ms. Braly, who received $13.1 million last year in compensation, as being insensitive to the politics involved in running a health insurer, at both the state and federal levels. 'I don’t think she has the scar tissue and experience,' he says. 'I don’t think she has the marketplace instincts.' Ms. Braly says her experience in government affairs makes her well suited for handling a complex regulatory environment. </blockquote> Ms. Braly's background was cited as unusual for a health care CEO not because she has no obvious experience in direct health care, or its scientific or social scientific bases, but because she is a lawyer, not an MBA. It is interesting that we as a society have become so used to health care run by businesspeople that nothing in the article even obliquely suggested that Ms. Braly could benefit from some direct knowledge of or experience in caring for patients (or in biology, epidemiology, public health, etc), much less some sympathy for the values of health care professionals. So I submit that this profile of the leadership of WellPoint provides another reason to reconsider why we have journeyed so far from an era <a href="http://hcrenewal.blogspot.com/2007/12/relman-in-jama-on-threats-to-physicians.html">when the AMA asserted</a>, "the practice of medicine should not be commercialized, nor treated as a commodity in trade."  Current commercial health insurance (and the power that generally has been concentrated in large health care organizations) has certainly turned medicine into a commercialized venture, and treated the work of the individual health care professional as a commodity in trade.  Yet so far, what we have called health care reform in the US has just reinforced the power of large health care organizations.  It also suggests that true health care reform ought to address the power now concentrated in large health care organizations, and ought to foster more honest and less profuse marketing by companies lead by people who have some knowledge of health care, and sympathy for its values.  We need to reinforce the neglected idea that health care ought to be a calling, not simply a way for some to become rich.

Reading Between the Lines: "Scrappy" WellPoint as an Illustration of Contemporary Health Care's Flaws

Giant US for-profit insurance company/ managed care organization WellPoint has provided numerous examples of problems with the current way h...

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