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"Peer Benchmarking," the "Lake Wobegone Effect," and Outsize Executive Compensation: the Amgen Example

We recently <a href="http://hcrenewal.blogspot.com/2011/10/health-cares-99-percenters.html">discussed </a>why health care's 99 percent may have reason to be upset with the one percent, the elite that run health care organizations. Once <a href="http://www.kevinmd.com/blog/2011/10/99-percent-health-care-angry.html">cross-posted on the KevinMD blog</a>, it caused an eruption of controversy. This included some anonymous commentators who insisted that top leaders' made contributions to health care that were so heroic that their compensation was insufficient. So conveniently an <a href="http://www.washingtonpost.com/business/economy/cozy-relationships-and-peer-benchmarking-send-ceos-pay-soaring/2011/09/22/gIQAgq8NJL_story.html">article</a> this month in the Washington Post dissected the mechanisms that let pay of top health care leaders inexorably rise whatever their and their organizations' performance.  The Amgen CEOs Compensation It used as an example the compensation given to Kevin W Sharer, the CEO of Amgen, the biotechnology and pharmaceutical company. <blockquote>Sharer, a 63-year-old former Navy engineer, was already earning lots of money — about $15 million in the previous year, plus such perks as two corporate jets. The board decided to give Sharer more. It boosted his compensation to $21 million annually, a 37 percent increase, according to the company reports.</blockquote> This outsize compensation has allowed Mr Sharer to live large. <blockquote>He owns at least three homes, according to property records: a $2 million home in Los Angeles, a $6 million spread in Vail, Colo., and a $5 million place on Nantucket. </blockquote>The Company's Less Than Stellar Performance This huge raise on top of an already huge compensation package, however, seemed completely unrelated to the performance of the company Mr Sharer lead. <blockquote>Shareholders at the company, one of the nation’s largest biotech firms, had lost 3 percent on their investment in 2010 and 7 percent over the past five years. The company had been forced to close or shrink plants, trimming the workforce from 20,100 to 17,400.</blockquote> In addition, <blockquote>by 2006, the growth that once distinguished Amgen had begun to taper off. In 2008, Forbes magazine named ... [Sharer] among among the country’s most overpaid bosses because the company’s returns had dipped 4 percent annually over six years while he’d earned an average of $12.3 million. The lack of enthusiasm was even more noticeable among the people who know most about Amgen — insiders. Companies are required to report when their officials sell stock. Since 2002, the ratio of share sales to purchases has been 12 to 1, according to Bloomberg data reviewed last fall by Christopher.</blockquote> "Peer Benchmarking" The Post article then analyzed the process used to set CEO pay at Amgen, and at many other corporations and organizations, and how it lead to such extreme results. <blockquote>This is how it’s done in corporate America. At Amgen and at the vast majority of large U.S. companies, boards aim to pay their executives at levels equal to or above the median for executives at similar companies. The idea behind setting executive pay this way, known as 'peer benchmarking,' is to keep talented bosses from leaving. </blockquote> We have discussed examples of peer benchmarking before, most recently <a href="http://hcrenewal.blogspot.com/2011/08/what-goes-up-non-profit-hospital-ceo.html">here</a>. Yet I believe the Post article has the clearest explanation to date of how this works and what its results are. Note that: <blockquote>It wasn’t until recently, however, that its pervasiveness and impact on executive pay became clear. Companies have long hid the way they set executive pay, but in late 2006, the Securities and Exchange Commission began compelling companies to disclose the specifics of how they use peer groups to determine executive pay.</blockquote> Peer benchmarking has two components. First the pay of peers are assessed, that is, benchmarked: <blockquote>Amgen selected 11 companies in the biotech/pharmaceutical field, which seems natural enough. </blockquote> However, how the peers are chosen is important (just as how the comparator treatment is chosen in a clinical trial of a drug is important.) In this case, <blockquote>But most of the companies on the list are far larger than Amgen. Amgen’s revenue in 2010 was $15 billion; the median revenue of its peer companies was $40 billion, according to Equilar. The practice of choosing peers that boost pay is common. Studies by Faulkender, Bizjak and ISS Corporate Services have shown that when choosing 'peers' for pay-setting purposes, companies tend to choose larger firms or firms with more highly paid chief executives.</blockquote> Then an assessment is made, almost always by the organizations board of directors or trustees, of how the CEO compares to these supposed peers: <blockquote>Maybe even more significantly, however, the Amgen compensation committee also decided that Sharer, despite being at a smaller company, should earn stock compensation at the 75th percentile of peers. This is critical because stock compensation tends to be the largest component of executive pay.</blockquote> What is missing in the Post article is any rationale for the assessment that Sharer was doing so much better than the median CEO of these questionably comparable companies. The information presented in the article suggested instead that the company was doing badly, with decreasing revenue, decreasing share prices, and declining employment. Cronyism on the Boards Serving on the board of directors of a for-profit corporation requires board members to "demonstrate unyielding loyalty to the company's shareholders" [Per Monks RAG, Minow N. <a href="http://www.amazon.com/Corporate-Governance-Robert-G-Monks/dp/1405116986">Corporate Governance</a>, 3rd edition. Malden, MA: Blackwell Publishing, 2004. P.200.] (Boards of trustees of non-profit organizations have duties of loyalty, "a board member must give undivided allegiance when making decisions affecting the organization" and duty of obedience, "board members [must] ... 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," per <a href="http://www.boardsource.org/Knowledge.asp?ID=3.364">BoardSource</a>.) Rather than representing the interests of stockholders, however, many boards seem to put the interests of the CEO and top management first: <blockquote>The practice has persisted because corporate board members, many of whom have personal or business relationships with the chief executive, have been unwilling to abandon the practice. At Amgen, for example, four of the six members of the board compensation committee had <a href="http://www.washingtonpost.com/business/economy/ties-to-board-members-aided-amgens-ceo/2011/09/29/gIQAAuXPJL_story.html">personal or business connections to Sharer </a>before joining the board. In fact, he nominated at least two of the six to the board, according to a company source and reports. These kinds of ties — between chief executives and the boards that oversee them — permeate corporate America. On a typical board, the chief executive considers about about 33 percent of the board of directors as “friends” rather than as mere “acquaintances,”according to a survey of chief executives at about 350 S&P 1500 corporations conducted over 15 years by University of Michigan business professor James Westphal. More tellingly, the chief executive is likely to find even more friends on the compensation committees of corporate boards — almost 50 percent.</blockquote> The Obvious Problems with Peer Benchmarking <blockquote>But the practice has long been controversial because, as critics have pointed out, if every company tries to keep up with or exceed the median pay for executives, executive compensation will spiral upward, regardless of performance. Few if any corporate boards consider their executive teams to be below average, so the result has become known as the 'Lake Wobegon' effect. It wasn’t until recently, however, that its pervasiveness and impact on executive pay became clear. Companies have long hid the way they set executive pay, but in late 2006, the Securities and Exchange Commission began compelling companies to disclose the specifics of how they use peer groups to determine executive pay. Since then, researchers have found that about 90 percent of major U.S. companies expressly set their executive pay targets at or above the median of their peer group. This creates just the kinds of circumstances that drive pay upward. Moreover, the jump in pay because of peer benchmarking is significant. A chief executive’s pay is more influenced by what his or her 'peers' earn than by the company’s recent performance for shareholders, according to two independent research efforts based on the new disclosures. One was by Michael Faulkender at the University of Maryland and Jun Yang of Indiana University, and another was led by John Bizjak at Texas Christian University. 'Peer benchmarking has a significant influence on CEO pay,' Bizjak said. 'Basically, you can’t have every CEO paid above average without pay ratcheting upward over time.' The gap between what workers and top executives make helps explain why income inequality in the United States is reaching levels unseen since the Great Depression. Since the 1970s, median pay for executives at the nation’s largest companies has more than quadrupled, even after adjusting for inflation, according to researchers. Over the same period, pay for a typical non-supervisory worker has dropped more than 10 percent, according to Bureau of Labor statistics. Critical to executive pay levels is peer benchmarking. Even before the extent of the practice was known, it drew criticism from prominent business figures. After the Enron scandals, a blue-ribbon committee led by Peter G. Peterson, then chairman of the Federal Reserve Bank of New York, and John Snow, former chairman of the Business Roundtable, called for setting executive pay 'unconstrained by median compensation statistics.' Legendary investor Warren Buffett, in one of his famously plain-spoken letters to investors, likewise derided the method. 'Outlandish ‘goodies’ are showered upon CEOs simply because of a corporate version of the argument we all used when children: ‘But, Mom, all the other kids have one,’' he wrote. Similarly, former Federal Reserve chairman Paul Volcker called it the 'Lake Wobegon syndrome' in congressional testimony in 2008, referring to Garrison Keillor’s fictional town where 'all the children are above average.'</blockquote> Summary Peer benchmarking, as it currently is implemented, is an irrational system that has nothing to do with the free market. It shows how perverse the incentives given to top health care leaders have become. It shows how top hired executives of health care organizations are no longer are accountable to anyone. The boards that are supposed to exercise stewardship over them have become their cheerleaders, possibly because they are populated by cronies, and current and former hired executives of other organizations who are more interested in preserving the wealth and power of hired executives than representing shareholders, or upholding organizations' missions. The problems caused by such perverse incentives include: - Paying the leaders so well (and supporting the public relations staff who sing their praises) costs money that could better be used to improve patients' and the public's health. - Providing such perverse incentives, which seem entirely unrelated to the organizations' primary missions, is likely to distract leaders from the organizations' abilities to support these missions. - It is likely that employees of such organizations who actually try to uphold the mission will be demoralized by the realization that their leaders' enrichment comes first, further damaging the organizations' ability to uphold the mission. - Finally, it is possible that such perverse incentives attract leaders who are particularly unsuited to the task of upholding the mission. So, ad infinitum, I repeat.... health care organizations need leaders that uphold the core values of health care, and focus on and are accountable for the mission, not on secondary responsibilities that conflict with these values and their mission, and not on self-enrichment. Leaders ought to be rewarded reasonably, but not lavishly, for doing what ultimately improves patient care, or when applicable, good education and good research. On the other hand, those who authorize, direct and implement bad behavior ought to suffer negative consequences sufficient to deter future bad behavior. If we do not fix the severe problems affecting the leadership and governance of health care, and do not increase accountability, integrity and transparency of health care leadership and governance, we will be as much to blame as the leaders when the system collapses.

"Peer Benchmarking," the "Lake Wobegone Effect," and Outsize Executive Compensation: the Amgen Example

We recently discussed why health care's 99 percent may have reason to be upset with the one percent, the elite that run health care orga...

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President of the American College of Physicians on Electronic Medical Records

I've taken so much flak over the years for being an "anti-EHR zealot", "a critic of the use of computerized medical records in hospitals", or similar canards [see note below] that I am letting someone else be a spokesperson today. I am simply posting a link to this essay by <a href="http://www.acponline.org/about_acp/leadership/executives_staff/#pres">Virginia L. Hood, MBBS, MPH, FACP</a>, President of the <a href="http://www.acponline.org/">American College Of Physicians</a> (ACP) with only one comment: <a href="http://www.acpinternist.org/archives/2011/10/presidents.htm" target="_blank"></a> <blockquote>Electronic Medical Records have Yet to Fill Their Potential <a href="http://www.acpinternist.org/archives/2011/10/presidents.htm" style="font-weight: bold;" target="_blank">http://www.acpinternist.org/archives/2011/10/presidents.htm</a> From the October ACP Internist, copyright © 2011 by the American College of Physicians</blockquote> Read the whole essay at that link. Nearly every issue mentioned is addressed extensively on this blog since 2004 and at my educational website "Contemporary Issues in Medical Informatics: Common Examples of Healthcare Information Technology Difficulties" <a href="http://www.ischool.drexel.edu/faculty/ssilverstein/cases/">at this link</a>. The latter site was started not just last month or last year, but in 1999. My only comment is that I was more than a decade ahead of my time in recognizing and writing about many of the issues she discusses. Sadly, few were listening; now physicians are not just being encouraged, but in fact prematurely coerced to adopt this technology - in the deficient state as it exists today - by HHS. Tens if not hundreds of billions of dollars have been earmarked for our 'National Program for IT in the HHS.' Ready, shoot ... aim. -- SS [Note] In reality, I am a critic of the use of poorly designed, poorly implemented and poorly managed clinical IT in hospitals.

President of the American College of Physicians on Electronic Medical Records

I've taken so much flak over the years for being an "anti-EHR zealot", "a critic of the use of computerized medical recor...

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Logical Fallacies to Support Putting a Major Academic Medical Center into the Contract Research Organization Business

Two uncritically positive biographical features on UCSF Chancellor Susan Desmond-Hellmann MD appeared within the last two weeks, <a href="http://www.nytimes.com/2011/10/11/science/11profile.html">one in the New York Times</a>, suggesting the game is afoot.  That game appears to be the Chancellor's new strategic direction for the university.  A New Strategy for "Increasing Collaborations" with Industry Per the NY Times, the university has just made a huge investment in bricks and mortar, <blockquote>the school’s gleaming new building for stem-cell research and its enormous new waterfront campus, Mission Bay, which is becoming a medical and biotech empire. </blockquote> Now, perhaps to pay for it, <blockquote>Dr. Desmond-Hellmann hopes to supplement the usual sources of income like patient fees, grants and tuition by increasing collaborations between the university and the biotech companies that have sprung up in the Bay Area — many of them spinoffs from research that began at the university. </blockquote> Dr Desmond-Hellmann described the general direction thus: <blockquote>Her vision for the university is to make it 'the world’s pre-eminent health sciences innovator.' That means 'unparalleled' care for patients, brilliant faculty and staff paid enough to stay and fast translation of scientific discoveries into treatments. </blockquote>That seems worthwhile, if quite a bit vague. Making "Collaboration," "Innovation," and "Translation" More Explicit An <a href="http://www.xconomy.com/national/2011/10/03/why-universities-are-key-to-the-future-of-biotech-and-how-ucsfs-chief-is-showing-the-way">article</a> in Xconomy sounded similar themes, but was more explicit. First, Dr Desmond-Hellmann said, <blockquote>I’m sticking my neck out there and saying the world is changing very quickly, and yet our aspiration at UCSF is to be a world leader in health science innovation</blockquote> So it is time to jump on the bandwagon, <blockquote>The old way of doing things doesn’t really work anymore.</blockquote> But the Xconomy article was more explicit about what sort of changes she envisioned, what innovation she had in mind, and what "translation" means in this context: <blockquote>Often, some of the best research ideas would get handed off from academia to a company at a very raw stage of development. But few venture capitalists are funding startups at this early stage of development these days, and Big Pharma R&D has always tilted more heavily toward D than R. The economy has put more pressure on companies to tilt that balance even further away from research, and more toward late-stage development that has a chance to bear fruit in the near-term. Universities need to recognize this is how things are. If they want to truly translate their innovations into products that help patients, they will have to carry the research a little further downfield themselves. Some Big Pharma companies have already shown they are willing to sponsor this kind of on campus work at UCSF and elsewhere.</blockquote> So, <blockquote>Working in collaboration with pharma companies is definitely a part of the future of advancing health, Desmond-Hellmann says. Financially, these deals are small potatoes, and aren’t going to close any budget gap. Even if UCSF researchers made a breakthrough cancer drug that generates billions of sales per year, it would likely only throw off a royalty stream to the university worth a few million a year—nice, but not exactly a big deal for a multi-billion-dollar institution. Instead, the collaborations are about improving the flow of basic research through development. Pharma companies need new products to preserve and grow their bottom lines, and they aren’t doing so hot at inventing them on their own. When budget cutters ask questions about how taxpayer dollars are spent on campus, academic centers need to be able to say something like, 'We discovered a breakthrough drug that helps people live longer, better lives,' instead of just 'We got a cool paper published in Nature.'</blockquote> Just to underline that, <blockquote>Big Pharma R&D operations, rich as they may be, are feeling the same pressure to make cuts as universities. What’s needed now are the creative partnerships, where someone knowledgeable about the whole process (like maybe a Desmond-Hellmann) steps in and finds a way to more seamlessly bring together these two factions around what they have in common.</blockquote> And the brave new world is almost here already, <blockquote>UCSF has struck a number of creative partnerships with companies like Pfizer, Sanofi, and Bayer, which are being closely followed at other universities. UCSF has also found a way, with the help of some big-time philanthropy, to break ground on two ambitious projects—a $1.5 billion hospital complex and a $200 million neurosciences research facility in the Mission Bay district. There in the same neighborhood, the university has also continued to support QB3, an incubator where academic scientists are starting companies that test whether their ideas just might have what it takes to become new drugs, devices, or diagnostics.</blockquote> So let us try to make Dr Desmond-Hellmann's new direction clear: what she meant by innovation and translation was doing contract research and development for big pharma and big biotech. The goal is not just to discover new knowledge, but to develop new products.  That should bring in a lot of money, which can pay for all sorts of fancy new buildings. A New Direction Supported by Logical Fallacies The problem is, as I hinted above, the arguments for this new direction were mainly based on <a href="http://www.nizkor.org/features/fallacies/">logical fallacies</a>. Begging the Question Note that the key argument in support of turning the university into a pharma/ biotech research and development shop was, "if they [universities] want to truly translate their innovations into products that help patients," they must develop those products themselves.  This <a href="http://www.nizkor.org/features/fallacies/begging-the-question.html">begged these questions</a>: -  Should they want to develop products? -  Why are they the only ones who can do so?  These questions were never asked in either article, perhaps because their answers are obviously "no."  Universities' missions are to discover and disseminate knowledge.  Developing and marketing products are not part of their missions.  Furthermore, there are lots of corporations that ought to be able to develop and market pharmaceuticals and devices outside of universities. Appeal to Common Practice/ Bandwagon Another argument in favor of Dr Desmond-Hellmann's radical new plan was "universities need to recognize this is how things are," in that "the old way of doing things doesn't really work anymore." This is an example of two logical fallacies, the <a href="http://www.nizkor.org/features/fallacies/appeal-to-common-practice.html">appeal to common practice</a>, and maybe <a href="http://www.nizkor.org/features/fallacies/bandwagon.html">the bandwagon fallacy</a> more so. An assertion is made that the world is changing, the change cannot be stopped or even questioned, so we all just have to climb on the bandwagon. Straw Man and Begging the Question (Again) The Xconomy article also noted: <blockquote>Some academics sneer at this late-stage research/early-stage development work. It’s a cultural attitude Desmond-Hellmann wants to change. 'There’s a technical competence in taking a discovery from a lab and turning it into a medicine. It’s embarrassing that people don’t honor that technical competence. You sometimes hear it called 'applied' or 'obvious' or some other pejoratives. But it’s my expertise. I do take that personally. There is a technical competence. It needs to be understood, put into curriculum, and valued.'</blockquote> Here Dr Desmond-Hellman seemed to be using the <a href="http://www.nizkor.org/features/fallacies/straw-man.html">straw man fallacy</a>, by setting up unattributed arguments against her cause that she could easily refute. Meanwhile, however, another <a href="http://www.nizkor.org/features/fallacies/begging-the-question.html">question she begged </a>was what exhibiting such technical competence has to do with the mission of the university. As we will discuss further below, the mission of a university is to discover and disseminate knowledge. "Technical competence" may be required to do so, but exhibiting technical competence per se is not the goal. (Consider: if the university had faculty members who were competent amateur automobile mechanics, would it fulfill the mission to establish a university automobile repair business using these faculty members' technical competence?) Another implied begged question was: if this competence ought to be a subject taught at the university, how would the need for such teaching require the university to do contract research and development for industry? Appeal to Authority Both articles also seemed to try to support Dr Desmond-Hellmann's ideas by emphasizing first that she had "a stunningly successful career in the pharmaceutical industry," perhaps so described because her "years in pharmaceuticals left her, by her own account, 'very, very wealthy," (It did allow that at the end of her career at Genentech, after she had become president of product development, "her compensation (base pay, stock and other payments) was more than $8 million a year. She also owned hundreds of thousands of shares of Genentech stock, worth $95 a share.") Also, despite her apparent membership in the top one percent of the population in terms of income, the Times article took pains to note "she is so nice," and again, "she's a very nice person." So the implication is that because she is successful, rich, and nice, her arguments and ideas must be correct.  This seems to be an <a href="http://www.nizkor.org/features/fallacies/appeal-to-authority.html">appeal to authority</a>. Questions That Should be Asked Neither the author of the NY Times article nor the author of the Xconomy article sought to ask her any of the questions that were begged, or to otherwise raised by Dr Desmond-Hellmann's grand plans.  So let me try. How Does Becoming a Contract Research Organization Fulfill the University's Mission? However her new plans are described, they entail hiring out the university's facilities and faculty to develop new products, drugs and perhaps devices. Yet the university's mission is to discover and disseminate knowledge. How will proprietary research and development fulfill that mission?  In fact, there are reasons to worry that the new focus on for-hire drug research and development will undermine the mission.  Any new knowledge produced is likely to be labelled trade secrets. Faculty who work as drug and device development contractors will not be teaching students. Students caught up in drug and device development will be working for big corporations, possibly without pay, and without any ownership of anything they may discover in the process. How Will the Resulting Institutional and Individual Conflicts of Interest be Managed? If the university becomes dependent on being paid for drug and device development, can university faculty remain unbiased teachers and researchers? Will they not feel pressured to show favor to the products, policy goals, and leadership of the corporations that are paying them? Why Would Faculty and Students Want to Participate in a Contract Research Organization Cloaked in Academic Robes? Will faculty want to be labelled as contract workers? What will that do for their academic credibility? Will students want to be educated by people beholden to specific corporations and corporate projects? Should Patients Want Care from a Contract Research Organization? How will they be confident that the drugs they are prescribed and the devices used in procedures they undergo are not chosen because their doctors and nurses feel beholden to the corporations that make them? Summary UCSF's new multimillionaire ex-biotechnology executive Chancellor seems determined to push the university into a much closer relationship with the drug, device and biotechnology industry. In fact, she seems to be advocating that the university should become, in effect, a contract research organization to service this industry. So far, this radically new direction seems to be provoking no questions, much less dissent, even though the public justification for it was apparently based on a string of logical fallacies. However, it is not clear how taking one of our major academic medical centers in this commercial direction will not harm, much less benefit its mission. For 30 odd years in the US we have been making health care more commercial, and have to show for it the world's most expensive but hardly the world's best health care system. This increasingly inaccessible system which provides care of uncertain quality has made the one percent who run it very rich. Those of us in the 99 percent need to question how making it even more commercial will do any of us any good. Post-Script: You Can Take the Executive Out of Biotech, But You Can't Take Biotech Out of the Executive When Dr Desmond-Hellmann first become UCSF Chancellor, we <a href="http://hcrenewal.blogspot.com/2009/05/bio-tech-u.html">questioned</a> how someone steeped in the culture of commercial biotechnology could distinguish that culture from the academic mission? (You heard that question here first.)  The answer now seems to be that her current ambitions substantially blur the academic mission with the pursuit of money and commercial success. Maybe one reason for this blurring of distinctions is that Dr Desmond-Hellmann apparently has not completely left the corporate world. - A <a href="http://www.athletepromotions.com/celebrity/Susan-Desmond-Hellmann-appearance-booking-agent.php">web-site </a>for a speakers' bureau in which she apparently still participates lists her as a current "Advisor of Genentech since April 2009." - In 2010, Dr Desmond-Hellmann joined the board of directors of Procter and Gamble, a company which makes many health related products, although it sold its global pharmaceutical business. Note that she got this position despite apparently not having any prior personal investment in P&G stock. However, per the company's <a href="http://www.pg.com/en_US/downloads/investors/annual_reports/2011/PG_2011_Proxy.pdf">2011 proxy statement</a>, she appears to be in line to collect over $250,000 a year in compensation for this position. It does not seem impossible that these ongoing commercial interests may influence how she acts in her role as Chancellor. ADDENDUM (5 November, 2011) - As <a href="http://www.reuters.com/article/2011/11/03/teva-pg-idUSN1E7A20BZ20111103">per Reuters</a>, <blockquote>Consumer products maker Procter & Gamble Co and Israeli drugmaker Teva Pharmaceutical Industries Ltd on Thursday gave details of a joint venture they have created to sell over-the-counter medicines. The joint venture, which was initially announced in March, will combine Teva's expertise in drug marketing with P&G's expertise in branding to expand their presence in the $200 billion consumer healthcare industry. </blockquote> So P+G is becoming more of a health care company, increasing concerns about how her position as a director of the company, which gives her fiduciary responsibility for its finances, may influence her in her role as Chancellor.

Logical Fallacies to Support Putting a Major Academic Medical Center into the Contract Research Organization Business

Two uncritically positive biographical features on UCSF Chancellor Susan Desmond-Hellmann MD appeared within the last two weeks, one in the ...

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Another Month, Another Set of Legal Settlements, Deferred Prosecution Agreements, and Jury Findings Adverse to Large Health Care Corporations

Another month, another series of adverse legal rulings suggesting misbehavior by large health care organizations.  In alphabetical order,... Baxter, McKesson, Teva Pay Punitive Damages As <a href="http://www.businessweek.com/news/2011-10-11/teva-jury-awards-162-5-million-in-damages-over-anesthetic.html">reported</a> by Bloomberg, <blockquote>A jury said Teva Pharmaceutical Industries Ltd. unit and two other drugmakers must pay $162.5 million in punitive damages for selling the anesthetic Propofol in a way that led three colonoscopy patients to develop Hepatitis C. Jurors in state court Las Vegas ordered Teva Parenteral Medicines Inc., Baxter Healthcare Corp. and McKesson Corp. to pay so-called punishment damages over sales of the anesthetic in vials large enough to be reused by doctors. Anne Arnold, Richard Sacks and Anthony Devito contend they contracted Hepatitis C from reused vials during colonoscopy procedures. They had sought more than $700 million in damages. It’s the second punitive award against Baxter and the unit of Petach Tikva, Israel-based Teva over a 2008 hepatitis outbreak in Nevada tied to Propofol. The first case resulted in a punitive verdict of more than $500 million against the drugmakers. Teva has agreed to cover all damage awards arising from the Nevada cases on behalf of Baxter and McKesson.</blockquote> In particular, <blockquote>The patients’ lawyers allege Teva intentionally sold Propofol in jumbo-sized vials to encourage doctors to reuse them, even with the risk of spreading blood-borne diseases such as hepatitis, an incurable liver disease.</blockquote> So the allegations are that the company intentionally put financial gain ahead of the safety of patients. Boston Scientific Settles Over-Billing Allegations Again <a href="http://www.businessweek.com/news/2011-09-26/boston-scientific-to-pay-9-25-million-in-whistleblower-case.html">per</a> Bloomberg: <blockquote>Boston Scientific Corp.’s Guidant LLC unit will pay $9.25 million to settle a whistleblower’s claim that the company over-billed the U.S. and private hospitals for heart pacemakers and defibrillators.</blockquote> The details: <blockquote>Guidant allegedly reneged on credits owed to the U.S. Department of Veterans Affairs for replacement of units still under warranty and is accused of over-charging hospitals for the devices, causing them to over-bill Medicare, according to an e-mailed statement from the Justice Department.</blockquote> Note that we have quite a extensive files on <a href="http://hcrenewal.blogspot.com/search/label/Boston%20Scientific">Boston Scientific</a>, and on <a href="http://hcrenewal.blogspot.com/search/label/Guidant">Guidant</a>, now its subsidiary. Hil-Rom Settles Fraud Allegations <a href="http://www.knoxnews.com/news/2011/sep/27/feds-announce-418-million-settlement-in-fraud">Reported</a> by the Knoxville News-Sentinel: <blockquote>Federal prosecutors announced Tuesday a $41.8 million civil fraud settlement in a 'whistle-blower' lawsuit against international medical equipment supply company, Hill-Rom Company Inc.</blockquote> The results also were that <blockquote>As part of the settlement, Hill-Rom has entered into a five-year 'corporate integrity agreement,' in which the firm will face close scrutiny by federal officials, Killian said.</blockquote>The allegations were: <blockquote>'Hill-Rom submitted false claims for medical equipment for patients who did not qualify for the equipment, including patients who had died, were no longer using the equipment or had been moved to nursing homes,' [US Attorney Bill] Killian said.</blockquote> In particular, <blockquote>The lawsuit alleged the firm was ripping off Medicare with its faulty billing practices. According to the lawsuit, unsealed Tuesday, Hill-Rom offered its sales representatives $200 gift certificates and 42-inch televisions as reward for boosting billings and, in 2001, laid off the lion's share of staff dedicated to ensuring compliance with Medicare rules.</blockquote> Note that this suggests a pattern of providing incentives to employees who "make their numbers," no matter how they do so. We have seen how making the financial numbers seems to take precedence over all else, including patients' well-being, in many contemporary health care organizations. Maxim Healthcare Settles Fraud Allegations In a <a href="http://www.baltimoresun.com/business/bs-bz-maxim-healthcare-settlement-2-20110912,0,4024222.story">story</a> in the Baltimore Sun, <blockquote>A Columbia-based health care firm has agreed to a $150 million settlement with the federal government and 43 states to resolve criminal and civil charges that it submitted claims for millions of dollars of work that it did not perform and operated offices that were not properly licensed, officials said Monday. A five-year federal investigation found that Maxim Healthcare Services Inc., one of the country's largest providers of home healthcare services, submitted $61 million in false claims for services to the federal government's Medicaid and Veterans Affairs health programs over an 11-year period from 1998 to 2009. Investigators said managers and workers at Maxim repeatedly modified time sheets and documents to cover up the fraud, creating a culture in which submitting false claims became 'common practice.'</blockquote> The settlement was of criminal as well as civil charges: <blockquote>The settlement includes a $20 million criminal fine and $130 million in civil settlements.</blockquote> It will also involve a deferred prosecution or corporate integrity agreement: <blockquote>In addition to the fines, Maxim also has been charged criminally with conspiracy to commit health care fraud. But the company could avoid conviction if it meets requirements outlined in the settlement.</blockquote> Unlike many such cases, this one involved criminal charges for and guilty pleas by some people involved in the wrong-doing, in this case, middle managers: <blockquote>Several regional account managers, a home health aid and a clinical services director also pleaded guilty to criminal charges, government officials said. They could face as much as $250,000 in fines and jail time for their roles in the fraud.</blockquote> Another atypical result was that the CEO who presided over the misbehavior actually suffered some consequences, although he did not have to pay fines for face criminal charges, <blockquote>Maxim officials said they take full responsibility for the violations. The company said it hired a new CEO in 2009 and changed its business practices to protect against a repeat.</blockquote> ProPublica published an <a href="http://www.propublica.org/article/troubled-health-care-staffing-chain-settles-with-government-for-150-million">article</a> at the same time which noted that Maxim's practices had come into question before, <blockquote>A different set of problems involving Maxim came up during a ProPublica investigation into the oversight of registered nurses in 2009. We identified several nurses who were hired by the Maryland-based company despite having a record of problems.</blockquote> Although that previous article did not mention the company's name: <blockquote>The articles focused on how regulators across the country did little to scrutinize troubled nurses who crossed state lines to continue working. Our earlier stories did not identify Maxim by name. </blockquote> We have noted that organizations which misbehave once are likely to misbehave again. This may stem from an organizational culture that puts revenue ahead of ethics and patients' and the public's health, and the lack of negative consequences that people who respond to the resulting positive financial incentives are likely to suffer. Medicis Settles Shareholder Class-Action Lawsuit <a href="http://www.azcentral.com/business/news/articles/2011/09/28/20110928medicis-auditor-will-pay-18-million-settle-suit.html">Noted</a> by the Arizona Republic, <blockquote>Medicis Pharmaceutical Corp. and its auditing firm, Ernst & Young, have agreed to pay $18 million to settle a shareholder class-action lawsuit stemming from the pharmaceutical company's financial statements.</blockquote> The shareholders alleged that Medicis was not honest about its financial affairs: <blockquote>The shareholders' lawsuit stems from Medicis' announcement in September 2008 that it would restate earnings from 2003 through the first half of 2008. Shareholders alleged that Medicis offered its wholesale customers generous return policies for prescription drugs as part of an effort to inflate the company's revenue. Medicis would accept returned products that were expired or about to expire at either no cost or substantial discounts to the wholesale customers, according to the lawsuit.</blockquote> Summary The constant march of <a href="http://hcrenewal.blogspot.com/search/label/legal%20settlements">legal settlements </a>by, jury verdicts against, and in some cases <a href="http://hcrenewal.blogspot.com/search/label/crime">criminal convictions </a>of or guilty pleas by large health care corporations indicate how common misbehavior by such organizations has become. Since it is likely that much misbehavior does not lead to publicly announced legal actions, what is published can only provide a floor for an estimate of how common it is. The march, which we have been documenting since starting Health Care Renewal, shows how sleazy and often corrupt health care has become, and how that sleaziness and corruption is prevalent not just among small players, but among the biggest and richest health care organizations, and their top leaders. One reason the situation continues to be so bad is that while the unethical behavior does sometimes result in pontificating by the civil authorities, and fines that may only be costs of doing business, it rarely leads to meaningful negative consequences for those who authorized, directed or implemented it. This was noted in the reporting of the Maxim Healthcare case above. For example, in the Baltimore Sun <a href="http://www.baltimoresun.com/business/bs-bz-maxim-healthcare-settlement-2-20110912,0,4927923,print.story">article</a> we found, <blockquote>One watchdog group called the penalty a drop in the bucket for a company that had $2 billion in reimbursements from 2003 to 2009. 'That is hardly crippling,' said Joe Newman, a spokesman for the Project on Government Oversight, which tracks government contractors. 'It is certainly something that stings Maxim's pocketbook, but they will be fine after that.' 'They won't be barred from the Medicaid program. That would hurt them.'</blockquote> Also, Sun columnist Jay Hancock <a href="http://www.baltimoresun.com/business/bs-bz-hancock-prmc-accountability-20110919,0,1446559.column">wrote</a>: <blockquote>Corporations are happy to be treated as people under the law, as we know from recent court decisions. They can own property. They can seek redress in Congress and the courts. They can make huge political contributions. But when it comes to being penalized for cheating the government, corporations quickly abandon their personhood and go back to being abstract blobs. 'I don't know about you, but if I hired a contractor to work on my house and he charged me a ton of extra money for work he didn't do, I wouldn't use that contractor again,' Minnesota Sen. Al Franken said in Congress a few months ago. 'And I would make sure my friends knew not to use them either. It seems like the same should be true of government contractors.'</blockquote> But that is often not the case. For years, government agencies have not vigorously enforced the law when doing so might inconvenience big corporations and their well-paid executives. Maybe this lenience stems from the loony philosophy of former Chairman of the Federal Reserve Alan Greenspan, who was once regarded as some sort of economic genius, who seemed to think that fraud cannot occur in his idealized idea of a free market, because somehow all bad actors would become widely known and therefore all counter-parties would avoid them. In an <a href="http://www.stanfordalumni.org/news/magazine/2009/marapr/features/born.html">article</a> in Stanford Magazine, <blockquote>The influential Greenspan was an ardent proponent of unfettered markets. Born was a powerful Washington lawyer with a track record for activist causes. Over lunch, in his private dining room at the stately headquarters of the Fed in Washington, Greenspan probed their differences. 'Well, Brooksley, I guess you and I will never agree about fraud,' Born, in a recent interview, remembers Greenspan saying. 'What is there not to agree on?' Born says she replied. 'Well, you probably will always believe there should be laws against fraud, and I don’t think there is any need for a law against fraud,' she recalls. Greenspan, Born says, believed the market would take care of itself. For the incoming regulator, the meeting was a wake-up call. 'That underscored to me how absolutist Alan was in his opposition to any regulation,' she said in the interview.</blockquote> It is a measure of the insanity of recent years that one of the chief leaders of government economic policy did not believe there was any need for laws against fraud. It appears that this daft idea has carried over to and still influences how many in government and out deal with health care. However, as we have d<a href="http://hcrenewal.blogspot.com/2010/08/how-fallacy-of-perfect-health-care.html">discussed</a>, health care is not and probably cannot ever be an ideal free market. Also, in health care, most of the bad actions remain <a href="http://hcrenewal.blogspot.com/search/label/anechoic%20effect">anechoic</a>, and in many cases it may be hard for counter-parties to avoid bad actors because they may dominate the market. Also, it may be those that make decisions about whether to deal with particular organizations may be executives, and sometimes health care professionals who have become indifferent to the ethical issues. As I have said again and again, pervasive bad behavior by large health care organizations has got to be a major cause of our ongoing health care dysfunction. So, to really deter bad behavior, those who authorized, directed or implemented bad behavior must be held accountable. As long as they are not, expect the bad behavior to continue.

Another Month, Another Set of Legal Settlements, Deferred Prosecution Agreements, and Jury Findings Adverse to Large Health Care Corporations

Another month, another series of adverse legal rulings suggesting misbehavior by large health care organizations. In alphabetical order,......

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"24", This Computer Project Was Not

A fascinating case study of IT failure in another life-critical domain has come to my attention. I think if the words "FBI" were replaced with "hospitals" and "healthcare IT", this could be a study of IT failure in the latter organizations. Many of the <a href="http://www.ischool.drexel.edu/faculty/ssilverstein/cases/">familiar issues</a> are there: <blockquote> <a href="http://pminit.blogspot.com/2009/11/failure-of-virtual-case-file-and-fbi.html">The Failure of Virtual Case File and the FBI</a> Background The FBI first sought to embrace technology in the 1980s during the onset of computer availability and hoped to have a paperless office where agents could quickly pull up case files, information, and photographs at the comfort of their desks without having to sift and sort through numerous paper files. The infrastructure in that time was limited to text based search engines and there were no provisions for photo storage or the ability to scan written reports. As a result, the FBI found its agents decided not to rely on the existing technology and were reverting back to paper. After the attacks on September 11, 2001, the FBI was placed under scrutiny for being ineffective and inefficient in its operations due to the time it would take to share information with other law enforcement agencies, locate reports, and transmit them from one location to another (usually done via fax or by mailed CDs). To combat this, the FBI developed a plan known as Trilogy, which aimed for three primary goals: A new computer network, personal computers for most agents, and an online criminal database that would be titled Virtual Case File (VCF). An external contractor by the name of Science Applications International Corp. (SAIC) was contracted in June 2001 to begin the project with an estimated schedule of three years for completion and a first year budget of $14 million. The project continued until early 2005 (7 months over schedule), at which time the project scope had expanded by 80% with costs of $170 million and was riddled with issues. Ultimately, in early 2005, the project was cancelled but not after escalation and persistence on the part of the FBI.<div class="post-body entry-content" id="post-body-7895894529226453236"> The Problems and Failure of VCF The FBI wanted SAIC to create the database from scratch instead of using off-the shelf Oracle programs that could have been customized. A study by the National Research Council (NRC) after the planned 3-year period in late 2004 was conducted to gauge the success of the program, and while the first two goals had been achieved (personal computers for most agents and the creation of a new network), VCF was found to be problematic and incomplete. The project plan was incomplete and there were no monitoring controls regarding finances or the schedule. The FBI threw quality out the window by wanting to bypass testing and release the product upon its ready date. However, VCF failed the most basic functionality tests under the NRC and had not included network management, security, and storage systems, or basic sorting capabilities. The study also found that most of the FBI's skilled managers had left for the private sector and there were little to no individuals who had the IT experience or knowledge to interact effectively with contractors to achieve what was needed. The definition and scope of operations and processes were ultimately entrusted to SAIC who were outsiders. In an attempt to salvage the project, the FBI immediately hired a federally funded R&D firm (Aerospace Corp.) costing $2 million to conduct an assessment of the project who concluded that the project needed to be scrapped and shut down due to the severity of the software issues. Upon investigation by Congress, there was a lack of financial controls and safeguards on the part of the FBI, enabling SAIC to continue to develop a program which was lacklustre and failed to meet objectives. 200 programmers from SAIC were used on the project when only a dozen were required and SAIC was not being properly monitored by the FBI. They felt as long as money was being funnelled to them by the government on the project, they did not need to be responsible for the effectiveness or viability of the program [was there a "hold harmless" clause as in health IT? - ed.] they were building and fired staff who expressed concerns over the direction of the program. [They must have been Luddites and IT skeptics who just refused to change the way they do things - ed.] Further, the FBI took a trial by error approach to the project without truly understanding their end goal and without setting benchmarks for evaluating the progress of the project and took a nearly hands off approach by entrusting SAIC entirely. SAIC claimed the FBI were indecisive in what they wanted and there had been 19 government personnel changes over the project tenure which brought on scope creep and the focus of the project in a state of flux, in addition to a clear lack of leadership. A further $17 million was then spent by the FBI to perform more rigorous testing to try to salvage the project once more, which was another missed opportunity to cancel the project. It was only in early 2005 that the decision was made by Congress to terminate the project. Source: Eggen, Dan; Witte, Griff. 'The FBI Upgrade that wasn't'. August 8, 2006. Website: http://www.washingtonpost.com/wp-dyn/content/article/2006/08/17/AR2006081701485.html (accessed on November 7, 2009).</div></blockquote> "<a href="http://en.wikipedia.org/wiki/24_%28TV_series%29">24</a>" this was not. <div style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg1y2WJpcRz-UF-syhZUPwyArrMHDGGoWmK7Ao4D-_rHYC0vWVfczNjoNBdK56HfyJ4PH6f6OnJvKYrmI8-fiyKlomJ8Q19JQeJDZDLw6-qPqDHuHp7MxHpYsbs4y8InkCqbRrk-DGUJ9nA/s1600/Chloe.jpg"><img alt="" border="0" id="BLOGGER_PHOTO_ID_5662968216287927170" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg1y2WJpcRz-UF-syhZUPwyArrMHDGGoWmK7Ao4D-_rHYC0vWVfczNjoNBdK56HfyJ4PH6f6OnJvKYrmI8-fiyKlomJ8Q19JQeJDZDLw6-qPqDHuHp7MxHpYsbs4y8InkCqbRrk-DGUJ9nA/s320/Chloe.jpg" style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 246px; height: 178px;" /></a>Chloe O'Brian, where were you? </div> In the FBI's case, the failure exposes us to potential crime. In a hospital's case, the stakes are even more personal. Even worse, at least here Congress intervened; health IT is a virtually unregulated industry and nobody is minding the store. The UK's National Programme for IT (NPfIT) in the NHS <a href="http://hcrenewal.blogspot.com/2011/09/npfit-programme-going-pffft.html">paid the price of failure</a> through problems such as above. Will the "NPfIT in the HHS" meet a similar fate? -- SS Oct. 13, 2011 Addendum: where have we seen SAIC before? How about <a href="http://hcrenewal.blogspot.com/2011/10/still-more-ehr-chaos-pandemonium-bedlam.html">here</a>? <blockquote> Case 3: Bedlam Meanwhile, Science Applications International Corporation disclosed that computer backup tapes containing medical data for 4.9 million military patients [that number also amounts to almost 2% of the total U.S. population - ed.] had been stolen from an employee’s car in San Antonio. The data included Social Security numbers, clinical notes, laboratory test results and prescriptions. </blockquote> -- SS

"24", This Computer Project Was Not

A fascinating case study of IT failure in another life-critical domain has come to my attention. I think if the words "FBI" were r...

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Health Care's "99 Percenters"

As Occupy Wall Street has gone from an obscure protest covered only on blogs and social media to a national phenomenon, the apparent parallels between the issues it is raising and the issues we have been raising in health care grows. 99 Percenters A growing number of protesters are calling themselves the "99 Percenters," (Alter, Jonathan.  Why Occupy Wall Street Should Scare Republicans.  Bloomberg, October 6, 2011.  Link <a href="http://www.bloomberg.com/news/2011-10-07/occupy-wall-street-should-scare-republicans-commentary-by-jonathan-alter.html">here</a>) referring to those who are not in the top 1% of earners.  (The top 1% of income is clearly greater than $250,000/ year [see 2009 census data on US household income <a href="http://www.census.gov/compendia/statab/2012/tables/12s0693.pdf">here</a>], and likely around $380,000 a year [based on the distribution of income reported on tax returns <a href="http://www.financialsamurai.com/2011/04/12/how-much-money-do-the-top-income-earners-make-percent/">here</a>.])  In health care, nearly all who are paid more than $380K/ year are either proceduralists (some medical sub-specialist physicians, and some surgeons, again mainly sub-specialist), or managers and executives of health care organizations. Health Care's 1%  We have been discussing since 2007 how the inequality among physicians' incomes favoring those who do procedures over primary care and other "cognitive" physicians has been driven not by the market, but by regulatory capture.  The fees paid for all physicians services by Medicare, a fee schedule adopted without question or major changes by nearly all insurers, are set through the Resource Based Relative Value System (RBRVS) by the US Center for Medicare and Medicaid Services (CMS).  CMS, in turn, gets virtually all its input on these fees from the <a href="http://hcrenewal.blogspot.com/search/label/RUC">RBRVS Update Committee (RUC),</a> a private committee of the American Medical Association (AMA), made up largely of proceduralists, whose deliberations are secret, and whose membership has been secret until recently.  See here for most recent posts.  Note that the CMS' peculiar relationship with the RUC is now subject of a lawsuit that accuses this relationship of violating the Federal Advisory Committee Act (Klepper B, Kibbe D. A legal challenge to CMS' reliance on the RUC.  Health Affairs Blog, August 9, 2011.  Link <a href="http://healthaffairs.org/blog/2011/08/09/a-legal-challenge-to-cms-reliance-on-the-ruc">here</a>)  The real top earners in health care, however, are not physicians, but executives of big corporations, non-profit and especially for profit.  We have <a href="http://hcrenewal.blogspot.com/search/label/executive%20compensation">discussed</a> endlessly how huge their compensation may be, and how it seems unrelated to any aspect of their own or their organizations' performance, especially not to how much they benefit patients' or the public's health.  Furthermore, we have noted how executives have prospered even when their management seems overtly <a href="http://hcrenewal.blogspot.com/search/label/mission-hostile%20management">hostile to the health care mission</a>, when it leads to ethical missteps requiring <a href="http://hcrenewal.blogspot.com/search/label/legal%20settlements">legal settlements</a>, or even guilty pleas or verdicts to <a href="http://hcrenewal.blogspot.com/search/label/crime">criminal charges</a>.  So health care's "99 percenters" ought to be angry at the top 1%. The Power of Finance Furthermore, the Occupy Wall Street protesters are not merely upset with the upper 1%, but particularly outraged by those in the financial sector, which "with regulators and elected officials in collusion, inflated and profited from a credit bubble that burst, costing millions of Americans their jobs, incomes, savings and home equity."  Then, "the initial outrage has been compounded by elected officials' hunger for campaign cash from Wall Street, a toxic combination that reaffirmed the economic and political power of banks and bankers, while ordinary Americans suffer.  Extreme income inequality is the hallmark of a dysfunctional economy, dominated by a financial sector that is driven as much by speculation, gouging and government backing as by productive investment." (Anonymous. Protesters against Wall Street.  NY Times, October 8, 2011. Link <a href="http://www.nytimes.com/2011/10/09/opinion/sunday/protesters-against-wall-street.html">here</a>) In another report, the protesters "unite around a common theme: bankers are ripping off America.  Two secondary themes also emerge....  One is that the super rich own the politicians.  The other is that the news media, almost across the board, view events through the eyes of the super rich." (Johnston DC. Occupy Wall Street.  Reuters Blogs, October 7, 2011.  Link<a href="http://blogs.reuters.com/david-cay-johnston/2011/10/07/occupy-wall-street/"> here</a>.) Finance's Links to Health Care We have <a href="http://hcrenewal.blogspot.com/2011/08/now-mainstream-notion-profit-seeking.html">noted</a> parallels between the effects of Wall Street and health care on the economy.  Furthermore, we have noted active ties among Wall Street and health care organizations. (Look <a href="http://hcrenewal.blogspot.com/search/label/finance">here</a> for examples.)  Top executives and board members of some of the financial firms most obviously responsible for the global economic collapse/ great recession have served on boards of trustees of top medical schools and academic medical centers, and their parent universities.  The top leaders of medical schools, academic medical centers, and their parent universities have served on the boards of such financial firms.  There are also board interlocks among Wall Street firms and all sorts of health care corporations.  The corporate culture of Wall Street and health care have long overlapped.  We have further noted how the leadership of big health care organizations has deceptively influenced policy, particularly through <a href="http://hcrenewal.blogspot.com/search/label/stealth%20health%20policy%20advocacy">stealth health policy advocacy</a>.  Meanwhile, until the last few years, much of health care dysfunction has been <a href="http://hcrenewal.blogspot.com/search/label/anechoic%20effect">anechoic</a>.  Now the media is beginning to report some of the abuses.  Little about them appears, however, in the medical and health care literature that health care professionals are likely to trust more than news media.  Summary We have frequently suggested that true health care reform requires reform of health care leadership and governance.  We need leaders who understand the health care context, uphold health care professionals' values, and put patients first.  We do not need leaders who are ill-informed, incompetent, self-interested, conflicted, or corrupt.  We need governance that is accountable, honest, transparent, ethical, and again puts patients first.  Maybe to do that we will have to "occupy health care." In any case, it is time for health care's "99 percenters" to stand up for their patients and the integrity of their values.

Health Care's "99 Percenters"

As Occupy Wall Street has gone from an obscure protest covered only on blogs and social media to a national phenomenon, the apparent paralle...

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Still More Electronic Medical Data Chaos, Pandemonium, Bedlam, Tumult and Maelstrom: But Don't Worry, Your Data is Secure

Case 1. Tumult <blockquote>October 5, 2011 New York Times <a href="http://www.nytimes.com/2011/10/06/us/stanford-hospital-patient-data-breach-is-detailed.html?_r=1">Patient Data Landed Online After a Series of Missteps</a> By KEVIN SACK Private medical data for nearly 20,000 emergency room patients at California’s prestigious Stanford Hospital were exposed to public view for nearly a year because a billing contractor’s marketing agent sent the electronic spreadsheet to a job prospect as part of a skills test, the hospital and contractors confirmed this week. The applicant then sought help by unwittingly posting the confidential data on a tutoring Web site. [Got all that? - ed.] In an e-mail sent to a victim of the breach, the billing contractor, Joe Anthony Reyna, president of Multi-Specialty Collection Services in Los Angeles, explained that his marketing vendor, Frank Corcino, had received the data directly from Stanford Hospital, converted it to a new spreadsheet and then forwarded it to a woman he was considering for a short-term job. The position was with Mr. Corcino’s one-man shop, Corcino & Associates, Mr. Reyna wrote in the e-mail, which was authenticated by his lawyer, Ellyn L. Sternfield. The job applicant apparently was challenged to convert the spreadsheet — which included names, admission dates, diagnosis codes and billing charges — into a bar graph and charts, Stanford Hospital officials said. Not knowing that she had been given real patient data, the applicant posted it as an attachment to a request for help on <a href="http://studentoffortune.com/">studentoffortune.com</a> [I wrote about that earlier <a href="http://hcrenewal.blogspot.com/2011/09/new-way-to-get-kids-interested-in.html">here</a> - ed.], which allows students to solicit paid assistance with their work. First posted on Sept. 9, 2010, the spreadsheet remained on the site until a patient discovered it on Aug. 22 and notified Stanford. </blockquote> My, how electronic data can travel when mishandled. Try that trick with 20,000 paper charts ... <blockquote> The hospital, located on the campus of Stanford University in Palo Alto, demanded that the spreadsheet be removed, and the Web site quickly complied. Pressed for time, the job prospect wound up completing the assignment herself and, in the end, did not get hired, Ms. Sternfield said. </blockquote> Ironically, this was all for naught. <blockquote>Mr. Corcino, in his first public statement, attributed the breach to “a chain of mistakes which are far too easy to make when handling electronic data.” </blockquote> Far too easy to make - especially by the dyscompetent. <blockquote>... Breaches of private medical data have become distressingly commonplace, with two substantial ones disclosed in the last week alone. [We don't know the details of those yet; that's for next week - ed.] </blockquote> Case 2: Pandemonium (from same NYT article) <blockquote>In Orlando, officials with Florida Hospital reported that three employees had improperly combed through emergency department records of 2,252 patients, apparently to forward information about accident victims to lawyers. The employees were fired, and law enforcement officials are investigating. </blockquote> Trolling for Torts - is this a new EMR TV game contestant show? Perhaps it could be followed by "<a href="http://hcrenewal.blogspot.com/2011/02/what-was-this-medical-resident-looking.html">Trolling for Tarts?</a>" Case 3: Bedlam (from the same NYT article) <blockquote>Meanwhile, Science Applications International Corporation disclosed that computer backup tapes containing medical data for 4.9 million military patients [that number also amounts to almost 2% of the total U.S. population - ed.] had been stolen from an employee’s car in San Antonio. The data included Social Security numbers, clinical notes, laboratory test results and prescriptions. The company said the risk of harm was low because retrieving data from the tapes would require specialized knowledge, software and hardware. [Who's to say the theft was not by someone with that specialization, or someone paid by same to steal the tapes? - ed.] The Texas breach is by far the largest since September 2009, when a new federal law began requiring disclosures of medical privacy violations involving at least 500 people. Some 330 such episodes have been tallied, including four others that affected more than one million people each. </blockquote> We'd all be buried in stray clinical paper by now if it weren't for computers. Thank god for them! <blockquote>Officials at the Department of Health and Human Services said the new reporting requirements had exposed deep vulnerabilities and encouraged renewed vigilance. </blockquote> Exposed to whom? The blind, deaf and dumb? <blockquote>“We’re moving in the right direction in terms of a culture of compliance,” said Leon Rodriguez, director of the department’s Office for Civil Rights, which investigates medical privacy cases. “Are there still a lot of problems out there? Yeah, my sense is there are still a lot of problems.” </blockquote> The Titanic was moving in the right direction - towards New York Harbor, in fact, when it met a little unexpected obstacle. Perhaps a culture of brains would be better than a culture of compliance... <blockquote>The Stanford breach was notable for the duration of public exposure, and for spotlighting the vulnerability created by a medical provider’s business relationships with outside parties. Last week, lawyers filed suit in state court in Los Angeles, seeking certification as a class action and $20 million in damages from Stanford Hospital & Clinics and Multi-Specialty Collection Services, which is known as MSCS. </blockquote> $20 million might hurt a bit, and might help motivate the organization to hire better and/or more appropriate clinical information management expertise - in house where it belongs (see below). <blockquote>The threat of liability set off a predictable round of finger-pointing. In written responses to questions, Lisa Lapin, Stanford University’s assistant vice president for university communications, said, “MSCS bears the complete and sole responsibility for the breach.” </blockquote> It's their fault, not ours. <blockquote>Ms. Lapin said the hospital had sent the data in encrypted form to Mr. Corcino, who requested it on behalf of MSCS to analyze a strategy for improving billing collections. She said Mr. Corcino had regularly represented himself as MSCS’s executive vice president and had been Stanford’s “primary contact” during a seven-year relationship. MSCS, a five-person firm that audits hospital accounts to maximize reimbursement, possessed the passwords to unencrypt the data, she said. </blockquote> It was all about money and outsourcing. <blockquote>“This mishandling of private patient information was in complete contravention of the law and of the requirements of MSCS’s contract and is shockingly irresponsible,” the hospital said in a statement. </blockquote> It is foolish to believe that someone else can run critical aspects of your business, and it is even more foolish to believe that it is OK for someone else to run critical aspects of your business. <blockquote>Ms. Sternfield, Mr. Reyna’s lawyer, said Mr. Corcino had never been an MSCS employee, but rather was paid a monthly fee to drum up business, typically in face-to-face meetings with health care executives. Mr. Reyna, she said, had no knowledge that the Stanford data had been sent to Mr. Corcino, or that he had passed it on. Mr. Corcino was not authorized to use an MSCS title, Ms. Sternfield said, but she declined to say whether Mr. Reyna was aware of the practice. She acknowledged that Mr. Corcino sometimes used an MSCS e-mail account. In his e-mail to the breach victim, who shared it with The Times, Mr. Reyna wrote that Stanford had sent the file to Mr. Corcino “for a potential MSCS project that would audit paid accounts to verify that the reimbursement was correct.” For his part, Mr. Corcino said in a statement that he was an independent contractor but was “the marketing face of the company,” and that MSCS “allowed me to use the title of executive vice president.” He wrote: “Stanford sent the file to me at MSCS, and I imported the data into a spreadsheet that was forwarded to the job applicant as part of a skills test. I did not intend to provide any personal health information in the file. This was a marketing project.” Without explaining how or why he sent the data to the applicant, Mr. Corcino said MSCS had not trained him properly and faulted Stanford for sending him private information that he did not need. That, he said, was the “first link in a chain of mistakes.” “I regret that Stanford released a file containing unnecessary information,” Mr. Corcino said, “that MSCS did not have an appropriate training and audit system for the handling of electronic data and that I was not more careful with the file. While Stanford and MSCS left the information in the file I received, it was my mistake to not catch its inclusion and remove the data.” ... The hospital has terminated its relationship with MSCS, and Mr. Reyna has done the same with Mr. Corcino. </blockquote> Even I can't follow all that. This will be one convoluted court case... <blockquote>Stanford Hospital has reassured affected patients that the posted spreadsheet did not contain Social Security numbers, birthdates or credit card numbers, and has offered free identity theft protection services. The hospital said it had not uncovered any misuse of the exposed data. </blockquote> Yet, that is. (Is it no wonder that sedatives are among the most highly-prescribed medications?) Moving from the NYT article: Case 4: Tumult (I'm running out of descriptors) <a href="http://newsandinsight.thomsonreuters.com/California/News/2011/06_-_June/Health_Net%E2%80%99s,_IBM%E2%80%99s_negligence_compromised_medical_data,_suit_says/"></a><blockquote><a href="http://newsandinsight.thomsonreuters.com/California/News/2011/06_-_June/Health_Net%E2%80%99s,_IBM%E2%80%99s_negligence_compromised_medical_data,_suit_says/">A large class action lawsuit again Health Net and IBM</a>: California Legal Westlaw Journal Insurance Coverage Health Net’s, IBM’s negligence compromised medical data, suit says June 7 (Westlaw Journals) - Health Net Inc. and IBM face a class-action lawsuit seeking $5 million in damages over the loss of computer storage devices that held the medical histories, financial data and Social Security numbers of 2 million people. Health Net Policyholder Alana Bournas’ class-action complaint in the U.S. District Court for the Eastern District of California alleges that the insurer and IBM breached their duty of confidentiality and negligently allowed the release of highly personal and confidential information of millions of Health Net employees and policyholders. The complaint alleges violation of California’s Confidentiality of Medical Information Act, Cal. Civ. Code § 56; Cal. Civ. Code § 1798.2, which concerns the unauthorized disclosure of customer records; Cal. Bus. & Prof. Code § 17200, the state’s unfair-competition law; and public disclosure of private facts. </blockquote> Companies will either pay the going price for competent employees, or pay for the mistakes of incompetent ones. It would probably be better for society, however, to do the former habitually. <blockquote>The suit says IBM agreed to manage Health Net’s information technology database for five years beginning in 2008. IBM informed Health Net Jan. 21 that it had lost nine disk drives containing the confidential information of 2 million people, including Health Net policyholders and employees. Health Net failed to alert the victims of the breach until March 14, the complaint says. IBM allegedly also failed to encrypt the data, thereby enabling anyone who possesses the hard drives to easily access the confidential information. This puts the victims at an increased risk of identity theft and “other unauthorized uses of plaintiff and class members’ personal information” the suit says. </blockquote> Encryption, a feature now built into mainstream OS's by Microsoft and Apple? (Oh wait...IBM...) <blockquote> Health Net’s attempt to compensate the victims by providing two years of free credit monitoring services through TransUnion is an inadequate remedy for the defendant’s conduct, Bournas says. This “remedy” fails to address unauthorized disclosures of medical information, and the monitoring services only protect against new account fraud but do not address fraudulent activity with existing accounts, the suit says.</blockquote> These executives apparently can't even get the fix straight. <blockquote>Moreover, the complaint says, Health Net has previously been accused of a similar breach of confidential information. In 2009 it lost the same types of records of nearly 1.5 million people and waited six months before notifying the victims. In settling the state of Connecticut’s lawsuit stemming from that security breach, the company promised “to enhance security procedures and training,” the suit says. </blockquote> What can I say? <blockquote>The current breach could have been avoided had Health Net and IBM taken proper precautions and implemented security policies to maintain consumers’ confidential data, according to Bournas. Therefore, the protections granted under California law require that Health Net be penalized for its negligence, she says. The plaintiff notes that millions of people entrusted Health Net with their private data. “At best, defendants’ actions allowed this private information to go astray. At worst, the private information is being viewed, sold, resold, and used for illegitimate and illegal purposes,” the complaint says. The suit is seeking injunctive relief, compensatory damages, declaratory relief, and attorney fees and costs. Bournas v. Health Net Inc., No. 2_11-CV-01262, complaint filed (E.D. Cal. May 11, 2011).</blockquote> I would revise that to say "The current breach could have been avoided had Health Net and IBM hired personnel in adequate numbers with the qualifications and true gravitas (and not laid them off, of course) to maintain consumers’ confidential data." Case 5: Maelstrom (I am reaching to the bottom of the barrel for such descriptors). <a href="http://www.ama-assn.org/amednews/2011/08/01/bisc0801.htm"></a><blockquote><a href="http://www.ama-assn.org/amednews/2011/08/01/bisc0801.htm">Wellpoint recently settled class-action suit in CA</a>. AMA news By Pamela Lewis Dolan, amednews staff. Posted Aug. 1, 2011. WellPoint reaches tentative accord in data breach suit It is the second settlement to come from lawsuits claiming that the company failed to protect the privacy of individual insurance applicants online. WellPoint has reached a preliminary settlement that will, if approved, bring an end to a class-action lawsuit filed more than a year ago. The lawsuit, filed in the Superior Court of the State of California, involves the potential exposure of data belonging to more than 600,000 individual health insurance applicants on a company-run website that allowed insurance applicants to track their applications. The situation came to light when an applicant to WellPoint-owned Anthem Blue Cross of California sued the company in March 2010. The applicant was able to manipulate the web address within the site to gain access to other applicants' information, including names, addresses, dates of birth, Social Security numbers and health and financial information. </blockquote> In other words, probably changing a simple number in the URL brought up someone else's records. Good going there, Wellpoint. What were the programmers thinking? (Were they thinking?) <blockquote>When the suit was filed, the company said an upgrade to the system caused the information to become exposed. The company said a third-party vendor validated that all security measures were in place when, in fact, they were not. Changes were made to the system soon after the situation was discovered.</blockquote> Blame someone else, yet again. <blockquote>In addition to the class-action suit, the company was sued by Indiana Attorney General Greg Zoeller in July 2010. The suit, filed in Marion County Civil Superior Court, alleged that the company violated the Indiana Disclosure of Security Breach Act by failing to notify Zoeller, and the 32,051 Indiana residents affected by the incident, in a timely manner. That suit was settled in early July, when WellPoint agreed to pay a $100,000 fine. As part of the settlement, WellPoint admitted it had a security breach and failed to properly notify the attorney general's office as required by law.</blockquote> <a href="http://www.urbandictionary.com/define.php?term=oy%20gevalt">Gevalt</a>. <blockquote> Under the preliminary settlement in the California class-action matter, WellPoint agreed to offer credit monitoring for two years to all affected individuals. Class members are eligible to receive reimbursement for identity theft losses of up to $50,000 per incident, as well as additional time to file identity theft claims until May 31, 2016. Those making identity theft claims are eligible for an additional five years of credit monitoring. The company also will donate a total of $250,000 to two nonprofit organizations whose efforts are directed at protecting consumers' privacy on the Internet.</blockquote> It might have been cheaper and better for goodwill not to outsource a vital function...those third-party vendors can really hurt you. (I'd really like to know - was this "third party vendor" domestic, or overseas?) <blockquote>WellPoint did not admit wrongdoing in the case, nor was it found guilty. A fairness hearing is scheduled for November, and the courts then will decide whether to approve the settlement.</blockquote> Large corporations are immune from such formalities as admitting wrongdoing or being found guilty. ----------------------- But don't worry. <a href="http://hcrenewal.blogspot.com/search/label/medical%20record%20privacy">Your medical data's safe.</a> Sort of. See also: <ul><li>"<a href="http://hcrenewal.blogspot.com/2010/02/networked-emrs-and-healthcare.html">Networked EMR's and Healthcare Information Security: Practical When Massive IT Security Breaches Continue</a>?",</li></ul><ul><li>"<a href="http://hcrenewal.blogspot.com/2010/02/networked-interoperable-secure-national.html">Networked, Interoperable, Secure National Medical Records a Castle in the Sky?</a>",</li></ul><ul><li>"<a href="http://hcrenewal.blogspot.com/2010/01/it-flaws-and-coverups-of-same-why-i.html">Operation Aurora And a Widespread Reluctance to Discuss IT Flaws: Is Universal Healthcare IT Really a Good Idea in 2010?</a>",</li></ul><ul><li>"<a href="http://hcrenewal.blogspot.com/2010/10/medical-data-breach-of-week-but-your.html">Medical data breach of the week - but your EMR data is secure, trust us, we're IT experts</a>", </li></ul><ul><li>"<a href="http://hcrenewal.blogspot.com/2010/11/insurers-test-data-profiles-to-identify.html">Insurers Test Data Profiles to Identify Risky Clients</a>",</li></ul><ul><li>and <a href="http://hcrenewal.blogspot.com/search/label/medical%20record%20confidentiality">others</a></li></ul> -- SS

Still More Electronic Medical Data Chaos, Pandemonium, Bedlam, Tumult and Maelstrom: But Don't Worry, Your Data is Secure

Case 1. Tumult October 5, 2011 New York Times Patient Data Landed Online After a Series of Missteps By KEVIN SACK Private medical data for ...

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