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"Barbarians at the Gate" - Making Private Equity Less Private, and Understanding Its Effects on Health Care

One good byproduct of the tumultuous everlasting 2012 campaign for the US presidency has been to shed light on a number of political and economic issues that had previously been ignored, especially those relating to the global financial crisis or great recession.  In turn, many of these issues may be relevant to our understanding of our ongoing health care dysfunction.  The latest issue to achieve prominence was the nature of private equity firms.  Current presidential contender Mitt Romney used to work for Bain Capital, a private equity group.  As we discussed <a href="http://hcrenewal.blogspot.com/2012/01/us-presidential-candidates-financial.html">here</a>, Bain Capital owned a variety of companies, including some important health care corporations.  More importantly, attacks on Mr Romney's record at Bain by other candidates have lead to a broader discussion of the nature of private equity.  This discussion is very relevant to health care, since private equity firms have taken over a number of important health care corporations, and more recently, have begun to take over formerly non-profit health care organizations. Therefore, we will summarize what has become known about private equity, and then consider its implications for health care. Understanding Private Equity as Re-Branded Leveraged Buy-Out Firms - Private Equity Firms are Just Re-Branded Leveraged Buyout Firms The first good statement to this effect I found was by Merrill Goozner in the Fiscal Times(1): <blockquote>Private equity is actually a misnomer, since the modus operandi of those investors is no different than the leveraged buyout firms that pioneered junk-bond financing in the 1980s. </blockquote> As reported by the Los Angeles Times(2): <blockquote>'Being known as a leveraged-buyout-deal shop wasn't the most attractive label out there,' said Colin Blaydon, director of the Center for Private Equity and Entrepreneurship at Dartmouth's Tuck School of Business. 'Private equity has a much nicer ring to it.'</blockquote> In fact, according to Forbes columnist Robert Lenzer,(3) the famed investor Warren Buffet called this re-branding <blockquote>'Orwellian': Buffett wrote that 'private equity' is a 'name that turns facts upside-down: A purchase of a business by these firms almost invariably results in dramatic reductions in the equity portion of the acquiree’s capital structure compared to that previously existing.'</blockquote> I must admit I always thought private equity firms simply collected large amounts of capital from investors, then used the pooled capital to buy out troubled firms. I assumed that because these investors therefore had a large personal stake in these firms, they would want to increase at least their financial value. I also thought that leveraged buy-out firms ceased to exist after all the bad press they got in the 1980s. It turns out I was wrong on all counts. Probably, a lot of other peoples' beliefs about private equity were similarly wrong. Once the equation of private equity and leveraged buyout firms is made, understanding what they do and its implications are easier. - Leveraging the Buy-Out The modus operandi of leveraged buyout firms is to make their purchases of troubled corporations mainly with borrowed money. As Merrill Goozner put it(1), <blockquote>Private equity firms generally finance anywhere from 60 to 90 percent of their purchases with borrowed cash. </blockquote> Note that, <blockquote>Interest payments on those debts are treated just like any other expense, and are therefore deductible from earnings.</blockquote> - Then Leveraging the Acquired Company If this leveraging were the only leveraging done in a leveraged buy-out, the implications might not be that big, except for the acquiring firm. After all, when the leveraged buy-out firm borrows the money, it then becomes obligated to pay it back. However, then comes the tricks. One important trick was described in the following example by economist Dean Baker on the Beat the Press blog(4), <blockquote>To take a simple example, suppose a public company (let's call it Gingrich Inc.), has $1 billion a year in profits. If Gingrich Inc. paid taxes at the full 35 percent rate (fat chance), it would have $650 million [thanks Robert] a year to either keep as retained earnings or to pay out as dividends to its shareholders. Now suppose that a PE company (we'll call it Romney Capital) steps in. The current price to earnings ratio in the stock market is around 14, so Gingrich Inc. would have a pre-takeover market value of approximately $9.2 billion (14*$650 million). Romney Capital then arranges for Gingrich Inc. to borrow $6 billion which it pays out as a dividend to itself. This means that the Romney Capital has just gotten back almost two-thirds of its investment.</blockquote> A somewhat less vivid description of the process appeared in a post by Robert K Lifton on the Huffington Post(5): <blockquote>Most often, in order to increase the return on capital invested by the fund, the fund will borrow a significant portion of the purchase price of the business. And sometimes, if it can, the fund will take back as a distribution immediately upon closing the purchase of the business, a portion of its investment in the purchase price, reducing its own investment and enhancing its return on the investment left in the business. This distribution may come from the company's existing cashable assets or from money that the company is caused to borrow.</blockquote> Thus, it appears that while the leveraged buy-out (or private equity) firm borrowed money to finance the purchase of a company, it can almost immediately get out of its obligation to pay off that loan, by making the acquired company its own loan, and using proceeds from that to end the LBO firm's debt. The leverage, and the obligation to pay back a debt has almost magically been transferred from the LBO or private equity firm to the acquired company. That has big implications, as Lifton wrote(5): <blockquote>This additional leverage also creates additional risk; if things don't go right the business will not be able to pay the carrying costs of the debt, the lender will take over the business and the fund will lose its investment. Sometimes, that results in the acquired company placed in bankruptcy proceedings either to liquidate its assets to pay off the debt or to restructure, a process Bain also experienced. </blockquote> - Selling Assets to Further Reduce the Private Equity Firm's Debt LBO firms have another trick up their collective sleeves. As Dean Baker continued his example(4), <blockquote>Now suppose that the Romney Capital arranges to sell off some of Gingrich Inc.'s assets, such as real estate or a highly profitable subsidiary, and then uses the proceeds to make a payment to the Romney Capital rather than leaving the money under the control of Gingrich Inc. Such sales may allow Romney Capital to recoup the rest of its investment and possibly more.</blockquote> Of course, the result is <blockquote>Gingrich Inc. is then left as a highly indebted company with few assets. In this story, Romney Capital may have earned a substantial profit on a limited investment (it recouped most of its money almost immediately when it loaded Gingrich Inc. with debt), without doing anything to improve the operation of Gingrich Inc. If Gingrich Inc. manages to stay in business and generate profits, then this will increase the return. Romney Capital may be able to resell the company and treat the whole sale price as profit. On the other hand, if Gingrich Inc. goes bankrupt, this will primarily be a problem for creditors, since Romney Capital has already gotten its investment back. In effect, Romney Capital might have secured large gains entirely by financial engineering, while creating no value whatsoever.</blockquote> Let me underscore that. The LBO model (now also the private equity model) enables the acquiring LBO firm to avoid any losses, by shifting all the risk and obligations to the acquired firms. This puts these firms at considerable jeopardy. - Tactics to Prepare Acquired Firms for Sale Of course, LBO/ private equity firms want to do more than not lose money. To make real money, they must be able to sell off the firms they acquire. To do so, they must make these firms, or their components, seem attractive, at least in the short term. To do this, they employ a standard set of tactics out of the generic management playbook. So, per the LA Times(2), <blockquote>layoffs are part of the playbook that elite investment firms use to squeeze cash out of struggling companies. </blockquote> Also, per Lifton(5), <blockquote>To increase the profits of the acquired company, the fund may reduce the number of employees, reduce pay levels or curtail work time.</blockquote> In addition, per Josh Barro writing for the Forbe blog(6), other tactics can include <blockquote>downsizing, increased automation, offshoring, and the like. </blockquote> - The Private Equity/ Leveraged Buy-Out Version of the Anechoic Effect It is striking that while Mitt Romney worked at Bain Capital in the last century, and private equity has been around, if not growing, since then, the current presidential campaign seems to be the first occasion which prompted any real public discussion about the nature of private equity, and its significance for the larger political economy. Thus private equity/ LBO seem to have been anechoic for a very long time (like much about how our current health care system operates seems to be <a href="http://hcrenewal.blogspot.com/search/label/anechoic%20effect">anechoic</a>.) This version of the anechoic effect seems to have been deliberately created by the private equity/ LBO firms. A Washington Post commentary(7) quoted Mitt Romney, <blockquote>You know I think it's fine to talk about those things in quiet rooms,...</blockquote> As a New York Times story(8) put it, these firms are lead by <blockquote>a group of Wall Street executives who prefer to operate out of the spotlight</blockquote> A story in Politico(9) called private equity/ leveraged buy-out firms <blockquote>one of the most secretive redoubts of the American economy</blockquote> The article went on to suggest that these firms may well have something to hide: <blockquote>Josh Kosman, author of 'The Buyout of America: How Private Equity Is Destroying Jobs and Killing the American Economy.' [said] 'Most private equity firms are because once you look behind the numbers, there is much they don’t want you to see.'</blockquote> Furthermore, <blockquote>Private equity companies often tend to have confidentiality agreements with their investors (Bain would not comment on what agreements it has). Several equity experts interviewed for this story thought any disclosures from Bain were likely to spook its investors. The private equity business model is based on taking companies out of the public markets, where reporting requirements are strict and investors punishing, making changes that will hopefully make them more profitable and then selling them or taking them public through an IPO. The part that happens behind the curtain is not always pretty, and private equity firms have learned over the years that it’s hard to tell a complicated story in the media. The goal of private equity is to keep things private. 'It’s had very little consciousness in the political realm until Romney came along because these guys are smart enough not to try to become Treasury secretaries,' said Bill Cohan, a former Wall Street banker-turned-investigative journalist who wrote 'Money and Power: How Goldman Sachs Came To Rule The World.'</blockquote> In addition, Dean Baker suggested that the confidentiality is used to hide how private equity/ leveraged buy-out firms remove capital from acquired companies(4), <blockquote>The sort of asset stripping described here, which harms creditors by taking away potential collateral for their loans, violates the law. However it is extremely difficult to prevent, especially with private equity companies that have to make few public disclosures.</blockquote> Thus secrecy/ confidentiality/ deception should be regarded as one of the main tactics used by private equity/ leveraged buy-out firms. Implications for Health Care Mitt Romney's candidacy has generated a surprising amount of discussion about the effects of private equity/ leveraged buy-out firms on the political economy. Many are worried that despite his claims, such firms cause more job loss than job creation. In the Huffington Post(10), Robert Creamer wrote that private equity/ LBOs have contributed to the sense that ordinary people who play by the rules suffer while well-connected insiders prosper: <blockquote>It just doesn't make sense to them that a relatively tiny number of people -- who don't build a product or create a service -- can make massive amounts of money, while ordinary people who work hard and play by the rules see their incomes flat-line. Their view is simple. They create cars, or food, or houses or computers -- or they provide police protection, or care for sick people, or teach our kids. Why should they be asked to sacrifice when guys who basically gamble for a living -- as Wall Street speculators -- make incomprehensibly large sums of money?</blockquote> There seems to be a good argument that the tactics used by private equity/ leveraged buy-out firms might be bad for the general political economy. Moreover, these firms often take over health care corporations, drug and device companies, health care information technology companies, health insurance companies, for-profit hospital chains, etc. There is reason to think that their standard tactics used on such targets are likely to be particularly bad for health care. Many health care corporations depend on a long-term view to be successes. To develop new products, drug, device, and health care IT companies must pursue research and development projects that take years. All health care companies depend on highly trained, specialized workers and professionals. To sustain these sorts of employees requires a long-term attention to their development. So private equity/ leveraged buy-out firms' short-term focus, transfer of debt and risk to the acquired companies, and emphasis on short-term generic management cutting costs techniques including lay-offs, outsourcing, etc clash with the sophisticated long-term focus these companies require. These health care organizations often require the complex interplay of many components. Private equity/ leveraged buy-out firms' efforts to sequester and sell particular assets may disturb this complex system. Health care quality, and successful research and development require transparency. Extreme emphasis on secrecy by private equity/ leveraged buy-out firms threatens such transparency. Even more pointed concerns may arise when private equity/ leveraged buy-out firms endeavor to take over non-profit health care organizations. We plan to discuss these in a subsequent post. The NY Times(g) noted that in the 1980s, leveraged buy-out firms <blockquote>were branded as 'barbarians at the gate' - the title of a book [by Burrough and Helyar, link <a href="http://www.amazon.com/Barbarians-Gate-Fall-RJR-Nabisco/dp/0060536357">here</a>] about the takeover of RJR Nabisco by Kohlberg Kravis Roberts.</blockquote> Now 30 years later we are finally having a conversation about the role of these firms in the greater political economy. We in health care should be having a parallel discusion about their role in our sphere. I submit that their role was not likely productive. Since health care should not merely be looked upon as a means to make money, but as a public good, we ought to be talking about how to restrain private equity/ leveraged buy-out firms from doing it more damage. References 1. Goozner M. Private equity's edge: buy now, deduct taxes later.  Fiscal Times, Jan 9, 2012.  Link <a href="http://www.thefiscaltimes.com/Articles/2012/01/09/Private-Equitys-Edge-Buy-Now-Deduct-Taxes-Later.aspx">here</a>. 2, Hamilton W. Private equity industry: a bad rep, but is it deserved. Los Angeles Times, Jan 12, 2012. Link <a href="http://articles.latimes.com/2012/jan/12/business/la-fi-private-equity-20120112">here</a>. 3. Lenzer R. Why Warren Buffet disdains the private equity crowd. Forbes, Jan 14, 2012. Link <a href="http://www.forbes.com/sites/robertlenzner/2012/01/14/why-warren-buffett-loathes-the-private-equity-crowd">here</a>. 4. Baker D. NPR does fluff piece for private equity. Beat the Press, Jan 13, 2012. Link <a href="http://www.cepr.net/index.php/blogs/beat-the-press/npr-does-fluff-piece-for-private-equity">here</a>. 5. Lifton RK. Mitt Romney and Bain Capital: understanding the reality. Huffington Post, Jan 13, 2012. Link <a href="http://www.huffingtonpost.com/robert-k-lifton/mitt-romney-bain-capital_b_1205157.html">here</a>. 6. Barro J. The discussion we should be having about Bain. Forbes, Jan 12, 2012. Link <a href="http://www.forbes.com/sites/joshbarro/2012/01/12/the-discussion-we-should-be-having-about-bain">here</a>. 7, Robinson E. Reexamining the myth of no-fault capitalism. Washington Post, Jan 16, 2012. Link <a href="http://www.washingtonpost.com/opinions/reexamining-the-myth-of-no-fault-capitalism/2012/01/16/gIQAvKO13P_story.html">here</a>. 8. Lattman P, Lowrey A. As Romney advances, private equity becomes part of the debate. New York Times, Jan 10, 2012. Link <a href="http://www.nytimes.com/2012/01/11/business/as-romney-campaign-advances-private-equity-becomes-part-of-the-debate.html">here</a>. 9. Hagey K. Mitt Romney's Bain Capital days: a black box. Politico, Jan 11, 2012. Link <a href="http://www.politico.com/news/stories/0112/71344.html">here</a>. 10 Creamer R. Why the Bain Capital controversy is so damaging to GOP chances this fall. Huffington Post, Jan 16, 2012. Link <a href="http://www.huffingtonpost.com/robert-creamer/why-the-bain-capital-cont_b_1208678.html">here</a>.

"Barbarians at the Gate" - Making Private Equity Less Private, and Understanding Its Effects on Health Care

One good byproduct of the tumultuous everlasting 2012 campaign for the US presidency has been to shed light on a number of political and eco...

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An "Anecdotal Complaint" About An ICU EHR

An "anecdotal complaint" (see health IT-specific definition of 'anecdotal' <a href="http://hcrenewal.blogspot.com/2011/08/from-senior-clinician-down-under.html">at this link</a>) from a practicing medical informaticist on an EMR system being rapidly rolled out - in a neonatal ICU, where a single slip is an ended life or lifelong crippling injury, and a multimillion dollar lawsuit, in the making: <blockquote>... Having just exited a 4 week “Night call” rotation of q3 nights (16 hours in house) or weekend days (16-26 hour shift in house) call / attesting/checking and signaturing horror show, my first with our “New” {#$@#**%%$@!*&!!*} charting and attesting, etc system [symbolic praise in the original - ed.], I can 100% attest that everything [another colleague -ed.] said is exactly why I’m scared to death of all the UCs [unintended consequences - ed.] of this current effort, when adult outpatient systems hit quaternary NICUs of 50-60 patients, with untested crash [i.e., artificially rushed - ed.] rollouts. Dozens and dozens>>>>thousands of examples of each and every comment [made by the other colleague on EHR problems - ed.], plus more is exactly what I’m personally suffering. The more is bilateral horrible carpel tunnel flare ups (7-10 clicks and scrolls to get an “overview” of anything) so right now both my hands are numb. Plus, one to two minute logons, is a lifetime when a baby is suddenly crashing. This is a “coding horror” and a safety nightmare. I live in constant fear of somebody screwing up something important, and perhaps uncorrectable. We do our work in real-time, most of the time. Where is the FDA when you need them? [Scared of hot potatoes as I wrote <a href="http://hcrenewal.blogspot.com/2011/04/fda-decides-regulating-implantable.html">here</a> - ed.] And we do still talk to each other – but even that doesn’t always “work out”, because we’ve lost our operational minds (collectively) – the shared-by-all compact, visually all data in one place, and temporally arranged – i.e., the shared nurse/doc/resp flowsheet [traditionally in an ICU, a long tabular scroll of paper for "at a glance" patient status overview - ed.] – where everybody was looking at the same page, which we no longer are – as the team is slowly discovering. And which required no logon for sign-over bedside rounding (~40 minutes for 20-30 babies was the allotted time). The flowsheet needed only a 10-15 second glance to spot developing problems; “the computer” is effectively inaccessible in the time allotted for the twice daily sign-n-out “rounds”. </blockquote> <div style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi6uA-QLFCLoiBsV4YhVSz3hwqgDYVq9iP8NUlU8by4E4UOMLw-z8G47WgiGRMxX3HWJAhx3Ul2F_IEvI6b2DaEGz4CwavXQ88hU8rZwQYr_ebfSXQONfCUzFM7Ga7nlGjC5jkQQxpWdyM9/s1600/flow1.jpg"><img alt="" border="0" id="BLOGGER_PHOTO_ID_5697899238418321186" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi6uA-QLFCLoiBsV4YhVSz3hwqgDYVq9iP8NUlU8by4E4UOMLw-z8G47WgiGRMxX3HWJAhx3Ul2F_IEvI6b2DaEGz4CwavXQ88hU8rZwQYr_ebfSXQONfCUzFM7Ga7nlGjC5jkQQxpWdyM9/s320/flow1.jpg" style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 172px;" /></a></div><div style="text-align: center; font-family:arial;">A traditional ICU flowsheet (click to enlarge) </div> One wonders how often this scenario - what I now call a "But ... patient safety is not compromised" scenario in the words of the typical hospital administrator - is being repeated around the country. Of course, the problem just can't be the software (as in the post <a href="http://hcrenewal.blogspot.com/2012/01/another-our-crappy-computers-screwed-up.html">at this link</a>). It's those dullard clinicians and hospital IT staff who have misconfigured the cybernetic miracle. This is certainly an example where the customs, traditions and methodologies of business IT (e.g., implement on-time and on-budget, at all costs, according to a strict timeline with benchmarks) are highly ill-suited for medicine. That assumes that there are not kickbacks or other financial 'incentives' or COI's in play, of course. In fact, it would not surprise me if the IT vendor, a major company, has insulated itself from liability through a "hold harmless " clause. If so, as I have written in 2009 in JAMA <a href="http://jama.ama-assn.org/content/302/4/382.1.extract">at this link</a> in response to an article by Koppel and Kreda [1], and at my Drexel Univ. health IT difficulties site at <a href="http://www.ischool.drexel.edu/faculty/ssilverstein/cases/?loc=cases&sloc=koppel_kreda">this link</a>, having signed such a clause would represent a breach of hospital governance's fiduciary responsibilities to their clinical employees and agents (in effect, laying the liability for EHR-induced malpractice solely on them), and to patients. I advised this doctor to 'be safe', as I would not want to have to be expert witness for a plaintiff whose child they injured or killed due to EHR-mediated obstacles to accepted professional standards of healthcare. Finally, if this doctor were to resign, perhaps a case could be made for <a href="http://en.wikipedia.org/wiki/Constructive_dismissal">constructive discharge</a>. -- SS [1] <a href="http://jama.ama-assn.org/content/301/12/1276.extract">Health Care Information Technology Vendors' “Hold Harmless” Clause Implications for Patients and Clinicians</a>. Koppel R, Kreda B. JAMA. 2009;301(12):1276-1278. doi:10.1001/jama.2009.398

An "Anecdotal Complaint" About An ICU EHR

An "anecdotal complaint" (see health IT-specific definition of 'anecdotal' at this link ) from a practicing medical infor...

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2011 Closes on a Note of Electronic Medical Record Privacy Breach Shame

At my Oct. 2011 post "<a href="http://hcrenewal.blogspot.com/2011/10/still-more-ehr-chaos-pandemonium-bedlam.html">Still More Electronic Medical Data Chaos, Pandemonium, Bedlam, Tumult and Maelstrom: But Don't Worry, Your Data is Secure</a>" and others in this query link on medical record privacy, <a href="http://hcrenewal.blogspot.com/search/label/medical%20record%20privacy">http://hcrenewal.blogspot.com/search/label/medical%20record%20privacy</a> I wrote: <blockquote>"Don't worry, your medical data's safe."</blockquote> Joseph Conn of ModernHealthcare.com apparently disagrees (with my sarcasm, that is) and states the obvious outright. I post his story with few comments and several emphases which are mine: <blockquote><a style="font-weight: bold;" href="http://www.modernhealthcare.com/article/20111222/blogs02/312229963">Year closes on a note of breach shame</a> Modern Healthcare Dec. 2012 <div style="border-width: medium; border-style: none; border-color: -moz-use-text-color; text-align: left; background-color: rgb(255, 255, 255); color: rgb(0, 0, 0); overflow: hidden; text-decoration: none;"> Three-eighty. Three-eighty. Do I hear four hundred? With 2011 winding down, there are now 380 major data breaches involving 500 or more patients' records listed on the "wall of shame" website kept by HHS' Office for Civil Rights. So far, from the first wall postings in September 2009 through the latest on Dec. 8 this year, there have been 18,059,831 "individuals affected," and even that massive number is an undercount of the breach problem. First, the civil rights office hasn't yet released the records of tens of thousands of breaches it has received under a federal reporting mandate on breaches affecting fewer than 500 patients per incident. I've been asking for electronic copies of those records since June. I hope to hear soon on an appeal of a decision last fall by HHS, claiming that the civil rights office can <a href="http://www.modernhealthcare.com/article/20111012/BLOGS02/310129999">hide those reports</a> while it "investigates" an estimated 30,000 or more breaches they describe. Second, even the OCR's posted numbers are low. A Nov. 4 public notice on a breach reported by the <a href="http://www.uclahealth.org/body.cfm?id=465">UCLA Health System</a> states that "some personal information on 16,288 patients" was stolen, but the wall of shame lists the "individuals affected" in the UCLA incident as 2,761. UCLA spokeswoman Dale Tate said in an e-mail that the nearly six-times-larger number in its notice "represents the number of individuals who had some information on the hard drive," while the 2,761 figure sent to the OCR "represents the number of people that met the specific criteria" under the federal breach notification rule. Under the federal rule, Tate says, "the information for these individuals could possibly cause more than a minimal amount of financial, reputational or other harm." Information on the rest of the individuals, Tate said, did not meet the criteria. Not to get too harpy, but this breach stuff is long past being ridiculous. The lawyers are already all over it, and maybe that's what it will take for the industry to finally start addressing the problem. Brian Kabateck, a California lawyer, thinks so. In the past three months, his Los Angeles law firm has filed a pair class-action breach suits against two of the most highly regarded healthcare systems in the state, University of California, Los Angeles and Stanford, as well as one of the latter's business associates, Multi-Specialty Collection Services. "I think this is a short blip on the radar," Kabateck said. As the settlement costs pile up, he said, "I think big institutions are going to learn—five years from now, these lawsuits are going to be obsolete." </div></blockquote>Class-action lawsuits are needed as much for health IT risk and safety issues causing near-misses, injuries and death as for security breaches, I note. I think five years is highly overoptimistic as well on the breach issue, considering the degree of "institutional learning" that's occurred on <a href="http://www.ischool.drexel.edu/faculty/ssilverstein/cases/">how to do health IT "right"</a> over the past ~ three decades, and considering that the breaches that are increasing, not decreasing, in intensity and severity across all industry sectors. That includes industry sectors far better equipped to manage IT security than hospitals. <blockquote>Right now, though, Kabateck says, "This is not to the level of being an epidemic, but it's close."</blockquote> I think it is epidemic. Rather than being a miracle that will revolutionize medicine, health IT is like any other information and communication technology (ICT): it has unintended consequences (UC's) that can dilute or even negate its advantages. The issue of damaged medical record privacy, confidentiality and security is but one UC of health IT. -- SS

2011 Closes on a Note of Electronic Medical Record Privacy Breach Shame

At my Oct. 2011 post " Still More Electronic Medical Data Chaos, Pandemonium, Bedlam, Tumult and Maelstrom: But Don't Worry, Your ...

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North Bristol Hits Appointment Problems: Another "Our Lousy IT Systems Screwed Up, But Patient Safety Was Never Compromised" Story

At my Dec. 2011 post "<a href="http://hcrenewal.blogspot.com/2011/12/yet-another-glitch-affecting-thousands.html">IT Malpractice? Yet Another "Glitch" Affecting Thousands of Patients. Of Course, As Always, Patient Care Was "Not Compromised</a>" referencing prior posts, I wrote: <blockquote>... At my Nov. 2011 post "<a href="http://hcrenewal.blogspot.com/2011/11/lifespan-rhode-island-yet-another.html">Lifespan (Rhode Island): Yet another health IT glitch affecting thousands - that, of course, caused no patient harm that they know of - yet</a>" I wrote: <blockquote>There's been yet another health IT "glitch" that, of course, caused no patients to be harmed. See other "glitches" <a href="http://hcrenewal.blogspot.com/2011/05/twelve-hour-health-it-glitch-at.html" style="font-weight: bold;">here</a>, <a href="http://hcrenewal.blogspot.com/2011/01/orderless-in-seattle-software-glitch.html" style="font-weight: bold;">here</a>, <a href="http://hcrenewal.blogspot.com/2010/03/will-it-take-luminosity-of-dozen.html" style="font-weight: bold;">here</a> and at other posts which can be found by searching this blog on the banal term 'glitch'.</blockquote></blockquote><blockquote></blockquote> Another "our clinical IT crapped out , BUT ... patient care/safety was never compromised" story just arose: <a href="http://www.ehi.co.uk/news/acute-care/7446/north-bristol-hits-appointment-problems"></a> <blockquote><a href="http://www.ehi.co.uk/news/acute-care/7446/north-bristol-hits-appointment-problems" style="font-weight: bold;">North Bristol hits appointment problems</a> E-Health Insider 11 January 2012 Rebecca Todd Clinicians working at North Bristol NHS Trust have expressed concern about disruption to patient care, which they say is caused by appointment problems following the go-live of a new Cerner Millennium electronic patient record system.</blockquote> I would have entitled the article "North Bristol hit by IT-created appointment problems." <blockquote>Reported problems include patients being booked into non-existent clinic appointments or not being told about scheduled operations, resulting in some operations being cancelled.</blockquote> No patient care compromise possible there. Who, after all, needs a timely operation? It frees up a lot of money for IT golf tournaments to let those of no value to society (i.e., the old, and those who will not admit computers in healthcare with deterministically revolutionize medicine because, well, they're magic) simply die due to delayed or cancelled surgery... <blockquote>Ehealth Insider understands that some of the problems relate to the way the trust configured the EPR system; including setting up dummy clinics for which appointment letters were subsequently sent out. </blockquote> It's never the software or computer's fault. As a matter of fact, I have not seen any official response to the work of Dr. Jon Patrick at U. Sydney on the many software engineering flaws of another product of the same company. His work is entitled "A study of an Enterprise Health information System" and is at this link: <a href="http://sydney.edu.au/engineering/it/%7Ehitru/index.php?option=com_content&task=view&id=91&Itemid=146">http://sydney.edu.au/engineering/it/~hitru/index.php?option=com_content&task=view&id=91&Itemid=146</a>. Do they have Class Action lawsuits in Australia? <blockquote>In a regional BBC news report, aired on Monday evening, anonymous hospital clinicians called the implementation a “complete shambles” and said it represented a “potential danger” to patients. According to the BBC report, the problems meant patients were being booked for impossible appointment times, such as 12.05 am, and quoted correspondence saying staff and the system were both on the “verge of meltdown."</blockquote> The clinician comments are anonymous since non-anonymous reporting would get the clinicians declared health IT apostates, and then excommunicated. Non-anonymous 'whistleblowers' could also fear being sued due to possible gag clauses - the kind of clause hospital executives sign in violation of their fiduciary responsibilities to their staff and to patients. (See my 2009 JAMA letter to the editor "Health Care Information Technology, Hospital Responsibilities, and Joint Commission Standards"at <a href="http://jama.ama-assn.org/content/302/4/382.1.extract">this link</a> and the much-expanded essay on the same themes "Health Care Information Technology Vendors' Hold Harmless and Keep Defects Secret Clauses" <a href="http://www.ischool.drexel.edu/faculty/ssilverstein/cases/?loc=cases&sloc=koppel_kreda">at this link</a>.) <blockquote>Martin Bell, director of IM&T at the trust, confirmed to EHI that North Bristol had experienced some “unexpected problems” in the past few weeks with some of the outpatient appointments and theatre lists. Bell stressed, however, that patient safety had not been compromised and that this continued to be the top priority.</blockquote> There's that line again. Perhaps it's part of some hospital administrator <a href="http://en.wikipedia.org/wiki/JournoList">JournoList-recommended</a> catchphrase for describing how safety was not compromised during a major workflow disruption? <blockquote>He said the problems were not down to the software itself, but due to “implementation and data migration difficulties in some clinics." </blockquote>Right. Quite credible. <blockquote>“Our information management and technology team, supported by our suppliers BT and Cerner, have been working very hard to sort out any initial issues as quickly as possible and we are already seeing improvements,” he said.</blockquote> Congratulations are due. They are seeing "improvements" in dangerous clinical IT malfunctions that should never have to have been seen in the first place, if the statement is true. <blockquote>“Many wards, our two minor injuries units and the Emergency Department, are successfully using the new system." The trust is one of the largest in the South of England, with more than 1,000 beds.</blockquote> Just give them time. <blockquote>EHI understands that as part of the Millennium implementation, dummy clinics were set up. Patients were then sent appointment letters for these clinics in error. EHI also understands that some patients had also not turned up for scheduled operations because they had not been informed about the booking. Bell apologised to patients who had been “inconvenienced during this transition period” and said staff had shown real dedication to continue to deliver patient care.</blockquote> What if someone had been inconvenienced into their grave, or ends up there as a result of delays? On what wavelength will the apology be transmitted? <blockquote> “We firmly believe that the new system, once fully implemented, will improve services for our patients and provide real value,” he said.</blockquote> That seems to be the mantra, but delivery on such promises are rare. See "Pessimism, Computer Failure, and Information Systems Development in the Public Sector" as <a href="http://www.ischool.drexel.edu/faculty/ssilverstein/cases/?loc=other">here</a>, Public Administration Review 67;5:917-929, Sept/Oct. 2007, Shaun Goldfinch, University of Otago, New Zealand. The article is a cautionary article on IT that should be read by every healthcare executive documenting the widespread nature of IT difficulties and failure, the lack of attention to the issues responsible, and recommending much more critical attitudes towards IT. <blockquote>A £69m contract for BT to deliver Cerner Millennium to three new, or ‘greenfield’ sites in the South of England was agreed in April 2010, under the auspices of the National Programme for IT in the NHS. </blockquote> That would not be the failed National Programme for IT in the NHS, the <a href="http://hcrenewal.blogspot.com/2011/09/npfit-programme-going-pffft.html">NPfIT what went PfffT</a>, would it? <blockquote> North Bristol was the last of these three sites to go-live with the system in December last year. It followed Oxford University Hospitals NHS Trust, which went live a week earlier, and Royal United Hospital Bath NHS Trust, which was the first to go-live in July. Cerner said it was working closely with North Bristol and BT on the recent implementation of Millennium. “In complex and large deployments, especially when migrating from two different systems, it is always anticipated that it would take time for the new system to bed-in,” it said in a statement.</blockquote> The patients are given full informed consent on this issue, right? Right? <blockquote>“Across much of the trust, the deployment has worked well. However, this is a major change management project and there have been some difficulties with outpatient appointments. “Although this is not a problem with the software, Cerner is working in partnership with BT and trust staff to resolve any issue as quickly as possible.” Link: <a href="http://www.bbc.co.uk/news/uk-england-bristol-16469728">BBC News</a></blockquote> Right. Perhaps this software and claim needs testing - in a court of law. The only thing missing is the word "glitch", though I am including that term in this posting's index, since I consider it another story in the ever-growing health IT "glitch" series. -- SS Addendum: A reader sent me this comment: <blockquote>How can anyone claim the problems at N. Bristol are unexpected. they are EXACTLY the same problems encountered in Taunton five years ago. The Somerset Trust had sixteen cancelled go live dates and when Cerner 'Millennium" (note: they never defined which Millennium...) was switched on the whole hospital went into slow-motion. Appointments could not be made at out-patient reception desks while patients waited and therefore had to be posted on. Twenty-four whole time equivalent clerks had to be employed to manage the back-up of appointment requests. So much for enhanced efficiency and cost savings. The only possible response to this news is again to remind people of Einstein's famous definition of insanity: "repeating the same thing again and again and expecting a different result." As for other Trusts, why no news of transformed performance by Cerner's systems at other Cerner implemented sites, Berkshire, Newcastle, Kingston, Oxford etc. The only 'good' news we get is that the system has been switched on. If any of this expensive activity had really produced data, efficiency or cost gains, we would be drowning in Cerner press releases, the silence can only mean one thing, that their system is performing as poorly at other sites as it has in the South West. Contrast this with the output and data produced openly by Birmingham University Hospital from its in-house created IT system. Unfortunately one can only draw one serious conclusion about the whole Cerner/ NHS debacle - to paraphrase Mr. Clinton - "It's the (imho substandard) software, stupid! This story needs serious investigation ... Recently US news items have started to discount the supposed efficiency gains for e-Health implementations and started to emphasize data capture and patient safety as the imperative for switch on. Unfortunately for Cerner supporters (and other vendors) the US Institute of Medicine's recent report stated unequivocally that there was (to everyone's apparent surprise) no quality evidence that e-Health improved patient safety. I would contend no drug, therapeutic equipment or operation would or could be implemented in secondary care in the absence of critical and peer reviewed evidence of benefit [emphasis mine - ed.] that has characterized the rush to switch-on substandard IT solutions in English NHS hospitals. </blockquote>I note that critical, peer-reviewed evidence, especially based on prospective randomized clinical trials as opposed to anecdotal, weak retrospective observational studies, have been deemed unnecessary in health IT. Yet serious case reports of risk and injury from credible sources are deemed the true "anecdotes" and discounted. As I've written before, the science of medicine is nearly entirely lacking in the domain of health IT. To put it in the words of James Le Fanu (channeling Sherlock Holmes) in his very apropos essay entitled "<a href="http://www.jameslefanu.com/research/the-case-of-the-missing-data">The Case of the Missing Data: The Dog That Didn't Bark</a>", details on contrary strands of evidence that could reasonably have been expected to appear in evidential text are absent. -- SS

North Bristol Hits Appointment Problems: Another "Our Lousy IT Systems Screwed Up, But Patient Safety Was Never Compromised" Story

At my Dec. 2011 post " IT Malpractice? Yet Another "Glitch" Affecting Thousands of Patients. Of Course, As Always, Patient C...

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Three Golden Parachutes and Some Unexpected Sequels

Golden parachutes are an always fascinating aspect of executive compensation in health care.  I have collected three relatively recently revealed stories about golden parachutes given to government and non-profit hospital system CEOs, at least two of which involve unexpected, and also fascinating sequels.  They will appear in order of the apparent size of the parachutes. Santa Clara Valley Health and Hospital System Santa Clara Health and Hospital System is a county (government) system of moderate size in California.  Last week, the compensation given its outgoing CEO in 2010 was <a href="http://www.bizjournals.com/sanjose/blog/2012/01/ex-santa-clara-county-health-chief-kim.html">revealed</a> by the San Jose Business Journal: <blockquote>Former Santa Clara Valley Health and Hospital System CEO Kim Roberts walked away with an impressive chunk of change when she abruptly left the job in February 2010. According to a city and county salary report released from the State Controllers Office, the position earned a little over $1 million that year. A county spokeswoman confirmed that the total included accrued vacation, sick leave and other payments Roberts was entitled to. The salary was the highest in the Bay Area for public employees in 2010. </blockquote> Note that <blockquote>Roberts was hired as CEO in March 2007 with a five-year contract. The agreement included a starting salary of $285,744 with annual salary adjustments, severance and other benefits.</blockquote> The issue here is that Ms Roberts was the CEO of a local government run health system. Traditionally, the pay given to people in such positions is closely scrutinized by politicians and tax payers, and hence is usually less than that given out by private, non-profit hospital systems, much less for-profit ones. Nonetheless, while it appears that Ms Roberts got something more than $700,000 worth of compensation beyond her usual salary in her last year, the nature of this compensation, and the justification for it is unclear. Erlanger Health System The <a href="http://timesfreepress.com/news/2012/jan/10/brexler-erlanger-trustees-ok-728000-severance-deal">story</a> that got my attention appeared two days ago in the Chattanooga Times-Free Press: <blockquote>After more than a month of negotiations, Erlanger trustees reversed a previous vote and approved a controversial $728,000 severance package for outgoing CEO Jim Brexler. Trustees voted 4-4 against the same severance package in December but voted 5-4 to approve it during a 30-minute meeting Monday morning.</blockquote> More detail about the package: <blockquote>The approved agreement provides 15 months of severance for Brexler, worth about $713,000. He also keeps his Erlanger health coverage for 18 months, paying his employee portion, a benefit worth about $15,000.</blockquote> This story is actually a complex sequel. We <a href="http://hcrenewal.blogspot.com/2011/01/making-their-numbers-examples-of.html">discussed</a> CEO compensation at Erlanger Health System, an academic medical center affiliated with the University of Tennesse, a year ago. At that time, we noted that a substantial bonus given to then CEO Jim Brexler was based on favorable financial results in the previous year, but did not apparently take into account the more recent decline in the system's finances. That bonus was justified by the typical paean to the leadership's "real expertise in health care" by one member of its board. By last month, however, Erlanger's finances had deteriorated dramatically. A Free Press <a href="http://timesfreepress.com/news/2011/dec/22/1222-a1-erlanger-considers-layoffs">article</a> then stated, <blockquote>Erlanger hospital employees have been asked to take 12 days off in the next two months, consider voluntary buyouts and face possible layoffs as Chattanooga's only public hospital bleeds money. The hospital has lost more $6 million in the last five months, half of that in November.</blockquote> The reason for this accelerating misfortune deterioration remain unexplained. Apparently, CEO Brexler had decided to depart, for also unclear reasons, two months earlier: <blockquote>In October, the hospital announced CEO Jim Brexler would retire at the end of the year.</blockquote> At that time, the board had voted to give him the severance package described above, but then suddenly began to reconsider after how bad things were became clear: <blockquote>The board voted earlier this month not to give Brexler a more than $700,000 severance package, but the issue may be brought back up, board members have said.</blockquote> It was unclear whether the decline in Erlanger's finances had to do with its relationship with another troubled hospital, Hutcheson Medical Center, as described in another Free Press <a href="http://timesfreepress.com/news/2012/jan/02/hutcheson-continues-to-bleed-money">article</a>: <blockquote>Despite a new board, new management and the infusion of a $20 million line of credit, a struggling North Georgia public hospital continues to lose money. Erlanger at Hutcheson, formerly known as Hutcheson Medical Center, lost more than $9 million in the first five months of the 2012 fiscal year, which began in July. It lost the most -- $2.7 million -- in September. Hutcheson board Chairman Corky Jewell could not be reached for comment last week. The hospital's administrator, Debbie Reeves, and other management personnel were not in the office the week between Christmas and New Year's, according to spokeswoman Haley Johnson. The publicly funded hospital in Fort Oglethorpe had been losing about $1 million a month, defaulted on a $35 million bond and laid off 75 employees in fiscal year 2011. In May, Erlanger Health System took over management of the hospital and extended up to $20 million in credit to it.</blockquote> Apparently inflated compensation to Hutcheson's CEO was also a subject of <a href="http://hcrenewal.blogspot.com/2011/01/more-on-hospital-executives.html">one of our posts </a>from about a year ago. At that time, we wrote, "despite a major financial loss, lay-offs and service discontinuations, and a bond default," the CEO got "bonus and incentive compensation" in 2009. So, to summarize, despite major financial problems, Hutcheson Medical Center's CEO got a bonus and incentive compensation in 2009. As its situation got worse, it was taken over in some sense by Erlanger Health System, whose CEO also got a bonus despite increasing financial problems in 2010. Thereafter, the finances of Erlanger really declined, its CEO announced his retirement, and still will collect a golden parachute. Thus Erlanger Health System's golden parachute for its outgoing CEO symbolizes the anti-gravitational powers of executive compensation. While lavish executive pay is often justified by short-term financial results, health care executives seem to be able to just keep collecting more and more until they have to flee. Health care seems to more and more be run for the benefit of self-interested insiders. Also, this case demonstrates how skeptical we ought to be of the breathless praise for health care executives and managers and the uncritical touting of their latest advances and initiatives.  (By the way, we posted <a href="http://hcrenewal.blogspot.com/2011/09/another-hospital-putting-on-ritz.html">here</a>, just before it became apparent how badly Erlanger's finances were collapsing, about its breathless advertisement of a "new service excellence program" for Erlanger employees run by the Ritz-Carlton hotel chain.  One wonders whether the attention to the peripheral ahead of core responsibilities this denoted could have been one reason for the system's decline.)  And we are just working our way up to our big case.... University of Chicago Medical Center This story actually dates back to 2009, but was first revealed briefly in late 2011, <a href="http://www.beckershospitalreview.com/compensation-issues/northwestern-memorial-ceo-dean-harrison-made-97m-in-2010.html">in Becker's Hospital Review</a>, <blockquote>The other three highest-paid hospital CEOs in Chicago in 2010 include the following: • James Madara, MD, and Ken Sharigian, University of Chicago Medical Center: $7.9 million Note: This includes severance for Dr. Madara, who resigned in Oct. 2009. Mr. Sharigian served as the interim in 2010.</blockquote> A little more detail came out in a side-bar to a <a href="http://chronicle.com/article/On-Campuses-the-Income-Gap/129980">story</a> on executive compensation in higher education by the Chronicle of Higher Education: <blockquote>James L. Madara, dean of the school of medicine and chief executive of the medical center, U. of Chicago Total compensation: $7,038,944 Mr. Madara’s base salary was $1.3-million, and he received $2.5-million in severance pay.</blockquote> There was also a hint of why this was so interesting: <blockquote>Mr. [sic] Madara stepped down after seven years as dean and three as chief executive to return to the faculty. He resigned amid controversy over his management decisions, such as a plan to redirect medical-center patients to neighboring hospitals, according to local news reports. </blockquote> A little digging shows there was more to it than that. Recall our recent <a href="http://hcrenewal.blogspot.com/2012/01/us-presidential-candidates-financial.html">post</a> that discussed the "Urban Health Initiative," a program ostensibly meant to direct some patients, allegedly mainly poor patients, to more appropriate health care venues, allegedly away from the Emergency Department of the university medical center, and again allegedly to make room for patients who need and whose insurance can pay for more lucrative services. By February, 2009, the Wall Street Journal <a href="http://online.wsj.com/article/SB123577975486997825.html">reported</a> that <blockquote>In February, two high-ranking doctors quit their administrative posts to protest the plan, saying it could lengthen already long waiting times for patients who visit the ER.</blockquote> In particular, <blockquote>The two doctors who gave up their administrative posts in Chicago were Dr. Vanden Hoek, who stepped down as interim chief of emergency medicine, and pulmonology researcher Joe G.N. Garcia, who had been chairman of medicine. The doctors still can practice medicine at the hospital. About a dozen other doctors from the emergency room and other departments had signed a letter of protest over the hospital administration's plan to reduce the number of beds available to emergency patients in the ER and other units.</blockquote> Three months later, as <a href="http://www.chicagobusiness.com/article/20090502/ISSUE01/100031705/u-of-c-docs-attack-ceos-finance-focus">reported</a> by Chicago Business, <blockquote>Some University of Chicago Medical Center faculty members are accusing CEO James Madara of putting hospital finances ahead of research and teaching. A letter delivered to Dr. Madaar last month and signed by 76 faculty members asserts that, since adding the hospital CEO title in 2006, Dr. Madara has lost focus on his role as a dean of the Hyde Park medical center's vaunted research and academic enterprise. A preocccupation with hospital profits and an 'insular management style' have 'disenfranchised' the faculty, the letter says. </blockquote> By that month, <a href="http://online.wsj.com/article/SB123681502175301913.html">according to the Wall Street Journal</a>, <blockquote>More than 190 doctors at the University of Chicago Medical Center signed a letter to trustees protesting plans to reduce the number of beds available to emergency patients as 'unnecessarily risky' and a threat to patient safety.</blockquote> The plan was put on hold by the university president a few days later. Dr Madara resigned in August. So, somewhat like the case above, this involved a hospital system CEO who got a very large golden parachute after leaving under fire, not for declining revenue, but for his role in overseeing a program of questionable ethics, one possibly bad for patients, and having lost the confidence of some important proportion of his medical faculty. He did not, however, go off quietly into the night. His next stop was Leavitt Partners (as noted in <a href="http://www.ama-assn.org/ama/pub/news/news/ama-names-new-evp-ceo.page">this AMA press release</a>), founded by former President George W Bush administration Secretary for Health and Human Services James Leavitt. As we noted <a href="http://hcrenewal.blogspot.com/2011/10/former-us-secretary-of-health-and-human.html">here</a>, <a href="http://leavittpartners.com/">Leavitt Partners</a> advertises that it "advises clients that invest in health care and food safety." It does not publicize its client list, but that list apparently includes Alliance Health Networks, whose press release noted that Leavitt Partners "will help it expand its presence in the US health industry and beyond "(look <a href="http://www.healthcareitnews.com/news/alliance-health-networks-gets-boost-leavitt-partners">here</a>); and Connextions, Inc, whose press release noted that it would work with Leavitt Partners to " refine existing health insurance exchange models for federal and state governments, as well as private sector organizations that are navigating health care reform law," (look <a href="http://www.businesswire.com/news/home/20110614005331/en/Connextions-Leavitt-Partners-Enter-Agreement-Bring-Health">here.</a>)  Mr Leavitt joined the board of Medtronic last year (look <a href="http://www.bizjournals.com/twincities/news/2011/10/17/medtronic-board-leavitt-fda.html">here</a>).  Then, however, he got back into the CEO business.  While still maintaining <a href="http://leavittpartners.com/team/dr-james-madara">a role at Leavitt</a>, in 2011, per the <a href="http://www.ama-assn.org/ama/pub/news/news/ama-names-new-evp-ceo.page">AMA release</a>, <blockquote>The American Medical Association (AMA) today named James L. Madara, M.D., as its new Executive Vice President and Chief Executive Officer. Dr. Madara will assume leadership of the nation’s oldest and largest physician group on July 1.</blockquote> That news release noted his past positions, <blockquote>the Thompson Distinguished Service Professorship and deanship at the University of Chicago Pritzker School of Medicine, where he was the longest serving Pritzker dean in the last 35 years. Subsequently, he added the responsibility of CEO of the University of Chicago Medical Center, bringing together the university’s biomedical research, teaching and clinical activities. </blockquote> Perhaps not surprisingly, it did not mention the controversies at the medical center that preceded his resignation, nor his sizable golden parachute, nor his ongoing role at Leavitt Partners. So, the American Medical Association claims to represent all US physicians and their values. It turns out that its current Executive Vice President and CEO is a former hospital system CEO who departed under fire with a golden parachute beyond any severance package a practicing or academic physician would dream about.  He also is a former and current consultant with a firm lead by one of our better recent examples of beneficiaries of the revolving door.  We have come a long, and the wrong way since the AMA asserted, "the practice of medicine should not be commercialized, nor treated as a commodity in trade." (See <a href="http://hcrenewal.blogspot.com/2007/12/relman-in-jama-on-threats-to-physicians.html">this post</a>.) This story is not just about the ridiculous compensation given to health care executives, and how this provides perverse incentives and suggests that many health care leaders have become insiders who put their self-interest ahead of the health care mission. This story is also about the connectedness of these insiders, and how they appear to control nearly every part of health care. The Moral of the Stories Maybe if I write this often enough, it will get some notice.... 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.

Three Golden Parachutes and Some Unexpected Sequels

Golden parachutes are an always fascinating aspect of executive compensation in health care. I have collected three relatively recently rev...

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US Presidential Candidates' Financial Relationships with Health Care Organizations

As the leadership of the large field of Republican candidates for the US Presidency shifts, different candidates come in for increased media scrutiny.  Recently, reporting about former Pennsylvania Senator Rick Santorum focused on his financial relationships with a health care organization. Senator Santorum, however, is only the candidate with ties to health care organizations to come into the spotlight most recently.  We will review the report on Santorum, and then summarize the publicly known relationships of the other candidates. Republican Former Pennsylvania Senator Rick Santorum and Universal Health Services The relationship was first revealed by <a href="http://www.businessweek.com/news/2012-01-09/santorum-becomes-millionaire-in-six-years-after-u-s-senate-loss.html">Bloomberg</a>, <blockquote>Santorum’s greatest financial gain came from $395,414 in director fees and stock options he listed in a recent financial disclosure. The fees and options came from King of Prussia-based Universal Health Services Inc., a publicly traded health-care management company.... </blockquote> Senator Santorum started on his board service in 2006. He resigned in June, 2011, when he started his campaign for the presidency. Note that while Santorum served on the board, the company was accused of ethical missteps: <blockquote>The Justice Department accused the company in a 2010 lawsuit of submitting fraudulent reimbursement claims under the Medicaid health-care program for the poor. The government said the company falsely claimed to have provided inpatient psychiatric services to children at a detention facility in Marion, Virginia. Pantaleoni said the case has been settled. The company has also risked losing certification to receive Medicare reimbursement for medical centers that it owns. According to a release on the UHS website, the Rancho Springs Medical Center and Inland Valley Regional Medical Center in Riverside County regained their certification in November after the Centers for Medicare and Medicaid Services threatened to terminate their provider agreement in June 2010. The state of California had also threatened to revoke the group’s hospital license. It wasn’t the first time UHS risked losing certification for one of its facilities. In late September 2008, CMS terminated participation in Medicare for the Two Rivers Psychiatric Hospital in Kansas City. It’s a decision that led to a court appeal and settlement requiring Two Rivers to retain an outside monitor for six months. </blockquote> Thus, Senator Santorum was on the board of a for-profit hospital corporation until just before he became a presidential candidate. While he was on the board, the company allegedly committed unethical actions. Republican Former Georgia Congressman Newton Leroy "Newt" Gingrich and the Center for Health Transformation and its Numerous Corporate Sponsors A few weeks ago, we <a href="http://hcrenewal.blogspot.com/2011/12/health-care-policy-of-insiders-by.html">posted</a> about Congressman Gingrich's operation of a health care consulting firm, the Center for Health Transformation. It had relationships with a long list of major health care organizations, including Allscripts, the American Hospital Association, AstraZeneca, Blue Cross Blue Shield, GE Healthcare, Gundersen Lutheran Health System, <a href="http://hcrenewal.blogspot.com/search/label/Johnson%20and%20Johnson">Johnson and Johnson</a>, <a href="http://hcrenewal.blogspot.com/search/label/Pfizer">Pfizer</a>, Pharmaceutical Research and Manufacturers' of America, Siemens, and <a href="http://hcrenewal.blogspot.com/search/label/WellPoint">WellPoint</a>. At a minimum, the Center helped some of these organizations try to influence health care policy to favor their vested interests in the guise of promoting health policy solutions. The juxtaposition of the stories about Senator Santorum's and Congressman Gingrich's financial ties to health care organizations suggested we review whether other current candidates also had such ties. Some quick searching revealed that some others did. We will review the other current major candidates below, starting with the other Republicans, in alphabetical order. Republican Former Utah Governor Jonathan Huntsman Jr I could not find any publicly reported relevant relationships. Republican Texas Congressman Dr Ronald E Paul Dr Paul is a physician, an obstetrics-gynecology specialist. According to Wikipedia, he apparently practiced until his current stint in the Congress began in 1996. I could not find any publicly reported relevant relationships. Republican Texas Governor James Richard "Rick" Perry and Merck In September, 2011, Governor Perry's prominence in the campaign caused a reconsideration of his relationship to Merck. As MSNBC <a href="http://www.msnbc.msn.com/id/44442051/ns/politics/t/perrys-merck-link-spotlight-following-vaccine-order/#.TwtMfoHfWSo">reported</a>, <blockquote>On the campaign trail, Perry had recently apologized for the executive order-which would have made Texas the first state in the country to mandate that all teenage girls, starting with 12-year-old sixth graders, be vaccinated with Gardasil. </blockquote> Gardisil is made by Merck. Then candidate Representative Michele Bachmann noted that Governor Perry had received campaign contributions from Merck. As the Los Angeles Times <a href="http://articles.latimes.com/2011/sep/13/news/la-pn-perry-merck-campaign-cash-20110913">reported</a>, <blockquote>In fact, Merck PAC — the company’s Washington, D.C.-based political action committee — has given Perry $28,500 since 2001, according to Texas Ethics Commission filings. The bulk of that money came before 2007, when the governor signed an executive order mandating all sixth-grade girls in the state to receive the Gardasil vaccine against HPV. </blockquote> However, Governor Perry had another tie to Merck, as noted by MSNBC, <blockquote>Perry's order came after the drug company that manufactured the vaccine hired Mike Toomey, his former chief of staff, as one of the firm's top lobbyists in Austin. Toomey, who is now running the main 'super pac' backing Perry's candidacy, was retained by pharmaceutical giant Merck & Co., maker of the Gardasil vaccine, which is designed to prevent the human papillomavirus, or HPV, an infection linked to cervical cancer in women. His hiring was part of an aggressive lobbying push in Texas by the drug company, which also donated $16,000 to Perry's gubernatorial campaigns in the two and a half years prior to the executive order. Merck paid Toomey between $260,000 and $535,000 in lobbying fees between 2005 and 2010, according to state lobbying records. Although Perry's GOP foes never brought up the connection during the debate, Democratic political operatives and a public watchdog group said Thursday his association with Merck is likely to be emerge as a prime example of Perry's 'crony capitalism,' should he win the GOP nomination. </blockquote> Although there were no reports that Governor Perry personally financially benefited from a relationship with Merck, the company paid substantial amounts to his campaign and to an organization he ran, and to his former chief of staff. There seems to be at least a reason to think that these relationships had something to do with a decision he made that lead to increased sales of a Merck product, and which he now regrets. Republican Former Massachusetts Governor Willard Mitt Romney and Bain Capital and Numerous Health Care Corporations Today's Wall Street Journal <a href="http://online.wsj.com/article/SB10001424052970204331304577140850713493694.html">summarized</a> the investments made by Bain Capital, a venture capital and private equity firm lead by Governor Romney, <blockquote>The Wall Street Journal, aiming for a comprehensive assessment, examined 77 businesses Bain invested in while Mr. Romney led the firm from its 1984 start until early 1999, to see how they fared during Bain's involvement and shortly afterward. Among the findings: 22% either filed for bankruptcy reorganization or closed their doors by the end of the eighth year after Bain first invested, sometimes with substantial job losses. An additional 8% ran into so much trouble that all of the money Bain invested was lost. </blockquote> Of the 10 firms that produced the biggest returns for Bain, four were involved in health care, PhysioControl, Waters, Dade, and Wesley Jessen VisionCare. Dade, a medical diagnostics company, went bankrupt in 2002. Furthermore, in 2007, the Boston Globe (<a href="http://www.deseretnews.com/article/680195957/Plenty-of-pitting-preceded-Romneys-profits.html">via the Deseret News</a>) reported on Governor Romney's private equity career, including his involvement with a company that had its ethical challenge, <blockquote>Bain Capital's 1989 purchase of Damon Corp., a Needham medical testing firm that later pleaded guilty to defrauding the federal government of $25 million and paid a record $119 million fine. Romney sat on Damon's board. During Romney's tenure, Damon executives submitted bills to the government for millions of unnecessary blood tests. Romney and other board members were never implicated. More than a decade later, when Romney was in pursuit of the Massachusetts governorship, his Democratic opponent Shannon O'Brien accused him of lax oversight at Damon and failing to report the fraud. Romney replied that he had helped uncover the illegal activity at Damon, asking the board's lawyers to investigate. As a result, he said, the board took 'corrective action' before selling the company in 1993 to Corning Inc. But court records suggest that the Damon executives' scheme continued throughout Bain's ownership, and prosecutors credited Corning, not Romney, with cleaning up the situation. Bain, meanwhile, tripled its investment. Romney personally reaped $473,000. </blockquote> Thus, Governor Romney was on the board of a device company, albeit many years prior to when he became a presidential candidate. While he was on the board, the company allegedly committed unethical actions. Democratic President Barack Obama, Michelle Obama, and the University of Chicago Medical Center The issue of then Democratic Senator Barack Obama's wife's role at the Medical Center was first discussed in 2008, with some follow up in 2009. As the Washington Post <a href="http://www.washingtonpost.com/wp-dyn/content/article/2008/08/21/AR2008082103646.html">reported</a> in 2008, <blockquote>Shortly after Barack Obama joined the U.S. Senate in 2005, the medical center promoted Michelle Obama to vice president of community and external relations, and more than doubled her salary. She is now on leave from the $317,000-a-year post, in which she sought to bridge the gap between the wealthy institution and its poorer neighbors. The hospital declined to discuss the budget for her program or her input into budgetary decisions. </blockquote> She was particularly involved in one program that became controversial, <blockquote>A few years ago, executives at the prestigious University of Chicago Medical Center were concerned that an increasing number of patients were arriving at their emergency room with what the executives considered to be non-urgent complaints. The visits were costly to the hospital, and many of the patients, coming from the surrounding South Side neighborhood, were poor and uninsured. Michelle Obama, an executive at the medical center, launched an innovative program to steer the patients to existing neighborhood clinics to deal with their health needs. That effort, in time, inspired a broader program the hospital now calls its Urban Health Initiative. </blockquote> The Post noted, <blockquote>The medical center markets its initiative as an effort to improve patient health for the poor and at the same time free its resources for emergencies and complicated procedures. The Urban Health Initiative also could save the hospital substantial amounts of money, by removing the nonpaying poor patients from its emergency room. </blockquote> However, after Senator Obama became President, his wife became the First Lady and quit her job at the medical center, the program became even more controversial. In March, 2009, the Chicago Weekly <a href="http://chicagoweekly.net/2009/03/12/medical-emergency-the-university-of-chicago-hospitals-face-a-crisis-of-conscience/">reported</a> on the extensions of the Urban Health Initiative <blockquote>or UHI, which has garnered a lot of criticism recently, such as accusations that it comes 'dangerously close' to the illegal practice of 'patient dumping.' Additionally, the emergency room structure that it will leave in its wake will likely result in a decline in the quality of care provided to Medicaid, Medicare, and uninsured patients. </blockquote> Ultimately, the Wall Street Journal <a href="http://online.wsj.com/article/SB123681502175301913.html">reported</a> that: <blockquote>More than 190 doctors at the University of Chicago Medical Center signed a letter to trustees protesting plans to reduce the number of beds available to emergency patients as 'unnecessarily risky' and a threat to patient safety. </blockquote> At that time, this admission appeared, <blockquote>Dr. Madara, the hospital's chief executive, said in an interview last week that the hospital is seeking to admit more patients to its 'programs of distinction' such as oncology and advanced surgery, and treat fewer in the ER, and that these moves will mean more privately insured patients at the hospital. </blockquote> Note that "programs of distinction" may also mean programs that provide the most revenue. Ultimately, the Chicago Tribune <a href="http://articles.chicagotribune.com/2009-03-14/news/0903130356_1_emergency-room-medical-school-hospital">reported</a> that the plan was halted by the university president, and a few months later, Dr Madara, the CEO resigned (again <a href="http://articles.chicagotribune.com/2009-08-15/news/0908140312_1_hospital-medical-center-board-medical-education-programs">per the Tribune</a>). Thus, while he was a Senator, current President Obama's wife earned a substantial salary from a non-profit academic medical center and hospital system. A program she ran was then and later alleged to have compromised patient safety and perhaps acted unethically. Summary We have frequently discussed how large health care organizations seek to influence discussions of health policy to further their vested interests. At times, they have organized <a href="http://hcrenewal.blogspot.com/search/label/stealth%20health%20policy%20advocacy">stealth health policy advocacy </a>initiatives to comprehensively push their aims. For example, we <a href="http://hcrenewal.blogspot.com/2011/02/wendell-potters-deadly-spin.html">discussed</a> how commercial health insurance companies have tried, often succesfully, to influence health policy as recounted by former CIGNA public relations leader Wendell Potter in his book Deadly Spin. It appears that the more one looks, the more one finds evidence of the web of influence of large health care organizations. Pulling together a variety of journalistic efforts over more than three years, it now appears that the majority of the current credible contenders for the presidency of the US have or had financial relationships with health care organizations. Often these relationships appear significant enough to be called conflicts of interest were the people who had them communicating about health policy in a venue that requires conflict of interest disclosure, like a major medical journal. One candidate until very recently was on the board of directors of a for-profit hospital corporation, and hence had a fiduciary duty to that company and its stock-holders. One candidate until very recently ran a health care consulting company whose clients included major drug, device, and insurance companies. One candidate previously was on the board of a medical device company. One candidate's spouse previously was a top executive of a academic medical center and hospital system. While the current candidates may now now be writing articles for medical or health care policy journals, by virtue of their candidacies they now receive enormous attention. Anything they say about health care policy is likely to be influential. Yet there is reason to be concerned that many of their views on health policy were influenced by their financial relationships. In particular, would a candidate who at one time got a major part of his or his family's livelihood from a big health care organization be likely to strongly challenge the status quo that allowed that organization to prosper? In my humble opinion, there needs to be complete reconsideration of how health care policy is made. In particular, we must define how much of the discussion is driven by vested economic interests, and make sure such interests and their relationship to those in the discussion becomes clear. It is just as important for health policy analysts, pundits, and decision-makers to disclose in detail their conflicts of interest as it is for clinical researchers and educators. Maybe the Institute of Medicine would be willing to take up this issue as they <a href="http://www.iom.edu/Reports/2009/Conflict-of-Interest-in-Medical-Research-Education-and-Practice.aspx">took up </a>conflicts of interest affecting research and education.

US Presidential Candidates' Financial Relationships with Health Care Organizations

As the leadership of the large field of Republican candidates for the US Presidency shifts, different candidates come in for increased media...

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The Corporate Psychopaths Theory of Health Care Dysfunction

A new article in the Journal of Business Ethics suggested that the global financial crisis, or great recession, was primarily due to a fundamental flaw in the leadership of financial organizations, one that has important implications for health care organizations.  The article, Boddy CR. The corporate psychopaths theory of the global financial crisis.  J Bus Ethics 2011; 102: 255-259 is <a href="http://www.springerlink.com/content/9072633443675517/">here</a>.  Its premise was: <blockquote>The Corporate Psychopaths Theory of the Global Financial Crisis is that Corporate Psychopaths, rising to key senior positions within modern financial corporations, where they are able to influence the moral climate of the whole organisation and yield considerable power, have largely caused the crisis.</blockquote> Note that in 2004 we first <a href="http://hcrenewal.blogspot.com/2004/12/snakes-in-suits.html">posted</a> about the possibility that a proportion of corporate managers, including those in health care, could be psychopaths, raised then by two experts on psychopathy, Paul Babiak and Robert Hare. In 2006, they published Snakes in Suits, about the dangers of psychopaths as executives and managers (see post <a href="http://hcrenewal.blogspot.com/2006/06/snakes-in-suits-book.html">here</a>). However, the issue got scant attention in those days of letting the good times roll. Defining Corporate Psychopaths Boddy described psychopaths as: <blockquote>the 1% of people who have no conscience or empathy and who do not care for anyone other than themselves. Some psychopaths are violent and end up in jail, others forge careers in corporations. The latter group who forge successful corporate careers is called Corporate Psychopaths.</blockquote>Corporate Psychopaths as Leaders Such people do not make good leaders: <blockquote>Although they may look smooth, charming, sophisticated, and successful, Corporate Psychopaths should theoretically be almost wholly destructive to the organizations that they work for. The probable mal-effects of the presence of psychopaths in the workplace have been hypothesized about in recent times by a number of leading experts and commentators on psychopathy. Researchers report that such malevolent leaders are callously disregarding of the needs and wishes of others, prepared to lie, bully and cheat and to disregard or cause harm to the welfare of others. Corporate Psychopaths are also poorly organized managers who adversely affect productivity and have a negative impact on many different areas of organizational effectiveness.</blockquote>How Corporate Psychopaths Could Have Become Prevalent Despite the dangers posed by such leadership, corporate psychopaths may rise quickly in management: <blockquote>Psychologists have argued that Corporate Psychopaths within organizations may be singled out for rapid promotion because of their polish, charm, and cool decisiveness. Expert  ccommentators on the rise of Corporate Psychopaths within modern corporations have also hypothesized that they are more likely to be found at the top of current organisations than at the bottom.</blockquote> The nature of current corporate culture may facilitate the rise of corporate psychopaths: <blockquote>These Corporate Psychopaths are charming individuals who have been able to enter modern corporations and other organisations and rise quickly and relatively unnoticed within them because of the relatively chaotic nature of the modern corporation. This corporate nature is characterized by rapid change, constant renewal and quite a rapid turnover of key personnel. These changing conditions make Corporate Psychopaths hard to spot because constant movement makes their behaviour invisible and combined with their extroverted personal charisma and charm, this makes them appear normal and even to be ideal leaders.</blockquote> The destabilization of modern corporations likely lead to the ascendancy of the corporate psychopath: <blockquote>However, once corporate takeovers and mergers started to become commonplace and the resultant corporate changes started to accelerate, exacerbated by both globalisation and a rapidly changing technological environment, then corporate stability began to disintegrate. Jobs for life disappeared and not surprisingly employees’ commitment to their employers also lessened accordingly. Job switching first became acceptable and then even became common and employees increasingly found themselves working for unfamiliar organisations and with other people that they did not really know very well. Rapid movements in key personnel between corporations compared to the relatively slower movements in organisational productivity and success made it increasingly difficult to identify corporate success with any particular manager. Failures were not noticed until too late and the offending managers had already moved on to better positions elsewhere. Successes could equally be claimed by those who had nothing to do with them. Success could thus be claimed by those with the loudest voice, the most influence and the best political skills. Corporate Psychopaths have these skills in abundance and use them with ruthless and calculated efficiency. In this way, the whole corporate and employment environment changed from one that would hold the Corporate Psychopath in check to one where they could flourish and advance relatively unopposed.</blockquote>The Harms Caused by Corporate Psychopaths as Executives Thus, Boddy hypothesized the rise of management by corporate psychopaths lead directly to the global financial crisis or great recession: <blockquote>As evidence of this, senior level remuneration and reward started to increase more and more rapidly and beyond all proportion to shop floor incomes and a culture of greed unfettered by conscience developed.  </blockquote><blockquote>Corporate Psychopaths are ideally situated to prey on such an environment and corporate fraud, financial misrepresentation, greed and misbehaviour went through the roof, bringing down huge companies and culminating in the Global Financial Crisis that we are now in. Writing in 2005, this author commentating on Corporate Psychopaths predicted that the rise of Corporate Psychopaths was a recipe for corporate and societal disaster. This disaster has now happened and is still happening.</blockquote>What Could be Next Worse, if this hypothesis is true, as long as it is not addressed, things will get worse: <blockquote>The very same Corporate Psychopaths, who probably caused the crisis by their self-seeking greed and avarice, are now advising governments on how to get out of the crisis. That this involves paying themselves vast bonuses in the midst of financial hardship for many millions of others, is symptomatic of the problem. Further, if the Corporate Psychopaths Theory of the Global Financial Crisis is correct then we are now far from the end of the crisis. Indeed, it is only the end of the beginning.</blockquote>Some Agreement The plausible theory that corporate psychopaths ascending to top management positions in finance caused the global financial crisis has been noticed by a few prominent financial pundits. <a href="http://www.bloomberg.com/news/2012-01-03/did-psychopaths-take-over-wall-street-asylum-commentary-by-william-cohan.html">Writing in Bloomberg</a>, William D Cohan agreed with Boddy's suggestion that "anyone who makes decisions that affect significant numbers of other people, concerning issues of corporate social responsibility or toxic waste, for example, or concerning mass financial markets or mass employment, should be screened to make sure that they are, at the very least, not psychopaths and at most are actually people who care about others." Brian Besham, writing <a href="http://www.independent.co.uk/news/business/comment/brian-basham-beware-corporate-psychopaths--they-are-still-occupying-positions-of-power-6282502.html">in the Independent</a>, suggested that Richard Fuld, former CEO of Lehman Brothers, whose bankruptcy kicked off public awareness of the global financial collapse, saying he wanted to eat the hearts of those selling his company's stock short (see <a href="http://hcrenewal.blogspot.com/2012/01/new-york-presbyterian-hospital-trustee.html">this post</a>), was a "terrifying" example of corporate executive psychopathy. Worse, Besham noted that he had discovered an case of an investment bank which "psychometric testing to recruit social psychopaths because their characteristics exactly suited them to senior corporate finance roles."  It may be that corporate psychopaths are actively recruiting their fellows. Implications for Health Care This is chilling. It also unfortunately is highly relevant to health care. As we noted, most recently <a href="http://hcrenewal.blogspot.com/2011/12/they-think-we-are-imbeciles-and-they.html">here</a>, leaders of big finance firms, including those whose failures were most spectacular, now often sit on boards of trustees of hospitals, academic medical centers, medical schools, and their parent universities. Thus, the likelihood that a good proportion of the stewardship of our most prominent not-for-profit health care organizations may be in the hands of psychopaths is not negligible. Furthermore, health care organizations have become as unstable and chaotic, in the way these terms were used by Boddy, as finance firms. This would suggest that their current nature would make it as easy for psychopaths to rise to positions of power in them as they may have in financial firms. In health care we certainly have seen the consequences he suggested were due to psychopathic managers, including - <a href="http://hcrenewal.blogspot.com/search/label/intimidation">intimidation</a> (per Boddy, corporate psychopaths are "prepared to lie, bully and cheat and to disregard or cause harm to the welfare of others"); - self-interest ("pursuit of self-enrichment and self-aggrandizement") leading to outrageous <a href="http://hcrenewal.blogspot.com/search/label/executive%20compensation">executive compensation</a> ("senior level remuneration and reward started to increase more and more rapidly and beyond all proportion to shop floor incomes") - <a href="http://hcrenewal.blogspot.com/search/label/fraud">fraud</a> and other <a href="http://hcrenewal.blogspot.com/search/label/crime">crime</a> ("corporate fraud, financial misrepresentation, greed and misbehaviour went through the roof,... ") So as we <a href="http://hcrenewal.blogspot.com/2006/06/snakes-in-suits-book.html">noted</a> in 2006, "a high prevalence of psychopathic managers could explain the prevalence of mismanagement, conflicts of interest, and corruption in the leadership of health care organizations that we have often discussed on Health Care Renewal." Boddy's first suggestion to deal with the problem in finance was: <blockquote>Measures exist to identify Corporate Psychopaths. Perhaps it is time to use them.</blockquote> However, it is as hard to imagine top health care leaders willingly and honestly submitting to the use of instruments designed to identify psychopaths as it is to imagine finance leaders doing so. Furthermore, it is easy to imagine how corporate psychopaths in positions of leadership would ruthlessly deploy their legions of public relations personnel and lawyers to quash any challenge should the notion that they are so dominant gain any credibility. However, if there is any significant prevalence of corporate psychopaths among the leaders of health care, woe will be unto us until we identify and remove them.

The Corporate Psychopaths Theory of Health Care Dysfunction

A new article in the Journal of Business Ethics suggested that the global financial crisis, or great recession, was primarily due to a funda...

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