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How the Anechoic Effect May Be Generated - The Chairman of a Hospital Board Buys a Newspaper

We have often noted that stories about problems with the leadership and governance of health care tend to be <a href="http://hcrenewal.blogspot.com/search/label/anechoic%20effect">anechoic</a>. That is, they tend to get less notice and generate less discussion than their content would seem to warrant. We have postulated that this has to do with fear of offending the rich and powerful who now lead and govern health care organizations, and the benefits, which may be produced by conflicts of interest, of maintaining good relationships with the rich powerful. Did a Newspaper Delay a Story Unfavorable to its Prospective Buyer? A story that has been emerging in bits and pieces over the last two months shows the sort of complex machinations that may generate the anechoic effect. In February, 2012, a New York Times <a href="http://www.nytimes.com/2012/02/16/business/media/in-philadelphia-papers-editorial-independence-at-issue.html">story</a> raised questions about how a bid to purchase a big city newspaper by a group of well-connected and wealthy buyers would affect news coverage.  The big city newspaper was the Philadelphia Inquirer.  The group bidding to buy it was: <blockquote>made up of the area’s most powerful Democrats. Edward G. Rendell, the former Philadelphia mayor and Pennsylvania governor leads the group, which includes George E. Norcross III, a Democratic powerbroker in South New Jersey;... </blockquote> The Times suggested that the Inquirer's coverage was being influenced by the proposed buyers before they had completed the sale: <blockquote>Last week, Gregory J. Osberg, chief executive and publisher of the Philadelphia Media Network, which publishes The Inquirer, The Daily News and Philly.com, summoned the news organization’s three most senior editors to his office. Over three hours, he told them he would be overseeing all articles related to the newspapers’ impending sale. If any articles ran without his approval, the editors would be fired, according to several editors and reporters briefed on the meeting who did not want to be identified criticizing the company’s leadership. In a telephone interview Wednesday morning, Mr. Osberg said the meeting did not happen. But Larry Platt, editor of The Daily News and one of the editors in attendance, said that it did. Late Wednesday, Mr. Osberg acknowledged that the meeting had taken place but denied interfering in the editorial decisions, saying he only wished to be notified of further coverage. Mr. Platt declined to comment on specifics, but said, 'We fought for what we believed in,' referring to editorial independence, 'and we didn’t get all that we wanted.' </blockquote> A Story About Who Benefits from How a Hospital is Lead This is directly relevant to the anechoic effect in health care. Per the Times, <blockquote>An investigation about conflicts of interest among board members of the Cooper University Hospital in nearby Camden, N.J., remains unpublished after months. Mr. Norcross serves as the hospital’s chairman. In an e-mail Mr. Norcross, who has called The Inquirer and The Daily News in the last week to discuss other coverage, said the reporter’s research 'contained significant factual errors and incomplete data about the hospital and health care industry.' </blockquote> The allegedly suppressed <a href="http://www.philly.com/philly/news/new_jersey/20120325_Powerful_Medicine.html">story</a> finally came out in late March. In its published form it implied that Mr Norcross had an outsized influence on hospital operations, the hospital had business relationships with people who donated to political causes and organizations favored by Norcross, the hospital seemed to disproportionately benefit from government money and actions, and the hospital's board was afflicted by numerous conflicts of interest. Norcross' Influence on Hospital Management Per the Inquirer, <blockquote>With Cooper suffering from record deficits, Norcross, then a top executive at Commerce Bank, helped bring the hospital back from the brink in 1999 when he arranged for the bank to lend it $8 million. Since then, Norcross has put his imprint all over Cooper, from its lavish marketing, to its competitive fight to lure doctors, to its recent $450 million construction boom, to the political figures who work at Cooper and serve on its board. Just as he was one of the first pols to spend heavily on television ads for lowly county races, Norcross was among the first to sell a hospital on TV, deploying Kelly Ripa as Cooper's pitchwoman. As it happens, she's the daughter of Joseph Ripa, the Democratic Camden County Clerk. The milestones have been coming faster. The medical school, a must-have for any hospital with big ambitions, is finally gearing up. This year, work began on a $100 million cancer center.</blockquote> The concern is that Mr Norcross was influencing operations in ways that happened to benefit his interests. Note that this contrasts with a number of cases we have discussed in which health care organizations' boards often seen too deferential to the organizations' hired leaders. Hospital's Relationships with Political Donors The Inquirer reported these instances, <blockquote>With its heavy capital spending and big operating budget, Cooper has become an economic powerhouse. It throws off millions in fees and contracts. Consider Cooper's heavy borrowing to pay for all that expansion. In the last decade, Cooper's bond sales have generated $5.1 million in fees to a variety of law firms, title companies, and financial advisers. On top of that, the hospital has handed out big-ticket contracts for other legal work, such as malpractice defense, its public disclosures show. Many of those who received work via Cooper are major political donors, giving across the state to both parties. But they have been especially generous in Camden County, Norcross' home base. During the last decade, firms involved with Cooper have given more than $1.5 million to Camden County Democrats. As an example, lawyers at Cozen O'Connor, a Philadelphia firm that worked on four Cooper bond issues, have given Camden Democrats $115,060 since 2002. That represented more than 70 percent of its local political contributions in New Jersey. A Cozen spokeswoman said all donations reflected candidates' merits. In interviews, Norcross conceded he had input into who was selected to work on hospital bond issues, managed by state and local authorities. 'Have I made recommendations of quality firms?' he said. 'Absolutely.' But he insists that firms are selected solely on ability and that political donations were irrelevant. "These people have been making major, sizable donations to the Democratic Party in this region long before any bond issue," he said. Lawyers offer varying explanations for their giving. Attorney Steven Weinstein, formerly with the Philadelphia firm of Blank Rome, has given steadily to South Jersey Democrats over the years, public records show. His giving hit a peak, in 2004 when he gave $30,000 to the Camden County Democratic Committee. The following year, Blank Rome was named one of four law firms to work on a $135 million Cooper bond issue, representing the investment firm Goldman Sachs. In the six years since, Weinstein's donations to Camden County Democrats came only to $2,850. Weinstein said his donations had no connection to Blank Rome. But David Lebor, another former Blank Rome partner who joined Weinstein in making Camden County donations in 2004, said the firm would sometimes request that lawyers make specific contributions. Lebor said he didn't know the firm's motives for making requests. 'I don't ask those questions,' he said.</blockquote> The implication is that Mr Norcross was using his control over the hospital to fulfill his political agenda. Favorable Relationships with Government The Inquirer documented instances which seemed to show that the hospital seemed to be treated disproportionately well by government, for example, <blockquote>Late last year, the Delaware River Port Authority, its once-vast development kitty finally running dry, approved its last round of project spending. Among the lucky few recipients: Cooper University Hospital. It got $6 million for the cancer center. No other hospital in New Jersey or Pennsylvania has ever received DRPA assistance, the authority says. The DRPA money was one of many ways in which Cooper has benefited from government action during the Norcross era. This year, Cooper received $52 million in state funding, more than any hospital in South Jersey - and in the top five for all 72 New Jersey hospitals. And U.S. Rep. Rob Andrews (D., Camden) has set aside $640,000 in federal earmarks for Cooper over the last decade, the most of any hospital in his district. Another Camden hospital, Our Lady of Lourdes, received nothing.</blockquote> The Board's Conflicts of Interest The Inquirer article noted, <blockquote>[Cooper Health System CEO John P] Sheridan's old law firm, Riker Danzig Scherer Hyland & Perretti L.L.P., has been a paid lobbyist for Cooper for at least a decade. More recently, the hospital put another firm on its roster. It didn't look far to make the hire. In 2010, Cooper added Republican lobbyist Jeff Michaels to the team. In another lobbying venture, he is the partner of [George] Norcross' brother Philip. The hospital has paid the firm solely operated by Michaels $180,000 over the last two years.</blockquote> Beyond that, <blockquote>As Cooper has spent its millions, hospital insiders have frequently been on the receiving end. From 2008 to 2010 Cooper paid more than $40 million to companies tied to the hospital's board of trustees, according to public-disclosure documents the hospital filed with the IRS. The payments included: $1.6 million to Norcross' Marlton insurance brokerage, Conner Strong and Buckelew. $1.8 million to the Parker McKay law firm, where Philip Norcross is the firm's chief executive. $4.6 million to the former Commerce Bank and its successor, TD Bank. Norcross and a former Cooper board member were top executives at Commerce. $277,000 to Riker Danzig, where Sheridan was once a law partner. But of the millions in payments, the largest share - $33 million - went to a joint venture between international construction giant Turner Construction and HSC Construction and Builders in Exton. Former board member Edward Viner's son, Jim, serves as president of HSC. Most of the money was passed through to subcontractors and the joint venture was paid $2.8 million in fees, Cooper said. In 2008 and 2009, the last years for which regional data were available, Cooper initially reported more of what the IRS calls 'Interested Persons' transactions than any hospital in the Philadelphia area.</blockquote> This again suggests that the hospital may be run such that board members' financial interests are put ahead of other concerns. Summary <a href="http://www.boardsource.org/Knowledge.asp?ID=3.364">According to BoardSource</a>, the duties of boards of trustees of non-profit organizations include: <blockquote>- Duty of Care The duty of care describes the level of competence that is expected of a board member, and is commonly expressed as the duty of "care that an ordinarily prudent person would exercise in a like position and under similar circumstances." This means that a board member owes the duty to exercise reasonable care when he or she makes a decision as a steward of the organization. -Duty of Loyalty The duty of loyalty is a standard of faithfulness; a board member must give undivided allegiance when making decisions affecting the organization. This means that a board member can never use information obtained as a member for personal gain, but must act in the best interests of the organization. -Duty of Obedience The duty of obedience requires board members to be faithful to the organization's mission. They are not permitted to act in a way that is inconsistent with the central goals of the organization. A basis for this rule lies in the public's trust that the organization will manage donated funds to fulfill the organization's mission. </blockquote> The delayed Inquirer story suggests that instead, those who are supposed to steward large health care organizations may be putting their own interests, political or financial, ahead of the mission, potentially violating their duties of loyalty and obedience. This story corroborates questions we have been raising about who now are the stewards of health care organizations, and to what ends. However, this particular story appears to have been delayed, and perhaps diluted, because of the power wielded by the sorts of people who now are supposed to be stewards of health care organizations. This shows how powerful insiders not only are distorting health care to fit their own agendas, but that they may be smothering the discussion of this vitally important issue. We will not be able to truly reform health care until we can freely discuss what has gone wrong with it.

How the Anechoic Effect May Be Generated - The Chairman of a Hospital Board Buys a Newspaper

We have often noted that stories about problems with the leadership and governance of health care tend to be anechoic . That is, they tend t...

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Will the UC-Davis Chancellor be Held Accountable for "Systemic and Repeated Failures?"

During the brief Occupy Wall Street etc campaign last year, the pepper spraying of unarmed protesters on the University of California - Davis campus became a symbol for some of what the powers that be thought of those who challenge the political economic status quo.  We discussed this incident (<a href="http://hcrenewal.blogspot.com/2011/11/uc-davis-pepper-spray-case-as.html">here</a> and <a href="http://hcrenewal.blogspot.com/2011/11/john-wiley-and-sons-director-apologizes.html">here</a>) on <a href="http://hcrenewal.blogspot.com/">Health Care Renewal</a> as an example of how the privileged hired leaders of big organizations, including health care organizations, may put their own interests ahead of the organizations' missions.  Note that this case is relevant to Health Care Renewal since UC- Davis has a medical school and academic medical center. The Task Force Report Now, five months later, an internal investigation of the case has been made public, and it seems to support our concerns about the leadership of large organizations.  The AP described the resulting report (<a href="http://www.seattlepi.com/news/article/CA-university-slammed-for-pepper-spraying-students-3476454.php">via the Seattle Post-Intelligencer</a>).  In summary, <blockquote>a UC Davis task force said the decision to douse seated Occupy protesters with the eye-stinging chemical was 'objectively unreasonable' and not authorized by campus policy. 'The pepper-spraying incident that took place on Nov. 18, 2011, should and could have been prevented,' concluded the task force created to investigate the confrontation.</blockquote> The report concluded that the Chancellor (functionally, the CEO) of UC-Davis, Linda Katehi had substantial responsibility for the incident: <blockquote>The task force blamed the the incident on poor planning, communication and decision-making at all levels of the school administration, from Katehi to Police Chief Annette Spicuzza to Lt. John Pike, the main officer seen in the online videos.</blockquote> Furthermore, <blockquote>The task force blamed the chancellor for not clearly communicating to her subordinates that police should avoid physical force on the protesters. It also said she was responsible for the decision to deploy police on a Friday afternoon, rather than wait until early morning as Spicuzza recommended.</blockquote> An <a href="http://www.mercedsunstar.com/2012/04/13/2306515/our-view-deep-reform-called-for.html">editorial</a> in the Merced Sun-Star focused more vividly on Katehi's poor leadership. <blockquote>The independent assessment of events leading up to the infamous Nov. 18 pepper-spraying incident at the University of California at Davis provides a devastating indictment of the leadership of Chancellor Linda P.B. Katehi and key vice chancellors -- and of the operations of the campus Police Department. Katehi showed either extreme naivete or incompetence in weighing a response to protesters camping in the Quad. The report of the task force, led by former California Supreme Court Associate Justice Cruz Reynoso, revealed a deeply flawed structure for decision-making. Little or no consideration of alternatives. Failing to record and adequately communicate key decisions, so that ambiguity and uncertainty ruled. The command and leadership structure of the campus Police Department, the report concluded, is 'very dysfunctional.' Lieutenants, the report stated, don't 'follow directives of the Chief.' This department needs a top-to-bottom review to bring it into line with best practices in policing for a university campus. Campus leaders had been dealing with protests since 2009 and were well aware of events that November in Oakland and at UC Berkeley. But instead of deliberate preparations, those events, according to the report, sparked alarmist fears among Katehi and other administrators that if any encampment was not removed immediately, older non-students might assault young female students. Katehi said she was worried about 'the use of drugs and sex and other things, and you know here we have very young students ... we were worried especially about having very young girls and other students with older people who come from the outside without any knowledge of their record ... .' But the report suggests Katehi and her leadership team did little or nothing to verify whether these fears were well-founded, ignoring evidence from student affairs staff that protesters were students and faculty. The report concludes that Katehi's fears were 'not supported by any evidence' obtained by the Kroll Inc. investigators. Worse, even if the concerns were real, Katehi and her leadership team did not consider alternatives to immediate removal of the encampment -- or learn anything from the experience of other places. This rush to action resulted in ad hoc decision-making, apparently with no one having a clear understanding of what was supposed to happen. Katehi did make one thing clear: She wanted the tents removed at 3 p.m. -- though it was never certain what legal authority police had to remove tents during the day in order to implement a policy against overnight camping. Subordinates, the report says, took her statement as an executive order and tactical decision. The report also notes that Katehi 'failed to express in any meaningful way her expectation' that campus police would use no force. There is no indication what Katehi thought police should do if protesters refused a request to take down tents.</blockquote> Furthermore, an <a href="http://www.theatlantic.com/national/archive/2012/04/remember-the-pepper-spraying-cop-uc-davis-releases-a-powerful-report/255903">article</a> in the Atlantic suggested that Katehi was not truthful in her dealing with the investigation: <blockquote>at face value ... [the report's] findings are also very damaging to the still-serving Chancellor of UC Davis, Linda Katehi. For instance, the Kroll report says about a letter asking the demonstrators to disperse: <blockquote>Chancellor Katehi told Kroll investigators that Student Affairs wrote the letter and that she did not review it before it went out. The record contradicts both of these statements, as detailed below. Katehi did review the letter, provided an editorial change and approved it. Student Affairs did not write the letter...</blockquote></blockquote> Will Leadership be Held Accountable? So, in summary, the report on the pepper-spraying incident portrays the Chancellor of UC-Davis as presiding over a dysfunctional police department, hastily responding to rumors rather than evidence, making decisions without considering alternatives, poorly communicating decisions and their rationale, and not always being honest.  This is not the portrait of a capable leader.  This a a portrait of someone totally out of her depth. So why is she paid the big bucks?  As we have <a href="http://hcrenewal.blogspot.com/search/label/executive%20compensation">discussed endlessly</a>, the top hired leaders of big health care (and other related) organizations seem to be almost universally lauded by their boards of trustees, not to mention fawning public relations departments, as brilliant.  That brilliance is used as a rationale for the leaders' compensation and benefits, and for deflecting their accountability. Yet often on close examination top hired leaders prove to be bumblers at best.  Again and again their leadership has been shown to <a href="http://hcrenewal.blogspot.com/search/label/mission-hostile%20management">subvert the mission</a> of their own organizations.  Yet the structure that has been erected to protect them, to put them into a "CEO bubble," keeps them unaccountable. Even after this report, will Chancellor Katehi be held accountable?  Once again, I am not holding my breath.  The strength of her protective bubble was demonstrated in an <a href="http://www.sacbee.com/2012/04/13/4410834/katehi-urged-to-stay-by-critic.html">article</a> in the Sacramento Bee, <blockquote>Cruz Reynoso, the former state Supreme Court justice whose task force blamed 'systemic and repeated failures' of UC Davis' leadership for the pepper-spraying of students last fall, said Thursday that Chancellor Linda P.B. Katehi should stay on the job and enact reforms to prevent a recurrence. 'She should not resign. The balance is that she has done a lot of good despite this drastic poor judgment,' Reynoso said, a day after releasing an investigative report that faulted the chancellor for failing to make clear to campus police she wanted no force used in dispersing protesters and taking down an Occupy encampment on Nov. 18. Reynoso said he was impressed by the chancellor's response: a written statement Wednesday vowing to protect students' 'safety and free speech' as the university learns 'from the difficult events.'</blockquote> What an example of cognitive dissonance this was. "Systematic and repeated failures," and "drastic poor judgment," which resulted in injuries to students and clear violation of the university mission is not reason enough to fire a CEO (as long as she writes a contrite letter promising to uphold the mission in the future)? There is no way to understand this other than as a manifestation of belief in the "divine right of CEOs" (look <a href="http://hcrenewal.blogspot.com/2012/03/why-health-care-leaders-remain.html">here</a> and <a href="http://hcrenewal.blogspot.com/2012/03/golden-calf-explains-how-economism-lead.html">here</a>). So my response is that we will not solve the problem of health care dysfunction, and our society's larger political economic problems until we resolve to hold our leaders accountable for the missions they are supposed to uphold.

Will the UC-Davis Chancellor be Held Accountable for "Systemic and Repeated Failures?"

During the brief Occupy Wall Street etc campaign last year, the pepper spraying of unarmed protesters on the University of California - Davi...

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Once More with Feeling - Johnson and Johnson Found Guilty, Fined $1.1 Billion

The latest legal black eye for giant pharmaceutical and device company Johnson and Johnson appeared in an Arkansas court room.  As documented by Bloomberg, <a href="http://www.nj.com/business/index.ssf/2012/04/johnson_johnson_ordered_to_pay.html">via NJ.com</a>, <blockquote>Johnson & Johnson was ordered to pay $1.1 billion by a state judge after an Arkansas jury found the company’s officials misled doctors and patients about the risks of the antipsychotic drug Risperdal. Jurors in Little Rock yesterday said the company’s marketing campaign also violated consumer-protection laws. The panel deliberated about three hours before finding J&J and its Janssen unit engaged in 'false or deceptive acts' by sending a 2003 letter touting Risperdal as safer than competing drugs to more than 6,000 doctors across the state. </blockquote> The prosecutors had alleged a variety of kinds of deceptions about Risperdal, <blockquote>Along with contending that J&J and Janssen defrauded the Medicaid program by failing to properly outline the antipsychotic medicine’s risks, Arkansas officials alleged J&J officials deceptively marketed the drug as safer and better than competing medicines. The state also argued the companies marketed the drug for 'unapproved uses, including various symptoms in children and the elderly' after being warned by federal authorities to halt such sales. </blockquote> In summary, <blockquote>Arkansas Attorney General Dustin McDaniel said in an e- mailed statement that he sued because residents in the state deserved to be protected from 'fraud and deceptive practices.' He said that jurors found 'Johnson & Johnson and Janssen Pharmaceuticals lied to patients and doctors because they cared more about profits than people.' </blockquote> Bloomberg noted that <blockquote>It’s the third jury verdict against J&J, the second-biggest maker of health products, in cases where states alleged it hid Risperdal’s risks and tricked Medicaid regulators into paying more than they should have for the medicine. Louisiana and South Carolina juries also found the company’s Risperdal marketing violated consumer-protection laws. </blockquote> In fact, this is just the latest in a remarkable string of legal cases suggesting an ongoing pattern of unethical and illegal behavior by this very large health care corporation. As we <a href="http://hcrenewal.blogspot.com/2012/03/despite-recalls-legal-settlements-and.html">wrote </a>recently, this included - Convictions in two different states in 2010 for misleading marketing of Risperdal, as noted above - A guilty plea for misbranding Topamax in 2010 - Guilty pleas to bribery in Europe in 2011 by J+J's DePuy subsidiary - A guilty plea for marketing Risperdal for unapproved uses in 2011 (see <a href="http://hcrenewal.blogspot.com/2011/08/why-cultivate-weldons-confidence-ceo.html">this link</a> for all of the above) - Accusations that the company, which makes smoking cessation products, participated along with tobacco companies in efforts to lobby state legislators (see post <a href="http://hcrenewal.blogspot.com/2011/09/smart-alecs-strange-bedfellows.html">here</a>) - A guilty plea to misbranding Natrecor by J+J subsidiary Scios (see post <a href="http://hcrenewal.blogspot.com/2011/09/johnson-and-johnson-pleads-guilty.html">here</a>) - More recently, in 2012, testimony in a trial of allegations of unethical marketing of the drug Risperdal (risperidone) by the Janssen subsidiary revealed a systemic, deceptive stealth marketing campaign that fostered suppression of research whose results were unfavorable to the company, ghostwriting, the use of key opinion leaders as marketers in the guise of academics and professionals, and intimidation of whistleblowers. After these revelations, the company abruptly settled the case (see post <a href="http://hcrenewal.blogspot.com/2012/02/texas-tmap-trials-as-illustration-of.html">here</a>). - Most recently, there are reports that the company is in negotiation with the US Department of Justice to settle other lawsuits about the marketing of Risperdal, perhaps for as much as $1.8 billion (see this <a href="http://www.businessweek.com/news/2012-03-12/j-and-j-said-to-face-u-dot-s-dot-demand-to-raise-risperdal-settlement-offer">BusinessWeek story</a>.) Meanwhile, as we also <a href="http://www.blogger.com/profile/00497209843184497847">discussed </a>recently, Johnson and Johnson seems to have lost the ability to manufacture high quality products. It has had to make 30 separate product recalls since 2009. The latest was Liquid Infant Tylenol. (The current WSJ Health Blog list of recalls can be found <a href="http://blogs.wsj.com/health/2012/02/17/jj-recall-watch-mcneil-pulls-liquid-infant-tylenol-on-dosing-system-concerns">here</a>.) So the real question here is how many instances of manufacturing of defective, mislabeled, contaminated, or harmful products, and how many court cases showing unethical or illegal behavior will it take until the leadership and governance of this company improves (and by extension, the leadership and governance of other large health care corporations with similar bad records improves). As we <a href="http://hcrenewal.blogspot.com/2012/03/despite-recalls-legal-settlements-and.html">posted </a>not long ago, the CEO who presided over most of these messes will be allowed to retire with a huge golden parachute.  His devotion to "making the numbers," that is, hitting short-term revenue targets ahead of all other goals, probably had something to do with a company once thought of as a paragon of corporate behavior turning so bad.  Yet he became extremely rich doing this, and neither his riches nor his legal status have ever been challenged.  His successor apparently will be another former sales representative who may be just as devoted to "making the numbers,."  Thus has the business school dogma that short-term financial results, prettied up as "shareholder value," is the only thing that should matter to corporate leadership (look <a href="http://hcrenewal.blogspot.com/2012/04/health-care-dysfunction-explained-by.html">here</a>) poisoned health care. How many more doctors and patients have to be deceived, how many products have to be contaminated or defectively made before we demand better leadership of health care organizations?

Once More with Feeling - Johnson and Johnson Found Guilty, Fined $1.1 Billion

The latest legal black eye for giant pharmaceutical and device company Johnson and Johnson appeared in an Arkansas court room. As documente...

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Health Care Dysfunction Explained by the Fallacy of "Maximizing Shareholder Value"

Over the last two weeks, the <a href="http://nakedcapitalism.com/">Naked Capitalism blog</a> ran a multi-part series (1-4) on what has gone wrong with US public for-profit corporations.  Although not targeted specifically on health care, the series included several themes we have discussed on <a href="http://hcrenewal.blogspot.com/">Health Care Renewal</a>, and suggested some important new ones.  So let us review the most relevant topics. "Financialization," and the Exclusive Ostensible Focus on Shareholder Value In the first post,(1) William Lazonick explained how corporations gave up their devotion to societal values to ostensibly focus only on the interests of shareholders:  <blockquote>What went wrong? A fundamental transformation in the investment strategies of major U.S. corporations is a big part of the story. A generation or two ago, corporate leaders considered the interests of their companies to be aligned with those of the broader society. In 1953, at his congressional confirmation hearing to be Secretary of Defense, General Motors CEO Charles E. Wilson was asked whether he would be able to make a decision that conflicted with the interests of his company. His famous reply: 'For years I thought what was good for the country was good for General Motors and vice versa.'</blockquote> However, then(1) <blockquote>the U.S. business corporation has become in a (rather ugly) word 'financialized.' It means that executives began to base all their decisions on increasing corporate earnings for the sake of jacking up corporate stock prices. Other concerns — economic, social and political — took a backseat. From the 1980s, the talk in boardrooms and business schools changed. Instead of running corporations to create wealth for all, leaders should think only of 'maximizing shareholder value.' </blockquote> This was formalized in the the scholarly management literature,(1) <blockquote>But in 1983, two financial economists, Eugene Fama of the University of Chicago and Michael Jensen of the University of Rochester, co-authored two articles in the Journal of Law and Economics which extolled corporate honchos who focused on 'maximizing shareholder value' — by which they meant using corporate resources to boost stock prices, however short the time-frame. In 1985 Jensen landed a higher profile pulpit at Harvard Business School. Soon, shareholder-value ideology became the mantra of thousands of MBA students who were unleashed in the corporate world.</blockquote> Ignoring the Interests of Employees: Cost Cutting, Layoffs, Off-Shoring Maximizing shareholder value only really seems to mean maximizing shareholder value in the short run, often by short-term cost-cutting that will reduce the ability to improve existing or develop new products and services. Hence, now(1) <blockquote>When the shareholder-value mantra becomes the main focus, executives concentrate on avoiding taxes for the sake of higher profits, and they don’t think twice about permanently axing workers. They increase distributions of corporate cash to shareholders in the forms of dividends and, even more prominently, stock buybacks. When a corporation becomes financialized, the top executives no longer concern themselves with investing in the productive capabilities of employees, the foundation for rising living standards for all. They become focused instead on generating financial profits that can justify higher stock prices....</blockquote> Furthermore,(1) <blockquote>n the name of shareholder value, by the 1990s U.S. corporations seized on these changes in competition and technology to put an end to the norm of a career with one company, ridding themselves of more expensive older employees in the process. In the 2000s, American corporations found that low-wage nations like China and India possessed millions of qualified college graduates who were able and willing to do high-end work in place of U.S. workers. Offshoring put the nail in the coffin of employment security in corporate America.</blockquote> Thus, "maximizing shareholder value" was the rationale for a variety of short-term cost-cutting approaches that turned employees (excepting, of course, the hired executives and their favorites) not merely into the makers of widgets, but into widgets themselves. By extension, this attitude that all employees (again, with the exception of top management and their cronies) are interchangeable applied even to highly skilled professional, technical and scientific employees, e.g., research scientists in a pharmaceutical company. By further extension, as we have<a href="http://hcrenewal.blogspot.com/2006/03/consequences-of-breaking-physicians.html"> noted</a>, health care organizations, including non-profit institutions like hospitals, insurance companies, and academic medical institutions, have been taken over by hired managers who are decreasingly health care professionals. Such hired <a href="http://hcrenewal.blogspot.com/search/label/generic%20managers">generic managers</a> have carried the latest fashionable management ideas into health care with them. Thus, in my experience, even experienced academic physicians began hearing that they had no individual value, were interchangeable and could easily be replaced starting in the 1990s. For organizations that depend on highly trained, dedicated technical, scientific, and/or professional workers, devaluing and demoralizing such employees wold appear to be the height of foolishness. As Lazonick pointed out in a later post(3), treating workers as interchangeable can be the death knell for innovation: <blockquote>As is generally recognized by employers who declare that 'our most important assets are our human assets', the key to successful innovation is the extra time and effort, above and beyond the strict requirements of the job, that employees expend interacting with others to confront and solve problems in transforming technologies and accessing markets. Anyone who has spent time in a workplace knows the difference between workers who just punch the clock to collect their pay from day to day and workers who use their paid employment as a platform for the expenditure of creative and collective effort as part of a process of building their careers. As members of the firm, these forward-looking workers bear the risk that their extra expenditures of time and effort will not yield the gains to innovative enterprise from which they can be rewarded. If, however, the innovation process does generate profits, workers, as risk-bearers, have a claim to a share in the forms of promotions, higher earnings and benefits. Instead, shareholder-value ideology is often used as a rationale for laying off workers whose hard and creative work has contributed to the company’s success. That’s grossly unfair. </blockquote> A Fallacious Rationale: Only Stockholders at Risk However, the reasoning, such as it was, behind the "maximizing shareholder value" mantra contained a rationale for so devaluing and demoralizing even the most dedicated and well-trained employees. As Prof Lazonick explained,(1) <blockquote>Proponents of the Fama/Jenson view argue that for superior economic performance, corporate resources should be allocated to maximize returns to shareholders because they are the only economic actors who make investments without a guaranteed return. They say that shareholders are the only ones who bear risk in the corporate economy, and so they should also get the rewards.</blockquote> He then went on to easily explain why this was complete rubbish(1): <blockquote>But this argument could not be more false. In fact, lots of people bear risks of investing in the corporation without knowing if they will pay off for them. Governments in the U.S., funded by the body of taxpayers, are constantly making investments in physical infrastructures and human capabilities that provide benefits to businesses, but without a guaranteed return to taxpayers. An employer expects workers to give time and effort beyond that required by their current pay to make a better product and boost profits for the company in the future. Where’s the worker’s guaranteed return? In contrast, most public shareholders simply buy and sell shares of a corporation on the stock market, making no contribution whatsoever to investment in the company’s productive capabilities.</blockquote> By Extension, In Health Care, Ignoring the Interests of Patients and the Values of Health Care Professionals If one believes only stockholders are at risk and hence only stockholders deserve benefit from corporate activities, by extension this eliminates the interests of patients and the values of health care professionals from consideration by the leadership of health care corporations. Of course, in health care, the patients may be the ones most at risk from corporate activities. For example, think of a patient who pays a large amount out of pocket for a drug that fails to benefit him or her. Worse, patients are not only at financial risk, but are at physical risk. For example, think of a patient who suffers an unusual, but severe adverse reaction to a drug. In addition, in health care, health care professionals who do not work for a particular health care corporation may be at risk from its activities. For example, think of a physician who is fooled by a pharmaceutical company's <a href="http://hcrenewal.blogspot.com/search/label/manipulating%20clinical%20research">manipulation of clinical research</a> into believing a drug is effective and safe when it is actually useless and harmful. We have documented numerous instances of <a href="http://hcrenewal.blogspot.com/search/label/suppression%20of%20medical%20research">suppression of clinical research</a>, <a href="http://hcrenewal.blogspot.com/search/label/manipulating%20clinical%20research">manipulation of clinical research</a>, <a href="http://hcrenewal.blogspot.com/search/label/ghost%20writing">ghost writing</a>, deceptive <a href="http://hcrenewal.blogspot.com/search/label/stealth%20marketing">stealth marketing</a>, and other tactics used by pharmaceutical, biotechnology and device companies to deceive physicians about the effectiveness and safety of drugs and devices. Physicians who have been thus deceived are at risk of violating their fundamental responsibility to put individual patients' interests first. Subverting the Mission of Non-Profit Health Care Organizations As we mentioned earlier, there is ample evidence that non-profit organizations are now most often lead by hired managers who have brought the latest management with them, rather than health care professionals. It is therefore likely that the dominant notion of "maximizing shareholder value" has been operationalized even in non-profit organizations that do not have shareholders. Most likely it has been transformed into simply maximizing short-term revenue. We have certainly seen many instances of leaders of such health care organizations who seem mainly preoccupied with short-term financial goals. Bad as this is for a public for-profit corporation, it is potentially disastrous for a non-profit organization which is supposed to put upholding its mission ahead of financial concerns (see examples of such mission-hostile management <a href="http://hcrenewal.blogspot.com/search/label/mission-hostile%20management">here</a>). Interests of Shareholders or Interests of Executives? It is terribly ironic that in practice "maximizing shareholder value" turns out to mean maximizing executive compensation. In retrospect, this mantra looks entirely self-serving.  As Prof Lazonick noted in a second post, executive compensation has soared in recent years(2) <blockquote>When all the data from corporate proxy statements are in within the next month or so, they will show that 2011 was another banner year for top executive pay. Over the previous three years the average annual compensation of the top 500 executives named on corporate proxy statements was 'only' $17.8 million, compared with an annual average of $27.3 million for 2005 through 2007. Yet even in these recent 'down' years, the compensation of these named top executives was more than double in real terms their counterparts’ pay in the years 1992 through 1994. It might surprise you to learn that in the early 1990s, executive pay was already widely viewed as out of line with what average workers got paid. In 1991 Graef Crystal, a prominent executive pay consultant, published a best-selling book, In Search of Excess: The Overcompensation of American Executives, in which he calculated that over the course of the 1970s and ’80s, the real after-tax earnings of the average manufacturing worker had declined by about 13 percent. During the same period, that of the average CEO of a major US corporation had quadrupled! </blockquote> We have documented seemingly endless examples of <a href="http://hcrenewal.blogspot.com/search/label/executive%20compensation">bloated executive compensation</a> in health care. In fact, as Prof Lazonick noted in his first post(1), by increasing stock prices short-term, executives of for-profit corporations can markedly boost their own compensation, <blockquote>When a corporation becomes financialized, the top executives no longer concern themselves with investing in the productive capabilities of employees, the foundation for rising living standards for all. They become focused instead on generating financial profits that can justify higher stock prices – in large part because, through their stock-based compensation, high stock prices translate into megabucks for these corporate executives themselves. </blockquote> The Conspiracy to Increase CEO Compensation As CEO compensation climbed, they and their supporters have invoked a market-based rationale, as Prof Lazonick described in his third post,(3): <blockquote>You often hear that stratospheric executive pay is the result of some inexorable law of supply and demand. If we don’t give top executives their multimillion dollar compensation, they won’t be willing to come to work and do their jobs. They are supposedly the bearers of 'scarce talent' that demands a high price in the market place. Even Robert Reich, Secretary of Labor in the Clinton administration and a critic of U.S. income inequality, has justified the explosion in executive pay, arguing that intense competition makes it much more difficult than it used to be to find the talent who can manage a large corporation (Supercapitalism, 2008, pp 105-114).</blockquote>We have provided many examples of similar talking points used to support fat compensation for health care leaders (e.g., <a href="http://hcrenewal.blogspot.com/2012/03/example-of-how-complex-takes-control.html">here</a>. <a href="http://hcrenewal.blogspot.com/2011/09/more-repeats-of-talking-points.html">here</a>, and <a href="http://hcrenewal.blogspot.com/2011/09/talking-points-sans-original-thought-to.html">here</a>). However, as we described here, the mechanism that executives have developed to set their own pay in line with the supposed market does nothing like that,(3) <blockquote>That is not what determines executive pay. Here is how it works: Top executives select other top executives to sit on “their” boards of directors. These directors hire compensation consultants to recommend an executive pay package, which consists of salary, bonus, incentive pay, retirement benefits, and all manner of other perks. The consultants look at what top executives at other major corporations are getting, and say that, well, this executive should get more or less the same. Since the directors are mostly these very same “other executives”, they have no interest in objecting – and if any of them were to do so, they would find that they are no longer being invited to sit on corporate boards. Meanwhile, given the preponderance of stock-based compensation (especially stock options) in executive pay, whenever there is speculative boom in the stock market, top executives of the companies with most rapidly rising stock prices make out like bandits. The higher compensation levels then create a 'new normal' for executive pay that, via the compensation consultants and compliant directors, ratchets up the pay of all the top dogs. And, when the stock market is less speculative, these corporate executives do massive stock buybacks to push stock prices up. What we have here is not 'market forces' at work but an exclusive club that promotes the interests of the 0.1%. All too often executives allocate corporate resources to benefit themselves rather than to invest in innovation and job creation.</blockquote>We have discussed similar mechanisms at work in health care, for example, <a href="http://hcrenewal.blogspot.com/2011/10/peer-benchmarking-lake-wobegone-effect.html">here</a>. In other words, <blockquote>almost unanimously, corporate executives proclaim that they run their companies for the sake of shareholders. In fact, their personal coffers pumped up with stock-based compensation, our business 'leaders' have increasingly run the corporations for themselves.</blockquote> Were contemporary management of health care be only based on maximizing shareholder value or short-term revenue, that would be bad enough. However, it appears that it is really based simply on maximizing executive compensation. Health care, and our society as a whole has been turned into something like a feudal state, in which hired managers have become the new aristocracy. The Rise of the Generic Manager The likelihood that "maximizing [supposed] shareholder value" would lead to bad ends is increased by the decreasing likelihood that the managers who set out in this direction would know anything about the specific context in which they were working or other goals they ought to attempt. As Prof Lazonick pointed out, even before the rise of the "maximizing shareholder value" mantra,(1) <blockquote>The beginnings of financialization date back to the 1960s when conglomerate titans built empires by gobbling up scores and even hundreds of companies. Business schools justified this concentration of corporate power by teaching that a good manager could manage any type of business — the bigger the better. </blockquote> This was the notion of the <a href="http://hcrenewal.blogspot.com/search/label/generic%20managers">generic manager</a>. In health care, generic managers who have little specific health care knowledge or experience, and little understanding of or sympathy for the values of health care professionals might be particularly ruthless about putting short-term financial goals ahead of everything else. Summary On Health Care Renewal, we have focused on problems with health care leadership and governance. We have discussed the rise of <a href="http://hcrenewal.blogspot.com/search/label/generic%20managers">generic managers</a>, a focus on short-term revenue sometimes leading to <a href="http://hcrenewal.blogspot.com/search/label/mission-hostile%20management">mission-hostile management,</a> the <a href="http://hcrenewal.blogspot.com/search/label/perverse%20incentives">perverse incentives</a> generated by<a href="http://hcrenewal.blogspot.com/search/label/executive%20compensation"> executive compensation</a> that is unrelated to achievement of the health care mission's goals, lack of executive <a href="http://hcrenewal.blogspot.com/search/label/accountability">accountability</a>, and sometimes executives' complete <a href="http://hcrenewal.blogspot.com/search/label/impunity">impunity</a>. It now appears that health care's leadership and governance problems simply reflect larger problems in the society as a whole. Maybe it should be a relief that we in health care are not uniquely cursed. However, the immensity of the problems faced by our society as a whole will not make it easier to solve the problem of health care dysfunction. I do feel better that our focus has been correct. Furthermore, I feel more confident asserting once again that true health care reform would put in place leadership that understands the health care context, upholds health care professionals' values, and puts patients' and the public's health ahead of extraneous, particularly short-term financial concerns. We need health care governance that holds health care leaders accountable, and ensures their transparency, integrity and honesty. Maybe realizing that health care's problems are a part of society's problems will lead to more support for their solutions. References 1.  Lazonick W. How American corporations transformed from producers to predators.  Naked Capitalism, April 2, 2012.  Link <a href="http://www.nakedcapitalism.com/2012/04/how-american-corporations-transformed-from-producers-to-predators.html">here</a>. 2. Lazonick W. How high CEO pay hurts the 99 percent. Naked Capitalism, April 3, 2012. Link <a href="http://www.nakedcapitalism.com/2012/04/william-lazonick-how-high-ceo-pay-hurts-the-99-percent.html">here</a>. 3. Lazonick W. Three corporate myths that threaten the wealth of the nation. Naked Capitalism, April 6, 2012. Link <a href="http://www.nakedcapitalism.com/2012/04/three-corporate-myths-that-threaten-the-wealth-of-the-nation.html">here</a>. 4. Parramore L. Capitalism's dirty secret: corporations don't create jobs, they destroy them.  Naked Capitalism, April 5, 2012.  Link <a href="http://www.nakedcapitalism.com/2012/04/lynn-parramore-capitalisms-dirty-secret-corporations-dont-create-jobs-they-destroy-them.html">here</a>.

Health Care Dysfunction Explained by the Fallacy of "Maximizing Shareholder Value"

Over the last two weeks, the Naked Capitalism blog ran a multi-part series (1-4) on what has gone wrong with US public for-profit corporati...

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There They Go Again - Pfizer CEO Compensation Triples, Ordinary Employees' Severance Cut

In mid-March, Pfizer, which used to proclaim itself to be the world's largest research-based pharmaceutical company, announced in a regulatory filing a huge increase in total compensation for its relatively new CEO.  Per the AP, <a href="http://online.wsj.com/article/AP2d98c5770af7413191c6c05d66a564f7.html">via</a> the Wall Street Journal: <blockquote>Pfizer Inc. nearly tripled CEO Ian Read's compensation in 2011, his first full year as top executive of the world's largest drugmaker, which has been cutting costs and making other moves to compensate for generic competition hurting sales of top medicines. Read, 58, received compensation worth a total of $18.12 million in 2011, up from $6.42 million in 2010, according to an Associated Press analysis of a regulatory filing Thursday by the maker of Viagra and cholesterol fighter Lipitor. The total includes a salary of $1.7 million, up 42 percent, stock awards and option awards totaling about $12.5 million, a $3.5 million incentive award and about $319,000 in other compensation. The last category ranges from use of company aircraft and a car and driver to contributions to Read's retirement savings.</blockquote> Contrast: Decreasing Research and Development Spending, Facilities, Employment Mr Read seems to have been rewarded for decreasing the scope of research and cutting research spending: <blockquote>Over the past year, Read has narrowed the focus of Pfizer's huge research operations to diseases with big sales potential or few existing treatment options, trimming the research budget significantly in the process.</blockquote> Reuters <a href="http://www.reuters.com/article/2012/03/15/pfizer-compensation-idUSL4E8EF78Y20120315">noted</a> that involved sweeping layoffs and the closure of multiple research facilities: <blockquote>Pfizer said it had improved its performance during 2011 by reducing research spending by nearly $1 billion. That feat came, however, at the expense of thousands of Pfizer researchers, whose jobs are being eliminated along with numerous laboratories in an effort to ultimately slash Pfizer research spending by up to $2 billion a year.</blockquote> Contrast: Long-Term Shareholder Value Read traded research capacity, and presumably the long-term value of the company, for an immediate boost in the stock price, <blockquote>Pfizer, under Read, has narrowed its focus to five main therapeutic areas and is considering either selling or spinning off its nutritional products and animal health units. Proceeds from the transactions will likely be used to buy back company shares, Read has said, delighting investors and helping boost company shares almost 27 percent in the past twelve months.</blockquote> On the other hand, a quick look at <a href="http://www.google.com/finance?q=pfizer">Google Finance</a> reveals that while the stock price is higher than it has been since 2009, it is roughly half of what it was from the late 1990s until 2004. On <a href="http://www.pfizer.com/about/">its web-site</a>, the company still proclaims, however, <blockquote>we at Pfizer are committed to applying science and our global resources to improve health and well-being at every stage of life. </blockquote> Contrast: Treatment of Other Employees Note that Mr Read is an employee of Pfizer, albeit its most highly paid employee by a huge margin. Other employees are not being treated so well. The massive increase in CEO compensation should also be contrasted with the company's new severance policies, as explained in <a href="http://www.theday.com/article/20120410/BIZ02/304109921/-1/BIZ">an article</a> from last week in The (New London, CT) Day, <blockquote>Pfizer Inc. personnel being laid off at the company's Groton laboratories after May 14 will receive less money than previous waves of departing workers have received. Pfizer, at the tail end of a planned 1,100 layoffs locally, said in a memo released last week that in the future people leaving the company will receive eight weeks of severance in addition to two weeks for every year served with the company. The pharmaceutical giant had previously offered at least 12 weeks of severance to employees, and before acquiring Wyeth Pharmaceuticals in 2009 had handed out three weeks of pay for every year served.</blockquote> Summary While Pfizer recently has made an amazing series of ethical missteps (look <a href="http://hcrenewal.blogspot.com/2011/10/what-pfizer-v-few-consequences-for-long.html">here</a>), a decreasing drug pipeline, lost half of its stock price since its peak, and decreased its ability to develop new products, it has quickly returned to its previous ways of making its top hired executives very rich. (No matter, by the way, that Mr Read ought to bear some responsibility for the company's previous problems, since as the AP pointed out, he "has spent his entire career at the New York-based drugmaker, became Pfizer's CEO in December 2010 after running its worldwide pharmaceutical business since 2006.") This is just the latest of many, many examples of how top hired executives of health care organizations are not like you and me. Whatever is happening to their organization, whatever its faithfulness to its mission, its performance, its value, its treatment of employees in general, many CEOs just get to take more and more off the top. Given this perverse incentive structure, is there really any question why most health care organizations do not always seem to put patients' or the public's health, or health care professionals' values, or their employees' welfare, or even their owners' financial interests (when they are publicly held for-profit corporations) first?  Or why health care costs steadily increase while quality and access decrease? Repeat after me - we will never solve the problem of health care dysfunction until we assure that the leaders of health care organizations are well-informed about the context of health care, uphold health care professionals' values, put patients' and the public's health first, are accountable and transparent, and receive reasonable incentives based on all the above.

There They Go Again - Pfizer CEO Compensation Triples, Ordinary Employees' Severance Cut

In mid-March, Pfizer, which used to proclaim itself to be the world's largest research-based pharmaceutical company, announced in a regu...

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The Pittsburgh Experiment - II - Another Echo of the Fall of AHERF

We recently <a href="http://hcrenewal.blogspot.com/2012/04/pittsburgh-experiment-i-caught-in.html">started</a> a series of posts about the battle for domination of health care in western Pennsylvania.  The contenders are the UPMC hospital system, the dominant hospital system in the region, and Highmark, the dominant health insurer in the region.  While these two health care behemoths fight, patients, health care professionals, and the public seem to be caught in the <a href="http://hcrenewal.blogspot.com/search/label/cross%20fire">crossfire</a>. There is something of history repeating itself in this battle. The biggest bone of contention in it is Highmark's attempt to purchase the struggling West Penn Allegheny hospital system.  UPMC leadership seemed to feel that this would put the insurer in direct competition with it, even though UPMC already provides a health insurance product, the <a href="http://www.upmchealthplan.com/">UPMC Health Plan</a>. West Penn Allegheny, in turn, is struggling because it is a remnant of a previous attempt by a single organization to dominate the health care system in this area.  As we <a href="http://hcrenewal.blogspot.com/2011/07/restless-shade-of-aherf-and-return-of.html">wrote</a> in 2011,  West Penn Allegheny was formed from some components of what used to the be the Allegheny Health Education and Research Foundation, AHERF.   AHERF was a large integrated health care system formed out of multiple mergers.  AHERF went bankrupt in 1998, leading to massive layoffs, hospital closures, and the near dissolution of a medical school (which ended up taken over by Drexel University). As we <a href="http://hcrenewal.blogspot.com/2008/07/10-years-later-eerie-echo-of-fall-of.html">noted</a> in 2008, although the AHERF bankruptcy appears to be the largest failure of a not-for-profit health care corporation in US history, its story has produced remarkably few echoes for doctors, other health care professionals, health care researchers, and health policy makers. I often use the fall of AHERF as major example in talks, at least the few talks I am allowed to give on such unpleasant subjects. Rarely have more than a few people in the audience heard of AHERF prior to my discussion of it. I only could locate <a href="http://content.healthaffairs.org/cgi/reprint/19/1/7.pdf">one article </a>in a medical or health care journal that discussed the case in detail, albeit incompletely since it was written before Abdelhak's guilty plea [Burns LR, Cacciamani J, Clement J, Aquino W. The fall of the house of AHERF: the Allegheny bankruptcy. Health Aff (Millwood) 2000; 19: 7-41.] I doubt the case is used for teaching in most medical or public health schools. (There is a new book out about the case, Merger Games, by Judith Swazey, available <a href="http://muse.jhu.edu/books/9781439907191">here</a> as  a set of PDF files from Project Muse for those with the proper password, but it has not yet had much of an impact, and I confess I have not yet read it.)  The lack of discussion of such a significant case is a prime example of the <a href="http://hcrenewal.blogspot.com/2007/08/bling-bling-poltical-correctness-and.html">anechoic effect</a>. Therefore, let me summarize some of important points about AHERF not found above (see also <a href="http://www.acponline.org/chapters/ri/nl-fall04.pdf">this narrative</a>, starting on page 5): <ul><li>AHERF, one of the largest health care systems of its day, was built by the poster-boy for health care imperial CEOs, Sherif Abdelhak.</li><li>Abdelhak, who <a href="http://www.post-gazette.com/aherf/part2.asp">started as food services purchasing manager </a>at Allegeheny General Hospital, was repeatedly hailed as a "visionary" (<a href="http://www.acponline.org/journals/news/mar97/phillymc.htm">in the March, 1997, ACP Observer</a>) a "genius," and the like. His plans to create a huge integrated health care system were part of the wave of the future. Abdelhak was even invited to give the prestigious John D Cooper lecture at the annual meeting of the American Association of Medical Colleges (AAMC), which was published in Academic Medicine [Abdelhak SS. How one academic health center is successfully facing the future. Acad Med 1996; 71: 329-336.] He proclaimed that "we will need to create new forms of organization that are more flexible, more adaptive, and more agile than ever before." And he announced that "my aim as chief executive has been to unleash the creativity and productive potential of every individual and to provide an environment that encourages teamwork" </li><li>While Abdelhak was making these grandiose promises, he paid himself and his associates very well. For example, he received $1.2 million in the mid-1990s, more than three times the average then for a hospital system CEO. He lived in a hospital supplied mansion worth almost $900,000 in 1989. Five of AHERF's top executives were in the top 10 best paid hospital executives in Philadelphia.</li><li>Although Abdelhak talked of teamwork, he warned the combined faculty of the new Allegheny University of the Health Sciences (AUHS): <a href="http://www.post-gazette.com/aherf/part6.asp">"Don’t cross me or you will live to regret it."</a></li><li>As AHERF was hemorrhaging money, Abdelhak continued to pay himself and his cronies lavishly.</li><li>After the AHERF bankruptcy, which was at the time the second largest bankruptcy recorded in the US, Abdelhak was charged with numerous felonies involving receiving charitable assets. In a plea bargain, <a href="http://www.post-gazette.com/localnews/20020830abdelhak0830p4.asp">he pleaded no contest </a>to misusing charitable funds, a misdemeanor, and was sentenced to more than 11 months in county prison.</li></ul>The story of AHERF is not merely that of an unlucky bankruptcy. It shows what can go wrong when health care adopts business practices such as jumping the latest management band-wagons and genuflecting before imperial CEOs.  It also shows what happens when a single health care organization, and the person who leads it, becomes too powerful. If either UPMC or Highmark definitively wins their current battle, the winner will become at least as locally dominant as AHERF.  As we shall see in the posts to come in this series, the leadership of both organizations has already demonstrated a certain arrogance.  Yet since 2008 we have not progressed to the point of controlling the tendency of a laissez faire health care system to approach monopoly, nor the monopolist's tendency to put his self-interest ahead of all else.  If nothing else, maybe the messiness of the fight between UPMC and Highmark will remind more people of AHERF, hence the need not to let our health care leadership and governance problems remain anechoic, hence the need for true health care reform that would constrain health care leaders to put patients' and the public's health before their narrow self-interest.

The Pittsburgh Experiment - II - Another Echo of the Fall of AHERF

We recently started a series of posts about the battle for domination of health care in western Pennsylvania. The contenders are the UPMC ...

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The Pittsburgh Experiment - I - Caught in the Crossfire

In our increasingly dysfunctional health care system, patients, health care professionals and the public are often caught in the crossfire between big health care organizations.  Such organizations are often led by people who do not seem to put the interests of patients and the public, and the values of professionals first.  (Note that we have been writing about this since at least 2003, when the concept appeared in my article: Poses RM. A cautionary tale: the dysfunction of the American health care system. Eur J Int Med 2003; 14: 123-130. Link <a href="http://www.ejinme.com/article/S0953-6205%2803%2900029-3/abstract">here</a>.) Last week, Anna Wilde Matthews and John W Miller <a href="http://online.wsj.com/article/SB10001424052702303812904577295901619123904.html">wrote in the Wall Street Journal</a> about an amazing example of such a crossfire that pitted the two dominant health care organizations in Western Pennsylvania against each other.  The case turns out to touch on many of the most dysfunctional aspects of US health care.  So rather than try to cram it into an overly long blog post, I plan to periodically discuss it over the next few weeks, starting now with an overview of the grappling titans. The Basic Conflict Per the Wall Street Journal article, <blockquote>In Pittsburgh, the acrimonious battle between <a href="http://hcrenewal.blogspot.com/search/label/Highmark">Highmark</a>, the region's most powerful health insurer, and <a href="http://hcrenewal.blogspot.com/search/label/UPMC">UPMC</a>, the dominant health-care provider, is drawing national attention as a test case on the impact of consolidation in the health-care industry. At the heart of the dispute is Highmark's effort to acquire a financially troubled local hospital group, West Penn Allegheny Health System, as the centerpiece of what it says will be a lower-cost and more efficient health-care operation. UPMC, which has its own insurance arm as well as 19 area hospitals and 3,240 doctors, says it doesn't want to bolster a company it now considers a direct rival. It has vowed not to sign a new contract to treat patients covered by Highmark, which would mean those patients generally would pay high out-of-network rates to use UPMC hospitals and doctors.</blockquote> As we will see, the dispute is between a dominant hospital system that is trying to muscle into the insurance business, and a dominant insurer that is trying to muscle into the hospital business. If either were to succeed, it would become the dominant health care organization in the Pittsburgh area. A Personal Fight Amongst Two CEOs However, the fight soon seemed to be more among the CEOs of the two organizations. Per the WSJ, <blockquote>In Pittsburgh, the battle has become unusually bitter, spearheaded by the two companies' chief executives, UPMC's Jeffrey A. Romoff, 66, and Highmark's Kenneth Melani, 58. Mr. Romoff, who has built UPMC into a $9 billion juggernaut and put its initials on the tallest skyscraper in the city, calls Highmark a 'monopoly.' Dr. Melani uses the same term in warnings about UPMC's power and referred to Mr. Romoff in a local newspaper as 'trying to rape the commercial marketplace to build his empire.'  (A spokesman for Mr. Romoff said the comment 'lacked both substance and dignity.')</blockquote> An <a href="http://www.pittsburghlive.com/x/pittsburghtrib/news/pittsburgh/s_771458.html">article</a> from December, 2011 in the Pittsburgh Tribune-Review had illustrated other aspects of the bitterness about and between the CEOs. <blockquote>UPMC CEO Jeffrey Romoff's satiric, fake Twitter profile lists his favorite games as Monopoly and Risk. In recent tweets, the anonymous author wrote under his name, 'New York State, here we come!' and said he wants to take Highmark CEO Dr. Kenneth Melani 'outside to settle things -- but it would be unfair competition if (we) could BOTH use our fists.' The month-old Fake Jeffrey Romoff persona, whose author declined to be interviewed but said it's 'no laughing matter,' depicts the head of Western Pennsylvania's dominant health care system as a greedy tyrant with an angry avatar. It counts fewer than 40 followers, but its existence points to a public relations failure for UPMC in its fight with Highmark Inc., media experts say. 'Nobody feels sorry for Romoff,' said Andrea Fitting, president of Downtown marketing firm Fitting Group. 'If you ask anyone on the street, they'll say Romoff is a monster. There's no person who's trustworthy and sympathetic who they've enlisted as a spokesman.' Romoff could not be reached for comment. UPMC spokesman Paul Wood said he is not concerned about the profile's effect on the hospital network's image. 'Not something that has virtually no followers,' he said. There's no fake Twitter handle lampooning Melani, but experts say the state's largest insurer is not doing a great job of managing its public image either.</blockquote> As found in the WSJ article, <blockquote>'There's no white hat here,' says Don White, a Republican who chairs the state Senate committee overseeing insurance. 'They're both concerned about their self-preservation and domination.' </blockquote> Neither CEO seems satisfied that his organization has become dominant in its field, and both seem to resent the success of the other organization in another field. Let us briefly review the backgrounds of both systems. UPMC as Dominant Hospital System The WSJ article started to probe the complexity of the situation: <blockquote>The struggle in Pittsburgh has roots that go back decades. UPMC, led since 1992 by Bronx native Mr. Romoff, has grown on his watch to $9 billion in annual revenue from $797 million when he took over. Today, UPMC has around 58% inpatient market share in Allegheny County and a brand buoyed by its identification with nationally known research and treatment centers like Hillman Cancer Center, where Ms. Wyckoff is being treated. The nonprofit system, with around $406 million in operating income in its most recent fiscal year ended June 30, is also Pennsylvania's biggest private employer. UPMC's initials dominate the Pittsburgh skyline from the top of the U.S. Steel Tower, the city's tallest building. The nonprofit leases a private jet that is used to fly executives and doctors to its facilities in Ireland and Italy. Mr. Romoff has become one of the city's most prominent business leaders. Poking fun at a local nickname for his boss, a staffer once presented Mr. Romoff with a Darth Vader action figure. In 2009, UPMC published a glossy history of its own expansion titled 'Beyond the Bounds.'</blockquote> Highmark as Dominant Insurer On the other hand, <blockquote>As UPMC grew, its main hospital rival, West Penn Allegheny, withered. The five-hospital group emerged from the ashes of a Pennsylvania hospital system that filed for bankruptcy in 1998 after piling on too much debt and acquiring money-losing assets. It struggled for years. By 2011, West Penn Allegheny was in the red, with heavy debt and pension obligations. To cut costs, it shut down much of its Western Pennsylvania Hospital. At one point, filmmakers took over its empty intensive-care unit to film a scene for a coming Tom Cruise movie. In June, Highmark's Dr. Melani unveiled his plan to acquire West Penn Allegheny for a combination of loans and grants valued at as much as $475 million. Like UPMC, nonprofit Highmark was a dominant presence in its market, formed from the merger of a Blue Cross and a Blue Shield plan in 1996. By 2011, it had market share of around 60% in Allegheny County, with annual revenue of $14.8 billion, and it was sitting on reserves of about $4.1 billion. Still, it was a bold and risky stroke for Dr. Melani, a blunt-spoken internal-medicine physician who himself trained at West Penn.</blockquote> Marketing Rather than Substance The two sides launched a marketing and public relations battle which did not seem to have much to do with quality of, access to, and cost of health care. As the WSJ article noted, <blockquote>The spat quickly got nasty. Highmark highlighted UPMC's rate request in ads, and hired a Washington lobbying firm to pull together a coalition of churches, patient groups and others that would press for a deal. UPMC's own ad campaign urged patients to 'Keep your doctor. Check your plan.' Highmark sued, arguing the ads were misleading. UPMC bought Google ads that called up its site when a user searched for 'Highmark.'</blockquote> The Pittsburgh Tribune-Review article included, <blockquote>Public relations experts agree that Highmark faces a daunting challenge: People might see UPMC -- and by extension, Romoff -- as a bully, but they don't want to lose access to the system's 19 hospitals and 3,000 doctors in Western Pennsylvania. UPMC's 'Keep Your Doc' ad campaign, produced by South Side agency GatesmanMarmion+Dave, is successful because it furthers the organization's business objectives, said Dale Leibach, an associate with Prism Public Affairs in Washington. This year, for the first time, UPMC gave four national insurers full access to its facilities and doctors, an arrangement previously granted only to Highmark. 'I would give points to UPMC for consistency and transparency, in promising more competition and then delivering on that promise by giving people in Pittsburgh and in the region many more options in terms of insurance providers,' said Leibach, who reviewed news accounts about the dispute. David Kosick Sr., senior associate at KMA Public Relations in Canonsburg, takes the opposite stance, saying Highmark receives greater sympathy from a public that views UPMC as an insensitive corporate titan. Mullen Advertising in the Strip District produces Highmark's 'Accepted. Everywhere' ad campaign for TV, radio, publications, billboards and the Internet. 'Highmark's winning the PR battle,' Kosick said, citing threats by state lawmakers to intervene and public criticism directed at UPMC, including Allegheny County Council's refusal last month to issue $335 million in bonds for UPMC because of public opposition. Wood said the health system recognizes its reputation 'may have taken a bit of a short-term hit locally,' but 'UPMC is focused on the longer term.' 'We've used our PR and marketing to fundamentally change the health care market in Western Pennsylvania,' Wood said. Gene Grabowski, senior vice president of Washington-based public relations firm Levick Strategic Communications, said that strategy could backfire.</blockquote> Also, <blockquote>In addition to online social media, the public relations campaigns have ramped up on television and in other advertising. UPMC placed its TV ads on major networks and cable and estimates they will reach the average Pittsburgh viewer four times a week, Wood said. He declined to say how much UPMC is spending on the ad campaign or what it budgets for advertising, but he said the budget has not changed since last year. The ads, Fitting said, target 'what people are really worried about.' Highmark stepped up its campaign in response to UPMC's, Weinstein said. He would not say how much Highmark pays Mullen Advertising or what it budgets for advertising. 'UPMC launched an aggressive, multifaceted misinformation campaign targeted at employers and consumers who subscribe to Highmark's health plans,' Weinstein said.</blockquote> Caught in the Crossfire Meanwhile, of course, patients and doctors are trying to avoid being stomped by the wrestling titans. The Wall Street Journal article opened with this theme, <blockquote>Trish Wyckoff is struggling with stage-four breast cancer, but now the 53-year-old Pittsburgh resident has another worry: a possible divorce between the hospital system that is treating her, the University of Pittsburgh Medical Center, and Highmark Inc., the health insurer that pays for her care. If the two companies can't agree, she fears she won't be able to keep seeing the doctors who she believes are keeping her alive. 'We are absolutely stuck in the middle,' she says. This is a really scary time.' </blockquote> Here is another anecdote, <blockquote>With local newspapers chronicling each tit-for-tat, Pittsburgh residents like Dan Glasser say they have been acutely aware of the battle. Mr. Glasser, a 46-year-old lawyer, says he is alarmed and annoyed at the potential split between his insurer and UPMC. If forced to choose a side, he says, he would switch health plans to ensure access to UPMC. He has been seeing the same doctor there since he graduated from law school. 'That's almost my whole adult life,' he says.</blockquote> Doctors are equally unhappy. <blockquote>For his part, Kenneth Gold, Mr. Glasser's primary care physician, says he has been telling worried patients that 'all of us are pawns in this fight,' which he hopes gets resolved. If Highmark and UPMC do break up, 'it is going to be mass chaos,' he says. </blockquote> Even employers are unhappy, <blockquote>Employers, for their part, say they feel trapped in the middle, worried about health-care costs and also under pressure from employees to lock in access to UPMC. Cheryl Melinchak, director of benefits at Pittsburgh-based Westinghouse Electric Co., says the firm is likely to offer a new health plan this fall, in addition to Highmark and a high-deductible Aetna version, to ensure workers can use UPMC. The standoff is 'frustrating,' she says. 'We need competition on both sides,' insurers and health providers. </blockquote> Summary So here we have the brave new world of the US health care system, a system that some people in other countries seem to think is worthy of emulation. Increasing <a href="http://hcrenewal.blogspot.com/search/label/concentration%20of%20power">concentration of power</a> has lead to health care dominated by ever larger organizations lead by ever more egocentric executives. Organizations that are dominant in one area seek to dominate other areas. Caught in the crossfire are patients, doctors, employers, and the public. While more money goes to advertising, public relations, and lawyers, nothing about the fight seems to be about improving care or making it more accessible. Further considering how this particular fight came to be will reveal various interlocking facets of health care dysfunction. If we can start to address them, we may be able to accomplish real health care reform.  Clearly we need health care organizations to concentrate on health care, not on increasing their power and domination.  We need them using most of their resources for health care, not on marketing, public relations, legal services, administrative support, and executive compensation.  Stay tuned to <a href="http://hcrenewal.blogspot.com/">Health Care Renewal</a> as we continue this series.

The Pittsburgh Experiment - I - Caught in the Crossfire

In our increasingly dysfunctional health care system, patients, health care professionals and the public are often caught in the crossfire b...

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