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The Spoils of a "Scorched-Earth Defense" - Merck CEO Got $13.3 Million in 2011

Last week, Bloomberg <a href="http://www.bloomberg.com/news/2012-04-19/merck-unit-s-plea-over-vioxx-investigation-accepted-by-judge.html">reminded us</a> of the legal baggage that pharmaceutical giant Merck is carrying. The company had announced yet another settlement of legal actions pertaining to its ill-starred but very profitable sales of now withdrawn Vioxx (rofecoxib) in 2011 (see post <a href="http://hcrenewal.blogspot.com/2011/12/merck-admits-little-while-settling.html">here</a>). Now the settlement, including a guilty plea was accepted by a judge. <blockquote>A unit of Merck & Co. (MRK), the second- largest U.S. drugmaker, pleaded guilty to a criminal misdemeanor charge as part of a $950 million settlement of a U.S. government probe of its illegal marketing of the painkiller Vioxx. An official of Merck Sharp & Dohme said today that the company agreed to plead guilty to one count of misbranding Vioxx. U.S. District Judge Patti Saris in Boston accepted the plea as part of the drugmaker’s agreement to pay a $321.6 million criminal fine and $628.3 million to resolve civil claims that it sold Vioxx for unapproved uses and improperly touted its safety. 'I’m certainly going to accept this agreement because I think it’s in the public interest,' Saris said from the bench. 'I hope the size of this settlement and the fact that all these cases are being pressed by the federal and state governments -- the 44 states’ attorneys general -- will be a signal that this isn’t acceptable conduct.' </blockquote> But unacceptable conduct can lead to a great deal of revenue. As Bloomberg noted, <blockquote>Approved by the Food and Drug Administration in 1999, Vioxx became Merck’s third-largest-selling drug by 2003, generating $2.5 billion in annual sales. The company pulled Vioxx off the market in 2004 after a study found it posed an increased risk of heart attacks and strokes. </blockquote> It can also lead to a great deal of personal profit for those at the company tasked with defending such "unacceptable conduct," and what has now been found to be criminal behavior. Writing in <a href="http://www.slate.com/articles/health_and_science/medical_examiner/2011/11/sandusky_cover_up_why_is_kenneth_frazier_leading_the_investigation_at_penn_state_.html">Slate</a>, <a href="http://www.snigdhaprakash.com/">Snigdha Prakash</a>, who wrote All the Justice Money Can Buy about the legal aftermath of Vioxx, identified the current Merck CEO and board chairman as the architect of the defense of Vioxx, as <blockquote>best known for his phenomenal success in defending a sordid chapter in Merck’s recent past—its years-long silence about the safety problems of the popular painkiller Vioxx. </blockquote> Furthermore, she wrote, <blockquote>As he showed with the Vioxx litigation, Frazier is adept at mounting a scorched-earth defense that minimizes payouts to potential plaintiffs. Tens of thousands of former Vioxx users sued Merck after it withdrew the drug, alleging Vioxx had caused them to suffer heart attacks and strokes. Frazier, then the company’s general counsel, declared Merck had done nothing wrong and refused to settle. 'We’ll fight every case,' he declared, and hired top-flight law firms in several East Coast cities, in the South, in Chicago, and Los Angeles, as well as a prominent New York firm to coordinate the overall strategy. It took three years and $2 billion in legal expenses for Frazier’s hard-nosed tactics to pay off. Merck settled in late 2007 for a relative pittance, resolving some 50,000 Vioxx cases for just under $5 billion. It was a far cry from the $25 billion to $50 billion in liability that analysts had predicted when Merck withdrew the drug. </blockquote> So it appears that Mr Frazier is now reaping his rewards. The Dow Jones News Service <a href="http://online.wsj.com/article/BT-CO-20120412-716176.html">reported</a> earlier in April, <blockquote>Merck & Co.'s (MRK) leader received compensation valued at $13.3 million for 2011, up 41% from the year before, reflecting his ascension to the drug maker's top post and Merck's ability to exceed certain internal performance targets. Kenneth Frazier, 57, became Merck's chief executive at the beginning of 2011 and chairman of the board in December. He was previously head of Merck's human health business. In a proxy statement filed Thursday with the U.S. Securities and Exchange Commission, Merck said certain elements of Frazier's compensation reflected growth in Merck's sales and adjusted earnings for 2011. In addition, Merck's board considered 'his performance, leadership, planning and oversight during a time of continued economic, regulatory and political challenges for the healthcare industry.' Earlier this year, Frazier acknowledged that Merck had a tough 2011. The company endured setbacks including negative clinical data for a once-promising heart drug, vorapaxar. Merck's full-year stock price performance lagged behind most of its large-pharmaceutical peers. But Merck of Whitehouse Station, N.J., continued to cut costs and was able to raise its dividend for the first time in seven years in 2011. Frazier said in January he was optimistic about 2012. Frazier's total compensation included: $1.5 million in salary, $3.1 million in stock awards, $3 million in option awards, $3.1 million in non-equity incentive plan compensation, and $2.6 million change in pension value and non-qualified deferred compensation earnings. </blockquote> So somehow a "tough 2011" for Merck's stockholders (Merck's stock price rose a mere 3.9%, from 36.29 to 37.70 through 2011) resulted in a cornucopia of riches for Mr Frazier. So rather than being rewarded for "maximizing shareholder value," (see post <a href="http://hcrenewal.blogspot.com/2012/04/health-care-dysfunction-explained-by.html">here</a>) maybe Mr Frazier was rewarded for, as Ms Prakash put it, "burying monumental corporate failures at Merck." Here is the latest version of how top health care organizational insiders manage to make even more money no matter what, in this case, no matter what happens to the fortunes of the nominal owners of the company, no matter what happens to the company's once proud reputation, and particularly no matter what happened to the patients unfortunate enough to suffer adverse effects from its drug. We will not be able to truly reform health care, to really improve outcomes, improve access, and control costs, until we hold the leaders of health care organizations accountable.

The Spoils of a "Scorched-Earth Defense" - Merck CEO Got $13.3 Million in 2011

Last week, Bloomberg reminded us of the legal baggage that pharmaceutical giant Merck is carrying. The company had announced yet another se...

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Perednia: "Starting Over With Healthcare Reform Is, Unfortunately, a Matter of Religion"

Over at "The Road to Hellth" blog, Douglas Perednia MD has written an excellent piece entitled "<a href="http://roadtohellth.com/2012/04/starting-over-with-healthcare-reform-is-unfortunately-a-matter-of-religion/" target="_blank">Starting Over With Healthcare Reform Is, Unfortunately, a Matter of Religion</a>." The use of the term "religion" is not literal but figurative: <blockquote class="tr_bq">... In deciding what to do [in recent years], political leaders stopped dealing in experience, evidence and compromise, and began dealing in faith-based – almost religious – healthcare decision-making. Of course in this context we’re not talking about “faith-based” in its meaning of handed down from the one true God (or the many true Gods, depending upon your religion), but instead faith-based in the sense of having fixed and immutable beliefs about things like how to run healthcare or, indeed, the whole country.  It doesn’t matter what the available evidence shows or what human experience has been, the political religions of the left and right, Republicans and Democrats, won’t tolerate alternative facts, strategies or explanations.  Doing so would be sacrilege, remediable only by human sacrifice.  The point of his post is that in the U.S. both political parties have abandoned all pretense of listening to science or reason and making compromises that benefit patients.  They are making all decisions on fervently-held, unshakeable ideological beliefs (and, I add in some cases, for personal gain no matter the consequences to the public). </blockquote> I am reproducing the section of his essay on health IT, that illustrates his point well: <blockquote class="tr_bq"> A third example is the sacrificial cult of electronic medical records.  [Sadly, that phraseology is all too apt - ed.]  Except for those who work at Departments of Medical Informatics or as physician “champions” for EMR vendors or health systems that are spending billions to implement the darned things, the vast majority of doctors and nurses will tell you that EMRs are a chainsaw to clinical productivity and the amount of time that we actually spend listening to and getting to know our patients and their problems.  Non-vendor, non-government studies that show that these systems save money or actually improve clinical results are scarcer than hen’s teeth, yet not a day goes by without having shamans in the Cult of EMR claim that we will see miraculous increases in efficiency, reductions in cost, improvements in health and a blooming of preventive medicine “any day now”.  </blockquote> These claims are increasing in intensity and shamelessness.  This is at a time when it is admitted by some of the most respected scientific bodies (e.g., National Research Council, FDA, IOM, NIST) that the technology does not support clinicians' cognitive needs, is in fact disruptive and hard to use, and reports of harm are appearing.  Worse, they report - magnitudes of reported harm are unknown due to impaired information diffusion.  The impairment is both due to lack of regulation and regulatory authorities to report to (which allows opportunism), as well as due to business IT-modeled legal contracts with IP-protection and defects gag clauses. <blockquote class="tr_bq">The cult has grown so powerful that has been able to force clinics and hospitals to sacrifice themselves in the process; goaded by the awards and penalties handed out for the presence or absence of “meaningful use”.  It’s no great revelation that is a new technology is truly useful, beneficial and cost-effective, there is absolutely no reason that a government would need to mandate its use or bribe people to buy it.  Dr. Scot Silverstein at the <a href="http://hcrenewal.blogspot.com/" target="_blank">Health Care Renewa</a>l blog has devoted his career to documenting the questionable engineering and lack of clinical awareness that goes into these systems, but you will not identify single iota of doubt in the pronouncements of the <a href="http://healthit.hhs.gov/portal/server.pt/community/healthit_hhs_gov__home/1204">Office of the National Coordinator</a> or the politicians who are receiving funds and advice from the “healthcare information technology” (HIT) industry.  Their minds are made up.  Don’t confuse them with the facts.</blockquote> I wouldn't say I've "devoted my career" to documenting the problems only.  I've been spending considerable time now doing something about it.  This includes, in part, advising attorneys on both sides of the Bar on the problems they need to be aware of. This knowledge will likely benefit plaintiff's lawyers and injured patients far more than the defense.  There is no defense for cybernetically harming people with poorly designed and implemented, experimental medical devices, used without patient informed consent, or for trying to conceal the malpractice via electronic legerdemain. It is my belief that a fair share of cavalier health IT experimenters, dyscompetents and "creative medical history editors" responsible for the current shabby state (technically and ethically) of commercial HIT, a situation that could have been avoided via learning from the medical and technological past, will have a very unpleasant and costly time in the courtroom in future years.  -- SS

Perednia: "Starting Over With Healthcare Reform Is, Unfortunately, a Matter of Religion"

Over at "The Road to Hellth" blog, Douglas Perednia MD has written an excellent piece entitled " Starting Over With Healthcar...

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Forbes: Obamacare Billionaire: What One Entrepreneur's Rise Says About The Future Of Medicine

An article in Forbes appeared today (4/18/12) entitled "<a href="http://www.forbes.com/sites/matthewherper/2012/04/18/obamacare-billionaire-what-one-entrepreneurs-rise-says-about-the-future-of-medicine/5/">Obamacare Billionaire: What One Entrepreneur's Rise Says About The Future Of Medicine</a>" by Matthew Herper. The article is largely a hagiography of Cerner founder Neal Patterson: <blockquote>North Kansas City is an unlikely place to launch a revolution in American health care. Yet here, amid the dilapidated grain elevators, fast food joints and vast green plains, the dream of using computers to keep you alive at a reasonable cost is battling onward. In a bunkerlike building built to withstand a direct hit by a category five tornado, 22,000 servers handle 150 million health care transactions a day, roughly one-third of the patient data for the entire U.S. Records of your blood pressure, cholesterol, lab test results, that gallbladder surgery last year—and how much you paid for it—may sit there right now. Armed guards stand watch. This is a data center at the headquarters of Cerner, the world’s largest stand-alone maker of health IT systems—and company number 1,621 on FORBES’ Global 2000 list—where the blood-and-guts realities of medicine meet the sterile speed and exactitude of the computer revolution. </blockquote> Omitted are some pertinent negative accounts, such as Cerner's role in the failed £12.7bn ($20bn U.S.) National Programme for IT in the NHS (NPfIT), as described <a href="http://www.ischool.drexel.edu/faculty/ssilverstein/cases/?loc=cases&sloc=granger_speaks_out">here</a> and <a href="http://www.blogger.com/hcrenewal.blogspot.com/2010/08/cerners-blitzkrieg-on-london-wheres-raf.html">here</a>. Patterson is quoted with the standard industry bellicose grandiosity and hysterics about computers "revolutionizing" (as opposed to facilitating) medicine: <blockquote>... In 1999 a report from the prestigious Institute of Medicine gave Patterson hope that the rest of medicine was ready to follow in Mayo’s footsteps. Titled “To Err Is Human,” the report detailed how between 44,000 and 98,000 people die every year in hospitals from preventable mistakes, like getting the wrong medicine or the wrong dose of the right one. The report specifically prescribed better computer systems as a way to prevent these deadly mistakes. Patterson cites that study as the moment when health IT entered the mainstream. But it was still slow going, and that drove him nuts. His customers at that time were more worried about the Y2K bug than they were about revolutionizing health care.</blockquote> I first heard him and other HIT CEO's uttering the "revolution" line at a Microsoft Healthcare Users Group meeting ca. 1997 and attended largely by IT technicians. I was probably the only Medical Informatics-trained professional in attendance, and perhaps the only physician there. When I then asked those in the room how many had healthcare experience or had even read the Merck Manual, few hands went up. The CEO's could not then satisfactorily explain how medicine would be "revolutionized" by such a crowd. (One of those CEO's, of erstwhile HIT vendor HBOC, was later found to be seriously cooking the books after acquisition by McKesson. See "<a href="http://www.fbi.gov/sanfrancisco/press-releases/2009/sf111909b.htm">Former McKesson HBOC Chairman Convicted of Securities Fraud; Defrauded Investors Lost in Excess of $8 Billion</a>" at FBI.gov. Some revolution...) Unfortunately, most medical errors have little to do with documentation, either paper or electronic, as I wrote in Dec. 2010 at "<a href="http://hcrenewal.blogspot.com/2010/12/is-healthcare-it-solution-to-wrong.html">Is Healthcare IT a Solution to the Wrong Problem?</a>". The latter, however, has introduced many new <a href="http://hcrenewal.blogspot.com/2011/02/updated-reading-list-on-health-it.html">errors modes and other social-technical problems</a>, permitted <a href="http://hcrenewal.blogspot.com/2012/01/2011-closes-on-note-of-electronic.html">massive security breaches</a> (it's very hard to haul away 10,000 paper charts without being noticed) and opportunities for medical records evidence spoliation simply not possible with paper. There are a few <a href="http://hcrenewal.blogspot.com/2012/02/health-it-ddulites-and-disregard-for.html">Ddulite-ish</a> quotes from Eric Topol and David Bates in an article with a clear tone of exalting health IT. I am quoted in the Forbes article in about the only comment critical of health IT, and the only comment concerning the ethics of human subjects experimentation conducted with this technology, as it exists in 2012: <blockquote>... the Hippocratic oath says nothing about breaking eggs to make omelets. “We’re kind of headed in the wrong direction,” says Scot Silverstein, a health IT expert at Drexel University who believes that the current systems are too prone to randomly losing data [I had cited <a href="http://sydney.edu.au/engineering/it/%7Ehitru/index.php?option=com_content&task=view&id=91&Itemid=146">this study</a> - ed.] and complicating doctors’ lives.</blockquote> While the "breaking eggs to make omelets" metaphor was not mine, it reminded me that I just carried out my final earthly duty for my mother, injured in mid 2010 by a health IT-related error and deceased since June 2011. I filed her final IRS tax return yesterday, the due date. I just hope my mother is enjoying her omelet in the Pearly Gates Diner. Scrambled eggs were about all she could eat well after the health IT accident. As a result of that experience, my new business card (phone # redacted): <div style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJ816cVuHWs6a6JHRvCv3Eg5mS_dE3ys3CfjSmUwEwZhrc35wFTqN4uJFYSbhZTdfZJGuyzbuJiv_ED8e3BftgodtuvyyQ5-2Oj8vEQCiAozTfs4R0ZXziQYJTc6ITSChhkddVI1ryXP_J/s1600/business_card_nonum.jpg"><img alt="" border="0" id="BLOGGER_PHOTO_ID_5732943107289611266" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJ816cVuHWs6a6JHRvCv3Eg5mS_dE3ys3CfjSmUwEwZhrc35wFTqN4uJFYSbhZTdfZJGuyzbuJiv_ED8e3BftgodtuvyyQ5-2Oj8vEQCiAozTfs4R0ZXziQYJTc6ITSChhkddVI1ryXP_J/s320/business_card_nonum.jpg" style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 275px; height: 153px;" /></a>(Click to enlarge) </div> I no longer merely write about health IT risks. I find past involvement with attorneys early in my medical career, as Manager of Medical Programs and Medical Review Officer (drug testing officer) for one of the largest public transit authorities in the United States, quite helpful in this new role. The "eggs that get broken", as in a well known old nursery rhyme from the early 1800's, <a href="http://en.wikipedia.org/wiki/Humpty_Dumpty">cannot be reassembled</a>. Those injured or killed in the unregulated, thoughtless, cavalier journey to some mystical medical cybernetic utopia deserve justice, and the eggheads responsible for their harms have earned the privilege of explaining themselves in the courtroom and being properly penalized where appropriate. The future of medicine - if it is to not become a nightmare <a href="http://bioethics.od.nih.gov/IRB.html#policies">ignoring the lessons of history</a>, repeating the <a href="http://www.npr.org/programs/morning/features/2002/jul/tuskegee/">mistakes of the past</a> - belongs to those willing to take an ethical stand in defense of medicine's core values, and in defense of patients. -- SS

Forbes: Obamacare Billionaire: What One Entrepreneur's Rise Says About The Future Of Medicine

An article in Forbes appeared today (4/18/12) entitled " Obamacare Billionaire: What One Entrepreneur's Rise Says About The Future ...

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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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