The Long Con - "Charitable" Hospitals Make Multimillionaires out of Their CEOs

The CEOs of ostensibly charitable hospitals founded to serve the poor continue to become rich.  

The latest reminders are in two articles from Maryland, from DelMarVaNow, and from the Baltimore Sun,.and one from the Boston Globe.

All this diligent reporting showed multimillion dollar executive compensation,  as usual not justified by evidence or logic, but also how executive compensation is becoming divorced from the ostensible charitable mission of non-profit hospitals.  

Most Hospital CEOs are Paid a Lot

So jin Maryland, we found via DelMarVaNow,

Peninsula Regional Medical Center paid its top executive and her immediate predecessor a total of $2.37 million in compensation in 2011 as the nonprofit hospital gained millions of dollars in profit.

In particular,

 The analysis shows that R. Alan Newberry was the third-highest paid hospital chief in Maryland, even though he has not run PRMC since 2009. In the year after formally stepping down from the hospital’s top job, Newberry received $1.57 million, about $600,000 more than he had while still working full time.

The Baltimore Sun summarized compensation given to multiple executives,

 Eleven executives earning seven-figure compensation packages including salary, bonus, retirement and other pay saw their total pay rise from as little as 0.13 percent to as much as 308 percent in the fiscal year that ended in 2012, according to tax filings. Another executive earning more than $1 million saw a pay cut.

In particular,

 The state's highest-compensated hospital executive that fiscal year was Kenneth A. Samet, the CEO of the 10-hospital MedStar Health system, who earned $6.3 million. More than half — $3.5 million — was money earned in a supplemental retirement plan during his 23 years of service. He won't get the money until he retires. His base pay was $1.2 million, and he received $1.5 million as a bonus and incentives.

The other top five highest-paid executives in Maryland are James Xinis, CEO at Calvert Memorial Hospital in Prince Frederick; Ronald A. Peterson, CEO of the Johns Hopkins Health Center Corp.; Robert A. Chrencik, CEO of the University of Maryland Medical System; and Thomas Mullen, CEO of Mercy Medical Center.

Xinis saw his compensation package jump 307.8 percent to $3.5 million, $2.8 million of which was a required distribution of vested retirement funds from a plan he begin contributing to in 2003, the hospital said in a statement. Xinis has served as CEO for 26 years and plans to retire in the next 18 months, the hospital said. His base salary in fiscal 2012 was $309,557.

Peterson, who oversees six hospitals, earned a $3.5 million compensation package. Peterson's 86.5 percent pay increase largely reflected pension benefits he'd earned during 40 years at Hopkins. His annual base salary increased about $49,500 to $1.1 million in fiscal 2012.

Chrencik, whose system has 12 hospitals, earned about $2.3 million. Chrencik's total pay grew 23.4 percent. Mercy's Mullen saw his pay rise 24 percent to $1.6 million for the fiscal year ending in 2012.

The one CEO earning more than $1 million who saw his compensation fall was Edward D. Miller, who retired in June 2012 as CEO of Johns Hopkins Medicine and dean of the university's medical school. His reported pay dropped to just over $1 million in fiscal 2012 from nearly $2.3 million the prior year, when he took a one-time retirement payout.

Also,

According to Saint Agnes tax filings, [CEO Bonnie] Phipps received $1.9 million in the 2012 fiscal year, 4.4 percent more compensation than a year earlier.

 Per the Boston Globe, local hospital executives also did really well

Chief executives at the Boston area’s largest nonprofit teaching hospitals drew pay packages of $1 million to $2.1 million in 2011, including salaries, bonuses, and compensation such as health and life insurance and retirement benefits.

Topping the list locally was Gary L. Gottlieb, chief executive of Partners HealthCare System, the state’s largest hospital and physicians organization, who received total compensation of $2.1 million in 2011, according to federal tax documents released Thursday by the nonprofits.

And,

The presidents of Partners-owned Massachusetts General and Brigham and Women’s hospitals also drew seven-figure packages in 2011, with Peter L. Slavin at Mass. General receiving a total of $1.7 million and Elizabeth G. Nabel at Brigham and Women’s a total of $1.9 million.

Also,

Tufts Medical Center reported that Ellen M. Zane, who served as chief executive through September 2011, had total pay of $1.6 million that year.

Eric J. Beyer, who took over from Zane in October, had total compensation of $744,722 that included pay for work as chief executive and at his previous job as president of the Tufts Medical Center Physicians Organization.

James Mandell, chief executive at Boston Children’s Hospital, was paid a total of $1.5 million in 2011. That was down from the $2 million he earned the prior year when he received two separate incentive awards, according to a hospital spokeswoman. Mandell plans to retire next month and will be succeeded by Sandra Fenwick, the hospital’s president and chief operating officer.

Total compensation for Boston Medical Center chief executive Kate Walsh was listed at nearly $1.4 million in 2011, an increase from $1.3 million in 2010.

At Dana-Farber Cancer Institute, chief executive Edward J. Benz Jr. received total compensation of nearly $1.3 million in 2011, up from $1.1 million in 2010.

Beth Israel Deaconess Medical Center paid three different top executives in 2011.

Eric Buehrens, who served as interim chief executive from February to October, drew total compensation of just over $1 million for that role and other executive jobs.

The Justification for this Pay is Stereotyped (and not Supported by Logic or Evidence)

The Usual Talking Points

The articles in combination provided the usual talking points as justification.  It seems nearly every attempt made to defend the outsize compensation given hospital and health system executives involves the same arguments, thus suggesting they are talking points, possibly crafted as a public relations ploy.   We first listed the talking points here, and then provided additional examples of their use here, here here, here, here, and here..   

They are:
- We have to pay competitive rates
- We have to pay enough to retain at least competent executives, given how hard it is to be an executive
- Our executives are not merely competitive, but brilliant.

As we have noted before, there is little evidence in support of these talking points.  What evidence there is on the topic suggests there is no real free market in interchangeable CEOs, and that CEOs are not very mobile, especially not across different kinds of organizations (look here).  There is little evidence that hospital (or other health care) executives are particularly brilliant, or any more brilliant than multitudes of physicians, nurses, and other health care professionals who work hard to make their institutions run.

True to form, the reporting from Maryland and Boston found that defenders of executive pay cited the talking points, but without any further logic or evidence. 

Competition

Re PRMC (from DelMarVaNow),

 'We’ve looked at about 17 like institutions. Eight are smaller than we are; eight are larger. Every hospital is different, so you have to always take into account there’s some variation, but we’ve always stayed in the middle. Our goal has been to stay in that 60 percent level as far as compensation goes,' said Martin Neat, chairman of PRMC’s board of directors, which oversees executives’ salaries.­

Note that in this case, no justification was provided for constantly setting the CEOs pay above the median.


Re Maryland, via the Baltimore Sun

 Hospitals argue that they have to offer competitive compensation to attract talent to run a complicated business.

Re Maryland and particularly UMMS, via the Sun,

 The medical institutions say they hire independent consultants and look at the pay of executives at comparable health systems when making their decisions.

Also,

UMMS hospital executives are compensated in line with national benchmarks,' [UMMS spokeswoman Mary Lynn] Carver said.

Note that there was no justification for the comparability of these institutions, or why a national versus regional comparison was made.

Retention

Re PRMC

 Above all, PRMC’s board of directors seeks to ensure that the hospital attracts and retains the best leaders.

Note that there was no evidence given that current leaders might leave were their compensation reduced.

 Brilliance

Re PRMC,

[Board Chairman Neat]  added: 'These are high-paid positions, but these are very capable people who could go elsewhere.'

Re Maryland, from the Baltimore Sun

 Executives need to understand everything from the latest health technologies to regulatory changes, including health reform.

So do doctors and nurses, so why do they not not get similar pay?

Also,

 [Carmela Coyle, CEO of the Maryland Hospital Association, said,] 'Hospital executives are in charge of incredibly complex organizations,' she said. 'They are organizations that are open 24 hours a day and are highly regulated. These are really difficult, difficult jobs'.

Note again the lack of comparison with the doctors and nurses who must staff the hospitals 24 hours a day, and make difficult decisions while caring for patients with sometimes life-threatening conditions.  How often does a hospital CEO get a call in the middle of the night, and how often does it require a decision in a life-and-death situation?

Re Mercy Medical Center,

 'As a result of Mr. Mullen's leadership, vision and skillful stewardship, Mercy has been an economic engine for the city, infusing additional jobs into the local economy,' the hospital said in a statement.

When in doubt, use the v (for visionary) word.  Note that this begs the questions of how many other people were responsible for the economic benefits, and whether such benefits, rather than, say ability to provide good care to patients, should be the main consideration.

Should Brilliance be Measured by Revenue?

At best, some defenders of high CEO pay seem to argue that the main measure of CEO brilliance ought to be their hospitals' financial performance. For example, the DelMarvaNow article included,

Fiscal health is one of the most important considerations in determining [new CEO Peggy] Naleppa's pay, [board chairman] Neat said. 

Also, he was quoted,

'There's no question that the financial performance of the institution is going to affect what you're going to pay', Neat said.

While,

Nationwide, hospital boards subscribe to a similar philosophy.  Financial health was cited by 100 percent of multi-hospital organizations in a 2006 survey as a factor in determining bosses' incentive plans.

Similarly, the Baltimore Sun quoted Dr Stephen F Jencks, "who serves on the board of the cost review commission,"

executives should be judged by whether they are running cost-efficient organizations

However, CEO pay seems to increase even at financially challenged institutions,  as the Baltimore Sun noted,

The CEO pay question — always a hot-button issue — is generating debate again this year after a state panel spurned a push by hospitals for higher rates, instead approving smaller increases and calling on them to do more to curb expenses. Hospitals have sought rate increases in each of the past three years, and this year at least one Baltimore-area hospital responded with layoffs in an effort to trim labor costs.

So,

'If they are laying off staff and decreasing what they invest in the community and executive compensation is increasing, that is a real question,' said Jessica Curtis, project director of the hospital accountability project at Community Catalyst, a national advocacy group that promotes wider access to affordable health care.

Even if one accepts that the compensation of leaders of organizations that take care of sick and injured patients ought to mainly depend on the brilliance of their leadership as measured by how much money the organizations make, rather than the quality of that care, it is not clear that all these leaders are brilliant in that sense.

The Charitable Mission and CEO Compensation

Essentially all US non-profit hospitals and hospital systems have a history of a charitable mission to improve the health of their patients and communities, even if that means taking care of poor people who cannot pay for these services.  Nearly all justify their legal status as non-profit corporations by stating this mission. 

For example, Peninsula Regional Medical Center, the main subject of the DelMarVaNow article, describes its mission thus in its US tax filing,

Peninsula Regional Medical Center is a not-for-profit 501 (c) 3 non-stock corporation founded in 1897 to serve the health care needs of the community.  The Hospital's primary purpose is to provide the highest [sic] primary, secondary, and selected tertiary health care services to residents of and visitors to the Mid-Delmarva Peninsula in a competent, compassionate, and cost effective manner designed to elicit a high degree of consumer satisfaction.  The Hospital's mission is to improve the health of the communities we serve....

Yet it appears that this mission is honored mainly in the breach, at least when it comes to CEO compensation. 

The DelMarVaNow article emphasized that hospitals' charitable functions are not seen as relevant by hospital boards when setting CEO compensation,

Despite the nonprofit status of the organizations they oversee, hospital boards don't appear to put weight toward the amount of free medical services and community outreach activities, good deeds collectively known as charity care, [executive vice president of Integrated Healthcare Strategies Kevin] Talbot

Also,

The head of the consulting firm that helps PRMC's board establish [current CEO] Naleppa's pay said community benefit shouldn't be part of the equation.

'In my over 25 years of consulting on hospital compensation, I have never seen community benefit used as a factor in determining executive pay,' Rian Yaffe said.  'Community benefit has nothing to do with how difficult a hospital is to manage and lead.'

However, community benefit is the mission of the hospital, and is justification for most US hospitals' non-profit status, which allows them to escape certain kinds of taxation, and for donors to make charitable, tax-advantaged contributions to the hospitals.  

The Baltimore Sun listed financial but not charitable performance as a justification for the compensation of a particular executive, the CEO of Johns Hopkins Medical Center, who is

'held responsible for stringent qualitative measures,'  in such areas as financial performance, patient safety and service excellence, [Johns Hopkins] spokeswoman Kim Hoppe said in a statement.

When asked by the Sun to comment, the advocacy group Community Catalyst stated

One of the factors that should be considered, it says, is the role of non-profit hospitals in the community and in providing charity care. 

Meanwhile, while the hospitals gain advantages from ostensibly focused on the mission of providing community care and benefit, not only are there leaders not given incentives to uphold this mission, they are explicitly compared to leaders of for-profit organizations who have no such missions, and who are primarily tasked with increasing short term revenue in this era of "financialization." 

In the Baltimore Sun,

Hospitals note that they compete with private sector businesses where their executives could choose to work instead.

Again, as noted above, there is little evidence that top hired managers are really that mobile, and less that a manager from one sector, e.g., non-profit hospitals, would be in great demand in another, e.g., a for-profit corporation.

The Boston Globe noted an argument made that implied no one should complain about how much non-profit hospital executives make, since executives of for-profit corporations make even more.

 'In a big successful teaching hospital, it’s very rare to see anything less than $1 million in total compensation for the chief executive, and $1.5 million to $2 million is the norm,' [managing director of consulting firm Compensation Resources Paul R] Dorf said. 'Executives at publicly traded pharma or medical device companies can make 10 times as much.'

So if there is little evidence for the mobility of top hired managers, there is less for the desirability of managers of non-profit hospitals as heads of large pharmaceutical or medical device companies.  But furthermore, in trying to justify, albeit illogically, outsize CEO compensation, the defenders of this compensation have provided evidence that the leaders and stewards of non-profit hospitals may no longer care about the hospitals' fundamental mission.  This suggests that hospitals' overt declarations of their mission, especially when used to obtain more donations and tax benefits, may amount to the ethical equivalent of a "long con," that is, a long-term confidence scheme.


Summary

While F Scott Fitzgerald noted that the very rich are different from you and me, it may now be more appropriate to say that top hired managers are very different from you and me.  Again and again we see that they play by very different sets of rules than do other people who work in health care.  Notably, while they often emphasize cost cutting, and may be quick to lay off or outsource other employees, their compensation increases year by year no matter how well their organizations are doing.  While other employees, increasingly now including doctors as well as other health care professionals, have to answer to the hired managers, the hired managers only answer to boards of directors or trustees who often act like their cronies, perhaps because they are often also current or retired hired managers.

Hired managers are subject to incentives that seem designed not to improve patients' and the public's health, but at best to improve the short-term revenue of health care organizations, and at worst to increase the wealth of hired managers.  Such perverse incentives risk promoting ill-considered, mission-hostile, or even corrupt management.  The sorts of people who aspire to be hired managers in such conditions are likely not the sort of people one would expect to really advance the health of patients or of the population.

As a first step to restoring health care leadership to some state of reasonable accountability and responsibility, we need to challenge the rules that only hired managers play by.  It would be nice to see articles in the media about health care CEO compensation that at least attempt to question the usual talking points.  All of us could think about how we could challenge our local million dollar plus hospital CEOs to justify why they should be treated so differently from all other hospital employees.

Since it seems that many hospitals no longer fit at least the spirit of the definition of not-for-profit organizations, even though they use this designation for financial advantage, we need policies to encourage them to uphold their mission, and that provide negative consequences if they do not. 

Should We Cry for Non-Profit Hospital System CEOs Paid Less than For-Profit CEOs?

Two recent articles (here and here) in Modern Healthcare providing an update on the compensation of CEOs of non-profit hospital systems raised new questions.

The CEOs' Compensation

The first article documented the rich compensation of the top paid CEOs of non-profit US hospital systems.  A summary of their total compensation:

-  Donald Faulk (now retired), Central Georgia Health System - $8 million
-  George Halvorson, Kaiser Permanente - $7.9 million
-  Jeffrey Romoff, UPMC - $6.1 million
 -  Pat Fry, Sutter Health - $5.2 million
-  Gregory Beier (retired), Novant Health  - $5.1 million
-  Dr Steve Safyer, Montefiore Medical Center - $5 million
-  David Bernd, Sentara - $4.6 million

The Usual Talking Points

The articles in combination provided the usual talking points as justification for this compensation.   We have noted that nearly every attempt made to defend the outsize compensation given hospital and health system executives involves the same talking points.   We first listed the talking points here, and then provided additional examples of their use here, here here, here and here.   They are:
- We have to pay competitive rates
- We have to pay enough to retain at least competent executives, given how hard it is to be an executive
- Our executives are not merely competitive, but brilliant.

So true to form, we found in the Modern Healthcare articles these justifications of the executives multimillion dollar pay.

Competition

In general,

In interviews, health system directors and executives at the systems where these top-paid executives work defended the compensation packages as necessary to remain competitive....

Re UPMC

UPMC spokeswoman Susan Manko described his [that is, Romoff's] pay as competitive for an institution of UPMC's size and complexity. 

Re Novant

Novant spokeswoman Kati Everett said Novant follows IRS rules that call for pay to be compared against the market....

Re Sutter

[Sutter Health board of trustees member and chair of the compensation committee Andy] Pansini said the Sutter board set the CEO's salary halfway between the lowest and the highest amount he could earn elsewhere.

Also,

He said Sutter's board relies heavily on consultants to compare Fry's compensation against the market.

Retention

 Re Sentara

'Mr Bernd's compensation takes into account his 40-year tenure of leadership at Sentara, with nearly 20 serving as the organization's top executives.

Brilliance

Re Novant

[Novant spokeswoman Kati Everett said] 'At Novant Health, we recognize (that) our responsibility to serve our community depends on the caliber of talent in our workforce, our leadership group....'

Re Sentara

[CEO Bernd's] 'pay reflects his experience, expertise....'

Re Sutter

[Pansini] defended [CEO] Fry's compensation as reasonable and necessary to meet Sutter's strategic goals by hiring a skilled executive team. 

Explicit Comparison to For-Profit Corporations

The articles also introduced one new element.  Some defenders of non-profit hospital CEO compensation explicitly argued that should take into account compensation of for-profit CEOs.

This argument was made by "Jill Horwitz, a law professor at the University of California at Los Angeles,' who had "defended paying not-for-profit healthcare executives market rates."

She also noted that not-for-profit systems have to compete with the for-profit sector for top talent. 'This idea that people should be donating their labor is a misunderstanding of charity.'

Defenders of CEO compensation at specific health systems also made similar points.  For example, a Kaiser Permanente spokesman explicitly compared his CEO's pay to that given to CEOs of for-profit health plans,

Kaiser spokesman Won Ha, in a written statement, said Halvorson's pay falls short of the average compensation of $14 million, not including option exercises, earned by CEOs of the 12 largest for-profit healthcare systems, which had average 2011 revenue of $37 billion.

'Compensation paid to senior management is substantially less than that of many for-profit health (plans),...'

Also, re Sutter,

[board committee chair Pansini noted that when comparing his CEO's pay against the market] That comparison includes other executives of similar not-for-profit health systems, and to a lesser degree, of for-profit systems.

 Summary: An Extension, but Still no Clear Justification for the Talking Points


The talking points to explain executive compensation in health care are used again and again.  They never seem to be publicly challenged.  However, they should raise some obvious questions.

The argument about competition raises several obvious questions.  Why should the top hired managers' pay be only compared to other top managers, and not explicitly to other employees?  Even if the comparison is restricted to other top managers, how can they be used for those at the top of the pay scale for non-profit hospital system CEOs?  How these CEOs' compensation could be dubbed merely competitive, much less "halfway between the lowest and highest amount he could earn elsewhere," is not clear.

The retention argument begs the questions of whether any of these managers is really likely to leave, whether they really would be attractive to other organizations at the same or even higher pay, and whether it would really be difficult to find replacements.

The brilliance argument raises the question of how brilliance is defined.  Given that it is almost unheard of for a fan of current compensation practices to dub any top manager anything less than brilliant, the obvious question is how can CEOs, like the children of Lake Woebegone, all be above average? 

 Furthermore, the talking points seem to be in the process of extension, which should raise even more questions.

Defenders of CEO pay, usually "spokespeople" or members of boards of trustees, often cite the need for "competitive" pay.  They usually are not clear about with whom they are competing.  Now it seems to be more popular to say that non-profit health care organizations are competing with for-profit corporations, despite the ostensible difference in their natures.  Non-profits are supposed to have a charitable nature and function, to have some sort of mission that serves the greater good.  To support that apparently benevolent purpose, in the US they are exempt from certain taxes, are are able to receive charitable contributions which in turn earn deductions for their givers.  For-profit corporations are in business ostensibly for their owners. 


In addition, by now asserting that the non-profit CEOs should be likened to the CEOs of for-profit corporations, the expanded talking points highlight questions that have been raised about how these hired managers are paid. We have previously discussed some pithy critiques of American practices of executive compensation (look here and here.)

CEO compensation as a multiple of the pay of the average worker has risen 10-fold since the 1960s (see this chart). As a consequence, the top 1% and 0.1% of the US income distribution is increasingly and disproportionately made up of executives, that is hired managers, (see the recent article by Bivens and Mishel[1] for a summary).  Per the article, the income of top corporate executives has grown even faster than that of other members of the top 0.1%.  It seems evident that these rates of growth cannot be explained by increases in the financial performance of their companies.  Furthermore, while it appears that compensation of US health care corporate executives has grown as fast as their brethren, there is no data that US health care has improved at anything like a similar rate.  It may have hardly improved at all.  A recent JAMA article is just the latest example of studies showing that US health is lagging that of other developed countries, although the US spends far more per capita on health care.(2)     

Furthermore, there is more and more criticism about how the compensation of top hired managers is set.  Steve Denning's blog  post in Forbes summarized a 2012 Harvard Business Review article(3) suggesting that "market-based" compensation schemes mistake top managers for innovative entrepreneurs, when they are mainly simply "bureaucrats"; reward managers for luck rather than skill; and is "inversely related to shareholder returns."

Finally, Elson and Ferrere critiqued the mechanics of how compensation is set.  In particular, while boards of directors may attend to data on compensation of CEOs at other, supposedly comparable corporations, they almost always "choose a package that is in the 50th, 75th, or 90th percentile of their target peer group.  Targeting levels below the 50th percentile is rarely, if ever done."  Thus, boards nearly always act as if their CEO is above average, while by definition, most CEOs cannot be above average.  Why do boards commit this folly?  The authors postulated that suggesting the CEO is less than average "may raise concerns over the executive's position within the company...."  Perhaps boards also fear that labeling the CEO below average may be an admission of below average governance. 

Desai suggested that the perverse incentives created by current schemes to compensate managers were a major cause of the 2008 financial meltdown.  As Dennings wrote,

despite the constraints to change, the overcompensation of the C-suite and the financial sector is not sustainable. It causes serious misallocation of capital and talent, repeated governance crises, rising income inequality and an overall decline of the US economy. It obviously cannot continue, if only because, as Margaret Thatcher used to say in a different context, 'Sooner or later you run out of other people’s money'

Clearly, in the health care context, the results could be even worse.  Perverse executive compensation could not only lead to misallocation of capital and talent in health care, it could lead to bad health care decisions that could harm patients' and the public's health.  However, there seems to be almost no discussion of, much less research about, much less policy changes addressing perverse incentives for health care managers and their likely ruinously bad effects on people and patients.

Such discussion and research is a prerequisite to true health care reform, which would require such policy changes.

Meanwhile, I hope at least the next time huge compensation of some health care managers is announced, someone asks the next set of questions after the usual talking points are made.  

Roy M. Poses MD in Health Care Renewal

References
1.  Bivens J, Mishel L. The pay of corporate executives and financial professionals as evidence of rents in top 1 percent incomes.  J Econ Perspect 2013; 27: 57-78.
2. US Burden of Disease Collaborative.  The state of US health, 1990-2010 burden of diseases, injuries, and risk factors.  JAMA 2013; 310: 591-608.  Link here.
3. Desai M. The incentive bubble.  Harvard Business Review, March 2012. 

Another Attempt to Show the RUC Behind the Curtain

In 2007, readers of the Annals of Internal Medicine could read part of the solution to a great medical mystery.(1)  For years, health care costs in the US had been levitating faster than inflation, without producing any noticeable positive effect on patients.  Many possible reasons were proposed, but as the problem continued to worsen, none were proven.

Prices are High Because They are Fixed That Way

The article in the Annals, however, proposed one conceptually simple answer.

The prices of most physicians' services, at least most of those that involved procedures or operations for Medicare patients, were high because the US government set them that way. Although the notion that prices were high because they were fixed to be so high was simple, how the fixing was done, and how the fixing affected the rest of the health system was complex, mind numbingly complex.

Perhaps because of the complexity of its implementation, the simplicity of the concept has not seemingly reached the consciousness of most American health care professionals or policy makers, despite the publication of several scholarly articles on the subject,.efforts by humble bloggers such as yours truly, a major journalistic expose, and recent congressional hearings.  The lack of discussion of this issue seemed to be a prime example of what we have called the anechoic effect, that important causes of health care dysfunction whose discussion would discomfit those who are currently personally profiting from the current system rarely produce many public echoes.  (For a review of what is known to date about how the offputtingly named Resource Based Relative Value Scale Update Committee (RUC) works, and previous attempts to makes it central role in fixing what US physicians are paid public, see the Appendix.)

The Washington Monthly Pulls Back the Curtain

Now another attempt to pull back the curtain that hides the RUC was just made by the Washington Monthly.  A long, detailed, well-written article by Haley Sweetland Edwards went through the major points, and included some new discoveries.  She asserted:

The RUC is Well Hidden

[The RUC is] probably one of the most powerful committees in America that you’ve never heard of.

The RUC Fixes Prices

when a roomful of professionals from the same trade meet behind closed doors to agree on how much their services should be worth. It’s called price-fixing. 

The Government Enables the RUC to Fix Prices

 this kind of 'price-fixing' is not only perfectly legal, it’s sanctioned by the U.S. government. At the end of each of these meetings, RUC members vote anonymously on a list of 'recommended values,' which are then sent to the Centers for Medicare and Medicaid Services (CMS), the federal agency that runs those programs. For the last twenty-two years, the CMS has accepted about 90 percent of the RUC’s recommended values—essentially transferring the committee’s decisions directly into law.

The Government Fixed Prices are Endorsed by the Private Sector

 private insurance companies also use Medicare’s fee schedule as a baseline for negotiating prices with hospitals and other providers. 

The Price Fixing Drives Up Costs and the Use of Services

 So if the RUC inflates the base price Medicare pays for a specific procedure, that inflationary effect ripples up through the health care industry as a whole.

These Incentives Cripple Primary Care

 These manipulated prices are also a major reason why specialists are in oversupply in many parts of the country, while a worsening shortage of primary care providers threatens the whole health care delivery system. 

These Incentives Benefit Big Corporations, not just Medical Specialists

 the incentives are perfectly aligned: ordering that extra test means more money for a doctor’s practice or hospital, more money for the labs, and often more money for the device makers and drug companies, too. (Oh, and, by the way, the device makers and drug companies are, not incidentally, major funders of the medical specialty societies whose members vote on the RUC.)

[Art by Monte Wolverton for the Washington Monthly article]

What to Do and What Will Happen?

We previously wrote,

 Economists have beaten us over the head with idea that incentives matter.  The RUC seems to embody a corporatist approach to fixing prices for medical services to create perverse incentives for physicians to do more procedures, and do less conversing with and examining patients, examining the best clinical research evidence about their problems, and rigorously thinking about how best to help them.  More procedures at higher prices helps physicians who do procedures.  It may help even more the corporations that provide the devices and drugs whose use is necessitated by such procedures, and the hospitals who can charge a lot of money as sites for performance of procedures.  It may even help insurance companies by driving ever more money through the health care system, and thus allow rationalization for higher administrative expenses as a function of overall money flow.

Yet incentives favoring procedures over all else may lead to worse outcomes for patients, and more costs to patients and society.  If we do not figure out how to make incentives given to physicians more rational and fair, expect health care costs to continue to rise, while access and quality continue to suffer.

Ms Edwards ended her article with two specific suggestions:

take the process away from the control of the AMA and put it in the hands of a well-resourced group of experts under the auspices of the federal government. This might take the form of a panel of doctors employed by the government, or of an advisory committee of representatives of different medical societies but with greater representation of primary care doctors.

Or

 get Medicare out of the business of funding fee-for-service medicine. 

I can only hope that the latest Washington Monthly article, which was accompanied by an editorial and a short first-hand account of how difficult is the lot of the modern primary care physician, will succeed in increasing awareness of the RUC and its essential role in making the US health care system increasingly unworkable.  Of course, such awareness may disturb the many people who are making so much money within the current system.  But if we do nothing about the RUC, and about the ever expanding bubble of health care costs, that bubble will surely burst, and the results for patients' and the public's health will be devastating.

APPENDIX - Background on the RUC

 We have frequently posted, first here in 2007, and more recently here,  here, here, and here, about the little-known group that controls how the US Medicare system pays physicians, the RBRVS Update Committee, or RUC.

Since 1991, Medicare has set physicians' payments using the Resource Based Relative Value System (RBRVS), ostensibly based on a rational formula to tie physicians' pay to the time and effort they expend, and the resources they consume on particular patient care activities. Although the RBRVS was meant to level the payment playing field for cognitive services, including primary care vs procedures, over time it has had the opposite effect, as explained by Bodenheimer et al in a 1997 article in the Annals of Internal Medicine.(1) A system that pays a lot for procedures, but much less for diagnosing illnesses, forecasting prognoses, deciding on treatment, and understanding patients' values and preferences when procedures and devices are not involved, is likely to be very expensive, but not necessarily very good for patients.
 
As we wrote before, to update the system, the Center for Medicare and Medicaid Services (CMS) relies almost exclusively on the advice of the RBRVS Update Committee. The RUC is a private committee of the AMA, touted as an "expert panel" that takes advantage of the organization's First Amendment rights to petition the government. Membership on the RUC is allotted to represent specialty societies, so that the vast majority of the members represent specialties that do procedures and focus on expensive, high-technology tests and treatments.
 
However, the identities of RUC members were opaque for a long time, and the proceedings of the group are secret.  As Goodson(2) noted, RUC "meetings are closed to outside observers except by invitation of the chair." Furthermore, he stated, "proceedings are proprietary and therefore not publicly available for review."
 
In fact, the fog surrounding the operations of the RUC seems to have affected many who write about it. We have posted (here, here, here, and here) about how previous publications about problems with incentives provided to physicians seemed to have avoided even mentioning the RUC. Up until 2010, after the US recent attempt at health care reform, the RUC seemed to remain the great unmentionable. Even the leading US medical journal seemed reluctant to even print its name.
 
That changed in October, 2010.  A combined effort by the Wall Street Journal, the Center for Public Integrity, and Kaiser Health News yielded two major articles about the RUC, here in the WSJ (also with two more spin-off articles), and here from the Center for Public Integrity (also reprinted by Kaiser Health News.) The articles covered the main points about the RUC: its de facto control over how physicians are paid, its "secretive" nature (quoting the WSJ article), how it appears to favor procedures over cognitive physician services, etc.
 
In 2011, after the "Replace the RUC" movement generated some more interest about this secretive group, and its complicated but obscure role in the health care system, the current RUC membership was finally revealed.  It was relatively easy for me to determine that many of the members had conflicts of interest (beyond their specialty or sub-specialty identity and their role in medical societies that might have institutional conflicts of interest, and leaders with conflicts of interest).  
 
Then that year a lawsuit was filed by a number of primary care physicians that contended that the RUC was functioning illegally as a de facto US government advisory panel.  It appeared that things might change.  However, it was not to be.  A judge dismissed the lawsuit in 2012, based on his contention that the law that set up the RBRVS system prevented any challenges through the legal system to the mechanism used to set payment rates.  The ruling did not address the legality of the relationship between the RUC and the federal government.  The eery quiet then resumed, only punctuated briefly in early 2013, when a Senate committee held hearings with no obvious effect.      

ADDENDUM (15 July, 2013) - see also comments by Dr Howard Brody on the Hooked: Ethics, Medicine and Pharma blog.  

ADDENDUM (18 July, 2013) - see also comments by Yves Smith on the Naked Capitalism blog.

References
1. Bodenheimer T, Berenson RA, Rudolf P. The primary care-specialty income gap: why it matters. Ann Intern Med 2007; 146: 301-306. (Link here.)
2. Goodson JD. Unintended consequences of Resource-Based Relative Value Scale reimbursement. JAMA 2007; 298(19):2308-2310. (Link here.)

Executive Compensation as "Legal Corruption" - and the Continuing Example of the Troubles of Wake Forest Baptist

"Legal corruption" was the description of current executive compensation practices appearing, of all places, in the Wall Street Journal.  The arguments, by Henry Mintzer of the Desautels Faculty of Management at McGill University, apply to health care, and provide a counterpoint to the usual talking points that are trotted out whenever a top health care manager, or his cronies, feels the need to justify his or her compensation. 

A Rigged Game with Other Peoples' Money

Prof Mintzer's arguments start with the assertion that executive bonuses are hopelessly rigged in favor of the managers who receive them.  In particular:

•  They represent gambling with "other people's money," in this case, "the stockholders [of large public corporations] not to mention the livelihoods of their employees and the sustainability of their institutions"

• Bonuses are given just based on the appearance of winning, for example, when a company's stock goes up short term, regardless of long-term results.

• Bonuses are given even when the company may lose, for example, the "golden parachute," or severance package that even executives forced to resign or retire may receive.

• Bonuses are given for actions that at best only provide potential gains for the company, for example prior to a merger, but before it is known that the merger will be successful

• Bonuses are given just for showing up, that is, "retention bonuses."

Thus he contended that bonuses inspire executives to be gamblers in a game rigged in their favor.

Based on False Assumptions

Furthermore, he argued that the current system of executive compensation is based on false assumptions.  These include:

"A company's health is represented by its financial measures alone - even better, the price of its stock." 

However, as Prof Mintzer noted:

Companies are a lot more complicated than that. Their health is significantly represented by what accountants call goodwill, which in its basic sense means a company's intrinsic value beyond its tangible assets: the quality of its brands, its overall reputation in the marketplace, the depth of its culture, the commitment of its people, and so on.  

I would note that this applies especially in health care, and more especially to organizations that provide direct patient care.  No hospital system, for example, could function at all without a corps of dedicated health professionals, physicians, nurses, therapists, etc. 

Furthermore, Prof Mintzer wrote,

All too often, financial measures are a convenient substitute used by disconnected executives who don't know what else to do—including how to manage more deeply.  Or worse, such measures encourage abuse from impatient CEOs, who can have a field day cashing in that goodwill by cutting back on maintenance and customer service, 'downsizing' experienced employees while others are left to 'burn out,' trashing valued brands, and so on. Quickly the measured costs are reduced while slowly the institution deteriorates 

This is obviously particularly pernicious in health care, a field in which institutions are complicated, and dependent on the efforts of some very highly trained and specialized people well beyond the management suite. 

"Performance measures, whether short or long term, represent the true strength of the company." 

Prof Mintzer pointed out the lack of accurate measures of the overall performance of a company or organization. 


"The CEO, with a few other senior executives, is primarily responsible for the company's performance."  

Prof Mintzer asked,

In something as complex as the contemporary large corporation, how can success over three or even 10 years possibly be attributed to a single individual? Where is teamwork and all that talk about people being 'our most important asset?'

More important, should any company even try to attribute success to one person? A robust enterprise is not a collection of 'human resources'; it's a community of human beings. All kinds of people are responsible for its performance. Focusing on a few—indeed, only one, who may have parachuted into the most senior post from the outside—just discourages everyone else in the company.

Again, this is obviously particularly the case in health care organizations, especially those that provide direct patient care.

Leading to the Worst Possible Leaders and Leadership

Finally, Prof Mintzer argued that the current system is designed to promote the worst possible leadership, leading likely to the worst possible outcomes.  He opened with

 Executive bonuses—especially in the form of stock and option grants—represent the most prominent form of legal corruption that has been undermining our large corporations and bringing down the global economy. 

Our argument has been that the current leadership of health care is similarly bringing down our health care system.

He later noted that current compensation practices mainly function to select out the worst possible leaders:

 executive compensation these days reinforces a class structure within the enterprise that is antithetical to its effective functioning. Because of its symbolic nature, executive compensation as currently practiced sends out the worst possible signal to everyone in the enterprise.

Furthermore,

bonuses can serve one purpose. It has been claimed that if you don't pay them, you don't get the right person in the CEO chair. I believe that if you do pay bonuses, you get the wrong person in that chair. At the worst, you get a self-centered narcissist. [Or even a full-fledged, if non-violent, psychopath, as noted here - Ed] At the best, you get someone who is willing to be singled out from everyone else by virtue of the compensation plan. Is this any way to build community within an enterprise, even to foster the very sense of enterprise that is so fundamental to economic strength?

Accordingly, executive bonuses provide the perfect tool to screen candidates for the CEO job. Anyone who insists on them should be dismissed out of hand, because he or she has demonstrated an absence of the leadership attitude required for a sustainable enterprise.

Of course, this might thin the roster of candidates. Good. Most need to be thinned, in order to be refilled with people who don't allow their own needs to take precedence over those of the community they wish to lead.

It will be interesting to see if anyone attempts a logical refutation of Prof Mintzer's arguments.  My guess is that we will see little response, based on the usual public relations dictum that it is best not to acknowledge one's detractors, even if they are right.  Furthermore, I predict that what responses there are will partake heavily of logical fallacies.

Finally, it is worthwhile to think about Prof Mintzer's points when assessing the arguments made in favor of particular executives' outsized remuneration. 

An Example - Continued Riches for Wake Forest Baptist Executives

Outsize Executive Compensation Continues

A few weeks ago, we noted that the leaders of this large medical center, while previously proclaimed as visionaries, and enjoying enlarging compensation, seemed to have lead the institution to a financial crisis due to difficulties with a poorly chosen or implemented electronic health record system. 

One follow up story updated compensation information and provided the official management rationale for the ongoing largess.  The redoubtable Richard Craver wrote in the Winston-Salem Journal,

Wake Forest Baptist Medical Center provided its top executive, Dr. John McConnell, an 11.9 percent raise in salary during 2011 to $983,777, although his total compensation dropped 18 percent, the center reported Wednesday as part of an annual regulatory filing.

McConnell was paid $2.04 million in total compensation, compared with almost $2.5 million for 2010. Although Wake Forest Baptist operates on fiscal years that end on June 30, the pay for its top executives is required to be listed on a calendar-year basis.

The main difference between the 2010 and 2011 compensation totals for McConnell was $461,575 he received as a one-time payment that replaced the retirement benefits he forfeited upon leaving the University of Texas Southwestern Medical Center in Dallas. McConnell was required to work at Wake Forest Baptist for two years to receive the one-time payment.

Keep in mind that in 2008-9x, Dr McConnell made a total of just over $700,000, so his compensation in 2011 was about three times that.

The benevolent board of the medical center saw to it that Dr McConnell got money for all sorts of reasons:

McConnell received $384,203 in bonus and incentives in fiscal 2010-11. The center said the amount reflects the achievement of clinical quality, academic and financial goals set by the board of directors. The bonus was down $115,797 from fiscal 2009-10 primarily because the center reduced the potential percentage of the incentive compensation from 75 percent of his base salary to 53 percent.

McConnell received $38,511 in other reportable compensation, which the center listed: as $8,797 in annual dues for Forsyth Country Club and Rotary Club membership, defined as for business purposes; $16,500 qualified deferred compensation; $3,612 in after-tax life-insurance deduction; and $9,602 in an automobile allowance.

 He also received $619,002 in contributions to retirement plans, including a supplemental executive retirement plan solely for McConnell’s benefit.

One wonders why, given his salary and bonus, Dr McConnell could not afford to pay dues to the country club and rotary on his own, or for his own car expenses, or to provide for his own retirement, for that matter?

Other executives also continued to do very well:

Donny Lambeth, former president of N.C. Baptist Hospital, received $2.47 million in total compensation. Lambeth served as president of Davie County Hospital and Lexington Medical Center before retiring last year. He is now serving as an N.C. House representative.

Lambeth’s $495,595 in base salary represented an 8 percent decrease related to his reduced job responsibilities. His bonus and incentive compensation was down 2 percent to $181,988. The bulk of Lambeth’s compensation was $1.62 million related to a fully vested deferred compensation upon his retirement.

Dr. Thomas Sibert, president of Wake Forest Baptist Health and chief operating officer, received a 14 percent increase in total compensation to $1.13 million, including $631,297 in salary (up 15.7 percent) and $234,540 in bonus and incentive compensation (up 41.3 percent). Sibert took over his role in September 2010.

Edward Chadwick, chief financial officer, received a less than 1 percent increase in total compensation to $979,420. His salary rose 4.6 percent to $527,216, while his bonus and incentive compensation fell 5 percent to $189,929.

Russell Howerton, chief medical officer, was paid $295,714 in salary, $300,786 in bonus and incentive compensation and $657,025 in total compensation. Doug Edgeton, former president of Piedmont Triad Research Park (recently renamed as Wake Forest Innovation Quarter), received $490,485 in salary, $162,367 in bonus and incentive compensation and $710,729 in total compensation.

The Chief Information Quietly Departs, with Some More Money

Meanwhile, Mr Craver also reported the quiet departure of the executive who presided over the troubled implementation of the EHR,

The chief information officer for Wake Forest Baptist Medical Center is stepping down, effective May 31, the center confirmed Friday.

Sheila Sanders has served in that role, as well as vice president of information technology, since being hired in 2009 to direct the center’s overhaul of its IT system.

She is leaving at a time when the center is struggling financially and operationally with implementing the Epic electronic health records system — one of the largest overall projects Wake Forest Baptist and most health care systems have undertaken in recent years.

Note that Ms Sanders was well rewarded for her questionable efforts,

Sanders was paid $333,961 in salary, $89,145 in bonus and incentive compensation and $464,543 in total compensation in 2011, according to a regulatory filing that Wake Forest Baptist made public Wednesday. The center’s executive-compensation data typically is about 18 months old when released.

In terms of salary, Sanders ranked sixth among the center’s 27 listed management officials. 

It was clear that Ms Sanders ought to have been directly responsible for the EHR implementation,

 The center said Sanders’ duties included clinical information, administrative, business, academic and research support systems, as well as core IT functions that include a central IT help desk, email, computer desktop support, IT security and telecommunications.

Nonetheless, the extremely well-paid top leadership did not seem to have hard feelings.

Dr. John McConnell, the center’s chief executive, said in a statement that Sanders decided in January to take 'a brief career break' after completing major portions of the overhaul. He said Sanders is relocating to Florida to spend more time with her family.

Wake Forest Baptist spokesman Chad Campbell stressed it was Sanders’ decision to leave her positions, and it was not related to Epic, which went live in September on the center’s main campus.

Also,

'We are deeply grateful to Sheila for her numerous contributions that will serve the medical center for years to come,' McConnell said. McConnell said senior IT officials will manage day-to-day IT operations with his oversight while the center conducts a national search for her replacement.

But to reiterate,

 The center said May 2 it had launched another round of 'multi-million dollar' cost-cutting measures that will last through at least June 30, the end of its 2012-13 fiscal year, related to fixing Epic revenue issues.

 Perhaps any attempt to saddle the chief information officer with responsibility would point out the lack of responsibility imposed on even higher level and better paid executives for apparently approving and authorizing her previous work.

The Usual Talking Points

Instead, the official statement from hospital system management about top executives' compensation trotted out the usual talking points in defense of all this lavish pay,

Wake Forest Baptist said in a statement explaining its executive compensation packages that as an academic medical center, it requires management with 'a special set of skills and experience to manage relationships with physicians and researchers, the university, its patients and community. … It takes proven talents possessed by a small group of health care executives.'

'Compensating executives, as we do all of our employees, competitively and appropriately, is crucial to the success of Wake Forest Baptist and to Northwest North Carolina.'

In addition,

 Baptist said its executive compensation is based primarily on comparisons with 32 academic medical centers, including Duke University Hospital and UNC Hospitals. 

With regard to Dr McConnell's special retirement plan,

'This is a common benefit for executives at academic medical centers and health systems to encourage retention and provide competitive retirement benefits,' the center said in its statement.

We first listed the talking points here, and then provided additional examples of their use here, here and here.   The official administration discussion above does seem to include: 
- We have to pay competitive rates
-  We have to pay enough to retain at least competent executives, given how hard it is to be an executive
-  Our executives are not merely competitive, but brilliant.

Left out was any evidence about the executives' performance, much less their degree of responsibility for their institution's performance.  Why the few top paid executives should continue to get credit for the institutions' supposed, but unspecified successes, while escaping any accountability for its failures (including the looming problems with its commercial health care information technology) was of course not mentioned. 

So here is a great, current example of how top health care executives are gambling with other peoples' money, in a game rigged so that they always win.  As long as we continue such perverse incentives in health care, they will continue to inspire leaders to line their own pockets at the expense of our health care institutions, and ultimately to the detriment of patients' and the public's health. 

Conclusion

So let me conclude with Prof Mintzer's conclusion,

All this compensation madness is not about markets or talents or incentives, but rather about insiders hijacking established institutions for their personal benefit.

Too many large corporations today are starved for leadership—true leadership, meaning engaged leadership embedded in concerned management. And the global economy desperately needs renewed enterprise, embedded in the belief that companies are communities. Getting rid of executive bonuses, and the gambling games that accompany them, is the place to start.

Reason for Hope? - Novartis Rescinds Vasella's Golden Parachute

Enormous compensation of hired health care executives, out of all proportion, if related at all to whether their work had any positive effect on patients' or the public's health, has long been a concern on Health Care Renewal.  For example, back in 2006, we posted repeatedly (look here for links) about the billion dollar plus fortune amassed by the then CEO of UnitedHealthcare which vividly contrasted with the company's avowal to "make health care more affordable."

We have posted many such stories.  Yet maybe there is a whiff of change in the air.  For the first time that I can recall, a gigantic pay package to a top health care executives has been rescinded after public protest.

Novartis' Golden Parachute for Vasella

This is how the New York Times described the huge golden parachute that was initially proposed:

A plan by Novartis, one of Switzerland’s biggest drug makers, to pay its departing chairman $78 million to keep him from sharing his knowledge with competitors has added fuel to an already heated debate about executive pay.

The announcement of the payment to the chairman, Daniel Vasella, was made last Friday, just two weeks before a Swiss referendum to give shareholders more power to determine executive compensation. Mr. Vasella, who had previously said that he would step down as chairman at Novartis’s annual shareholder meeting on Friday, is to receive the sum, 72 million Swiss francs, over six years. 

In a statement, Mr. Vasella said that 'it has been very important to Novartis that I refrain from making my knowledge and know-how available to competitors and to take advantage of my experience with the company.'

Unprecedented Resistance by Shareholders, Politicians and the Public

The plan to provide this "golden parachute" met stunning resistance from Swiss citizens and company shareholders.  As the Times reported,

Swiss lawmakers and shareholder activists criticized the company over the weekend for not making the amount public earlier. They also contended that the planned payment was just the latest of several bad decisions by Novartis on executive pay.

Ethos, a Swiss group of investors, on Monday called on Novartis to immediately cancel the contract with Mr. Vasella and take back any money already paid.

Christophe Darbellay, president of the Christian Democratic People’s Party, told a Swiss newspaper, SonntagsZeitung, that Mr. Vasella’s compensation was 'beyond evil.' Simonetta Sommaruga, the Swiss federal justice minister, told another newspaper, SonntagsBlick, that the payment was an 'enormous blow for the social cohesion of our country' and that such 'help-yourself mentality' was damaging confidence in the economy. 

Even Swiss identified as pro-business or right-wing joined in the criticism.  As reported by the Swiss Broadcasting Company, 

Philipp Müller, president of the centre-right Radical Party which traditionally has close links with the business community, is quoted as saying Vasella was 'taking liberal Switzerland to the henchman'.

Other politicians described the latest figure as 'disgusting' and denounced the recklessness of top managers.

The director of the Swiss Business Federation, which has been leading the fight against the initiative, said he was surprised by the 'dimension of the payment' to Vasella.

A Golden Parachute Despite a Past Record of Misadventures

Maybe there would have been even more outrage if those in Switzerland had known about Novartis' track record of misadventures, at least in the US, while Vasella had been leading it.  In particular,

-  In 2011, as we noted here, a company subsidiary paid $150 million to settle charges by several US states that it had misrepresented pricing information

-  In 2010, as we noted here, the company settled US federal civil and criminal charges in connection with its marketing of multiple drugs for $422.5 million.  The charges included giving kickbacks to physicians disguised as speakers' honorariums and fees for serving on advisory boards.  

-  In 2010, as we noted here, the company settled separate US charges that it made false claims to support off-label marketing of its drug tobramycin for cystic fibrosis for $72.5 million. 

- In 2008, as we noted here, the company settled charges in the US state of Alabama that it defrauded Medicaid for $33.7 million.

However, these legal escapades were not mentioned in the recent media coverage of the proffered and then withdrawn parachute. 

The Company Backs Down.

Nonetheless, what was really surprising was that the outrage made the company back down.  Per the Wall Street Journal, 

Novartis AG on Tuesday abandoned a 72-million-Swiss-franc ($78 million) exit package for its chairman, bowing to pressure from shareholders and Swiss politicians after four days of increasing criticism.

The Swiss drug maker said its board and Chairman Daniel Vasella agreed to cancel a six-year noncompete and related-compensation agreement designed to prevent him from joining or advising rivals and which would have paid him 12 million francs a year.

The agreement was scheduled to take effect on Friday, when Dr. Vasella, 59 years old, is planning to leave the Basel-based company at its annual shareholder meeting

Furthermore,

In the Novartis statement on Tuesday, Dr. Vasella acknowledged that his offer hadn't soothed public opinion: 'I have understood that many people in Switzerland find the amount of the compensation linked to the noncompete agreement unreasonably high,' he said. 

In addition, as Reuters noted, Vasella actually admitted he made "mistakes,"

'The fierce reaction and reproaches that were made as a consequence of the many-sided discussions about my compensation did leave its mark on me,' 59-year-old Vasella said in his opening address to 2,688 shareholders gathered at Novartis's annual general meeting in Basel.

'I made two avoidable mistakes: the first was to even negotiate this contract. And the second to believe that giving up this individual payment to charities would be considered as something positive by society.'

Of course, it is hard to believe that Novartis had previously paid him as lavishly as it did  - the New York Times had reported that his pay just prior to resignation was 12.4 million francs, "about $13.4 million a year" -  without securing an agreement to protect trade secrets.  Many businesses routinely add confidentiality clauses, trade secret protection, and non-compete clauses to contracts of many employees.  Thus adding a $78 million golden parachute ostensibly just to protect trade secrets and defection to the competition seems like impossibly gilding the lily.  Furthermore, if Novartis really thought that Vasella was likely to run to another firm at the drop of a hat, it would have made no sense to entrust someone thought to be at risk of such disloyalty with top leadership positions.

Reason for Hope

At least Chairman Vasella admitted "mistakes," and at least the ridiculous pay package was rescinded. This incident does show that it is possible for public and shareholder outrage over gargantuan payments to executives to have some effect.  That seems like real progress, and a reason to hope. 

Of course, executives of public for-profit corporations are supposed to be working for shareholders.  Thus their general impunity from shareholders' control up to now remains inexplicable.  Furthermore, executives of pharmaceutical companies and other health care corporations seemingly should be responsible for putting patients' and the public's health ahead of their own enrichment.  Thus their ability up to now to ignore public concern about their companies' actions, and to avoid personal responsibility for their companies' bad actions also remains inexplicable.

But progress may now be possible.  In and outside of Switzerland, shareholders of publicly-held for-profit health care corporations should demand accountability from the executives who are supposed to be working for them.  In and outside of Switzerland, health care professionals, policymakers, and the public at large should demand accountability from leaders of health care organizations for the effects of their organizations on patients' and the public's health. 

It is Harder to Run a Small Public Hospital System than California? - Deep Seated Myths and Logical Fallacies Underpinning Health Care Executive Compensation

Hospital executive compensation, the gift that keeps on giving... 

A Public Hospital CEO's Current Compensation

A recent, somewhat obscure news article shows how deeply rooted is the current practice of paying top hired managers of health care organizations amounts that seem outlandish given the context.

The article, in the Argus - San Jose (CA) Mercury News, discussed the compensation given the CEO of a small public hospital district.  It opened with,

 Amid a budget crunch that has forced sweeping cutbacks at its medical facilities, the Washington Township Health Care District board of directors on Wednesday awarded its CEO $162,783 in incentive pay that raises her total annual compensation and contract perks this year to more than $800,000.

The bonus pushes Farber's total 2012-13 compensation past $813,915, less than the $936,349 she made in 2011 or her $912,519 pay in 2010, when she was among the top five paid government employees statewide in a survey by the state controller's office. 

Note first that Washington Township Health Care District is a public health district.  As an article from January, 2013 in The Argus - San Jose Mercury News explained,

The Washington Township Health Care District is a public agency in southern Alameda County and receives tax money from 320,000 district residents under voter-approved bond measures. 

The District is also under financial stress.  As the earlier Argus - Mercury News article stated,

Physician assistants, nurses and medical directors were among the 200 jobs recently eliminated by the Washington Township Health Care District to cut costs, according to new information released by the district.

In response to a request under the California Public Records Act, the district provided a list this week of the 75 job titles included in the approximately 132 vacant and 68 filled positions eliminated in recent months as part of a 13 percent workforce reduction.

Furthermore, as the newer Argus - Mercury News article noted,

 Farber was overseeing a 13 percent workforce reduction that eliminated 200 mostly vacant jobs. The district had seen operating profits plummet tens of millions of dollars last year from recent years.

So Ms Farber got a large salary plus bonus at a time when hospital "profits" were declining and many employees, including health care professionals with direct patient care responsibilities were being laid off. 

A Long History of Outsize Compensation

Note that this small public hospital system actually has a long history of paying its CEO a lot.


In 2003, the (Fremont-Newark, CA) Argus editorialized (the full article requires payment),

 HOW MUCH is too much?

We don't know the answer to that, but we're pretty sure $479,600 a year qualifies.

That's how much Washington Hospital is paying CEO Nancy Farber.

Farber will make a base salary of $406,000 during the 2003-04 fiscal year, a 10 percent raise from her 2002-03 salary of $368,000, plus she is getting a $73,000 bonus.

That editorial did not seem to prevent Farber from getting raise after raise in the subsequent years.

In 2011, the Los Angeles Times published an article with the headline, "Hospital executives occupy top tier of California's public workers."  It said this about the pay given Nancy Farber, still the CEO of Washington Township Health Care District,

The hospital's chief executive, Nancy Farber, is the second-highest-paid official covered in Chiang's database [of pay to public officials] so far. She was paid about $874,000 in 2009.

So Ms Farber's compensation has about doubled in the last 10 years, during which US cost of living has increased about 24% (look here).  And at least one local editorialist thought she was paid too much in 2003.

Justifying Large Payments with the Usual Talking Points

So why should the pay of the CEO of a relatively small public hospital system keep rising so fast, despite criticism.  To some extent in 2011, and quite clearly in 2013, her supporters trotted out the usual suspect arguments.

We previously have described (most recently here) how whenever anyone bothers to try to justify extravagant executive compensation at hospitals, and for that matter, most other health care organizations throughout the US, they seem to repeat the same set of talking points.    We first listed the talking points here, and then provided additional examples of their use here, here and here.   The talking points are:
-  we pay what everyone else pays
-  CEOs work hard and are brilliant, and so deserve high pay
-  high pay is needed to attract and retain competent, if not brilliant people.

In 2011, per the Los Angeles Times, "officials" of the health district combined all three in a single sentence, :

Officials at the Washington Township Health Care District in Fremont, Calif., also argued that they needed to pay 'market rate' to obtain top-quality staff.

In 2013,  the Argus - Mercury News described how Ms Farber's defenders used them all at length. 


CEOs Work Hard and are Brilliant

Board member Bernard Stewart, a local dentist who has served for more than a decade on Washington's board, said the salary comparison with other public employees was unfair.

'It's a temptation for all of us to compare the CEOs salary with other elected officials or other public officials, but I can't stress in the strongest means possible, that is an absolute error,' Stewart said. 'We in this hospital are a public hospital. We are a publicly elected board, but we are engaged in an incredibly competitive and difficult business and we are different from any other public organization in that regard.'

So one board member explicitly argued that being the CEO of a small public hospital system is much harder than any other kind of state government leadership position.

Since the article also included a comparison of Ms Farber's pay with that of the Governor of California,

By comparison, Gov. Jerry Brown will make just over $165,000 this year.

the board member implied that it is much harder to run a small public hospital district than the whole state.  That is breathtaking.


The board also more generally praised the CEO, 

 Ahead of the vote for the bonus Wednesday, all five board members praised Farber's leadership and said that, because of the difficulties facing the hospital, experienced leadership was needed.

In addition, note that hospital district board members suggested specific aspects of Ms Farber's performance worthy of high remuneration.

Board members credited Farber with implementing a new electronic records system, the construction of the district's new center for joint replacement on time and on budget, and for various accolades the district received last year. Among them, the district was ranked the fourth best hospital in the Bay Area by U.S. News & World Report and among the top 10 in the state for joint replacements by HealthGrades, a designation received for the last seven years.

Board members said Farber's decision to reduce the workforce was evidence of her exemplary leadership.

'Making the decision to downsize, or right-size, when necessary, is as much a part of being a responsible administrator as is building, growing and improving the health care system,' Nicholson said.

Board member Michael Wallace said Farber, 'has made tough and unpopular choices. The easy thing would have been to kick the can down the road, which is what we see happening all the time in Washington, but she didn't do that,'....

So we see here that the CEO is given personal credit for all good things, even good things that obviously required considerable work by other people.  I am certain that the CEO did not personally implement the EHR, did not construct the joint replacement center, and did not directly care for patients.   All the other employees who contributed to these apparent successes implicitly got no credit, and it is likely that some employees who actually contributed were laid off.

Furthermore, note that the board somehow believed that laying off employees in a time of financial stress, a hardly original business strategy in this day and age, and one presumably only undertaken due to a crisis, was somehow a sign of brilliant leadership.  Again, this is breathtaking.  

I would argue that asserting the CEO has a harder job than the state governor, giving the CEO credit for numerous activities that obviously required the work of many others, while denying her responsibility for financial distress amount to a prolonged logical fallacy, a prolonged appeal to authority.  The argument that whatever the CEO does MUST be brilliant, and its assessment should not be the subject of critical thought.


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High Pay is Needed for Recruitment and Retention

Admittedly, Ms Farber's defenders did not belabor these points as much, but, board member Michael Wallace said

'I don't want our leadership and management team wooed away by those monolithic systems willing to pay market compensation, which is a risk if we are not willing to do so.'

 He provided no evidence that this supposedly brilliant group of hired managers was in any danger of being recruited elsewhere.  As we have noted before, the evidence suggests that most top executives are recruited from within the organization, and hence this assertion is at best another kind of logical fallacy, an appeal to common practice.  

The Myth of the Divine Right of CEOs

We have seen again and again how top executives of health care organization, particularly CEOs, are given credit for everything good that happens, while avoiding responsibility for everything bad, and have the ability to continually enrich themselves regardless of the evidence about their personal performance, or about the context in which they work.  

Thus they are treated by those around them as some sort of aristocracy,  just short of omnipotent, minor deities.  In fact, as we wrote here, there is reason to think that some trends in economic thinking, combined, as we wrote here, with some trends in religious, or pseudo-religious thinking, have combined to promote something akin to the "divine right" of CEOs.

Yet CEOs and other health care executives are demonstrably human, and hence flawed.  Furthermore, shielding them from all accountability is a tremendous perverse incentive that is likely to lead to ever more incompetent, self-interested, mission-hostile, and even corrupt leadership.  

Somehow we need to start combating the talking points used to justify the lack of accountability and self-interest of top health care organizational leadership, and ultimately the whole notion of hired managers and executives as super human. 
As a society we need to wake up from our dazed acquiescence to ideas that border on crazy.  We need to challenge rote justifications and talking points for that which makes no sense, but serve to make the powerful more powerful.