When we began this blog, I never dreamed I would do so much writing about finance and the financial services sector of the economy, but,... 

The Governance of Citigroup

The discussions and revelations generated by the global financial collapse/ great recession continue to provide insights into the ongoing health care crisis.  Let me start with a small item from the Dow Jones Newswire this week:

The California Public Employees' Retirement System said it opposes the re-election of two Citigroup Inc. (C) directors, in part because of their roles in the recent financial crisis.

The nation's largest public pension fund, which owns about 61.2 million Citigroup shares, plans to cast 'withhold' votes for board nominees Andrew Liveris, chairman and chief executive of Dow Chemical Co. (DOW), and Judith Rodin, Rockefeller Foundation president, at the annual shareowners meeting Tuesday.

Both served on the company's audit and risk committee before the financial crisis. During the crisis, the banking giant accepted a total federal government infusion of $45 billion, which it has repaid.

'It's time for new blood in the boardroom,' said Anne Simpson, the senior portfolio manager who heads the Calpers corporate governance program....

Let me back up a bit.

The near-failure of global banking giant Citigroup, prevented only by a massive US government bail-out, was one of the central components of the global financial collapse. We noted recently how Mr Robert Rubin, one of the key leaders of Citigroup was accused of "being asleep at the switch," "irresponsibility and misjudgment," and being a "very well paid boob" after his testimony at hearings by the committee investigating the collapse. We also noted his link to health care. As senior member of the Harvard Corporation, Rubin is one of six top stewards of the US' oldest and arguably most presigious university, containing one the country's most prestigious medical schools and teaching hospitals.

Although all those who were members of the Citigroup at the time it collapsed have not been hauled in front of the committee, there has been considerable discussion of their responsibility for the company's failures. For example, in 2008, soon after the government rescue of Citigroup began, the Wall Street Journal published an editorial:

"Citi never sleeps," says the bank's advertising slogan. But its directors apparently do. While CEO Vikram Pandit can argue that many of Citi's problems were created before he arrived in 2007, most board members have no such excuse. Former Treasury Secretary Robert Rubin has served on the Citi board for a decade. For much of that time he was chairman of the executive committee, collecting tens of millions to massage the Beltway crowd, though apparently not for asking tough questions about risk management.

Chairman Sir Win Bischoff has held senior positions at Citi since 2000. Six other directors have served for more than 10 years -- including former CIA Director John Deutch, Time Warner Chairman Richard Parsons, foundation executive Franklin Thomas, former AT&T CEO C. Michael Armstrong, Alcoa Chairman Alain Belda, and former Chevron Chairman Kenneth Derr.

When taxpayers are being asked to provide the equivalent of $1,000 each in guarantees on Citi's dubious investments, how can these men possibly say they deserve to remain on the board?

While other banks can claim to be victims of the current panic, Citi is at least a three-time loser. The same directors were at the helm in 2005 when the Fed suspended Citi's ability to make acquisitions because of the bank's failure to adhere to regulatory and ethical standards. Citi also needed resuscitation after the sovereign debt disaster of the 1980s, and it required an orchestrated private rescue in the 1990s.

Last year, as reported by Bloomberg,

Citigroup Inc. investors should vote against re-electing four of 14 board members, including John Deutch and Michael Armstrong, to improve management of the company’s risks, a shareholder advisory group said.

Deutch, former U.S. Central Intelligence Agency director, Armstrong, former AT& T Inc. chief executive officer, and Alain Belda, chairman of Alcoa Inc., should be opposed 'for poor risk oversight,' RiskMetrics Group Inc.’s ISS Governance Services said today. Xerox Corp. CEO Anne Mulcahy shouldn’t be re-elected because she sits on more than three boards, which may limit her effectiveness, the group said.

'The pattern of chronic oversight failure at Citi and the magnitude of the corresponding shareholder losses warrant removal from the board of directors most responsible for risk oversight,' RiskMetrics said in the statement.

Furthermore,

'Despite the fact that the board has many incumbent directors that have been successful in their respective fields and have been on the board for some time, their track record taken as a whole is dismal given that the company is currently surviving on federal assistance,' RiskMetrics said.

Rick Conrad, of the Seeking Alpha blog, thus berated the CEO of Citigroup at its 2009 shareholders meeting,

Mr. Armstrong, who has been a director since 1989 is no longer part of the Audit Committee, as of this year, continues his 'service' to our Company on the Nomination as well as the Compensation Committee. Much as this company has suffered under an illusion of prosperity, it appears to continue to suffer under an illusion of competence.

John [Deutch] has served on the Audit Committee of our Company since 1997 and hence, likely drank the Kool-Aid as to the Illusion of Prosperity.

I note that the audit and risk management committee has many members who, like Mr Deutch and MrArmstrong presided over this seemingly out of control disaster.

Andrew Liveris since 2005 on Audit

Ann Mulcahy since 2007 on Audit

Dr Judith Rodin since 2004 on both Executive and Audit Committees.

Overlaps Among Citigroup's Board and Health Care Organizations' Leadership

So there seems to be good reason to believe that the board of Citigroup at the time the firm collapsed were a collective example of inattentive goverance and poor stewardship. We have previously documented overlaps among poor governance and leadership of finance, and the governance and leadership of health care, suggesting that the poor leadership and governance of the latter may be in part a result of infection from the former. So I looked for overlaps among the Citigroup board and health care organizational leadership.

A list of the membership of the failed board comes from the 2008 Citigroup proxy statement.  The biographies provided therein, supplemented with some Google searching, produced the following overlaps:

- C Michael Armstrong - is also Chairman, Johns Hopkins Medicine, Health Systems and Hospital

- Alain J P Belda - was a Trustee and member of the Corporation of Brown University (including the Warren Alpert Medical School)  (He stepped down prior to 2009 at an unknown time.)

- Sir Winfried Bischoff, Chairman of the Board - is a director of Eli Lilly and Co.

- Kenneth T Derr - is a director of the University of California San Francisco Foundation.

- John M Deutch - no overlap found

- Roberto Hernandez Ramirez - no overlap found

- Andrew N Liveris - is a Trustee of Tufts University (including the School of Medicine and Tufts- New England Medical Center)

- Anne M Mulcahy - in 2009, was appointed to the Board of Directors of Johnson and Johnson

- Vikran S Pandit, CEO - is a Trustee of Columbia University (including the College of Physicians and Surgeons and Columbia University Medical Center)

- Richard D Parsons - is a Trustee of Howard University (including the College of Medicine and Howard University Hospital)

- Judith Rodin - is President of the Rockefeller Foundation

- Robert E Rubin - is a member of the Harvard Corporation (including Harvard Medical School and multiple Harvard teaching hospitals), and a Trustee of Mount Sinai Medical Center

- Robert L Ryan - was a director of UnitedHealth Group, is a Trustee of Cornell University (including Weill Cornell Medical College, and Weill Cornell Medical Center), and was a Senior Vice President and CFO of Medtronic

- Franklin A Thomas - no overlaps found

Summary

So in summary, of 14 board members, 2 are trustees of major medical centers (Johns Hopkins and Mount Sinai), 6 were or are trustees or equivalent of universities that include medical schools and medical centers (Brown, Tufts, Columbia, Howard, Harvard and Cornell), one is a trustee of such a university's foundation (University of California San Francisco Foundation), 2 are or would be board members of pharmaceutical corporations (Eli Lilly and Johnson and Johnson), one was a board member of a commercial managed care organization/ health insurance company (UnitedHealth), one was a former top executive of a medical device company (Medtronic), and one is the President of a large charitable foundation which historically has supported multiple medical and public health initiatives (Rockefeller Foundation).  Only 3 of 14 did not have a major leadership role of a health care organization.  

Most of these health care organizations have been involved with cases we have discussed on Health Care Renewal (see links above).

Given the seriousness of the failure of Citigroup, one has to wonder why so many of the directors who presided over it still have such influential positions in health care organizations?

As we have pointed out, as the world economy was driven to near ruin by "masters of the universe," some of the same also became leaders of academia and academic medicine in their spare time. Maybe this made sense 10 or 20 years ago, but why does it still make sense? On the other hand, now that we understand how bad the leadership of finance really was, it is a little easier to understand why the leadership of health care has become so bad. Iit seems reasonable to hypothesize that some of the problems of academia, and particularly the problems of medical academia, may have been at least enabled by leadership more used to working in an increasingly amoral marketplace than to upholding the academic mission.  The failures of the leadership and governance of finance thus suggest we need to re-examine the leadership of health care.

It would seem likely.

In May 2009 at "The Machinery Behind Healthcare Reform: How the HIT Lobby is Pushing Experimental and Unsafe Technology on Unconsented Patients and Clinicians" I wrote:

... I can add that if this initiative [the U.S. multibillion dollar ARRA push towards national healthcare IT by 2014] blows up as it has in the UK, then the only triumph will be the financial triumph of the trade group and its apparatchiks. The losers will be the administration, patients, clinicians, and everyone else in the healthcare system.

The UK situation is much worse than I thought. The UK's NPfIT in the NHS was suspected to have been doomed from the start, but proceeded anyway; see "16 key points in Gateway Reviews on NHS IT scheme" and the secretive Gateway Reviews themselves upon which the preceding article was based, released under UK Freedom Of Information laws. From ComputerWeekly.com author Tony Collins on Gateway Reviews:

... Gateway reviews are mini-audits at critical stages in projects. The reports in question gave a red, amber or green status at each stage to help the project’s senior responsible owner decide whether to move to the next phase.
The government’s policy on Gateway reviews is to keep them confidential. All copies of a review are shredded, with the supporting material, to ensure only two reports remain – one for the Treasury’s Office of Government Commerce (OGC) and the other for the project’s senior responsible owner.

Highlights of the secretive health IT program reviews, now made public:

• the NPfIT was probably doomed from the start, in Spring 2002. As one Gateway Review put it, many dedicated people were working hard on building the components for a car that hadn't been designed. To some extent that's still true today.

• people didn't really know what they were doing in the first critical months in 2002

• the initial plan was for new IT - not for changes to the way people work. So the preoccupation was with IT and not patients. It was hoped that new IT would drive change. But that rarely if ever succeeds.

• that the costs and complexity were initially underestimated - by about £7bn - because nobody had an understanding of what was needed.

• that speed was unduly important. One gateway review suggested that key staff didn't have time to take action on recommendations or learn lessons.

• the programme as a whole, according to one Gateway Review, was not assessed against a list of Common Causes of Failure, as published by the National Audit Office. Only individual projects were assessed against the list.

How many of these findings apply in the U.S. Health IT program in 2009?

Finally, about the aforementioned May 2009 post, Matthew Holt of the Healthcare Blog wrote that I had "gone loopy", i.e., crazy (see footnote to the above-linked May 2009 post). The Chairman of CCHIT Mark Leavitt wrote that concerns about health IT are expressed by "fearmongers" and should be "laughed off."

These cavalier attitudes are a major part of what has gone wrong in HIT, as well as our society more generally.

Not to draw a specific comparison with these individuals, but our society is crumbling, and it's in no small part due to clowns in leadership roles, rather than as performers in Ringling Bros. and Barnum and Bailey's Greatest Show on Earth.

According to Matthew Holt and Mark Leavitt, Health IT concerns are a laughing matter, expressed by crazy people.

I (and many like minded colleagues) don't find healthcare information technology issues a laughing matter, however.

Health care reform is now the big health care story in the US. Discussion of various health care reform proposals regularly lead in print and electronic media. Yet we have been very quiet here on Health Care Renewal about health care reform.

I personally have written little, because it seems to me that hardly any of the discussion swirling around relates to the concerns we discuss on this blog. We write about the bad effects of continuing concentration and abuse of power in health care on physicians' and other health care professionals' core values. We note instances of ill-informed, incompetent, self-interested, conflicted, or even corrupt leaders of health care organizations. We discuss how problems with the governance of health care organizations allow such leadership. We comment on instances in which bad leaders use tactics such as deception, creation of perverse incentives, and intimidation. And we address how all this can lead to higher costs, decreasing access, poor patient outcomes, and demoralized professionals.

For example, just in this month, July, 2009, we posted about:

How Trusted Health Care Institutions are Lead by the Conflicted

• One of the largest and most respected medical societies gets three times as much income from the pharmaceutical, biotechnology and device industries as from membership dues, and its current generously salaried president just asks the public to "trust us, we're doctors" 
• The White House health care reform czar just stepped off the board of directors of a health care corporation accused of "ruthless" behavior and making patients feel they are only equivalent to "dollars" 
• An award-winning show on public television featured remarks favoring drug treatment of psychiatric illness by an academic "key opinion leader" without disclosing his multiple financial ties to the pharmaceutical industry (link here);
• A state legislator pleaded guilty to selling his services to an academic medical center

Health Care Leaders Do Not Share Physicians' Traditional Values

• Leaders of the university that employs the academic "key opinion leader" mentioned above intimidated another of its professors because he wrote a blog critical of the pharmaceutical industry ;
• A study showed that primary care doctors burn out not just because they think their pay is low, but because they work in "chaotic" environments, lead by people who do not inspire trust and whose values are not aligned with those of the physicians ;

And our archives, going back now to the end of 2004, include much more.

For the most part, however, these are not the issues discussed in the great health care reform debate.

There does seem to be, at the margins, some discussion of a few productive approaches, which deserve credit. These include the Sunshine bill, which would improve disclosure of conflicts of interest generated by health care corporations' payments to health care professionals and academics; the push to support some comparative effectiveness research; and some attempts to address the perverse incentives built into the system used by Medicare to pay physicians. It is not clear, however, whether these efforts are going to get very far, and in any case, they remain peripheral to fervent discussions of health care financing, which seems to be the only topic of interest to most would-be health care reformers.

I believe that the US health care reform will not produce good results if it fails to address the issues we discuss on Health Care Renewal.

But discussion of them, of course, may threaten many with vested interests, and lots of people who have been made rich and powerful by the current system.

So look forward to endless debates about whether the "public option" for health insurance is a good or bad idea, but nothing about how the insurance industry is lead, much less how pharmaceutical, biotechnology, device companies, hospitals and academic medical centers, medical not-for-profit organizations, health care information technology companies, and government agencies are lead, and how bad leadership facilitated by bad governance will continue to make things worse.

In the US, many important health care organizations are not-for-profit organizations. Many US medical schools, and other health educational institutions, along with their parent universities are not-for-profit. (Essentially all the exceptions are supported by local or state government.) The majority of US hospitals and hospital systems, including academic medical centers, are not-for-profit. Some managed care organizations are not-for-profit. Medical and professional societies, health care advocacy groups, health care charities, and a variety of other groups are not-for-profit.

Not-for-profit health care organizations here have hardly been immune from leadership and governance problems. We have discussed numerous instances of ill-informed, conflicted, and even corrupt leadership of these organizations, and underlying problems with their governance, which may be unrepresentative of key constituencies, unaccountable, secretive and opaque, and not subject to clear ethical rules.

There may be some major changes coming, however, affecting leadership and governance of all US not-f0r-profit organizations, including health care organizations. The US Internal Revenue Service (IRS) has long required that not-for-profits that exceed certain minimums file and make publicly available certain information on a form 990. Relatively recent forms from most US not-for-profits are available online from Guidestar.org. The old forms provided for some minimal transparency. They displayed, for example, a list of the filing not-for-profit organization's trustees, and the salaries and retirement plans given to their five highest-paid employees.

The IRS has revised the forms starting with those to be filed in 2009, which will reflect 2008 data, so as to markedly increase organizational transparency. The actual forms can be found on this IRS web-page, and a discussion of key points can be found here on the GuideStar.org web-site.

For the first time, the forms will include information about certain aspects of leadership and governance.

Leadership Conflicts of Interest

The new form 990 will require each organization to establish the "independence" of the organizations' trustees, directors, officers, and key employees. Independent individuals would be those without any direct or indirect business relationships with the not-for-profit organization; without any relatives with such business relationships; and who were not serving as an officer, director, trustee, key employee, partner, or member of an organization doing business with the not-for-profit organization. The relationships preventing individuals from being independent would have to be documented.

It is likely that perusal of such information on the new form 990 would reveal to some extent the degree the organization's leaders are conflicted. Up to now, it has been very difficult to get information about conflicts affecting the leadership of health care organizations. We have reported numerous cases of seemingly high-level conflicts affecting leaders of not-for-profit health care organizations. It is likely that such conflicts affect the ability and inclination of leaders to uphold their organization's mission, that is, to fulfill their duty of obedience.

Leadership Compensation

The new form 990 will ask for detailed information about the total compensation given to officers, directors, and trustees, key and the five most highly paid employees, and former officers, directors, trustees, key and most highly compensated employees who continued to receive substantial amounts. This will include not only reportable and other compensation, but whether anyone received unusual compensation such as first-class or charter travel, companion travel, tax indemnification for gross-up payments, discretionary spending accounts, housing allowance or residence for personal use, payments for business use of personal residence, health or social club dues or fees, and personal services (e.g., maid, chauffeur, chef). Also, the form inquires about severance packages and supplemental non-qualified retirement plans.

Up to now, little information about the compensation of not-for-profit leaders beyond base salaries, contributions to employee benefit plans and deferred compensation, and expense allowances and the like was available. Clearly, while not reaching the stratospheric levels enjoyed by top leaders of for-profit health care corporations, some leaders of not-for-profit health care organizations have come to be paid enough to make them rich. It is possible that some now regard their positions as first a pathway to wealth, rather than a calling to improve the health of society, or to advance medical education or science. Furthermore, it is possible that some leaders have been receiving additional compensation which has made them even more wealthy, while particular "perks," like staffed houses, chauffeured cars, and first-class travel, has isolated them from the patients, clients, and/or students they are supposed to be serving.

Organizational Policies

The new form 990 will ask whether the organization has a written conflict of interest policy, and if so, how compliance is monitored and enforced, and a written policy to protect whistle blowers.

Summary

In my humble opinion, the IRS' new form 990 could make substantial improvements to the transparency and accountability of not-for-profit health care organizations. Review of form 990's filed starting this year could provide important information about conflicts of interest affecting organizational leaders, whether they have been distracted by new-found wealth, or decoyed by luxurious perks, and whether their organizations have clear policies meant to maintain certain ethical standards.

However, while the IRS will mandate that such information becomes available, it is not clear what it will do about the information so revealed. Additionally, the wealth of information that will be provided could easily bury the few watchdogs, including the Health Care Renewal bloggers, that have been trying to monitor the governance and leadership of health care organizations.

However, the new information provides an important opportunity to other people concerned about these issues. For example, perhaps some health professionals have concerns about how their alma maters are lead and governed. Maybe they will peruse the new information provided, and then try to use it to make their alma maters more accountable. It is at least possible to be optimistic.

What Is to Be Done?

If you are concerned about a particular not-for-profit health care organization, you can prepare for the availability of more information from the revised form 990 in several ways, by searching for already publicly available information. You can peruse older form 990s, which at least provides the names of trustees and officers, and officers' and key employees' salaries.

In addition, the web makes it possible to identify some conflicts of interest affecting current leadership. For example, try first entering each leader's name, surrounded by quotes, into Google, to look for biographical information that could reveal conflicts. Next, try searching on the name plus terms like "board of directors," "board of trustees," "consultant," or "advisory board," which may uncover some additional conflicts. If you find anything of concern, consider making it more public.

Remember, the best way to improve health care leadership is to hold it accountable to an activated public, preferably strongly infused with health care professionals who want to uphold their professionalism.

On The Torch blog, hosted by FIRE (Foundation for Individual Rights in Education), this post by Kyle Smeallie summarized the travails of "petition candidates" for the boards of trustees of two elite American universities (Dartmouth and Harvard). As we have noted, at most universities, the boards of trustees, the bodies ultimately responsible for upholding the universities' missions, are closed shops. At most universities, the boards appoint new members to replace departing ones, without input from alumni, parents, students, faculty or anyone else who might be considered constituents. Thus, at most universities, even though the boards are ultimately responsible for the stewardship of the institutions, and upholding the institutions' missions, practically, they are accountable to no one. At very few universities, there may be contested elections for a few board seats, and an opportunity for those outside the board, usually alumni, to place candidates on the ballot. However, even at those somewhat more enlightened universities, those candidates face an uphill battle. Thus, while Dartmouth and Harvard have somewhat more transparent, accountable, and representative governance than do most academic institutions, even that is under threat.

In Lake Woebegon, all children are above average. Now it seems that hospital CEOs have moved there.

Ventura County, Where No CEO is Below Average

The Ventura County (California) Star reported on the uniformly high remuneration of the CEOs of local, mostly small, not-for-profit hospitals and hospital systems.

T. Michael Murray reaped $330,545 in 2008 as chief executive officer of St. John’s hospitals in Oxnard and Camarillo. He drew an additional $187,071 in bonuses with $73,113 more in benefits and other compensation.

His total package, according to IRS records, reached $590,729.

And he may have been underpaid, according to a statewide survey of 118 nonprofit hospitals. The report by the Payers & Providers healthcare business publication suggests the base salary for CEOs averaged $514,237.

Kick in bonuses, retirement money, reimbursement for education costs, expense accounts and the average total compensation hit $732,004.

Public records show similarly lofty numbers at Ventura County’s three nonprofit, tax-exempt hospital groups. Gary Wilde of Community Memorial Health System, which runs hospitals in Ventura and Ojai, was the highest paid CEO in 2008. He earned a base salary of $508,682 and his total compensation was $853,528, with much of the additional money placed into a retirement fund that won’t be paid out until Wilde serves six more years as CEO.

Simi Valley Hospital changed its leadership in 2008, with a total compensation of $1.25 million recorded in 990 tax forms for two different CEOs. That’s slightly more than the hospital provided in treatment for poor uninsured patients where there was no attempt to collect payment, though hospital leaders say charity care definitions encompass only a fraction of the total care they provide without pay.

Outside the county, tax records from the Cottage Health System in Santa Barbara showed a base salary of $848,826 for CEO Ronald Werft and other compensation of $546,846. His total topped $1.3 million.

Ken Anderson of the John Muir Health System, which operates hospitals in Walnut Creek and Concord, was the highest compensated CEO in the Payers & Providers study. He made $745,000 in base salary and nearly $7 million in other compensation, much of it deferred over his career for retirement.

Recall that these people are leading relatively small, not-for-profit community hospitals whose missions are to provide health care to the community. Total compensation ranging from three-quarters of a million dollars to multi-millions seems vastly disproportionate to the jobs and their settings.

Explanations and Excuses
As expected, those supporting the CEOs have all sorts of explanations and excuses:

Hospital leaders in Ventura County and throughout California say the numbers are inflated by retirement plan accumulations that must be included on tax records even before executives qualify to receive the money. They defend the half-million-dollar salaries, with bonuses on top, as the only way to compete with for-profit hospitals for executives who can lead a facility that may employ more than 1,000 workers, drive a community’s economy, provide access to the uninsured and deliver care that saves lives.

'Given the context, it’s not out of line,' said Murray, a CEO with 28 years of experience who is now semiretired after resigning from St. John’s at the end of March. 'I think you need to retain and also attract sufficient talent. I’m not saying there aren’t inappropriate salaries out there. I don’t think mine was one of them.'

Also,

But [economist Sung Won] Sohn said that paying below average is risky.

'When you try to get somebody at $400,000 rather than $700,000 you will get plenty of takers but they’re not competent,' he said. 'Hospitals are so important in the community that you want to make sure it’s run properly.'

Nor does he see any problem with paying more than average if a hospital board wants to reward an executive.

Furthermore,

John Romley, an economist at the Schaeffer Center for Health Policy and Economics at USC, said the amount hospitals spend on executive pay is a sliver of their total expenses and can’t legitimately be blamed for driving the rising cost of healthcare.

'I guess I’m not shocked even though I’m jealous,' he said of the compensation.

Some people were not pleased about this use of health care dollars:

Others worry the compensation may push hospitals into spending more on executives than their nonprofit mission of providing care for the poor. Federal regulations already limit compensation for CEOs of corporations bailed out by the government to $500,000. Similar caps placed on nonprofit hospitals could create dramatic differences, said Ron Shinkman, author of the Payers & Providers statewide survey on CEO salaries.

'You’re looking at close to $39 million that could be used on uncompensated patient care,' he said. 'It’s a lot of money.'

Consumer advocates aim much of their concern at nonprofit hospitals that not only reward CEOs with lucrative paydays but also provide little charity care to poor, uninsured patients. The Payers & Providers research identifies 17 hospitals — all outside of Ventura County — where the total compensation to CEOs exceeded the cost of charity care.

'It would be outrageous if hospitals are paying more to their (entire) executive teams than in indigent care in their community,' said Anthony Wright of Health Access California. 'For some hospitals to provide more to one individual just seems wrong.'

The Mechanism: Ego Bias

The mechanism making CEO compensation constantly increase appears to be simple:

Typically, hospital boards hire consultants to conduct studies showing market averages for comparable hospitals in their regions. They often try to pay somewhere around the 50th percentile.

That’s a reasonable way to do it, but such studies tend to push up the salaries, said economist Sung Won Sohn, who was involved in setting compensation at two Minneapolis hospitals.

'People at the low end try to increase the CEO closer to the average,' said the professor at CSU Channel Islands. 'If everyone does that, the average CEO salary will go up.'

So there you have it. At no hospital is the CEO deemed by a sympathetic (and sometimes crony filled board) below average. If the CEO's compensation has somehow dropped below average one year, it is immediately raised to at least average the next. Apparently almost never is the CEO's pay deemed to be too high.

That notion is corroborated by the assumption by the CEO documented above that all CEOs have "sufficient talent," and the assertion above that anyone who would accept a lower salary would be "not competent."

So every year all the CEOs who had below average compensation the previous year get compensation increased at least to last year's average. Almost no CEO gets a reduction. So the average moves up relentlessly year after year.

Of course, unless all CEOs are exactly alike, some CEOs must be below average.

So this becomes a great example of the ego bias at work. Ego bias is a common cognitive bias usually discussed in the context of making probabilistic judgments. A simple definition is that people tend to believe that outcomes of what they do, or what a group with whom they identify does will be above average. A long time ago, colleagues and I showed that interns in an intensive care unit judged the survival of their patients on average to be better than their judgments of the mean survival of all patients in the ICU. On the other hand, ICU attending physicians displayed a slightly more sophisticated version of the bias. They judged their patients' survival accurately, but judged the mean survival of their ICU's patients to be higher than it really was. [Poses RM, McClish DK, Bekes C, Scott WE, Morley JN. Ego bias, reverse ego bias, and physicians' prognostic judgments. Crit Care Med. 1991 Dec;19(12):1533-9. Link here.]

So we have the ego bias writ large in judgments made about the performance and compensation of hospital CEOs, at least in Ventura County, California.

The Implications

I agree that paying a CEO more than a hospital's entire expenditures for the care of the poor is unseemly.

However, in my humble opinion, the issue is even bigger than that. It is not so much how much of the hospital's budget goes to executive compensation, but what lessons this teaches CEOs. I propose they are:
- I am a wonderful person. I can do no wrong.
- If I do wrong, I cannot be punished.
- I can get rich and powerful doing this.

Of course, as we have written many times, being the CEO of a small community hospital is supposed to be a calling, whose goal is to uphold the institution's mission. Instead, CEOs are learning to be tin-pot dictators. Some are probably sensible enough to resist learning this message. I am afraid many are not.

Furthermore, there is no reason to think that this phenomenon is confined to Ventura County, California, or to small community hospitals. We have discussed how the management of health care organizations have become unsympathetic to, or even hostile to the mission. We have discussed their organizations' institutional conflicts of interests. We have discussed how they have wound up with imperial CEOs.

The resulting ill-informed, mission-ignorant or mission-hostile, self-interested, conflicted, or even corrupt leadership is a major, but still largely anechoic cause of our health care dysfunction.

As I have said endlessly, true health care reform will require finding well-informed leaders who understand and support the mission, put the mission before their own self-enrichment, and are unconflicted and honest.

Last year we noted that the US Internal Revenue Service (IRS) required more detailed reporting starting in 2009 by US not-for-profit organizations. Many US health insurance companies/ managed care organizations, most hospitals, nearly all medical associations, nearly all disease advocacy organizations, all health care charities, and nearly all medical schools are not-for-profit organizations. We suggested then that this reporting might lead to more transparency about the leadership and governance of these organizations. The 2009 990 forms seem to be trickling into public view, sometimes leading to some striking disclosures about how US not-for-profit health care organizations are lead.

The California Watch blog just reported about the interesting part-time job of a hospital CEO:

The former president of a Laguna Beach hospital has been operating a debt-collection company that recovered medical payments from his own facility, raising conflict-of-interest questions as the CEO moves to a new hospital in Riverside County.

Bruce Christian ran South Coast Medical Center from 2005 until it was sold in 2009. At the same time, Christian was owner of Metro Republic Commercial Services, a consulting and medical debt-collection firm that provided at least $110,000 in services to South Coast while Christian was a top manager, records show.

South Coast Medical Center disclosed the arrangement as 'self-dealing' in federal tax filings. State law allows self-dealing by board members of nonprofits, typically as long as the body explores other options and determines they are not unduly enriching one of their own.

Of course, I also get to write, but wait, there is more:

Christian was also at the helm of the hospital in 2006 when Adventist hired one of his Metro Republic consultants as interim chief financial officer, tax records show.

Adventist said it appointed the interim CFO when it believed the hospital would be sold quickly.

Additionally, a version of the Metro Republic website in 2006 said the firm supplied South Coast Medical Center with health care financial consulting, managed care-revenue recovery and accounts-receivable services.

The website, which appears to have been offline since 2006, describes Christian as a health industry leader for 30 years who built the Corona-based Metro Republic from a three-person office to one with 150 employees.

Predictably, the response from the hospital and its parent health system was that it was all no big deal.

Adventist Health West, the Roseville-based company that owned South Coast, acknowledged that the arrangement was 'unusual' and 'not the norm' for the firm.

In a statement, Adventist said Christian's firm collected hospital debts for years before Adventist bought the hospital and prior to Christian’s tenure as president and CEO.

Board members were aware of the arrangement. It remained in place while the chain sought to sell the medical facility throughout Christian’s tenure, the statement said.

'Unfortunately, it took much longer than originally envisioned to sell the hospital,' Adventist Health said in a statement. 'Adventist Health continues its deep commitment to providing mission-driven, quality health care to the communities we serve.'

Some thought otherwise:

But allowing a hospital administrator – who can have considerable power over setting prices on medical procedures – to operate as the hospital’s own bill collector presents a thorny conflict of interest, said Ken Berger, executive director of Charity Navigator, a New Jersey-based charity evaluation group.

'Just because the (hospital) board may sanction it doesn’t make it right, appropriate or ethical,' he said. 'The mission of hospitals and the mission to squeeze money out of those that are slow to pay can be quite contradictory. It’s just wrong.'

Another expert thought something ought to be done:

Kathryn Peisert, managing editor for publications at the San Diego-based Governance Institute, said a hospital CEO’s duty is to further the interests of the hospital. As such, she said, Christian should have eliminated all appearances of impropriety and cut ties between the medical center and his consulting firm.

'That’s really a big no-no,' said Peisert, whose organization advises hospital boards. 'I’m surprised some regulatory agencies haven’t been after this.'

We will see if anything will be done, but this conflict of interest seems not to have gotten in the way of Mr Christian's career advancement.

Christian is now chief executive of a Loma Linda University Medical Center campus expected to open in 2011 in Riverside County. A Loma Linda University Medical Center spokesman said the Murrieta campus will not contract with Metro Republic.

As I have said before, I expect that as more 990s dribble out, seemingly as slowly as many organizations can manage, we will see many more examples of these sorts of conflicts of interest, in which top organizational leaders also turn out to be vendors, consultants, etc.

In theory, and perhaps in a golden era in the past, leaders of not-for-profit health care organizations were supposed to regard their work as a calling, and to be primarily concerned with upholding the mission of the organization. Instead, we now see more leaders who seem to regard their organizations as their own personal sand boxes, providing opportunities for play, and sometimes personal enrichment. (Note that Mr Christian's total compensation from the hospital was "$360,000 and $400,000 in salary, benefits and deferred compensation in 2006 and 2007 at South Coast Medical Center.")

Unfortunately, Mr Christian's case demonstrates that leaders who get used to their organizations as personal sand boxes, rather than face punishment, may be given the opportunity to play in larger venues. One wonders how much he will make at the helm of a new academic medical center, what other side deals he will manage, and how much he will be concerned with the academic and clinical missions.

Once again, I say that true health care reform will only be achieved when health care organizations are lead by people who put the mission ahead of their personal enrichment, and are held accountable for their ability to do so.

As we predicted, it seems that the US Internal Revenue Service's (IRS) increased reporting requirements for not-for-profit organizations are leading to more examples of the coziness now prevalent among the top leaders of such organizations. The latest entry in this new parade comes from a story in the Bradenton (Florida) Herald about a not-for-profit community health agency whose mission is to provide health care to the poor and disenfranchised:

Providing medical services to the indigent and uninsured in Manatee and Sarasota counties has financially benefitted some of Manatee County Rural Health Services Inc.’s officers, board members and their families, records show.

The nonprofit agency has paid nearly $2 million in recent years to businesses owned by board members, officers, employees or their relatives, according to tax documents obtained by the Bradenton Herald. And its chief executive officer, Walter “Mickey” Presha Sr., has long been the highest-paid CEO of any such agency in Florida: His salary last year was $433,000 — $140,000 more than that of his closest counterpart, records show.

The article listed multiple examples self-dealing by the top leaders of Rural Health Services.

According to tax returns filed since 2004, Rural Health has paid:

- $558,121 to John Lewis, a board member, for optometry services.

- $536,591 to The Pinnacle Group of West Coast Florida Inc. for construction, maintenance and repair work. One of its principals is Trina Presha-Rosier, Presha’s daughter.

- $344,766 to The Lawn Authority of Manatee County Inc. for lawn care maintenance at the agency’s facilities. Wardell Jackson, the agency’s vice president of support services, is a principal in the business.

- $387,673 to A to Z Complete Property Management Inc. for janitorial cleaning and maintenance services. It is owned by Chris Mullinex, the agency’s facilities director.

- $96,000 to R & L Healthcare Advisors, whose principals include Marc Lazarus, a board member, for consulting services.

- $44,242 to More Power Properties and Investments LLC, co-owned by board Chairman J. Garry Lowe, for storage of agency files and equipment and the purchase of a modular building.

Leaders of rural health offered mostly the usual explanations:

>>As long as we say it is not a conflict, it is not a conflict<<

According to a conflict of interest statement that board members are required to sign, Rural Health prohibits them, management and their families from having any 'beneficial interest or substantial obligation to' any entity engaged in business with the agency. But some have been able to bypass that prohibition because of this loophole: 'Unless it has been determined by the board, on the basis of full disclosure of facts, that such interest does not give rise to a conflict of interest.'

>>We, our relatives, and our firms are the best possible source of the services<<

Jackson, Mullinex and Presha-Rosier’s businesses won competitive bids, which are reviewed by a board committee and approved by the full board, Lazarus said. Presha said he is not involved in reviewing bids for construction projects that his daughter might seek.

The agency chose to do business with the three board members’ companies because of special circumstances, agency officials said.

Lewis is one of Manatee Rural Health’s founders and has overseen its optometry services since the beginning. Lowe offered the storage space for less than what commercial storage facilities charged, then sold one of the storage buildings to Manatee Rural Health for a reduced price. And Lazarus has 36 years’ experience in the health care field, including as an executive at Sarasota Memorial Hospital.

They were hired because they provide needed services at a lower cost, thus allowing the agency to spend more money on patient care, officials said.

>>Trust us, because we are wonderful people<<

'It’s always disclosed to the board, so we always have the opportunity to not do it,' said Juanine Lowery, a board member since 1984. 'It hasn’t been a problem. It’s always been competitive.'

And a slightly more coherent version of that:

'Everything’s checked out and vetted,' Lazarus said. 'The arrangements are as good as or better than what we could get on the open market.'

The explanation for the CEO's out-sized salary should come as no surprise. He got that high salary because

>>I am a wonderful CEO and I deserve it<<

Rural Health board members also defend Presha’s $433,000 salary, which makes him the highest-paid chief executive officer of any federally qualified community health center in Florida. His job performance, managerial skills and the organization’s complexity and size are all reasons he makes the top salary, board members say.

Of course, the CEO himself thinks he is a wonderful CEO and deserves it:

'I know what I do,' said Presha, who said he took a pay cut to take the Manatee Rural Health job in 1984 and has turned down job offers with higher salaries since then. 'If I could do it for free, I would do it for free. But I earn my keep.'

So here we have another case of the cozy leadership of a not-for-profit health care organization, who all think they are doing just a wonderful job, who never seem to question their own actions, and who all believe all their buddies are also doing just a wonderful job. So naturally, since they are all such wonderful people doing a wonderful job, we should not begrudge them a few dollars here and there.

Of course, if they were the leaders of a privately held company that made widgets, it would be their own money that they are spending, and maybe no on else should care.

Even if the amounts involved seem relatively small relative to some of the cases that appear on Health Care Renewal, we should care particularly about how the leaders of Manatee County Rural Health Care Services throw around money (to each other), because of the nature of the organization's mission, as described by CEO Presha himself:

MCRHS has served the poor and underserved in our communities with the mentality of a 'provider of choice.'

Our group is not only compassionate, but also innovative,....

It is truly unseemly for a not-for-profit community health care organization dedicated to serving "the poor and undeserved" lead by people so complacent about their own entitlement.

So to repeat what I have written before, in my humble opinion, this sort of coziness, this sort of fuzziness at the boundaries of institutional duties and personal interests, may be a fundamental reason that our current health care system has become so solicitous of the interests and prerogatives of its leaders, and so cold to the needs of patients and the values of professionals.


The need for more transparent, accountable leadership of health care who explicitly are subject to clear ethical rules was never more apparent.

Stay tuned as more and more cases like this appear....

We have posted frequently on the governance and leadership of academic medical organizations. While one would think that health care organizations, and especially academic health care organizations ought to be held to a particularly high standard of governance, we have noted how their governance is often unrepresentative of key constituencies, opaque, unaccountable, unsupportive of the academic and health care mission, and not subject to codes of ethics. How the governance of organizations with such exemplary missions and sterling reputations got this way has been unclear.

We have often come back to the example of Dartmouth College, of which Dartmouth Medical School is a significant component. We most recently summarized here an ongoing dispute about the extent that the institution's board of trustees ought to represent the alumni at large, or instead, ought to be a self-elected body not clearly accountable to anyone else. When we first addressed the dispute, we noted that the self-elected, or "charter" members of the board were mostly leaders in finance, and when they succeeded increasing the proportion of self-elected members, the additions were again, mainly from finance.

The latest development at Dartmouth is that the board, whose majority is now self-elected, is going to boot off one of the few members who was elected by the alumni at large after being nominated by petition of alumni. As described in an editorial in the college newspaper, The Dartmouth,

We were dismayed to learn of the Board of Trustees’ decision not to reelect Trustee Todd Zywicki ‘88 for a second term ('Board votes not to reelect Zywicki ‘88,' April 7). Even in the wake of Zywicki’s open letter to the Dartmouth community on Tuesday ('Zywicki ‘88 criticizes Board in open letter,' April 15), the Board has yet to provide the Dartmouth community with a sufficient explanation for the removal.

Since 1990, when the power to reelect alumni trustees was transferred from alumni to the Board itself, reappointment to the Board for a second term has generally been routine; Zywicki is the first trustee in recent history to be denied reelection.

Zywicki said in his letter that comments he made during an address at the John William Pope Center in October 2007 'might have been' one of the reasons behind the Board’s decision. In the address, Zywicki made a series of controversial and inflammatory statements, including calling former College President James Freedman 'truly evil.'

Assuming that no egregious act remains undisclosed (and there has been no indication that this is the case), Zywicki’s removal disregards the will of the alumni who put him on the Board, and contradicts the democratic manner in which alumni elect trustees.

Dissenting opinions are essential to the operation of any governing body. While Zywicki may have behaved unprofessionally, the public reprimand issued by the Board was sufficient punishment. It is one thing to reprimand a trustee for making statements against the College in a public forum, but to remove dissenting opinions from the boardroom is to undermine the will of the alumni who voted in support of those very views.

Further news coverage in The Dartmouth suggested a flawed process was used to get rid of Zywicki,

Trustee T.J. Rodgers '70, who like Zywicki was nominated to be a candidate for the Board via petition and was successfully reelected at the April meeting, compared the reelection process to a 'witch-hunt trial' and said it was 'an affront to due process' in an e-mail to The Dartmouth.

'[Zywicki] was ejected by a secret vote — he was not allowed to know the vote count or even the reasons behind his ejection,' Rodgers said in the e-mail.

Rodgers added that he believes the decision not to reelect Zywicki was 'an embarrassment for the Board.'

'The effect of Todd’s ejection has been to warn me and any other trustee likely to speak his or her own mind to watch our step,' he said in the e-mail.

Finally, Mr Rogers wrote his own commentary in The Dartmouth,

'Hang one, warn a thousand' says the ancient Chinese proverb. In its April meeting, the Dartmouth Board of Trustees hanged Todd Zywicki '88, thus warning the petition trustees — and any others tempted to express independent views — not to cross the party line. The Board’s action was coldly deliberate. The legal machinery by which it was achieved took two years to construct.

Every 20 years or so, when a majority of the alumni body decides that the College is ignoring a critical problem, it elects petition trustees to promote change. That tradition, a healthy method of governance that sets Dartmouth apart, goes back to 1891, when alumni were formally granted one-half of Dartmouth’s Board seats in return for financing the College.

[After Rogers' election,] Subsequently, the alumni elected three more petition trustees with views similar to mine: Peter Robinson ‘79, Todd Zywicki ‘88 and Stephen Smith ‘88. It was no accident that each of them was a university professor or scholar. The Board Majority, predominantly composed of investment bankers, could have benefitted greatly from the new trustees’ education-first viewpoint, but instead, we were treated as if we were attacking the College. We were actually called a 'radical cabal' trying to 'hijack' the College by the Board member whose seat I had taken. The petition trustees had successfully overcome the penny-ante counterattacks, such as denying us the ability to mail our petitions to alumni to request signatures, and raising the required number of petition signatures, so it came time for the Board Majority to fix the petition trustee 'problem' permanently.

First, the Majority Board members simply declared the right to double their number from eight to 16 without adding an equivalent number of alumni trustees, despite an Association of Alumni poll of 4,000 alumni, who responded in favor of alumni trustee parity, 92 percent to eight percent. Then, the Majority threw its weight and College funds into a campaign to remove the Association leaders who had sued the College for breaking the 1891 Agreement.

In the boardroom, the Majority rewrote the 50 year-old Trustee Oath into an oath of loyalty, which was designed, in part, to limit trustees’ ability to express dissenting viewpoints without the direct threat of being ejected from the Board. And finally — fatally for Todd Zywicki — the Majority installed a formal review process that judged trustees against the new oath on a line-by-line basis.

On the day of his trial, Zywicki was asked if he wanted to make a statement. He apologized again for his Pope Center speech and exited. In order to maintain the confidentiality of board proceedings, I cannot give details. However, I can say from personal knowledge that many of the statements made in that meeting about Todd Zywicki were factually incorrect, but Todd was not there to respond. In my opinion, all of the issues, including his speech, did not rise to the level of negating the votes of the alumni who elected Todd. Despite my objection, the vote — for the only time in my five years on the Board — was secret.

Todd Zywicki’s greatest achievement as a Dartmouth trustee may well be having the personal courage to force the Board Majority to take responsibility for a political lynching.

Since I started writing about the governance of health care organizations, I used the example of Dartmouth (again, really a university with a medical school as a major component) as an example of governance that was more representative and accountable than that of many other health care organizations. Most universities that contain medical schools, for example, do not allow alumni to vote on the membership of more than a few board seats, and most only allow them to vote for alumni candidates hand-picked by the administration, not nominated by alumni petitions. However, since I started writing about Dartmouth, it seems that the self-elected majority of its board has done its best to make the board less representative and less accountable. Furthermore, it seems that some of the board's self-elected members regard anyone who disagrees with them as an enemy of the institution. Thus, their attitude seems to be: "l'universite c'est moi."

However, the duties of boards of trustees include the duty to uphold the institution's mission, not the board members' personal whims.

When I first started writing about these issues, I was surprised to find that the majority of the Dartmouth's boards self-elected, that is, "charter" trustees were from the finance sector. Now, having seen poor, sometimes arrogant, greedy, or even corrupt leadership of that sector bring down the world economy, I ask again whether people brought up in that culture ought to be dominant among the leadership of higher education?

As we get closer to graduation season for most institutions of higher education, another story about the leadership and governance of higher education, involving an institution housing a prominent medical school, has come into view, albeit indirectly. Let me try to explain this complex story, which on its surface has something to do with the ongoing financial crisis, but nothing to to with academia, by quoting, as usual, from media coverage.

We start with an article from the New York Times last week:

The man leading the Obama administration’s efforts to restructure the auto industry has been described in Securities and Exchange Commission documents as having arranged for his investment firm to pay more than $1 million to obtain New York State pension business.

Although he is not named in the documents, a person with knowledge of the inquiry said the investment executive is Steven Rattner, co-founder of the Quadrangle Group, the prominent private equity firm.

The S.E.C. complaint, filed as part of an expansive state and federal investigation into corruption at the state pension fund, details the efforts of Quadrangle to gain business from the pension fund beginning in 2004.

The person who received most of the $1 million-plus payment has been indicted, accused of selling access to the fund.

Here are the details of allegations of how Mr Rattner interacted with intermediaries to get NY state pension fund investments into his company.

Investigators are scrutinizing the fees paid by investment firms to intermediaries who arranged deals with the $122 billion pension fund. While such payments are legal, they often raise questions about conflicts of interest and would be illegal if used to bribe public officials.

In a 123-count indictment issued last month, two aides to Mr. Hevesi were accused of selling access to the fund. The aides, Hank Morris, who was Mr. Hevesi’s top political consultant, and David Loglisci, the fund’s chief investment officer, have denied any wrongdoing.

The S.E.C. complaint, which was released Wednesday, describes steps undertaken by the Quadrangle executive to win $100 million worth of business from the pension fund in 2005. That amount accounted for nearly 5 percent of a Quadrangle private equity fund and helped the company raise money from other investment funds.

In October 2004, the executive met with Mr. Loglisci to seek the pension fund investment and Mr. Loglisci 'reacted favorably' and 'began taking the necessary steps to secure approval' for the investment, the complaint said.

Two months later, in December, the same executive met with Mr. Morris, who, according to prosecutors, was working in tandem with Mr. Loglisci to generate millions of dollars in fees from the investment firms, and within weeks had agreed to a deal to pay an obscure securities firm that employed Mr. Morris 1.1 percent of any money that the retirement fund invested with Quadrangle, as a placement agent fee. That worked out to $1.1 million, of which Mr. Morris received 95 percent.

The timing of the meeting with Mr. Morris was significant, the complaint indicated, because the Quadrangle executive had already met with Mr. Loglisci and would presumably not need a placement agent. In addition, Quadrangle had previously retained a separate placement agent.

The executive also met with Mr. Loglisci about a low-budget movie Mr. Loglisci was producing, 'Chooch.' Soon afterward, GT Brands Holdings, a company owned by one of Quadrangle’s private equity funds, made a deal to acquire the DVD distribution rights to 'Chooch,' an agreement that made the film’s producers nearly $90,000.

The Quadrangle executive called Mr. Morris after the distribution deal was closed, and told him of the deal’s 'connection to Loglisci.' Three weeks later, Mr. Loglisci 'personally informed the Quadrangle executive that the retirement fund would be making a $100 million investment' in Quadrangle, the complaint said.

Later, the Washington Post published an article which alleges possible conflicts of interest affecting Mr Rattner in his current position as "automobile czar,"

The questions around Quadrangle and Rattner follow others that came to light soon after he emerged as a candidate to lead the Obama administration's efforts to prop up Chrysler and General Motors.

Quadrangle was, at least indirectly, previously involved in a deal involving Chrysler's majority owner, Cerberus Capital Management, a private equity firm.

That connection has led some Chrysler investors to doubt whether Rattner can decide without bias how the government should aid Chrysler.

In the summer of 2007, Quadrangle purchased Dennis Publishing, the owner of magazines including Maxim and Blender. The estimated price was $250 million.

Quadrangle's new magazine company was renamed Alpha Media and it took a loan of $125 million, much of it coming from Cerberus.

A year after Quadrangle's purchase, the publishing company's profits began to plummet.

The company announced last month that it would cease publication of its Blender magazine. Quadrangle has written the Alpha Media investment down to zero on its books, and Cerberus, the company's major creditor, is now effectively in control of Alpha, a person familiar with the matter said.

This week, a NY Times article revealed that Mr Rattner and Quadrangle are facing a wider investigation, and may be a target of investor lawsuits:

Two months after Steven Rattner left Wall Street for Washington, his private investment company is facing a widening investigation into corruption in public pension funds — and fighting for its future.

As state and federal authorities examine Mr. Rattner’s dealings with the New York State retirement fund, questions are emerging about his efforts to gain business from several other public funds, including ones in New Mexico and New York City. His private investment firm, the Quadrangle Group, is moving to calm anxious pension managers, who have entrusted the firm with hundreds of millions of dollars.

Mr. Rattner, who is leading the Obama administration’s efforts to revamp the auto industry, has left his small but prominent firm in a bind. Because he was integral to Quadrangle, investors can try to withhold additional money that they have pledged to the firm now that he has left.

No charges have been filed against Mr. Rattner, who did not respond to e-mail messages on Tuesday, or against Quadrangle, whose executives declined to comment.

While Quadrangle’s funds have not suffered as much as some other private equity funds, its investors have suffered losses in other parts of their portfolios. Some of them might try to capitalize on the inquiry to avoid making good on their pledges.

Another crucial question, however, is whether money from one Quadrangle fund was used to lure investors to a second fund. That possibility that might expose Quadrangle to investor lawsuits.

Furthermore, a Washington Post article raised the question of a failure of honest disclosure:

Government officials are expanding their investigation of Quadrangle, the private-equity firm founded by the Obama administration's lead auto negotiator, as new details emerge about an alleged kickback scheme involving the New York state pension fund.

On Wednesday, the New York City Comptroller William C. Thompson Jr. said he is working with the state's attorney general, Andrew M. Cuomo, to determine whether the city's pension funds were 'intentionally misled or deceived' by Quadrangle's failure to disclose the use of a middleman who has since been indicted, Hank Morris.

New York City's comptroller on Wednesday said Quadrangle never disclosed that it had paid Morris fees in connection with the city pension funds' investment in Quadrangle. The city invested $85 million in 2005 and $40 million in 2006.

The city has a rule that use of placement agents must be disclosed, but that rule was implemented in 2008 and does not apply to the Quadrangle investments.

But as part of the due diligence for receiving the investment, Quadrangle said in writing at the time that it used only two placement agents, Monument Group and London-based Helix Associates, the comptroller's office said.

'We take any ethical lapses by our managers seriously and will consider any remedies available to investors,' Thompson, the city's comptroller, said in a statement.

In response to all this, New York state government officials decided to ban middle-men from influence over pension fund investment decisions, according to the Wall Street Journal:

New York state said its public pension fund, one of the nation's largest, would ban the use of middlemen to help private-equity funds and other investors secure its business.

The move marked a pivotal development in a burgeoning controversy that has grown from a local corruption probe to a broader examination of the tactics that investment firms used to win lucrative business from vast public pension pools.

In most states, charging placement fees is legal if they are disclosed as required. But potential conflicts of interest are rife, especially for officials with a legal obligation to make informed, well-intended decisions about how pension-fund money is spent. Lawyers say a gray area emerges when finder's fees are paid to individuals or firms that do little more than trade on their access to public-pension-fund executives.

Such alleged behavior is at the heart of the scandal unfolding in New York. The state attorney general and the SEC have accused a former top fund official and a political adviser of giving investment funds access to billions of dollars of state pension money, in exchange for kickbacks and other payments for personal and political gain. One such middleman already has pleaded guilty to securities-fraud charges.

Some officials across the country have expressed concern about so-called pay-to-play practices -- that is, paying to influence people who direct the investments of public-employee retirement funds. Pay-to-play can range from illegal kickbacks, which in some instances have led to jail time, to legal activities such as campaign contributions to elected officials on the boards of pension funds. Pension funds are especially vulnerable to such accusations because their boards are often populated by elected officials or people with limited financial experience who need to rely heavily on outside advisers.

New York state's comptroller, Thomas DiNapoli, said that in light of the allegations contained in the case brought by the state's attorney general and the SEC, 'the best way to restore the pension fund's reputation is to say we won't be involved with any transactions that involved placement agents.'

Meanwhile, several commentators raised questions about Mr Rattner's suitability to be "automobile czar."

David Rothkopf, the author of Superclass, dubbed Mr Rattner the "kickback czar" on the Foreign Policy blog,

Are you joking? The Obama Administration somehow thought that it was okay to give a pass to Steve Rattner? They thought it was okay to appoint a guy to a key job after he apparently acknowledged to them that he was under investigation for providing a million dollar payment to pension consultant in exchange for receiving an assignment to manage a big chunk of pension fund money for New York State?

They thought it was okay in the middle of a justified surge of global disgust with Wall Street to embrace a big time Wall Street player who is smart enough to be arguing the legal technicalities of the transaction but not smart enough to recognize that it might just seem to be sleazy, dubious and a gross disservice to the people who were depending on the State to use appropriate methods and metrics to find stewards for their retirement money?

They even thought it was okay when part of the deal involved payments to support a movie called 'Chooch.' (What’s worse than bad ethics and bad taste all wrapped up into one sordid exchange? The New York Post called 'Chooch' which scored an amazing 00 rating from Rotten Tomatoes “the kind of vanity project that gives amateurs a bad name.”) What's more they did all this while giving Rattner the job of auto czar for which he had no material auto industry experience? I thought the way high ethical standards worked was that you didn't just bar people convicted of crimes, you tried to weed out people who had done things that were wrong or contrary to the public interest.

On BlackStarNews, Edward Manfredonia wrote:

I believed Rattner’s efforts to take the Times private should have disqualified him from an appointment with the Obama Administration; especially the key post of trying to stabilize the collapsing auto industry.

The White House still insists that the Administration fully supports Rattner; that reminds me of Bush proclaiming backing for Don Rumsfeld when it was clear he should have been shown the door as defense secretary.

Here's why Rattner deserves the boot.

An even more egregious form of activity that what I previously covered has become public. Rattner, who has extensive ties to Bill and Hillary Clinton, has been identified in several published news reports as the Quadrangle Fund executive who paid $1.1 million to receive more than $100 million from New York State’s multi-billion dollar pension fund to manage. The manner in which the payments were made leaves no doubt that they were meant for 'pay to play', which is illegal in my opinion.

Not surprisingly, a NY Times editorial was milder, but did allow,

Mr. Rattner showed some bad judgment in the 'Chooch' deal, and the public has a right to expect more of him in his new, highly sensitive position.

It's an interesting story, with implications in many areas, and it has hardly played out. Anyone reading this far is probably wondering, however, what this has to do with leadership, governance, and ethics in health care. None of the articles quoted above mentioned anything related to health care, or academics for that matter.

Here is where I pull the rabbit out of the hat.

Steven Rattner, in fact, has an important leadership position relevant to academics, and to academic health care. He is a member of Brown University's Board of Fellows, the "upper house" in the university's bicameral board of trustees, called the Brown Corporation. Brown University includes the Alpert Medical School, and the Division of Biology and Medicine. (Full disclosure: I am an alumnus of the College at Brown, and of the Medical School. I am a former full-time Brown faculty member, and currently a voluntary Clinical Associate Professor.)

And thus the issue here is really about the anechoic effect. Even though this convoluted case raises issues about Mr Rattner's role at Brown analogous to the issues it raises about his role as "automobile czar," there has been to date not even any media mention of his role at Brown, much less discussion of its implications for the university, academic leadership and governance, etc.

To survey the local coverage, the Providence Journal has not published any relevant news stories so far. It did print an op-ed questioning Mr Rattner's suitability for the "automobile czar" position, which had to do with the lack of sympathy an "investment banker" might have for the United Auto Workers. The Boston Globe ran a story from the Washington Post about the case, but one that had nothing on the local, or the academic angle. The Brown Daily Herald published a two news stories (here and here) about Mr Rattner's appointment as "automobile czar," which did note he is a "corporation member," but has not covered the current controversy. I am aware of no recent open discussion, or any discussion at all of Mr Rattner as a member of the Board of Fellows, in light of the recent unpleasantness.

Thus, our local angle on the New York pension/ placement agents/ Quadrangle/ "Chooch" affair mainly demonstrates how at many academic institutions, it is simply not done to bring up issues that question leadership and governance, especially at the highest levels.

Parenthetically, we have posted many times, most recently here, about the leadership and governance of Dartmouth College. Some might have interpreted these posts as hostile to that institution. They were anything but. In fact, it has only been possible to discuss leadership and governance at Dartmouth so thoroughly because that institution is much more open about its leadership and governance than is the typical US academic institution. Half of the he Dartmouth Board of Trustees, as we noted, used to be elected by vote of the alumni. The alumni could nominate their own candidates for the Board, through a petition process. The successful attempt to decrease the overall proportion of elected Trustees sparked a tremendous amount of open discussion and debate. Issues of leadership and governance at Dartmouth seem to be frequently discussed in local publications, on blogs, and sometimes even in the national media. I suspect that a governance system at Dartmouth marked by more than average representativeness and accountability has lead to much more vigorous debate and discussion of academic governance and leadership than occurs at more typical universities. (Note that even after the "board packing," Dartmouth still has a larger proportion of alumni-elected trustees than does the typical university, and it is still possible for alumni to put people on the ballot via petition.)

Brown University, on the other hand, is lead by a Corporation most of whose members are appointed by the Corporation itself. While a minority (14 of 42) of the Board of Trustees (the lower house) of the Corporation are elected by alumni, to my knowledge, all the election candidates are hand-picked by the Brown Alumni Association, and there is no provision for petition candidates. Although a few fiesty students occasionally call for more light to shine on the Brown Corporation, (e.g., see here), for the most part, questioning the leadership and governance of the university is simply not done. Thus, Brown seems to be typical of most major US academic organizations.

However, more transparent, accountable, governance, clearly guided by ethical principles and the organization's mission might allow US academia, and academic medicine to address some of the problems that we too often have opportunities to discuss on Health Care Renewal.

We recently commented on the conviction of a state legislator charged with selling his influence to a powerful local medical center. NorthJersey.com has a follow-up on this story which shows how health care leaders are often members of the power elite, if not quite of the superclass, and how their machinations put this group's interests ahead of the mission of their health care organizations.


The General Overview

The trial of former state Sen. Joseph Coniglio, convicted in a bribery scandal involving Hackensack University Medical Center [affiliated with UDMNJ, which has had its own issues, e.g., here], exposed the hospital’s reach into the State House — and put a spotlight on the wealthy, influential men who serve as the hospital’s power brokers.

Hackensack’s board members have connections and political muscle that extend far beyond the hospital. At black-tie fund-raisers and dinners at board member Joseph Sanzari’s Stony Hill Inn, business — hospital and otherwise — is on the agenda.

Various board members help to underwrite Bergen County’s Democratic machine and powerful lawmakers in Trenton. They’re awarded many of the region’s public construction contracts. They have the network — and the money — to smooth over zoning issues for the hospital. Testimony at the trial this month showed they supported the hiring of Coniglio, who was convicted of steering millions in grants to Hackensack while on the hospital’s payroll.

'A political machine' is how Assistant U.S. Attorney Thomas R. Calcagni described the hospital as he told jurors about Hackensack’s relationships with former acting governor and Senate President Richard Codey, state Sen. Paul Sarlo, Coniglio and others during the trial.

Board Members' Self-Dealing

There are several results. One is that "some [board members] are also making money off the hospital." The article gave several examples of such conflicts of interest.

A few examples from the hospital’s federal tax filings for 2007, the latest available:

* Companies owned by Sanzari and Creamer are building a 975-car garage as part of the $135 million cancer center now under construction. Creamer was paid more than $475,000 by the hospital for construction services.

* The hospital paid more than $2 million to Progenitor Cell Therapy, a private stem cell research company owned in part by Ferguson; Dr. Andrew Pecora, director of the cancer center; board members Peter C. Gerhard, George T. Croonquist and Samuel Toscano Jr.; and the hospital’s chief operating officer, Robert C. Garrett.

* The hospital paid $2.5 million to lease space from Sanzari 2001, where board member David Sanzari — Joseph’s cousin — is a managing member with an ownership stake. It also spent $68,000 at the Marriott at Glenpointe hotel, which is owned by David Sanzari’s family.

* The DeCotiis law firm, one of the most influential in the state, made more than $1 million from the hospital. It is representing the hospital in the Coniglio case and guiding its campaign to reopen Pascack Valley Hospital in Westwood. During that time, Frank Huttle III, a partner, served on the board. He said Friday that he resigned recently.

* Universal Health, which operates a retail pharmacy at the hospital, received $200,000. At the time, Toscano was the company’s chief executive officer.

Political Influence Disadvantages the Competition

The membership of the hospital's leaders in the power elite could be used to advance the hospital against less-connected competitors.

The Coniglio trial served as a primer on the backroom politics of New Jersey, where certain grants, known as 'Christmas tree items,' were doled out based on who has 'the juice.' By all accounts, Hackensack mastered the game and loomed large in Trenton. From 2004 to 2006, the hospital received $17.4 million for its cancer center, an extra $9 million in charity care above the millions it was already getting and $250,000 for the Joseph M. Sanzari Children’s Hospital. A $900,000 research grant was awarded to the private stem cell firm at the hospital and $70,000 went for a seat belt study.

Those awards dwarf the grants given to Hackensack’s competitors.

Connectedness of the Hospital's Board Members

The article gave further examples of how connected were the board members, and how they used their connections.

At Hackensack, a few names — Simunovich, Ferguson, Sanzari, Creamer — keep showing up in influential roles on key boards. They serve as trustees of the Hackensack University Medical Center Foundation, the hospital’s fund-raising arm, as well as the hospital’s board of governors and Hillcrest Health Service System, the hospital’s parent corporation. Leading contractors and developers — Sanzari, Creamer and John C. Fowler — are on the building committee.

Simunovich is the former chairman of the board of governors and current chairman of the board of trustees for the Hackensack University Medical Center Foundation, the hospital’s fund-raising arm.

Governor Corzine did not reappoint Simunovich to the Turnpike Authority in 2007 after he was investigated by the State Ethics Commission; as chairman, he had voted on millions in public contracts that were awarded to Sanzari while he accepted free rides on the contractor’s private jet. Simunovich paid a $50,000 fine, which was not an admission of guilt.

'Mr. Simunovich’s actions do not reflect the standards demanded by the governor for those who serve in his administration,' Corzine’s then-spokesman Anthony Coley said.

Joseph Sanzari serves as first vice chairman, the No. 2 position on the hospital’s board of governors.

Sanzari is part owner of both the Stony Hill Inn in Hackensack and the New Bridge Inn in New Milford, popular hangouts for Bergen County’s political elite. Sanzari, his companies and employees have contributed more than $100,000 to political campaigns and political action committees in the past three years, according to data the company provided to state elections regulators.

Among his top employees is state Sen. Paul Sarlo, also the mayor of Wood-Ridge. Sarlo oversees billions in public spending as a lead member of the Senate Budget and Appropriations Committee. As chairman of the Senate Judiciary Committee, he also controls key appointments to state agencies that have awarded millions in contracts to Sanzari’s firms.

Sarlo, chief operating officer for Sanzari’s construction company, testified at the trial that he was largely responsible for getting the $900,000 grant for the hospital’s cancer center. He said he also lobbied Codey for the $9 million cancer center grant and played a role in the $900,000 grant for stem cell research at the hospital.

Conclusions

Hospitals often have sterling reputations within their communities as selfless organizations devoted to improving the health of the people. As we have noted, hospitals and other health care organizations have come to be run more often by people with managerial background than those with health care experience. Not-for-profit hospitals have boards of trustees who are supposed to exercise stewardship, making sure the organization upholds its mission. But as we have noted before, e.g., here, boards of health care and related organizations may put their own agendas ahead of the mission. Furthermore, boards of big hospitals and other health care organizations seem to be increasingly composed of the well-connected, often to the point that they can be regarded as members of the power elite, if not the superclass. There may be some short term benefits to having such people on the boards. In the long run, however, is it any surprise that their missions may give way to other interests?

Hat tip to University Diaries.

ADDENDUM (4 May, 2009) - Hackensack University Medical Center's response to the news story discussed above was apparently first to stop advertising in the offending newspaper, and ban its sales in the hospital. Another example, almost laughable, of a health care organization's leadership trying to shoot the messenger, and of how the anechoic effect may be generated. Hat tip to the Schwitzer Health News Blog.

After a well-publicized story that managers of small town in California were paid in the high six-figures, reporters in California have gotten interested in the pay of public officials.

Thus the San Diego Union-Tribune reported on the compensation received by CEOs of local public health agencies, called public health care districts, two of which run hospitals. One in particular received generous compensation:

The top official at Palomar Pomerado Health, a public agency serving health-care needs in Poway and Escondido, receives in excess of $1 million in compensation per year.


Michael Covert, who has run the North County hospital district since 2003, receives a base salary of $736,000 a year. Retirement, bonuses and other benefits push Covert’s total pay past $1.1 million.

One other public health CEO, also responsible for a hospital, made somewhat less:

Tri-City chief executive Larry Anderson collects a base salary of $480,000 and benefits that drive his total compensation past $625,000 a year. He also received a $50,000 relocation benefit when he arrived last year.

Two CEOs of health districts that did not run hospitals, having leased them out, made less still:

Grossmont chief executive Barry Jantz makes about $183,000 a year in base pay and benefits that increase his total compensation to just under $250,000 a year.

Fallbrook administrator Vi Dupre, ... is paid a base salary of $61,000 a year and benefits that raise her compensation to just over $69,000,....

Why is Mr Covert paid so much?

Bruce Krider, the health-care district chairman, said Covert does an excellent job managing a complex enterprise that includes two major hospitals. Covert juggles the interests of staff, physicians, patients, volunteers, board members and other stakeholders, he said.

'A million dollars sounds pretty good to anybody, but my view is, pay a lot and expect a lot,' said Krider, a management consultant who also is a former hospital executive. 'You can’t have some mediocre public servant. You need somebody that has got vision, that can see the issues that are most important and put it all together.'

So now even the managers of public health agencies have become million dollar babies. And of course, according to the boards of trustees who are supposed to supervise them, they all do excellent work and therefore are underpaid even then. As we have noted before, it seems that every board supervising every health care executive thinks their executives are above average, if not stellar. Note, though, that the chair of the board overseeing Mr Covert is himself a retired hospital administrator. So, as we have noted before, it seems that the boards of such organizations often have a preponderance of members who are not inclined to be critical of their hired executives, much less limit their pay.

So the rules for top leaders of health care organizations seem to be different from those for you and me. All these managers seem to be entitled to be above average. (The only ones who are eventually deemed below average seem to be those up to no good in ways that do not financially benefit their organizations, e.g., see this.)

In my humble opinion, it is unseemly for the leader of a government run public health organization to make so much.

True health care reform would decrease perverse incentives throughout the systems, spread the power in organizations more broadly, and make leaders accountable.

As we predicted (here), the new reporting requirements imposed on US not-for-profit organizations are beginning to yield interesting results about the coziness of the leadership of some health care organizations. 

Western Pennsylvania

For example, we start with an article in the Pittsburgh Tribune-Review about hospitals in western Pennsylvania.

Board members at Western Pennsylvania hospitals have provided legal, real estate, insurance and advertising services to their organizations, according to IRS reports examined by the Tribune-Review.

The reports, which cover the fiscal year ending June 30, 2009, are the first under new reporting requirements imposed on nonprofit hospitals by the IRS. Still more requirements will kick in next year.

Details of the filings by the two largest area health care firms, UPMC and West Penn Allegheny, were made public last month. UPMC reported $10 million and West Penn reported $5 million in dealings with board members or top executives.

Five other major nonprofit health care providers reported business dealings with board members and, like UPMC and West Allegheny, cited in-place reporting and monitoring systems to avert or minimize any conflict of interest.

The specifics include this about Ohio Valley General Hospital:

At Ohio Valley General Hospital, the tax return shows two relatives of the chief executive officer are on the payroll.


Dr. David Provenzano, son of CEO William F. Provenzano, was paid $613,781 in salary and benefits. The CEO's daughter-in-law, Dr. Dana Dellapiazzo, was paid $130,525.


David Provenzano is the medical director of the hospital's pain center. Dellapiazzo is an anesthesiologist.

About Excela Health:

At Excela Health, which operates the Westmoreland Regional Hospital and two other hospitals, a company part owned by CEO David Gallatin was paid $253,835 for direct mail services.

Excela spokeswoman Robin Jennings said Mailing Specialists 'processes our mail in preparation for sending to the post office with appropriate bar coding.'

Excela reported payments of $683,250 to Westmoreland Emergency Medicine, which employs board member Dr. Robert Whipkey.

About Washington Hospital:

At Washington Hospital, board member Thomas Northrop's Observer-Reporter newspaper was paid $212,071 for advertising services. The hospital paid $308,185 in premiums to the Campbell Insurance Agency, where board member John Campbell is an owner.

About Jefferson Regional Medical Center:

Jefferson Regional Medical Center in Jefferson Hills, according to its report, paid $151,940 in legal fees to the law firm of board member Gregory Harbaugh. It paid $331,280 in real estate commissions to the firm run by board member Kevin Langholz.
The hospital paid $75,035 to the Thorpe Reed law firm where board member Anne Mulaney works.

About St. Clair Hospital:

At St. Clair Hospital in Mt Lebanon, a radiology firm that employs Dr. Donald Orr, who is a board member, was paid $1.95 million for providing medical services, according to the hospital's filing.

The hospital paid $80,000 for insurance related services to the HGH Group headed by hospital board member Bryan Hondru.

New Hampshire

The New Hampshire Union-Leader reported on Catholic Medical Center:

The head of Catholic Medical Center, whose salary is being questioned by the Attorney General's Office, has two offspring and two step-children employed or in one case recently employed there, the hospital acknowledged.

A hospital official defended its hiring practices, saying no favoritism is shown and that of the 11 members of senior CMC management, seven have relatives who either work or have worked at the hospital, some on a per-diem basis.

Executive Vice President Ray Bonito said his own son held a per-diem job during college. Offspring of trustees can also work at the hospital, he said.

Alyson Pitman Giles has been CMC president and chief executive officer since 1999. Her bid to intertwine CMC with Dartmouth-Hitchcock Health has been stalled by the New Hampshire attorney general, who deemed it an acquisition of CMC and said it violates state law and would need court approval.

CMC provided the following information on Giles' four relatives.

-- Son Seth Pitman has worked per-diem over the past several years. Late last month, the hospital said he was working as a project writer in the marketing office. But last week, the hospital said he is not actively employed there.

-- Daughter Sarah Pitman manages a primary-care physician practice. The hospital has not said when she started at that job. She was a hospital volunteer from June 1999 to January 2001, when she started working per-diem.

Two Giles stepchildren are also employed at the West Side hospital.

-- Stepdaughter Megan DeSantis is a physician assistant at Surgical Care Group, where she was hired six years ago. CMC acquired the group in May 2009.

-- Stepson William Giles is a physician recruiter. He started as a program analyst with the IT department in June 2000 and received several promotions over the last 10 years, CMC said.

Summary

The defenses for hiring top leaders' relatives, and doing business with top leaders' firms were similar in both locations. For example, in western Pennsylvania,

All reported that any dealings with connected firms individuals were 'at arm's length' with prices set at 'fair market value.'

In New Hampshire,

'It's not just a question for hospitals,' Bonito said of hiring relatives. 'It's a question for all companies.'

What's important, he said, is that a strict process be followed.

'Everyone goes through the same process. I don't care whose kids they are,' said Bonito. 'Everyone gets treated the same. We hire the most qualified candidate.'

It all smacks of an excess of coziness.  One wonders if there was any effort made to find other candidates when the CEO's family members showed up, or to find any other vendors when the board members' firms were available. Maybe they could have found writers, physician recruiters, and even physicians other than the immediate family members of the hospital CEO. Maybe they could have found direct mail companies, advertising agencies, and law firms available where no relatives of the CEO work, and which were not run by hospital trustees.  However, rejecting a CEO's child, or a board member's firm may require an independence of spirit rarely found in today's bureaucratic health care environment.  Instead, it may be easier to "go along to get along."

Once hired, furthermore, even when there are "processes and procedures" in place, it may become all to easy to treat the CEO's relatives differently than run of the mill employees, and to treat the trustees' firms differently than the usual vendors.  That is where the real conflicts of interest set in.  The sort of coziness that allows hiring leaders' relatives and doing business with leaders' firms could soon lead to confusion between leaders' interests and the institutions' mission.  However, leaders of hospitals and other not-for-profit health care organizations have a duty to put the mission of the organization ahead of their personal interests. 

In my humble opinion, this sort of coziness, this sort of fuzziness at the boundaries of institutional duties and personal interests, may be a fundamental reason that our current health care system has become so solicitous of the interests and prerogatives of its leaders, and so cold to the needs of patients and the values of professionals. 

The need for more transparent, accountable leadership of health care who explicitly are subject to clear ethical rules was never more apparent. 

Stay tuned as more and more cases like this appear....