These sorts of hits just keep on coming.  This story comes from the Baltimore Sun.

The Golden Parachute

First, let us just review the financial details,

Former University of Maryland Medical System CEO Edmond F. Notebaert, who resigned two years ago during a tumultuous time that included infighting and a board shakeup, is again the subject of controversy over his $7.8 million pay package.

The package included $2.4 million in severance, about $639,000 in salary for seven months, deferred bonuses and contributions to a retirement plan that instantly vested when he left.

By the way, Mr Notebeart did not actually go into retirement after he received this largess,

A spokeswoman for Temple University, where Notebaert now heads the health system, said he was not available for comment.

The Justification

The view from some amongst the local leadership was that the price was reasonable,

[Current Board Chairman Stephen A] Burch acknowledged that Notebaert's compensation was large but said it was justified because of Notebaert's experience and accomplishments while working at the medical system. The system added Shore Health System and Chester River Health System to its roster of institutions under Notebaert's tenure.

Total profit reached $301 million during Notebaert's tenure, compared with $49 million during the prior five-years, according to the medical system. Revenue was $2.1 billion when Notebaert left in fiscal 2009, Burch said.

'Mr. Notebaert's salary reflected his many years of successful and significant experience at large, complex health systems and was well within the range of comparable executives,' Burch said.

The Lack of Disclosure

Of course, the golden parachute given to Mr Notebaert did not seem to be something that UMMS wanted to boast about:

Notebaert walked away with the compensation — details of which weren't disclosed in filings with the Internal Revenue Service until this week — after he announced his retirement in July 2008.

The Process

In fact, there were questions raised about the process that lead to the golden parachute,

The system's protocol for deciding compensation came under fire in the months after Notebaert's retirement because the pay was awarded without full board approval. Now, the recently detailed pay package is drawing criticism anew.

"This is an outrageous case of excessive executive compensation in a public institution," Gov. Martin O'Malley said Wednesday in an e-mailed statement. "This sort of 'golden parachute' has no place in the public sector."

Furthermore,

[Maryland's Speaker of the House, Michael E] Busch served as interim chairman of the board after Chairman John P. Erickson resigned amid the controversy. Busch said the compensation committee at the time left the rest of the board in the dark about Notebaert's payout.

The Questions About Prior Performance

In addition, the Baltimore Sun article recounted some major questions raised about Mr Noteabert's leadership:

Tensions had arisen between him and physicians over how the system was run. Shortly after his departure, one-third of the board resigned, including the chairman and vice chairman.

Also,

Under Notebaert, physicians had complained that relations between the medical system and the medical school had deteriorated to a point that jeopardized both institutions. Critics said the system was becoming too focused on profits and less on medicine and research.

In addition,

Maryland's House Speaker, Michael E. Busch, who serves on the medical system board, said there is little legal recourse to try to recoup any of the compensation and that he thought the severance package was excessive given the dysfunction at the medical system when Notebaert left.

'I think a lot of the members of the board disagree with the payment, considering how he left,' Busch said. 'It's not like he left being hailed by the institution. He didn't leave under great circumstances.'

In addition, Maryland Governor Martin O'Malley said,

There were quite a few messes that had to be cleaned up over the last four years and leadership dysfunction at UMMS was one of them

The Summary

So there you have it, a leader noted for his "dysfunction" by the state Governor, and for his bad relationships with health care professionals, who felt he was putting profit ahead of the system's mission, walked off with a $7.8 million golden parachute provided without the approval of the hospital system's full board of directors, and only disclosed two years later. Mr Notebaert seems to be another member of the enlarging group of health care organizational leaders who received enough compensation to make them rich, despite performance that was questionable at best.

For other posts about the often outrageous compensation given health care leaders, often seemingly completely at odds with their performance, look here.  For a longer discussion of the implications of current executive compensation in health care, look here. 

I will just conclude, as I have before, with this....  executive compensation in health care seems best described as Prof Mintzberg described compensation for finance CEOs, "All this compensation madness is not about markets or talents or incentives, but rather about insiders hijacking established institutions for their personal benefit." As it did in finance, compensation madness is likely to keep the health care bubble inflating until it bursts, with the expected adverse consequences. Meanwhile, I say again, if health care reformers really care about improving access and controlling costs, they will have to have the courage to confront the powerful and self-interested leaders who benefit so well from their previously mission-driven organizations. It is time to reverse the coup d'etat of the hired managers.

Dr Douglas Bremner is a Professor of Psychiatry and Radiology at Emory University, and Director of the University's Clinical Neuroscience Research Unit. He has also written a book critical of the pharmaceutical industry (Before You Take That Pill), and writes a blog (also called Before You Take That Pill) that is also skeptical about certain aspects of current psychiatric dogma. Inside Higher Education reported that Emory University can apparently no longer bear to have its name mentioned in Dr Bremner's blog:

Emory University has been accused repeatedly over the last year of looking the other way while one of its prominent physicians built extremely close ties to the pharmaceutical industry and -- critics charge -- failed to adequately report those ties as required by university and federal regulations.

But what if you are an Emory professor who happens to differ with the pharmaceutical industry? Then, it appears, Emory watches you closely -- and if you are a blogger, the university can tell you that you must remove the Emory name from your Web site. That's why a recent post on the J. Douglas Bremner's blog Before You Take That Pill is called 'I Am Removing the Name of My University From This Blog.'

In the post, he notes that he was recently ordered to remove the Emory name both by the interim chair of psychiatry and behavioral sciences, and by the medical school's executive associate dean for faculty affairs. In the letters, which he provided to Inside Higher Ed, they tell Bremner to remove Emory's name, logo and letterhead from his blog because none of them can be used for 'non-Emory business.' He was also told to report on when he had removed Emory from his blog.

The letters cite complaints that the university received about a blog post Bremner made in January in which he criticized the eviction of a man with bipolar disorder who was being forced out of his apartment for smoking. Bremner made his point in the form of a mock letter 'To Whom It May Concern' giving his blessing for the man to continue to smoke. According to Bremner's Emory superiors, complaints they received suggested that he was making 'clinical recommendations for a patient you do not know and have never examined,' and these postings made them feel the need to tell him to stop using the Emory name.

And even more concerning:

Sarah E. Goodwin, director of media relations for Emory Health Sciences, said that Emory's objection to the use of its name in non-official places was 'across the board' and not related to the content of Bremner's blog. When told about other blogs or Web sites where Emory professors' university affiliation was noted on non-Emory business, she said she didn't know why that was the case but insisted that the ban was 'across the board.'

She noted that Bremner has been 'blogging for some period of time,' and that 'if you read it over a long period of time, you can see comments he makes that may be of concern.' She declined to identify those comments.

So there you have it. It appears that faculty members, even senior faculty at Emory who make comments "that may be of concern" to an Assistant Vice President for Health Sciences, and Director, Media Relations, are not supposed to identify themselves as Emory faculty. This is the sort of policy one might expect from certain corporations. But Emory is a university. It proclaims it

is an inquiry-driven, ethically engaged and diverse community whose members work collaboratively for positive transformation in the world through courageous leadership in teaching, research, scholarship, health care and social action.

It proclaims its strategic plan is entitled:

Where Courageous Inquiry Leads

We can see where courageous inquiry leads at Emory. It leads to University executives attempting to censor faculty blogs when they included "concerning" remarks. As Inside Higher Education noted, Emory executives have not attempted to have other faculty bloggers remove references to the University, or to the bloggers' faculty status from their writing. Presumably, those bloggers were more politically correct.

We have often written about the suppression of medical research that is now a plague upon medicine, and the most dire threat to the evidence-based medicine approach. The research most likely to be suppressed is that which offends vested interests, particularly vested interests in selling particular health care goods or services. On the other hand, the Foundation for Individual Rights in Education (FIRE) for years has been fighting to uphold free speech and academic freedom on campus, but has mostly dealt with threats to politically or socially unpopular speech.

This case seems to blend these these different kinds of threats to free speech and academic freedom. It once again shows how elite universities increasingly are run like for-profit corporations, putting the prerogatives of managers ahead of the individual rights of faculty and students, and putting the mission of the university, to discover and disseminate the truth in the spirit of free enquiry, in the trash.

Dr Bremner's own comments in his blog are here. He concluded that Emory managers were "thinking more like a corporation than a university, where the free exchange of ideas, regardless of the perceived value or political correctness of those ideas, is held to the highest standard."

See also comments by Prof Margaret Soltan in the University Diaries.

ADDENDUM (15 July, 2009) - Emory has backed down, and will once again allow Dr Bremner to identify himself as a faculty member. See this post by Dr Bremner, and this post on The Torch (the FIRE blog).

The San Francisco Chronicle just reported that a new Chancellor has been nominated for the University of California - San Francisco (UCSF). UCSF is functionally a health sciences university, and its Chancellor functions as its president. The UCSF medical school is generally considered one of the elite US academic medical institutions.

Genentech executive Susan Desmond-Hellmann has been nominated to be the next chancellor of UCSF, making her the first woman or biotech leader ever asked to run the research campus and hospital system that is San Francisco's second-largest employer.

Desmond-Hellmann has served most recently as president of drug development at Genentech, the South San Francisco biotech firm that was recently acquired by Swiss drugmaker Roche. She was trained as a physician, did her internship at UCSF and has taught there recently as an adjunct associate professor while working at Genentech.

Although prior UCSF chancellors have come from more academic or scientific backgrounds, [Dr Holly] Smith said Desmond-Hellmann's biotech connections would be an advantage as the university tries to translate scientific discoveries into medical treatments.

Dr Desmond-Hellmann is, in my humble opinion, a very unusual candidate to be Chancellor of one of the country's premier academic medical institutions. According to her official Genentech bio (taken off the Genentech server, but transiently available in the Google cache here), and a biography in Nature Drug Discovery, Dr Desmond-Hellmann, after getting both an MD and an MPH, spent two years doing AIDS research in Uganda as a UCSF junior faculty member, and then spent a few years in private practice hematology-oncology. She published few articles (5, according to Medline, last in 1995), and by 1993 went to work in industry, first for Bristol-Myers-Squibb. She started at Genentech in 1995, and worked her way up to her current position, "president, Product Development. In this role, Hellmann is responsible for Genentech's Development, Process Research & Development, Business Development, Product Portfolio Management, Alliance Management and Pipeline Planning Support functions. Hellmann is a member of Genentech's executive committee." Before her nomination to be Chancellor, Dr Desmond-Hellmann was "affiliated" faculty of the Department of Epidemiology and Biostatistics at UCSF, apparently with the rank of adjunct associate professor. In that capacity, she apparently gave a single seminar in 2007, and lectured in the Designing Clinical Research course in 2003.

So, on one hand, Dr Desmond-Hellmann, to be charitable, does not have much of an academic track record, at best approximating that of a very junior medical faculty member. She also certainly has no experience in academic administration. In general, people who lead academic medicine often have substantial track records in academics and in academic administration. So, in some sense, Dr Desmond-Hellmann's appointment seems to based on the theory of the generic manager. That is, the popular notion in the business world managers can manage anything, any organization, with any mission, in any context. Managing in the complex health care context, especially managing large, complex academic medical institutions, may not be easy for those used to managing elsewhere, even in the health care corporate world.

Furthermore, the complex mission of academic medicine, which includes providing excellent care of individual patients, while discovering and disseminating the truth in a spirit of free enquiry, is very different from the mission of a for-profit biotechnology company. How well someone used to the bottom-line mentality of the corporate world would uphold the academic mission is not clear.

Dr Desmond-Hellmann came from a company known for charging very high prices for the drugs it marketed, and Dr Desmond-Hellmann was on record personally defending this practice. Quoting from a news article in the Journal of the National Cancer Institute [McNeil C. Sticker shock sharpens focus on biologics. JNCI 2007; 99: 910-914.]

Never mind their novel targets and mechanisms. It's the cost of new biologic agents that's creating a buzz these days. At thousands of dollars a month, which can mean many tens of thousands for some regimens, sticker shock has generated recent, prominent articles in both the national and trade press.

On one level, the argument is about macroeconomics. Neal Meropol, M.D., of Fox Chase Cancer Center in Philadelphia, pointed out that cancer drugs account for 40% of all Medicare drug expenditures. That makes them a major contributor to the country's high health care costs, now about 17% of our gross domestic product (GDP) and growing. That percentage is much higher than in other developed countries with higher life expectancies, he said at a forum on cancer care costs at the American Association of Cancer Research annual meeting.

On the other side of the macroeconomic debate, experts point out that the U.S. has a high GDP to begin with and so can afford to spend more on health. And cancer biologics, though among the most costly drugs, are still only a tiny fraction of total GDP, said Genentech's Susan Desmond-Hellmann, president for product development, at AACR.

Hellmann and others argue that with these drugs’ potential to alleviate the huge societal burden of cancer, biologics are worth the cost.

The industry has responded to concerns about costs by putting more resources into patient assistance programs. When Genentech received U.S. Food and Drug Administration approval for bevacizumab in lung cancer last October, it also announced a cap on expenditures for the drug for patients with family incomes less than $100,000 a year. In 2005, the median household income was $46,326.

Originally announced as $55,000, the cap actually doesn't kick in until after a patient has received 10,000 mg. At the wholesale acquisition cost, 10,000 mg is about $55,000, said Genentech spokesperson Edward Lang.

What the companies have not done so far is reduce prices. The reason, industry representatives say, is the need to recoup massive research and development costs, including high manufacturing costs for biologics. These costs have long kept biotech companies from making much of a profit overall, Hellmann said. She noted that profit levels of publicly held biotech firms have "hovered close to zero" throughout the life of the industry.

But, while Dr Desmond-Hellmann was defending pricing drugs that at more than $55,000 a year, and complaining about low industry profits, she was pocketing lavish rewards. According to Genentech's 2008 proxy statement, (the last available, since the company has been bought out by Roche), her total compensation was $8,361,348 in 2007 and $7,820,142 in 2006. In 2007, her total compensation was equal to 0.3% of the firm's total net income, and the top five company executives' total compensation was equal to about 1.5% of the firm's total revenues. In 2007, the firm's stock price declined from 91.30 on 6 January 2007 to 66.38 on 4 January, 2008, or 27%, according to Google Finance. In 2007, she held 1,616,383 shares of stock, or stock options exercisable within 60 days of January 31, 2008. In 2007 she exercised 170,000 stock options, realizing $11,556,663. So perhaps those high drug prices were needed not only to pay for research, but to make top executives, including Dr Desmond-Hellmann, very rich.

This raises further questions about her inclination to uphold the university's mission in the future.

University of California, San Francisco is a leading university dedicated to defining health worldwide through advanced biomedical research, graduate-level education in the life sciences and health professions, and excellence in patient care.

In any case, hiring a lavishly compensated top executive from a biotech firm known for its high drug prices to run a public health sciences university does considerably blur the line between academic medicine and the health care industry. In the Chronicle article, Dr Desmond-Hellmann declared, "I began my career at UCSF and my heart has never left it." If she does become Chancellor, let us hope that her heart will speak louder than all those millions she used to make by, among other means, charging more than $55,000 a year for bevacizumab.

We began this blog way back in 2005 to discuss threats to physicians' values, especially from concentration and abuse of power. Personal experience, and cases and anecdotes described by colleagues suggested that a dysfunctional health care system was making patients and physicians miserable. Interviews with more physicians suggested pervasive threats to their values, many stemming from how leaders of health care organizations wielded their power.

Threats to Professional Values

In a 2007 post, based on an article in JAMA by Dr Arnold Relman, I asserted that the notion that threats to physicians' professional values are a major cause of health care dysfunction was becoming mainstream. Furthermore, Dr Relman's review of the history of the problem suggested that the rising power of for-profit health care corporations, for whom making money came before the health and safety of patients, was a primary culprit.

Dr Relman has discussed the issue frequently (e.g., see this post). However, despite occasional publication in some prestigious medical journals, his views seem to have gotten little traction.

Arrow's Analysis: Is Health Care a Perfectly Competitive Market?

Amazingly, however, the issue has made it into the New York Times, in the form of two posts in the Economix blog by health economist Prof Uwe Reinhardt. Prof Reinhardt started by resurrecting the classic article by "Nobel laureate economist Kenneth Arrow," which argued that health care's special context means that the health care market cannot be truly competitive.

First Prof Arrow reviewed the characteristics of a perfectly competitive market:

To lay down a standard to which to compare the health care sector, Professor Arrow explained first on what basis economists consider a perfectly competitive market for some good or service as 'maximizing human welfare,' an outcome economists describe as 'efficient.'

The crucial characteristics of a perfectly competitive market are (1) that all of the quality dimensions of the good or service traded in that market are accurately understood by buyer and seller; (2) that potential buyers have full transparency on the price they will have to pay per unit of that good or service; (3) that it is easy and relatively costless for potential sellers to enter and exit this market; (4) and that there are so many potential buyers and sellers that none individually can affect the market price of the thing being traded.

If those and some other conditions are met, Professor Arrow explained, then for any given initial distribution of income and wealth that market will settle down at a unique equilibrium, that is, a state from which no potential buyer or seller would want to move. This equilibrium has important attributes.

First, in what Professor Arrow calls the First Optimality Theorem of welfare economics, it can be shown that in this equilibrium the traded good or service is allocated among buyers in such a way that it would be impossible through any reallocation to make someone happier without making someone else less happy.

It is an allocation that economists call Pareto efficient, in honor of the Italian industrialist, economist and philosopher Vilfredo Pareto (1848-1923), who first proposed this criterion.

For any given initial distribution of income and wealth, economists declare the associated Pareto-efficient allocation of the thing being produced and traded to be 'welfare-maximizing' — hence the term 'welfare economics' for this type of analysis.

Second, and very importantly, in what Arrow calls the Second Optimality Theorem, he explains that if on ethical grounds society wished to distribute a good or service (for example, education or health care or food or beach houses) among people in a particular way — like egalitarian principles — it need not have government directly involved in producing or distributing that good or service.

In his second blog post, Prof Reinhardt summarized why health care cannot be such a competitive market. The problems are uncertainty and asymmetry of information:

This uncertainty has several aspects.

First, physicians may not agree on the medical condition causing the symptoms the patient presents.

Second, even if physicians agree in their diagnoses, they often do not agree on the efficacy of alternative responses — for example, surgery or medical management for lower-back pain.

Third, information on both the diagnosis of and the likely consequences of treatment are asymmetrically allocated between the sell-side (providers) and the buy-side (patients) of the health care market. The very reason that patients seek advice and treatment from physicians in the first place is that they expect physicians to have vastly superior knowledge about the proper diagnosis and efficacy of treatment. That makes the market for medical care deviate significantly from the benchmark of perfect competition, in which buyers and sellers would be equally well informed.

Uncertainty and asymmetry of information about the quality of goods or services being traded is not, of course, unique to the medical care market. It is ubiquitous in modern economies that trade in highly complex goods and services. We find these characteristics, for example, in financial transactions, including all types of insurance; in automobile repairs, in plumbing and even in the purchase of some consumer electronics.

Wherever asymmetry of information is present, there exists the potential for the better-informed market participants to exploit the ignorance of the less well informed. How society responds to this flaw in markets depends on the severity of its consequences.

In the market for electronic products, for example, the consequences appear to be regarded as trivial. A customer may be seduced into purchasing an excessively complex and expensive product, but society takes no action on this front. In finance, on the other hand, the consequences of asymmetric information can be severe, as we have been reminded once again in the recent financial crisis.

Professional Standards and Mission-Oriented Non-Profit Organizations to Remedy Market Imperfections
Prof Arrow suggested that how health care worked when he wrote his article, in 1963, could be partially explained as attempting to remedy the problems created by uncertainty and asymmetry of information.

Professor Arrow explained many of the nonmarket social institutions and regulations characteristic of medical care [at that time] that he had identified as 'attempts to overcome the lack of optimality resulting from asymmetry of information and the inability of competitive markets to allocate efficiently all of the risks inherent in health care.'

Pointedly, he said, 'It is the general social consensus, clearly, that the laissez-faire solution for medicine is intolerable.'

That was then and this is now.

The Rise of "Greed is Good"

The problem is, of course, that health care has changed a lot since 1963. In an interview with the Atlantic from 2009, Prof Arrow defended his basic analysis:

I think the fundamental questions are the same. I also think there are more problems in the market today than when I wrote the paper. But I think the basic analysis hasn't changed.

He also discussed how failure to heed it have lead to our current dysfunctional health care system:

The market won't work -- it doesn't work well in the health context. But something else supplements the market, and the thing I put stress on in the paper are the elements that put a non-economic influence on the market: professional commitments to provide a service, to engage in services that aren't self-serving. Standards of caring decided by non-economic actors. And one problem we have now is an erosion of professional standards. In a way there is more emphasis on markets and self-aggrandizement in the context of healthcare, and that has led to some of the problems we have today.

Furthermore, he commented on those who sold the idea, which today ought to be totally discredited, in my humble opinion, that health care could be a perfect market, and this market would make everything right:

Sometimes I think it's because of the Chicago School. I think there has been a general drift around the country towards the idea that greed is good. Look at Wall Street. All of these industries involve a professional element in which information is flowing. You're supposed to be constrained to be honest about it. I don't really know why. But there is now more of an emphasis on popularization, which does improve efficiency but can also lead to an erosion of professional standards. There was this idea that professional standards were a mask for monopoly power--a Chicago theory, which I believe came from George Stigler. I don't know if they were that influential, but they seemed to be saying a lot of things that people were taking up in practice. I'm not totally sure why these professional standards changed, but it's more than medical reasons.

So you do not need to take it from me, take it from a Nobel laureate economist. It now seems clear in retrospect that a major characteristic of modern health care is how the "better-informed market participants ... exploit the ignorance of the less well informed."

Summary: What is to be Done?
We have been sold a real bill of goods that health care could function as an ideal market. That bill of goods has lead to the deprofessionalization and commercialization of physicians, the destruction of the basic values of health care professionals, and the rise of health care organizations that put making money ahead of patients' health, safety, and welfare. And in health care, the dominant slogan has become "greed is good." This is true of course, but only for the greedy.

True health care reform would help physicians and other health care professionals uphold their traditional values, including, as the AMA once stated, "the practice of medicine should not be commercialized, nor treated as a commodity in trade." True health care reform would put health care "delivery" back in the hands of mission-focused, not-for-profit organizations, which put patients' health, safety and welfare first.

These reforms, however, would certainly threaten the continuing wealth of a lot of people who have profited mightily from the current dysfunctional system. So do not expect them to be happy about even the discussion of them.

Three issues that come up frequently on Health Care Renewal are problems with man-machine interfaces in health care information technology (IT), as in this post by Dr Scot Silverstein; ill-informed and mission-ignorant or hostile leaders, sometimes in a position to overrule health care professionals, as in this post; and whistle-blowers, and their silencing.

A truly amazing story just surfaced that deals with all these issues, albeit not in health care. If it is true, and if it had been revealed earlier, maybe society would have become more concerned earlier with these issues, and maybe they would have not ended up plaguing health care so.

Let me first just go through the basic structure of the story to underline the parallels with health care issues. Then I will quote the specifics.

(If you do not instantly recognize the story, I suggest going through this post sequentially, not jumping to the end, to make its impact more clear.)

The Structure of the Story

Introduction
A large corporation had just put on-line, with much publicity, a high-technology system that was advertised as bigger, faster, better than the competition.

Confusing Interface and Terminology, Wrong Control Input

A few days after becoming operational, those in charge suddenly noticed a looming and severe problem. A technician was ordered to make an extreme control input to avoid the problem. However, there was confusion about the terminology of the input. While the system he was controlling was new, and had a new interface, it was operating in an area in which the old terminology, from a time in which the interface for the particular control worked in the opposite direction, was still in use. So his extreme input was in exactly the wrong direction. By the time the mistake was clear, and the control was reversed, it was too late, and the first stage of the catastrophe ensued.

Ill-Informed Management Overrules the Professionals

It is possible that the catastrophe could have been ameliorated if a crucial part of the system were then to have been quickly shut down. The highest ranking professional on duty ordered it shut down. However, soon after the events above, a top executive in the corporation, who was nearby only because of all the hoopla surrounding the system's roll out, came on the scene. He countermanded the order for the shutdown, possibly thinking continuing operation would cost less money and result in less bad publicity. True disaster then ensued.

Whistle Blowing Suppressed

After the disaster, there were several government hearings. The top executive denied any knowledge of the decision making that lead to the disaster. A professional who had not been present when the decisions were made, but was told about them by those who were present, avoided mention of the events above, because the top executive had told him that if he were to have told the truth, the company would have been found negligent, its insurance would not have covered the disaster, and it would have gone bankrupt, and everyone would lose their jobs. So he never told anyone except first-degree relatives. The other people who were present for the events above did not testify, for reasons to be discussed below.

So this story has all the familiar elements. But so have many others. Why was the suppression of this version of the story (assuming its true, which is not proven) so important?

The Real Story

Let us go through the elements again, this time with quotes from the article in the London, UK, Telegraph:

Introduction and Context

All families have their secrets, but usually about things that don’t matter to anybody else. Not in the case of Louise Patten, though – or The Lady Patten to give her her full title, the wife of former Tory Education minister, Lord (John) Patten, though her own career as one of the first women board directors of a FTSE 100 company, and as a successful author of financial thrillers, means that she has plenty of achievements in her own right.

As a teenager in the 1960s, Patten was let in on a secret by her beloved grandmother, which, if revealed, she was warned, would result in two things. The first was awful – it would destroy the good name of her dead grandfather, Charles Lightoller, awarded the DSC with Bar in the First World War, and a hero again for his part in the evacuation of Dunkirk in 1940. But the second would change history, overturning the authorised version of one of the world’s greatest disasters, the sinking of the Titanic with the loss of 1517 lives in April 1912.

The tension between these two outcomes goes some way to explaining why, for 40 years, Patten kept quiet....

'After the collision,’ Patten goes on, 'my grandfather went down with the Captain and [First Officer] Murdoch to Murdoch’s cabin to get the firearms in case there were riots when loading the lifeboats. That is when they told him what had happened.'

Confusing Terminology and Interface

'Instead of steering Titanic safely round to the left of the iceberg, once it had been spotted dead ahead, the steersman, Robert Hitchins, had panicked and turned it the wrong way.’

At first glance it sounds extraordinary that anyone – much less the man put in charge of the wheel on the maiden voyage of what was then the world’s most expensive ocean liner – could have made such a schoolboy error.

'Titanic was launched at a time when the world was moving from sailing ships to steam ships. My grandfather, like the other senior officers on Titanic, had started out on sailing ships. And on sailing ships, they steered by what is known as “Tiller Orders” which means that if you want to go one way, you push the tiller the other way. [So if you want to go left, you push right.] It sounds counter-intuitive now, but that is what Tiller Orders were. Whereas with “Rudder Orders’ which is what steam ships used, it is like driving a car. You steer the way you want to go. It gets more confusing because, even though Titanic was a steam ship, at that time on the North Atlantic they were still using Tiller Orders. Therefore Murdoch gave the command in Tiller Orders but Hitchins, in a panic, reverted to the Rudder Orders he had been trained in. They only had four minutes to change course and by the time Murdoch spotted Hitchins’ mistake and then tried to rectify it, it was too late.

A Manager Countermanding the Professional

If the steersman Hitchins had made a human error, Bruce Ismay, chairman of the White Star Line, owners of the Titanic, and another survivor of the sinking, gave a lethal order.

'Titanic had hit the iceberg at her most vulnerable point,’ explains Patten, 'but she could probably, my grandfather estimated, have gone on floating for a long time. But Ismay went up on the bridge and didn’t want his massive investment to sit in the middle of the Atlantic either sinking slowly, or being tugged in to port. Not great publicity! So he told the Captain to go Slow Ahead. Titanic was meant to be unsinkable.’

However,

'If Titanic had stood still,’ she demonstrates, 'she would have survived at least until the rescue ship came and no one need have died, but when they drove her 'Slow Ahead’, the pressure of the sea coming through her damaged hull forced the water over the bulkheads and flooded sequentially one watertight compartment after another – and that was why she sank so fast.’

Whistle Blower Suppressed, the Cover Up

Why, though, I puzzle, would Patten’s grandfather, who sounds like a thoroughly honest and brave man, have lied and carried on lying? 'Because,’ she explains, 'when he was on the rescue ship, Bruce Ismay pointed out to my grandfather that if he told the truth, the White Star Line would be judged negligent and its limited liability insurance would be invalid. Ismay pretty much said that the whole company would go bust and everyone would lose their jobs. There was a code of honour among men like my grandfather in those days. So he lied to protect others’ jobs.’

But why didn’t her grandmother speak up after her husband’s death in 1952? 'She was worried about showing this heroic figure to be a liar. And my mother, who also knew the secret and was even uncomfortable with Granny having told me, felt even more strongly about it. She hero-worshipped my grandfather.’

So there this secret sat, locked in a family circle from which Patten is now the only survivor.

Conclusion

The story does seem amazing. I am hardly an expert on the sinking of the Titanic, so should not try to comment on its truth. It does have some plausibility, and provides an explanation for one of the most important and influential disasters of the 20th century that is still poorly understood and a cause for controversy.

In my humble opinion, if it were true, and had it come out earlier, this amazing story would have focused society's concerns on issues that have instead become scourges of our current era, and particularly important, if not frequently enough discussed causes of our health care dysfunction.

The Titanic disaster lead to major changes in numerous safety practices, leading to rules about the adequacy of lifeboats and radio communication, and even swimming proficiency requirements in higher education. (I had to pass a swimming test as a Brown University freshman that was a legacy of the sinking of the Titanic, I was told.) Most of these practices increased the survivability of accidents.

What if the focus was also on the causes of accidents? What if there was a groundswell of advocacy, starting in 1912, against pressure from business and financial leaders on professionals sworn to protect the public's health and safety, and against intimidation of whistle-blowers whose revelations could protect public health and safety? Maybe health care, and many other parts of life, would have turned out better?

As we have quoted many times, sunlight is the best disinfectant. New US Internal Revenue Service requirements for reporting by not-for-profit organizations has resulted in more transparency about the finances of many health care organizations, and this transparency has shown that the culture of perverse incentives and management privilege has spread far and wide.

How far and wide? Consider this story in the (Harford County, Maryland) Aegis:

Harford County’s Upper Chesapeake Health lost $70 million because of bad bets in the derivatives markets two years ago, but still paid its chief executive more than $900,000 in annual salary and bonuses.

According to figures from their latest tax returns and from the state agency that regulates hospital rates, Upper Chesapeake Medical Center in Bel Air and Harford Memorial Hospital in Havre de Grace, hospitals owned and operated by nonprofit Upper Chesapeake Health Inc., posted huge losses in their fiscal year ending December 2008.

The losses were the result of an increase in non-operating expenses, according to the Maryland Health Services Cost Review Commission.

The hospitals had combined revenue of $254 million for the year, but posted a combined net loss of $61 million.

The two hospitals also paid out some of the highest salaries in Harford County, led by their CEO, Lyle Sheldon, who made more than $900,000 in 2009, a figure which was first reported by The Baltimore Sun on Aug. 29.

Including Sheldon, the hospitals’ top administrators and top medical staff, who are hospital employees, received a combined $5 million in salary, bonuses and other compensation in 2009.

So how did the hospital's management explain the huge loss?

'That was the year the stock market fell, in fiscal year 2008,' Dean Kaster, Upper Chesapeake’s senior vice president of corporate strategy and business development, said Tuesday in explaining the 2008 loss.

'We saw a significant change in terms of how some of the instruments we used in managing our debt service were valued and during that time period what these dollar changes reflected was an accounting loss directly related to the decline in the overall market in 2008,' he said.

Kaster said Upper Chesapeake, like many hospitals, has investment instruments it uses, called derivatives and hedges, to manage its long-term debt. He said the value of those instruments changed in fiscal year 2008.

In simpler terms, like many corporate, institutional and individual investors, Upper Chesapeake got burned by taking risks that backfired when the economy tanked.

Since those markets have come back, Kaster said, Upper Chesapeake has recovered two-thirds, or about $46.7 million, of the $70 million it lost from investments.

Of course, 2008 was the year of the great recession/ global financial collapse, or whatever we may end up calling it, happened. The value of many investments, and many peoples' homes, imploded. The best current explanation of the collapse had to do with the bets financial institutions made on risky derivatives which their managers often did not understand. In hindsight, these bets seem somewhere between unnecessarily risky and stupid.

Many smaller businesses and organizations were fortunate to be financially conservative enough not to have bet on derivatives. But little Upper Chesapeake Health apparently bet a large chunk of its money on them, and lost badly. Although VP Kaster belabored the obvious in noting that 2008 was the year of the collapse, he did not explain what the stewards of a not-for-profit health care institution were doing when they were betting on risky derivatives.

One thing they were doing was making a lot of money themselves.

At UCH, the highest compensated employee is President and CEO Lyle Sheldon.

Sheldon’s annual compensation for the hospital’s fiscal year 2009, the most recent information available, was $918,957, according to the Form 990 submitted to the IRS.

Sheldon’s base salary for the year was $535,000 and his bonus and incentive compensation was $224,007.

Sheldon’s compensation is nearly $500,000 more than the next highest paid employee for UCH.

Other executives did well too:

Second to Sheldon, the next highest paid employee in UCH’s upper management is Joseph Hoffman III, the senior vice president and CFO, who was paid $420,355 in the hospital’s fiscal year 2009. His base salary was $272,210 and his bonus and incentive compensation was $91,439.

Senior Vice President and COO Kenneth Kozel was paid $352,538, according to Upper Chesapeake’s Form 990. Kozel received additional nontaxable benefits and deferred compensation on Harford Memorial’s form, bringing his total compensation to $396,039.

Kaster, the senior VP for strategy and business development, was paid $281,142, according to Upper Chesapeake’s form. He also has additional nontaxable benefits and deferred compensation on Harford Memorial’s form, bringing his total to $330,598.

Vice President of Human Resources Toni Shivery’s Upper Chesapeake compensation was $204,531, with an additional $33,895 from Harford Memorial, bringing the total to $238,426.

Note that the CFO of this small hospital system, the person who ought to be most directly responsible for the decision to "invest" in derivatives, made over $420,000, and the vice president for strategy and business development, responsible for the simplistic discussion of derivatives above, made over $330,000.


Providing such perverse incentives seems to contradict the hospital system's high-minded statements of values, which includes:

Responsibility: We take responsibility for our actions and hold ourselves accountable for the results and outcomes.

A CEO who truly accepted responsibility for a $61 million loss from risky bets on opaque derivatives would not accept total compensation of over $900,000. A CFO who truly accepted responsibility for these bets would not accept over $400,000.

So in summary, we see that now CEOs of even the smallest community hospital systems seem entitled to make nearly a million dollars a year. We see that even CEOs whose institutions lose millions due to risky investments still receive such compensation. We see that the executives who seem directly responsible for making such money losing investments still earn hundreds of thousands of dollars.

This is an extreme illustration of how perverse incentives permeate health care, how CEOs command pay beyond the dreams of ordinary people, even when their leadership is financially calamitous, and how little health care leaders support their organizations' idealistic values.

Are leaders who are not held accountable for easily measured financial performance likely to be good stewards of clinical performance, which is much harder to measure?

If we do not hold health care leaders accountable, if we do not provide them with incentives that are proportional to their actual performance, why should we expect health care organizations to do any more than satisfy their leaders' self-interest?