Last week, the influential New England Journal of Medicine published an article by Bruce Vladek entitled "Fixing Medicare's Physician Payment System."(1)  Although only identified as working for Nexara, a health consulting business, Mr Vladek was a former administrator of what was then called the Health Care Financing Administration (HCFA) of the US Department of Health and Human Services (DHHS), the part of the department that then ran the US Medicare program.  Vladek thus can reasonably be viewed as an expert on Medicare. 

Vladek identified two main problems with the current way physicians are paid by Medicare.  First,

Medicare is captive to an arbitrary, if elegantly conceived, formula for total payments to physicians — the sustainable growth rate (SGR). In the alternate reality of the Congressional budget process, the SGR will reduce Medicare's physician payments, which already trail those from private insurers, as far into the future as the eye can see.

Second,

there is widespread consensus that the relative fees in the current system are a significant cause of the growing imbalance in supply and utilization between primary care and specialty services in the U.S. health care system. That imbalance, in turn, is widely perceived as a major cause of both excessive costs and inadequate quality of care. This is not just a Medicare problem: the Medicare Resource-Based Relative Value Scale is used by most private insurers to set relative prices for physicians.

Vladek expanded on the second point as follows

the basic mechanics of the Medicare Physician Fee Schedule, which was supposed to change physician payment to increase rewards for primary care services at the expense of procedural and interventional services, appears to have gone totally off track. For various reasons, the fee schedule, which originally did increase the prices of evaluation and management services relative to those of surgery or invasive procedures, turned in the other direction through the process of annual updating of relative value units. Surgeons, radiologists, and some medical specialists are now paid two to three times as much per hour as providers of cognitive services, which is about where we began 20 years ago; this was the situation that the fee schedule was supposed to fix.

The question of the relative virtues of primary versus specialty care can be debated ad nauseam, but in other wealthy countries that serve their populations at least as well as we do, the ratio of primary care physicians to specialists is much higher than in the United States, and the gap in compensation is much smaller or the poles even reversed. Young physicians, burdened by increasing educational debts, may well choose a career path on the basis of a major difference in compensation, especially when the better-compensated positions require less ongoing responsibility for patients and offer better working hours.

This is about all that Vladek wrote about how the imbalance between how Medicare pays for primary care and other "cognitive services," and for procedures came about. Vladek, and many others have argued that this imbalance has lead to strong financial incentives that have been slowly destroying primary care, and strong incentives that have lead to the use of too many procedures, both strong drivers of rising costs in the most expensive health care system in the world.

Vladek noted vaguely that "through various reasons," the incentives were imbalanced by "the process of annual updating of relative value units."

However, as we have discussed in several blog posts, a lot more is known about how this process got "totally off track."

In fact, in 2007, an article by Bodenheimer et al in the Annals of Internal Medicine explained the problems in considerably more detail.(2)  As we wrote then, Its main points included

• Proceduralists are often able to learn how to do their procedures more quickly, and thus increase the volume of procedures done, while office and hospital visits can only be sped up so much.
• The process used to update the RBRVS system is biased towards procedures for three main reasons: 1. "specialty society influence in proposing RVU [relative value unit] increases," 2. the specialist-heavy RUC [Relative Value Scale Update Committee] membership," and 3. "the desire of RUC specialists to avoid increases in evaluation and management [that is, cognitive, or non-procedural] RVUs."
• Medicare now uses a formula to limit increases in overall spending. The use of this formula leads to across the board cuts in all reimbursements. Since cognitive services reimbursements were never high to begin with, and have rarely been individually increased, these cuts tend to have disproportionate decreases.
• Private insurers and managed care organizations tend to follow Medicare's lead in their reimbursement procedures, but tend to tilt the playing field even more in favor of procedures versus cognitive services. Several studies showed that such payers paid more for procedures than did Medicare, but about the same for office and hospital visits.

The role of the RBRVS Update Committee (RUC) is complex and in many ways mysterious.  As we wrote before, to update the system, the Center for Medicare and Medicaid Services (CMS) relies almost exclusively on the advice of the RBRVS Update Committee. The RUC is a private committee of the AMA, touted as an "expert panel" that takes advantage of the organization's First Amendment rights to petition the government. Membership on the RUC is allotted to represent specialty societies, so that the vast majority of the members represent specialties that do procedures and focus on expensive, high-technology tests and treatments. However, the identities of RUC members are opaque, and the proceedings of the group are secret.

To expand on the penultimate point, the current page on the AMA web-site that describes the RUC only lists its members in terms of their specialties and organizational affiliation.  Their names do not appear.  A response to a previous post by me on the subject by the then Chair and Chair-Elect of the RUC suggested that the RUC membership is not quite secret. They stated that "a list of the individual members of the RUC is published in the AMA publication, Medicare RBRVS 2009: The Physicians Guide." This publication is available from the AMA here for a mere $71.95. However, the book is not on the web, or in my local or university library, and I have no other way to easily access it.  Thus, the RUC membership as at best relatively opaque.

To expand on the ultimate point, as Goodson(3) noted, RUC "meetings are closed to outside observers except by invitation of the chair." Furthermore, he stated, "proceedings are proprietary and therefore not publicly available for review."

The fog surrounding the operations of the RUC seems to have affected many who write about.  We have posted (here, here, and here) about how previous publications about problems with incentives provided to physicians seemed to have avoided even mentioning the RUC.  In 2010, post the US recent attempt at health care reform, the RUC seems to remain the great unmentionable.  Even the leading US medical journal seems reluctant to even print its name. 

Thus, as we noted before, however, the mysteries about it remain:

• How did the government come to fix the payments physicians receive? Government price-fixing has not been popular in the US, yet this has caused no outcry.
• Why is the process by which they are fixed allowed to be so opaque and unaccountable? Why are there no public hearings on the updates, and why is there no input from practicing physicians or organizations other than those related to the RUC?
• How did the RUC become de facto in charge of this process?
• Why does the AMA keep the membership on the RUC so opaque, and give no input into the RUC process to its general membership?
• Why is the RUC membership so dominated by procedural specialists? Why were primary care physicians, who made up at least a sizable minority of physicians when the update process was started, not represented according to their numbers?
• Why has there been so little discussion of the RUC and its responsibility for an extremely expensive health care system dominated by high-technology, expensive, risky and invasive procedures?

Without discussing how the incentives for physicians became so unbalanced, do we really expect we can fix them?  In this case, the persistence of the anechoic effect seems to be doing real damage to the discussion of the critical issues we in the US face today.

References

1. Vladek B. Fixing Medicare's physician payment system. N Engl J Med 2010; 362:1955-1957. (Link here.)

2. Bodenheimer T, Berenson RA, Rudolf P. The primary care-specialty income gap: why it matters. Ann Intern Med 2007; 146: 301-306. (Link here.)

3. Goodson JD. Unintended consequences of Resource-Based Relative Value Scale reimbursement. JAMA 2007; 298(19):2308-2310.  (Link here.)

Big US based health care insurance companies have not been covering themselves in glory in the last week.

Aetna's Math Errors

First, there was the case of Aetna's mathematical prowess, e.g., as reported by the Los Angeles Times:

A second insurance company in California has killed plans for double-digit rate hikes for individual policyholders because of errors in its filing that would have inflated premiums, state regulators said Thursday.

Connecticut-based Aetna Inc. had sought an average 19% increase in rates for its 65,000 individual customers, but pulled back after multiple math errors in its paperwork were found by its own staff and by an independent consultant working for the state.

Aetna's decision follows a similar move by Anthem Blue Cross, which canceled a rate increase of as much as 39% for many of its 800,000 California policyholders in April after the state consultant found calculation errors in its filing with the California Insurance Department.

Of course, Aetna tried to minimize the story:

An Aetna spokeswoman said the company found 'a miscalculation not previously detected' when it conducted a third round of internal reviews.

'This was a simple human error,' said spokeswoman Anjanette Coplin, who did not elaborate.

However,

'There were multiple errors … in the way [Aetna] annualized premiums and in the compounding of the rate increase,' said state Insurance Department spokesman Darrel Ng.

Of course, somehow the errors all were in Aetna's favor:

Even with the new disclosure requirements, regulators have limited authority to block rate increases. They can do so only if insurers fail to spend at least 70% of their premiums on medical claims.

In Aetna's recent rate filing, the insurer said its plan met the 70% minimum. But once the errors were identified, medical-claim spending fell below the 70% requirement. The proposed rates were higher than they should have been, officials said.

WellPoint's Computer Errors

A few minutes ago, the Associated Press reported:

WellPoint Inc. has notified 470,000 individual insurance customers that medical records, credit card numbers and other sensitive information may have been exposed in the latest security breach of the health insurer's records.

The Indianapolis company said the problem stemmed from an online program customers can use to track the progress of their application for coverage. It was fixed in March.

Spokeswoman Cynthia Sanders said an outside vendor had upgraded the insurer's application tracker last October and told the insurer all security measures were back in place.

But a California customer discovered that she could call up confidential information of other customers by manipulating Web addresses used in the program. Customers use a Web site and password to track their applications.

Note that this security breach was potentially serious:

WellPoint's security breach doesn't crack the top 10 in terms of number of people who may have had information exposed, said Paul Stephens, the [Privacy Rights Clearinghouse]organization's director of policy and advocacy. Even so, he labeled the breach 'very serious' because it possibly involved both financial and medical information.

This is not the first time WellPoint's computers and software have violated the privacy of its applicants or customers:

Two years ago, WellPoint offered free credit monitoring after it said personal information for about 128,000 customers in several states had been exposed online. In 2006, backup computer tapes containing the personal information of 200,000 of its members were stolen from a Massachusetts vendor's office.

Summary

Of course, everyone makes mistakes.  However, one would expect that at least health insurance companies/ managed care organizations ought to be able to do the math necessary to support their rate proposals correctly, and keep their policy-holders' and applicants' personal information confidential.  These would seem to be fundamental competencies that such organizations ought to display.  Of course, one can find other examples of lack the lack of competency (and worse) displayed by both Aetna and WellPoint. 

Furthermore, anyone can make mistakes, but in the real world, those who preside over such mistake-prone enterprises often do not do too well.  However, in the bizarre world of large health care organizations, the executives who preside over the ongoing bumbling just make more and more money, under the pretense that their continuing brilliant leadership just leads to one triumph after another. 

As we noted here, WellPoint CEO Angela Braly's total compensation increased in 2009 to an outsized $13.1 million, with the executives just underneath her paid proportionately well.  Per its 2010 proxy statement, WellPoint's

Total Rewards compensation program is designed to attract, engage, motivate and retain a talented team of executive officers and to appropriately reward those executive officers for their contributions to our business and our members. We seek to accomplish this goal in a way that is closely aligned with the long-term interests of our shareholders and the expectations of our members and health care providers.

I suspect that WellPoint's members' expectations did not include the three computer security breaches noted above.

Similarly, according to its 2010 proxy statement, Aetna CEO Ronald A Williams' total compensation in 2009 was a mere $18,058,162. Other top executives made proportionate amounts, from more than $1 million to more than $12 million. The rationale underlying executive compensation includes:

We seek to implement a pay-for-performance philosophy by tying a significant portion of our executives’ compensation to their achievement of financial and other goals that are linked to the Company’s business strategy and each executive’s contributions towards the achievement of those goals.

To me, avoiding mathematical errors in calculating policy premiums ought to be part of the company's goals linked to its business strategy.

An old rock song that starts with "don't know much about history," may have a certain charm.  Health insurance companies that cannot accurately calculate premiums or protect the confidentiality of policy-holders' computerized data has none. 

As long as "imperial CEOs" can continue to get extremely rich while presiding over incompetence and stupidity, if not worse (see here), we can expect the foolishness to continue.  Meanwhile, the foolishness drives up costs and drives down quality of health care for the poor suffering patients, let alone the physicians and other health care professionals who must deal with it.

To really reform health care, we need to provide incentives for competent, honest leadership, and make that leadership accountable for its shortcomings.

In 2005, we entitled a post, "How Can a $124.8 Million a Year CEO Make Health Care More Affordable?"  At that time, we contrasted the enormous compensation given to the then CEO of UnitedHealth, Dr William McGuire, with the stated mission of his corporation.  Since then, we have traced the travails of UnitedHealth and its leadership.  Dr McGuire was eventually accused of receiving backdated stock options (which at one time raised his personal fortune to over $1 billion), and was pushed into retirement.  UnitedHealth was accused of a variety of management and ethical lapses.  The rather sorry story as of April, 2010 was summarized here.

The more things change, the more they stay the same.  The Minneapolis Star-Tribune just reported:

Stephen Hemsley, a serious and studious man, is known for his marathon-like work schedule, which regularly includes Saturdays and Sundays, in his role as chief executive of Minnetonka-based UnitedHealth Group.

Now, he also is known as the highest-paid CEO in Minnesota with a 2009 pay package totaling $101.96 million, six times the amount paid to the next CEO in the Star Tribune's annual survey of the state's 100 highest-paid chief executives at publicly traded companies.

But Hemsley's big pay package is also a vestige of the company's former practice of loading executive compensation heavily with stock options, a practice that changed in the wake of a crippling backdating scandal four years ago.

Those options, granted under a different regime of board directors, accounted for $98.6 million of Hemsley's income in 2009.

The attempts company officials made to minimize Hemsley's outsized compensation were almost funny:

UnitedHealth officials assert that Hemsley's 2009 pay package minus the 10-year-old options was $8.9 million, far less than the compensation paid to CEOs in other health insurance organizations.

But Hemsley did exercise the options, so he did receive the additional $98.6 million.

Hemsley also seems on target to get gargantuan compensation this year too:

Nonetheless, Hemsley has already put up good compensation numbers for 2010 with the exercising of additional options granted after 1999 worth $21 million. He also controls 6 million exercisable and unexercisable options, half of which are underwater or below the stock's current value.

The cringe-inducing contrast is with UnitedHealth's high-minded mission statement:

Our mission is to help people live healthier lives.

* We seek to enhance the performance of the health system and improve the overall health and well-being of the people we serve and their communities.
* We work with health care professionals and other key partners to expand access to quality health care so people get the care they need at an affordable price.
* We support the physician/patient relationship and empower people with the information, guidance and tools they need to make personal health choices and decisions.

Hemsley's compensation could have provided "care they need" to quite a few people at an affordable price.

More to the point, it is hard to imagine that a company that feels the need to pay so much to its CEO, and a CEO that can accept such riches, have the slightest understanding or interest in providing people "the care they need at an affordable price."

In this cynical age, I doubt many people credit the UnitedHealth mission statement with being more than advertising fluff. Nonetheless, I suspect most people believe that our society should try to provide as many people as possible with "the care they need at an affordable price," but realize that we are far from doing so. Health care insurance companies/ managed care organizations that see fit to make their hired leaders extremely rich seem to be part of the problem, not the solution.

A little while ago, the Wall Street Journal reported on the highest paid US corporate CEOs of the past decade. One name stood out for those interested in health care: Dr William W McGuire, the former CEO of giant health care insurance company/ managed care organization UnitedHealth Group. Dr McGuire was number 9 on the list, with a total realized compensation of $469,300,000.

We started discussing the disconnect between Dr McGuire's corpulent pay and his company's failure to uphold its stated ideals back in 2005, when he was reported to have received more than $124 million to lead a company which championed "affordable" health care. Later, it turned out that much of Dr McGuire's compensation came in the form of back-dated stock-options, and the resulting scandal was followed by his resignation. Later, Dr McGuire was forced to give back some the options. The final settlement of the fiasco cost UnitedHealth $895 million, and Dr McGuire $30 million and the cancellation of 3.6 million stock options.

Meanwhile, UnitedHealth was compiling an unenviable record of ethical lapses:

• as reported by the Hartford Courant, "UnitedHealth Group Inc., the largest U.S. health insurer, will refund $50 million to small businesses that New York state officials said were overcharged in 2006."
• UnitedHalth promised its investors it would continue to raise premiums, even if that priced increasing numbers of people out of its policies (see post here);
• UnitedHealth's acquisition of Pacificare in California allegedly lead to a "meltdown" of its claims paying mechanisms (see post here);
• UnitedHealth's acquisition of Sierra Health Services allegedly gave it a monopoly in Utah, while the company allegedly was transferring much of its revenue out of the state of Rhode Island, rather than using it to pay claims (see post here)
• UnitedHealth frequently violated Nebraska insurance laws (see post here);
• UnitedHealth settled charges that its Ingenix subsidiaries manipulation of data lead to underpaying patients who received out-of-network care (see post here).

At the same time, UnitedHealth continues to boast that:

Our mission is to help people live healthier lives.

* We seek to enhance the performance of the health system and improve the overall health and well-being of the people we serve and their communities.
* We work with health care professionals and other key partners to expand access to quality health care so people get the care they need at an affordable price.
* We support the physician/patient relationship and empower people with the information, guidance and tools they need to make personal health choices and decisions.

Dr McGuire certainly expanded his access to money, which doubtless empowered him.

And as we noted here, his successor, Mr Stephen J Helmsley, seems to be going down the same path. In 2009 his total compensation was $8.9 million, and he sold stock options obtained from previous compensation packages for $98.6 million. Mr Helmsley was a top leader (President and Chief Operating Officer [COO]) of UnitedHealth during Dr McGuire's reign as CEO, so should be viewed as having some responsibility for the excesses of the McGuire years.

Despite recent attempts to reform health care, or at least health insurance, it seems that the health insurance industry still leads the way in providing its leaders perverse incentives while failing to hold them accountable for their organizations' unethical behavior and subversion of their stated missions. Is it any wonder that these organizations continue to act unethically, and that the costs of the goods and services they provide rise continuously?


If we truly want health care that is accessible, of high quality, at a fair price, and more importantly, if we want health care that is honest and focused on patients, we need to provide health care leaders with clear, rational incentives in these directions, and make them fully accountable for their actions, and the courses of their organizations under their leadership.

In late 2009, we posted about problems at a Genzyme plant that manufactured some fabulously expensive drugs, e.g. Cerezyme whose cost to patients approximated $160,000 a year. We thought then that for a drug costing that much, the company ought to have figured out a conservative process to provide pure and unadulterated product. In a later post we also why a company that could afford to make its CEO very rich could not afford to adequately maintain its manufacturing facilities. In May, 2010, we posted about a legal settlement of charges related to its manufacturing problems requiring Genzyme to pay a $175 million fine and function under US government supervision.

Recent news articles suggest that the fix of the company's inabilities to manufacture pure, unadulterated drug remained remote. Reuters reported that it had to discard "additional inventories of drugs ... for failure to the meet the company's quality control standards." Bloomberg reported that it "may take three to four years to complete changes requested by U.S regulators after plant contamination."

Meanwhile, however, the company continues to talk to Sanofi-Aventis about being bought out, and the Boston Globe reported just how much Genzyme CEO Henri A Termeer would stand to make if the buyout takes place:

Under the 'hange of control' agreement currently worth $23 million, Termeer would receive several payments. He would receive a lump sum of $11 million, a figure representing three times his base salary plus a bonus. He would also get $356,000 in benefits, including health, life, accident, and disability insurance, outplacement and relocation services, and legal fees. And he could cash out 175,137 shares through accelerated equity awards. Those shares are now worth $11.9 million, but almost certainly would be worth more if the company is acquired at a premium.

Furthermore,

Apart from the golden parachute, Termeer could reap huge stock gains if the company is sold. The 4.1 million Genzyme shares he owns represented about 1.5 percent of its stock as of April 9, the most recent regulatory filing. At the current share price, Termeer’s stake is worth more than $275 million.

So riddle me this: over the last 5 years, Genzyme stock-holders have seen their investment lose 5.7% of its value (according to Google Finance), while patients have paid outlandish prices for contaminated medicine, or have had to reduce their medication dosages after the defective manufacturing plant was shut down. So why should the CEO who presided over all this, whose has already become rich as a hired employee of Genzyme, get even richer?

Once again we demonstrate how massively perverse incentives stupendously reward the top brass of health care organizations for mediocre, or worse leadership and bad results for both patients/ clients/ customers and stock-holders alike. As long as being a health care CEO is effectively a license to loot the company, is it any wonder that health care organizations continue to be badly lead, and health care costs soar while quality and access suffer?

Once more with feeling: real health care reform would require us to make health care executives truly accountable for their actions, and penalize them for those that are ill-informed, contemptuous of health care values, self-interested, or corrupt.

WellPoint, the largest US for-profit health care insurance company, has provided a steady stream of examples of poor management and bad behavior for the edification of Health Care Renewal readers. Most recently, a company whose core functions include reliably and confidentially managing electronic data on policy-holders allowed what should have been private data from nearly half a million people to appear on-line (see post here. For other examples, look here.)

This week, the Los Angeles Times recounted what happened to a highly placed WellPoint executive who tried to improve the company's behavior.

Leslie Margolin was the public face of Anthem this year when it sought to raise individual insurance rates as much as 39%. The move triggered a backlash in Washington and Sacramento, where lawmakers accused Margolin and her corporate bosses at insurance giant WellPoint Inc. of trying to gouge unknowing policyholders.

Margolin, 55, generated headlines statewide when she was called to testify before angry lawmakers in the state capital. With television cameras rolling, the hearing's chairman stared her down and asked bluntly: 'Have you no shame?'

Now, speaking publicly for the first time since her departure, Margolin says she had been chagrined over the rate hikes for the last year and had worked internally to get Indianapolis-based WellPoint to rescind them or scale them back, and to apologize.

'I thought the rates were too high,' she said. 'I thought the impact on our membership was too significant.'

Margolin did not object to the rates in her Sacramento testimony this February. But in the months that followed, she repeatedly voiced her objections to WellPoint and in appearances outside the company, remarks that went largely unnoticed by the public.

In a March talk at Pepperdine University's business school, for instance, she told a gathering of students and business leaders that she wasn't responsible for rate increases she believed were ill-timed and ill-advised.

'We have impacted individual consumers in ways that were so significant for those individuals,' she said. 'And for that, I personally feel very, very sorry.'

As she made the Pepperdine appearance and others, Margolin said, she privately pressed WellPoint to abandon the company's get-tough approach to longtime adversaries — doctors and hospitals — and instead collaborate as part of a new 'healthcare transformation strategy' to cut costs and improve patient safety and the quality of care.

So what happened to Ms Margolin? Did she get a big raise and an award for doing the right thing? Is the moon made of green cheese?

In fact, here is what happens to a health insurance executive who says she is sorry for excessively high insurance rates:

Last month, WellPoint replaced her. At the time, Margolin said her departure was a mutual decision. Interviews with company insiders, insurance industry leaders and others familiar with the situation now make clear that she was pushed out.

'Her undoing was that she rocked the boat and wanted to do things a different way,' said one person familiar with the events who declined to be identified for fear of retribution. 'She wasn't a good corporate soldier.'

Margolin herself spoke cautiously about her resignation, but said: 'There is no question I needed to leave.'

In fact, her exit was quite inglorious:

Margolin vividly recalls her last day. Even though her Anthem team was exceeding its financial goals and membership numbers, she said, she was ushered from the doors of Anthem's Woodland Hills headquarters. She didn't have a chance to send a farewell message to her 400 employees.

So it seems that being a top health insurance corporate executive means never admitting a mistake, and never, ever saying you are sorry.

In contrast, in the 2009 WellPoint Annual Report, CEO Angela Braly boasted:

As you can see throughout this report, we’re focused on making health benefits more affordable, improving access to care, and simplifying interactions with the delivery system. We believe that we have to favorably impact the value equation in health care while improving the experience of members, doctors, and employers.

So presumably at WellPoint, "making health benefits more affordable" means raising premiums 39%. As we mentioned earlier this year, for this and other bits of legerdemain, Angela Braly's 2009 compensation increased 51 percent to $13.1 million. This seems more like pay for propaganda than pay for performance.

In a post in the Dismounting Our Tiger blog, Edwin Lee addressed the origins of the BP oil spill by noting how most big corporations have come to promote leaders distinguished mainly for their careerism, tribal attitude, and disinclination to question received wisdom. He wrote that the result was promoting "mediocre, short term thinkers with similar work experiences, outlooks, temperaments and personal incentives. Disaster response, creative thinking and fundamental changes are outside their limited range of interests or competencies." Thus we can expect that at some point, WellPoint, and many similarly lead health care organizations, will create their own disasters. We can only hope that our health care system survives them.

Meanwhile, kudos to Ms Margolin for trying to put the interests of policy-holders and the public ahead of following the company line. If only more such people were able to lead health care organizations rather than being unceremoniously fired, we might have a fighting chance to have health care that really is high quality, affordable, and accessible.

PS - For those old enough to have been forced to watch Love Story, the original quote was "love means never having to say you're sorry."

St. Vincent's Hospital in the Greenwich Village section of New York City was a landmark institution which filed for bankruptcy in April, 2010, and then closed its doors.

Background

A New York Times article written earlier this year described an institution "threatened with extinction" because it stuck to its mission of "compassionate care" in a health care environment that values "fancy equipment and celebrity doctors." Thus, "officials blamed a high rate of poor and uninsured patients as well as cuts in Medicare and Medicaid and the hospital's inability to negotiate favorable contracts with health insurance companies...."

Painting Another Picture

However, a story this week in the grittier New York Post painted a different picture:

St. Vincent's Hospital was looted by execs and consultants in the two years before it closed, then grossly exaggerated its debt, according to blockbuster papers set to be filed tomorrow in Manhattan Supreme Court.

The filing, a petition that seeks to force the state Health Department to turn over documents on the closing, says the defunct medical center blew through millions in 'highly questionable' expenses, including $278,000 for a golf outing, while paying its top 10 executives a combined $10 million a year.

It also shelled out $17 million for 'management consultants,' $3.8 million on 'professional fund-raising' and a staggering $104 million on unspecified costs it listed simply as 'other' on its federal tax returns, the petition says.

But even with all that money going out, St. Vincent's wasn't nearly as cash strapped as it claimed, say the court papers, prepared by a law firm working for doctors and nurses formerly employed there and the hospital's West Village neighbors.

Its crushing debt of about $1 billion, which the hospital blamed for having to close its doors in April, was bloated by hundreds of millions of dollars in loans dumped on St. Vincent's from other medical entities run by the Archdiocese of New York, starting in 2001, after the other institutions merged with the hospital, the papers say.

'The debt of the hospital was specifically exaggerated by numerous factors, including the transfer of debt from other Catholic medical centers and mismanagement by the board of directors,' the documents say. 'These transfers . . . remain undisclosed to the public.'

Historical Parallels
These accusations parallel themes that appeared towards the end of the February, 2010, NY Times piece. First, regarding the transfer of debt:

To remain competitive, in 2000 St. Vincent’s merged with several other Catholic hospitals to form St. Vincent Catholic Medical Centers.

Along with the flagship hospital in the Village, it ran seven other hospitals: Bayley Seton and St. Vincent’s on Staten Island; Mary Immaculate, St. John’s and St. Joseph’s in Queens; St. Mary’s in Brooklyn; and St. Vincent’s Westchester, in Harrison, N.Y. It was also affiliated with St. Vincent’s Midtown, formerly St. Clare’s, in Midtown Manhattan.

The merger was conceived as a way to streamline management and give the hospitals pricing leverage, but it was troubled from the beginning. After closings and sales, the network was left with just one New York City hospital, the flagship; a psychiatric and substance abuse treatment hospital in Westchester; and several nursing homes and other outpatient facilities. Some of St. Vincent’s debt was inherited from the closed hospitals.

Second, regarding mismanagement:

In 2004, St. Vincent’s turned over management to Speltz & Weis, the first in a series of turnaround consultants. It paid the firms millions of dollars a year to run the hospital and hired their officials as hospital executives. The system filed for Chapter 11 bankruptcy protection in early July 2005, when it appeared, according to court papers filed by hospital creditors, that it would be unable to make its payroll.

In a lawsuit filed in 2007, some of the hospital’s creditors painted a picture of a hospital system trapped between unscrupulous consultants and a passive or gullible board. The lawsuit accused David E. Speltz and Timothy C. Weis, the hospital system’s former chief executive and chief financial officer, of delaying the bankruptcy organization while they and their consulting firm collected millions of dollars in fees.

The lawsuit accused them of hiring high-priced contractors and padding their fees, instead of using hospital employees to do work. And it says they leveraged their positions with the hospital to negotiate the sale of their consulting company to Huron Consulting Group, in Chicago, also a defendant in the case.

The outcome of that earlier lawsuit was unclear. It does suggest that St. Vincent's may have been chronically bled by greedy managers and consultants.

Contrasting Financial Health and Executive Compensation

Of course, as one of our unofficial legal consultants noted, anyone can file a lawsuit. However, perusal of the latest 990 form filed with the Internal Revenue Service by St Vincent Catholic Medical Centers for calendar year 2008 did reveal a disquieting contrast.

That form stated that the the hospital lost over $65 million in 2008, and over $34 million in 2007. However, in 2008, here were the compensation of its highest paid managers

- Brian Fitzsimmons, Executive Director, $2,135,401
- Bernadette Kingman-Bez, Senvior Vice President, CCO (?), $1,520,841
- Paul Rosenfeld, Executive Director, CC, $1,196,458
- Henry Amoroso, CEO, $1,081,592

In addition, seven current and former executives at the Senior Vice President of Vice President level earned over $500,000 that year, and another 13 earned over $250,000.

Summary

So clearly, while the hospital was hemorrhaging money, and a little more than a year away from bankruptcy, this not-for-profit hospital whose mission emphasized serving the poor served a large corps of executives very large amounts of money. So we see again the pattern of top managers rewarding themselves disproportionately (here, grossly so) given the mission and financial status of their organizations. The picture is of pay entirely independent of performance, and leaders who are ultimately only in it for the money.

How many more examples like this do we need until there is resolve that real health care reform will make top health care leaders accountable for their performance, and provide them incentives that are fair and rational, rather than perverse?

Post-Script

Of course, if we regard the fall of institutions whose mission was to do good as inevitable in our Darwinian world, an explanation that earlier coverage of this story suggested, all we can do is to throw our hands up. However, the inevitability argument is often made by those who are benefiting from the current way of doing things. A more skeptical view of this case, and related health policy issues, may suggest a different approach.

As we predicted, more stringent requirements by the US Internal Revenue Service for financial reporting by not-for-profit organizations, including hospitals and hospital systems, have produced an enlarging parade of revelations of obese pay packages for hospital leaders. The latest report came out courtesy the Baltimore Sun:

Baltimore-area hospital CEOs and presidents boast seven-figure salaries, club and gym memberships, and paid financial planning and tax services as part of compensation packages from their nonprofit employers.

According to a survey of Baltimore-area hospitals, the highest-ranking executives were often the recipients of financial payouts and perquisites that many private-sector companies have abandoned in the face of intense public debate about excessive CEO pay. The heads of hospital systems, which oversee many facilities, tended to make the biggest salaries and incentives. Eight top executives made more than $1 million, and the largest CEO pay package totaled $7.8 million.

The article described some of the more corpulent compensation packages.

St Joseph Medical Center

One was from St Joseph Medical Center, already under fire for for the lavish use of cardiac procedures by one of its staff doctors:

St. Joseph Medical Center, a member of Catholic Health Initiatives, said in a statement that it offers a level of compensation that allows it to compete for talent. The hospital paid former CEO John K. Tolmie $846,128 in salary, bonus and other pay, the latest IRS filing shows.

'Hospital CEOs have one of the most demanding, high-pressure jobs in the nation, dealing on a daily basis with everything from ever-changing regulations to workforce shortages and lower reimbursement for services,' the hospital statement said.

Tolmie resigned in May 2009 after being on administrative leave to avoid a conflict of interest during a federal investigation. Since then, one of the hospital's cardiologists, Dr. Mark G. Midei, has been accused of performing hundreds of unnecessary heart procedures.

Mercy Medical Center:

Mercy Medical Center head Thomas Mullen made $1.08 million in compensation during fiscal 2009. The hospital said in a statement that it 'believes this compensation to be appropriate given the responsibilities of serving as a president and CEO of a $520 million health system.'

Johns Hopkins
One might expect the CEO of the Johns Hopkins hospital system to be paid well, but he was paid particularly well since he also seemed to have the full-time, separately paid position of dean of the medical school:

Edward Miller, CEO of Johns Hopkins Medicine, made $729,297. He also gets paid separately for his position as dean of the School of Medicine at Johns Hopkins University. The fiscal 2009 filing for the medical school was not yet available. But Miller collected $1.4 million for that job the year before.

Summary


A chart of the compensation of all CEOs is here. As noted in the article, eight CEOs got more than $1 million, and another three got over $900,000.

A Baltimore Sun commentator noted that not only did the CEOs get large salaries, but:

Close to a dozen had personal dues for 'social clubs' financed by your charitable donations, tax dollars and health insurance premiums. Many enjoy lavish and opaque executive retirement plans that also put upward pressure on the medical costs that threaten government budgets and the economy.

As we have noted before, he pointed out that it is unseemly for not-for-profit hospitals, which are supposed to be devoted to the mission of caring for patients, usually explicitly including poor patients, and which are funded to a great extent by government programs and the income from donations, to make millionaires out of their top hired executives:

Hospitals aren't Goldman Sachs. They're not Stanley Black & Decker or Microsoft, either. They're nonprofits, getting charitable donations and huge government subsidies beyond all the loot they rake in from Medicare and Medicaid. If the newly required disclosures on the IRS 'Form 990' put pressure on hospital boards and CEOs to tone it down, it's about time.

People who donate to hospitals, thinking they are doing so to provide better health care, or to help out the less fortunate, may be surprised to hear about the hospital CEO as millionaire:

For some hospital donors, the revelations are transparently shocking.

'Donors are completely outraged,' says Ken Berger, president of Charity Navigator, an organization that helps people make smart giving choices. 'Donors tell us more than anything that they're just blown away by the fact that an organization that is a charity basically is creating millionaires in its leadership.'

'The most common remark we get is this: 'I've been giving to this organization for years, and I can't believe what the CEO is making, and I will never support this organization again.' '

I am glad that newspaper commentators are getting even more wound up on this issue than I have:

Why any hospital executive should need a company-paid club membership is a deep mystery. It can't be to woo potential donors. No donor with half a brain wants to endow an institution so employees can play golf with her money.

It shouldn't be to wine and dine business prospects. A hospital's business is collecting revenue for medical care. To be frank, there's too much of that going on already for the good of the country's wallet. Hospitals are far too focused on sales and marketing and not enough on delivering quality, efficient care.

Hospital trustees on any compensation committee can deliver a windy treatise about how pay for senior executives is ethical, carefully considered and worth every penny.

It's all a crock. The 'independent' compensation consultants that boards rely on are often referred by the CEO himself. The consultants know they can't make waves, or they won't get hired to rubber-stamp executive pay at other hospitals. To justify high pay, boards and consultants often use unrealistic comparisons from much bigger institutions or from the for-profit sector.

It doesn't take $1 million to get a great boss.

But it gets worse. People who love to play golf on company money, and feel entitled to make a million or more are not the right people to lead organizations that are supposed to focus first on health care, including health care for the less fortunate. Moreover, people who get used to the pay and perks are likely to focus on keeping them coming, rather than the mission, even if they started out with some devotion to the mission. Furthermore, the excessive pay and perks are perverse incentives, telling the CEOs that they are wonderful people, they can do no wrong, and should stand for no criticism, all further diverting them from what they really are supposed to be doing: upholding the mission.

As we have said many times before, true health care reform would encourage leadership of health care who understand health care and care about its mission, rather than those who see a quick way to make a small fortune.

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?

I have collected another series of stories from the wild and wacky world of health care executive compensation. These are from three different hospitals/ hospital systems, ordered from smallest to largest.

Jefferson Healthcare

This story, from Jefferson County, Washington state, came from the Peninsula Daily News:

When Mike Glenn takes over the Jefferson Healthcare CEO office Oct. 4, he will be receiving $225,000 annually to run the 25-bed publicly funded hospital.

And he will become the highest-paid public official in Jefferson County.

Jefferson Healthcare's budget is $65 million, and it employs 360 full-time workers and about 550 part-timers.

Note that the amount above is apparently salary, not total compensation, which could well be higher.

Lakeland Regional Medical Center

This story, from Lakeland, Florida, came from the Lakeland Ledger.

The latest IRS report available on Lakeland Regional Medical Center shows, for the first time, how much LRMC officials receive in base pay and how much in 'bonus and incentive compensation' based on meeting goals assigned them.

Not-for-profit hospitals are required to release their IRS reports. Previously, those reports combined salary and bonuses, which may or may not be awarded in a given year.

Jack Stephens, president and chief executive, was paid $856,514. Of that, $644,034 was his base pay and $212,480 was bonuses.

Second-highest paid was Paul Powers, vice president and chief financial officer. He earned a total $435,581, of which $352,661 was base pay and $82,920 in bonuses.

Third was Dr. William Sadowski, psychiatrist, earning $430,117, of which $149,226 was base pay and $280,891 bonuses.

Others listed as highest compensated:

Dr. Edward Sammer, chief medical officer, $404,789 ($327,607 base pay, $77,182 bonus).

Dr. Olumide O. Sobowale, who heads trauma services, $306,792 ($227,692 base pay, $79,100 bonus).

Janet Fansler, vice president/cardiac and specialty care, $266,672 ($215,954 base, $50,718 bonus).

Mary Ford, chief information officer, $264,283 ($213,978 base, $50,305 bonus).

Carole Philipson, vice president support services and facilities, $246,530 ($199,474 base, $47,056 bonus).

Hugh Autry, vice president acute/surgical care, $245,216 ($198,408 base, $46,808 bonus).

Jeffery Payne, vice president human resources, $229,304 ($185,696 base, $43,608 bonus).

John Schliesser, vice president planning and external relations, $226,571 ($183,363 base, $43,208 bonus).

Dr. Michael A. Campanelli, neurosurgeon, $197,887, not divided into base/bonus.

Ken Menefee, executive director LRMC Foundation, $181,045 ($151,142 base, $29,953 bonus).

Dr. Joy L. Jackson, physician adviser, $164,923, not divided into base/bonus.

Dr. Rajan K. Raj, trauma surgeon, $141,344, not divided into base/bonus.

Note that LRMC is a bigger institution that Jefferson Healthcare, with operating revenue just under $650 million. However, it is now having financial woes, as reported in a separate story in the Ledger.

Lakeland Regional Medical Center's rates will increase an average 10 percent, for the third year in a row, in the fiscal year starting Friday.

These continual increases reflect the financial pressures affecting hospitals, patients and the health care system nationwide.

Costs are increasing for almost everything LRMC pays for - drugs, bad debts, charity care, write-offs to managed-care and government insurance plans, insurance and utilities among them.

The number of hospitalized patients is expected go up very little, an increase of slightly less than 2 percent, according to Vice President and Chief Financial Officer Paul Powers.

UCLA Medical Center

Our last story, from the Los Angeles Times, is about a large, prestigious academic medical center.

First, the board [of regents] approved $3.1 million in bonuses for medical center executives that are linked to efficiencies and improvements in patient health. That money, which comes from hospital revenues, will be distributed among 37 UC hospital leaders across the state.

As part of that group, Feinberg, UCLA's hospital system chief executive officer, will receive a $210,000 bonus. But in a more divisive matter, UCLA officials also received the regents' approval to give Feinberg an extra raise of about $410,000, boosting his total compensation to more than $1.3 million.

Why was this divisive? It turns out that the University of California system is in deep financial trouble.

The University of California regents took steps Thursday to shore up the university's badly underfunded retirement plans by raising the amounts employees and the university will be expected to contribute to them.

In particular,

Meeting at UC San Francisco, the regents unanimously approved a plan that will raise contributions to the pension and retirement health plans over two years to 5% from the current 2% of employees' paychecks, and to 10% from 4% of payroll for the university. The change will take effect quickly for about half of UC's 115,000 employees, including its faculty, but must be negotiated with its unionized employees.

More tough choices are ahead as UC tries to fill an estimated $21-billion liability gap in its retirement plans. Until this spring, neither the university nor its employees had made any contributions to the plans for 20 years.

In December, the regents are expected to review proposals for even more extensive changes, including one that would create a less generous program for employees hired after 2013 and boost the minimum retirement age to 55 from 50.

So in times of such financial stress, why increase the compensation of the UCLA medical center CEO so much?

UCLA Chancellor Gene Block said Feinberg was doing an excellent job and was being wooed by other employers. 'Keeping this team together is essential,' he said.

Summary

So to summarize, the CEO of a tiny hospital gets $225,000 in salary, presumably more in total compensation. The CEO of a mid-size medical center with stagnant revenues and rising costs got over $850,000 in total compensation, while 11 other executives, mostly non-physicians, all got more than $180,000. The CEO of a large medical center, within a university system with a seriously underfunded pension plan which is increasing deductions from all employees' pay, and contemplating reduced retirement programs for new hires, got a $210,000 bonus and a $410,000 raise for total compensation of more than $1.3 million.

So once again we see that even in tiny, public hospitals, the CEOs are paid well, and in bigger hospitals, even those in the midst of financial problems, the CEOs are paid very well.

There does seem to be a rough correlation with hospital size. Executives, and their boosters like to imply that the bigger the institution, the harder the job. Keep in mind, however, that most hospitals, like most modern corporations, are highly pyramidal. The CEO hardly manages each and every worker. Rather, the CEO manages a few top executives, who in turn manage a few middle-managers, etc, etc. For example, a Bloomberg report noted that only 11 top executive report to the CEO of the huge Bank Of America.

Another claim by CEOs and their defenders is that it is all about pay for performance. As noted above, and in other posts about executive compensation, the criteria for performance are rarely stated, and hardly explicit. Anecdotally, there are many examples, including one above, of financially stressed institutions cutting back in other areas, but paying top executives more. As in the last case above, nearly every CEO seems to be doing a wonderful job, at least according to the boards of directors or trustees to whom he or she is supposed to be accountable.

In fact, the real lesson seems to be that top managers almost always do well financially, regardless of performance, regardless of financial pressures on their organizations, and do better and better the longer they hold their jobs. Top executives are really different from you and me.

I say again, 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?

The issue of executive compensation in health care seems to be attracting more media attention.

A St Louis Post-Dispatch editorial noted how executive compensation for for-profit health insurance CEOs has grown. It started with a quote from Steven Hemsley, the CEO of UnitedHealth:

Today the American people are questioning whether or not we receive fair value for the $2.6 trillion we, as a society, are expecting to spend this year on our health care system. The vast majority, including those of us at UnitedHealth Group, believe the answer is, 'No.'

Here is a summary of the compensation information:

Modern Healthcare, a leading health industry trade journal, published its annual executive compensation survey this week. Topping the list is Stephen Hemsley, quoted above, who gave a speech to the Detroit Economic Club last year questioning the value Americans receive for all that health spending. [Note: We discussed Hemsley's compensation here.]

His take for 2009: $106 million — $7.5 million in salary and benefits and $98.5 million in stock options.

Mr. Hemsley is not alone. The CEOs at insurance giants Cigna, Humana, Aetna, Coventry Health Systems and WellPoint all took home between $10 million and about $18 million. Many of those companies already have announced double-digit premium increases for next year.

In all, the CEOs of America’s 10 largest health insurance companies made $228.1 million in salary and stock options during 2009, according to the liberal advocacy group Health Care For America Now. (That's enough to buy health insurance for at least 47,284 people, based on figured cited in this Kaiser Family Foundation survey on average premiums.)

Since 2000, those CEOs have received slightly less than $1 billion in compensation, the group said.

As an aside, the article noted how the compensation received by CEOs of the larger US health care corporations of all types, not just health insurance companies, has grown:

Researchers analyzed pay and benefits for 342 CEOs of corporations in the Standard & Poor’s 500 index.

They found that health care CEOs received an average compensation of $10.5 million last year. That’s 40 percent more than the average for all S&P 500 companies — 77 percent higher than chief executives at financial services companies.

Even the CEOs of not-for-profit hospital systems have become million dollar babies:

Last year, the average compensation for hospital system CEOs was $1 million. That’s enough to hire five new primary care doctors.

However, the editorial was a bit vague about why paying CEOs of health care organizations so much was a bad idea, although it did imply that it was unseemly given that much of health care is funded by government programs, and not-for-profit health care organizations receive tax breaks that give "the public an even larger stake in their efficient operation"

In my humble opinion, there are other big problems with the massive compensation that hired managers of health care organizations now command.

Paying them so much instantly vaults them into the upper class, and the CEOs of larger health care corporations now live a life style more reminiscent of aristocracy than of that of the patients who depend on them. Such riches isolate those who receive them in their own bubbles. Can one really expect a million, or ten million, or hundred million dollar CEO to really care about the health of individual patients?

Furthermore, paying them so much, usually regardless of their performance, their companies' performance, or the health effects of their products and services gives them perverse incentives to maintain their position at any cost, even at the cost of the patients they are supposed to serve.

So, we do not receive "fair value for the $2.6 trillion we, as a society, are expecting to spend on our health care system." But we cannot really expect a billion dollar group of babies to fix that.

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

A year ago, I posted about leadership and governance problems at Northeast Health Systems, a small hospital system located in neighboring Massachusetts. The colorful story included leaders who solicited money from the community but concealed what they were doing from the same community, an adolescent pregnancy pact after the hospital system refused to provide confidential birth control information at the high school clinic it ran, a hospital vice-president accused of art theft, various cuts, some concealed, of medical services, accusations of conflicts of interest affecting the board of trustees, and no-confidence votes by nurses and physicians. Finally, Stephen Laverty, the CEO held responsible for much of the mess, resigned and things quieted down a bit. However, he left a system in deficit, leading to further lay-offs, (e.g., see this story in the Boston Globe). And the vice-president accused of art theft was also "arraigned on bribery and larceny charges" (also per the Boston Globe.)

Yet, Mr Laverty collected a tidy sum just to leave, as the Salem News just reported:

Former Northeast Health System President and CEO Stephen Laverty collected more than $1 million from the nonprofit hospital chain after he resigned under fire in the fall of 2008, newly released financial records show.

The earnings, $1.08 million in total, include a settlement package of more than a year's salary plus pay for the one month the controversial Laverty was at the helm of Northeast, which owns Beverly Hospital, as well as Gloucester's Addison Gilbert Hospital.

The documents provide the first details of how much Northeast, now laying off workers and cutting costs, was willing to pay to part ways with its CEO who had just endured no-confidence votes from nurses and doctors, plus the arrest of one of his top managers.

Neither the hospital system nor its former CEO was exactly forthcoming about the rationale for this payment:

As part of Laverty's resignation, both sides agreed not to discuss the settlement or any of the details that led them to part ways.

'I have no understanding of what you are talking about,' Laverty said yesterday afternoon from his home in Concord, when asked about his settlement package. He then hung up the phone.

A spokeswoman for Northeast Health System said she could not comment on Laverty or the terms of any agreements between the company and past employees.

So even the hired manager of a small community hospital system is entitled to a million dollar plus golden parachute when resigning in disgrace. This is another great example of the current perversity of the incentives given to hired health care managers. Even small community hospitals, the backbone of real community health care throughout the country, seem to feel obligated to make millionaires out of their managers, no matter how bad their performance.

As we said before, the problem is not just the money wasted paying for bad performance. These perverse incentives are likely to encourage worse performance. They send the message to even the worst executives that they are wonderful people, they can do no wrong, and should stand for no criticism, all further diverting them from what they really are supposed to be doing: upholding the mission.

As an editorial in the Gloucester Times noted, although the nexus is perverse incentives given to paid managers, it is not only the paid managers who are to blame for this situation.

The other party to his contract was the Northeast Board of Trustees.

So,

Those who want to serve as trustees of Northeast need to get the notion out of their heads that their board seats are not just resume builders — with high-profile community roles and a few corporate dinners thrown in. These are positions of community leadership and responsibility that comes with a measure of accountability.

New Northeast CEO Ken Hanover has indeed seemingly ushered in a new era of relative openness in dealing with the community. But the same cannot be said for the Board of Trustees.

If Laverty's shameful buyout deal and these types of contracts are examples of their 'leadership' and responsibility, each and every one of them should step down now.

As we have said many times before, true health care reform would encourage leaders of health care who understand health care and care about its mission, rather than those who just see a quick road to riches or social respectability.