More Rising Compensation for Executives at Financially Challenged Hospitals, Justified by More Talking Points

In the spring, leaves turn green, and executive compensation turns greener.  The media has provided another set of stories about the inexorable rise of compensation for executives of non-profit hospitals, presented in order of the stories' appearance.

Westchester Medical Center

The Journal-News reported in April,

A Journal News analysis of salary data, obtained through a Freedom of Information request, revealed that 20 hospital administrators received increases in their total compensation for 2010, including one employee whose pay package jumped 18 percent.

Also,

The newspaper’s analysis of data for 2010, the latest year available, shows that 26 administrators at the medical center would have exceeded Gov. Andrew Cuomo’s limit of $199,000 a year for executive compensation. Cuomo signed an order, scheduled to take effect April 15, that restricts the amount of state money that nonprofit organizations can use toward salaries and benefits.

Overall, the medical center spent $11.8 million in compensation to 44 executives in 2010, during which three administrators resigned and three others had their titles downgraded to the director level. The executive payroll rose 11 percent between 2008 and 2010.

In particular,

Administrators who received increases in their total compensation included CEO Israel, who earned the top salary of $1.3 million in total compensation; the chief financial officer; an executive vice president and several senior vice presidents.

However, the fortunes of the top executives were rising at a time of financial trouble for the institution:

That same year, the medical center laid off 130 workers, instituted a hiring freeze and announced an $18 million budget cut for the following year.

'There is no shared sacrifice, there is no appearance of a shared sacrifice,' said Jayne Cammisa, a union representative and a registered nurse in the hospital’s transplant unit.
Those who defended the executives' compensation sounded familiar themes:

Hospital boards rely on compensation committees, outside consultants and market analysis and documentation to justify how much they pay administrators. The medical center uses an outside firm to analyze compensation packages, which are based on market values, [Senior Vice President for Communications Kara] Bennorth said.

The only way to keep the institution and be financially viable is you have to have top management,' [Chairman of the Board Mark] Tulis said.

Note that we briefly mentioned the CEO's compensation in this post.

Connecticut

In May, the Hartford Courant reported,

The health care system may be ailing, but newly compiled data show that compensation for top executives at Connecticut hospitals remains healthy.

Eighteen executives at the state's 30 hospitals made more than $1 million in 2009-10, according to information the hospitals reported to the Internal Revenue Service.

Some of the more notable examples included,

Hartford Hospital's outgoing chief executive officer, John J. Meehan, was the highest paid in Connecticut and one of the highest paid nationally. His compensation totaled $6.98 million – all but $1.1 million of it nontaxable and retirement benefits, according to the hospital.

Also,

In addition to Meehan, Connecticut's 10 highest paid administrators were two Yale-New Haven Health System executives, the departing CEOs at the Hospital of Central Connecticut and the Hospital of St. Raphael, the departing treasurer of Hartford Hospital, the treasurer of the Hospital of Central Connecticut and the presidents of Stamford, Yale-New Haven and St. Francis Hospital and Medical Center. All made more than $1.59 million in 'reportable' W-2 and 1099 miscellaneous compensation.

A few executives had significant 'non-reportable' compensation in addition to W-2 and 1099 pay. The outgoing president at William Backus Hospital in Norwich had $2.2 million in deferred compensation related to his retirement, for total pay of nearly $3 million, according to a C-HIT analysis of the data. The chief operating officer at the Hospital of Central Connecticut had $472,443 in reportable pay and $838,880 in other compensation, for a total of $1.3 million.

Again, there were complaints that executive compensation had nothing to do with the performance of the executives' organizations,

'I don't understand what the hospitals are getting for their money. Some of the highest paid are the worst performing,' said Ellen Andrews, executive director of the Connecticut Health Policy Project in New Haven. 'The system isn't working for anyone – for the state, for the hospitals or for consumers.'

Note, however, that the system is working for the top hired executives.

In response to these complaints, the Courant cited the usual defenses of executive pay:

Others say the compensation reflects the complexity of the health care business, keen national competition for good leaders, and the uncertain future that executives face when they sign on for top-level positions in an industry undergoing enormous change. Pay needs to be competitive to attract and retain key executives, they say – even for nonprofits that are struggling to find their place.

'Hospital executives are responsible for extremely complex organizations,' said Michele Sharp of the Connecticut Hospital Association. In addition to managing advanced medical services and technology, a skilled staff and extensive physical plants, hospital CEOs are often responsible for an array of services beyond the hospital, such as primary care clinics, home health organizations and surgery centers. They work in a highly regulated environment and must comply with demanding standards in areas that range from patient safety and financial performance to institutional stability and community health, Sharp said.

'When you bring in exceptional talent, you can manage effectively and efficiently,' said Vin Petrini, senior vice president for public affairs atYale-New Haven Hospital. 'It's a very complicated and complex industry. We need to be thoughtful about how we manage and retain and recruit talent.'

Wake Forest Baptist

The Winston-Salem Journal uncovered the compensation of several local executives,

A commitment Wake Forest Baptist Medical Center made to Dr. John McConnell, its chief executive, when he was recruited led to a nearly 50 percent increase in his total compensation for fiscal year 2010-11, the center reported Tuesday.

McConnell was paid almost $2.5 million in total compensation, compared with $1.68 million for fiscal 2009-10.

The total included essentials such $25,560 for moving expenses and $9,568 for country club dues.

Other executives did well too:

Donny Lambeth, former president of N.C. Baptist Hospital, had a 36 percent increase in total compensation to $1.16 million. Lambeth now serves as president of Davie County Hospital and Lexington Medical Center. His salary dropped 11 percent to $537,997, while his bonus and incentive compensation rose 165 percent to $186,261.

Dr. Thomas Sibert, president of Wake Forest Baptist Health and chief operating officer, received a 2 percent increase in total compensation to $995,133, including $545,517 in salary and $166,027 in bonus and incentive compensation. Sibert took over his role in September 2010.

Edward Chadwick, chief financial officer, received a 32 percent increase in total compensation to $974,587. His salary rose 71 percent to $503,663 in salary, while his bonus and incentive compensation fell 42 percent to $200,000.

Dr. William Applegate, retired president of Wake Forest University Health Sciences and dean of its medical school, was paid $743,541 in total compensation, down 25 percent. His salary dropped 3 percent to $518,231, while his bonus and incentive compensation fell from $378,900 to $99,900.

Doug Edgeton, former president of Piedmont Triad Research Park, received a 38 percent decrease in total compensation to $655,048. His salary fell 1 percent to $484,360, and his bonus and incentive compensation fell from $361,600 to $111,700.

However, a Winston-Salem Journal article in April noted that the same CEO, Mr McConnell would be aggressively cutting costs and possibly laying off employees:

Wake Forest Baptist Medical Center has told employees it is considering reducing its workforce as part of a major initiative aimed at improving patient outcomes at a lower cost.

The center confirmed Friday a memo sent April 2 by Dr. John McConnell, its chief executive, which addressed what the center is calling 'accelerated transformational initiatives.'

In particular,

In a separate statement, the center said it is looking at expense-reduction opportunities that include 'energy conservation, cost savings through supply chain management, revenue-cycle improvements, efficiencies such as reducing length of stay, reduction in discretionary spending, and managed employment through attrition, retirements, eliminating duplication and process redesign.'

"Managed employment" seems to be the latest circumlocution for layoffs.

The largess given to top executives at a time when lesser employees may be sacked was explained by trotting out the usual suspects,

Wake Forest Baptist said the center is a 'very complex organization that requires a special set of skills and experience to manage relationships with physicians and researchers, the university, its patients and community.'

I wonder if "complexity" comes from a set of talking points, since it gets aired so often in this context.

Note that we discussed compensation given to Wake Forest executives the year before, and its relationship, or lack thereof to the quality of their leadership here.

Summary

There they go again. We have the latest additions to what has become a long series of examples of executive exceptionalism in health care organizations. Top hired executives, be they of for-profit health care corporations, or non-profit organizations, tend to be paid very well, even when their organizations perform poorly or are financially threatened.

The same rationales are cited repeatedly to justify their treatment. Executives are said to have very difficult jobs, Competitive pay is necessary to hire the brilliant people required.  Left unsaid, however, is how difficult these managerial positions are in comparison to the demanding work and sometimes life or death responsibilities of health professionals, how brilliant executives are in comparison to such well trained professionals, and why the executives deserve competitive pay when other employees may be laid off. Perhaps the close ties of those making the arguments to the executives explains the questions they beg.

So it is time to say it again,....  Health care organizations need leaders that uphold the core values of health care, and focus on and are accountable for the mission, not on secondary responsibilities that conflict with these values and their mission, and not on self-enrichment. Leaders ought to be rewarded reasonably, but not lavishly, for doing what ultimately improves patient care, or when applicable, good education and good research. On the other hand, those who authorize, direct and implement bad behavior ought to suffer negative consequences sufficient to deter future bad behavior.


If we do not fix the severe problems affecting the leadership and governance of health care, and do not increase accountability, integrity and transparency of health care leadership and governance, we will be as much to blame as the leaders when the system collapses.

The CEO as False Messiah

Why is the leadership of health care organizations so bad?  An important explanation of one part of the puzzle appears on InformationWeek's Brainyard blog written by Venkatesh Rao. 

The Visionary, Charismatic, or Messianic Leader

In "The Fall of the Messiah Leader," Rao described the rise of the concept of "visionary" leadership:

we'll look at the rise in the 1980s and impending fall of the idea of 'Leadership' as a pop business construct. The role of visionary leader emerged to make up for the apparent failure of the manager mind, but it evolved into something very different, illustrated in the picture below: a role dedicated mainly to creating and maintaining an illusion of control in the markets interspersed with occasional Big Bold crisis management moves that generally fail.

Rao suggested that the first example of the messianic organizational leader was former General Electric CEO Jack Welch:

Welch was the first modern example of 'charismatic leadership,' and his was the first widely recognized business name since the robber barons. I challenge you to name, off the top of your head, one "celebrity" business name between Rockefeller and Welch that the average man on the street would have recognized.

Rao described the charismatic, or visionary leader in truly messianic terms:

one savant-like figure can intuitively read market conditions, spot brilliant strategic opportunities, create clarity of purpose in pursuit of that opportunity, and steer by an innate sense of True North, without a compass.

Oh yeah, and while performing this miracle routinely, the leader also models virtues and values that would put saints to shame. This idealized leader sparks a pursuit of corporate greatness with a brilliant strategic insight every few years, and he ensures that the pursuit is conducted in accordance with values so noble you feel like writing epic poems in his honor.

These charismatic figures are supposed to be capable of intuitively cutting through complexity and producing visionary decisions that make the managers' jobs tractable again.

In case this description of supposedly messianic leaders of recent years sounds far-fetched, recall the example of the failed, then eventually jailed CEO of what was once the Allegheny Health Education and Research Foundation (AHERF), one of the largest vertically integrated health care systems of the 1990s. (Currently, we call such organizations accountable care organizations, or ACOs.) Abdelhak was described in an American College of Physicians publication as a "visionary." (See the summary beginning on p 5 here.) Abdelhak had previously been called a "visionary" or a "genius" in the media. [Gaul GM. Creator of a cross-state health system despite personal and financial questions, Sherif Abdelhak has boldly expanded from Pittsburgh to Philadelphia. Philadelphia Inquirer, March 4, 1991. P. D1. Gaul GM. The new prescription for health care: Hahnemann’s merger dwarfs - and frightens - many local rivals. Philadelphia Inquirer, November 21, 1993. P. E1.]  For more recent examples of how health care leaders may be described in messianic terms, look here, here, and here.

The False Messiahs

Just as Abdelhak proved to be not a messiah, but a criminal, most messianic leaders are anything but. As Rao put it,

Do these Messiahs actually do the job required of them--relieve beleaguered mere-mortal managers and steer the company toward greatness? Nine out of 10 times, they do nothing of the sort. What they do is convince people that they're in control.

His main point is that the "messiahs" are just people playing at that role, supported by public relations, if not propaganda and disinformation:

Heroic, charismatic leadership in the context of large public companies is mostly a myth. What makes it a myth isn't that such figures don't exist (there have been a handful, such as Welch himself, Jobs, and Bezos), but the idea that the phenomenon can be studied in general terms, codified, and turned into a teachable skill.

True leaders are born, not manufactured. And they're quite rare. What the leadership cottage industry can manufacture are false leaders: People who can act like leaders. That theater has two audiences: the media and Wall Street.

The psychological allure of 'leadership' as a concept is almost entirely due to its profitability as a business-writing cottage industry, which in turn is based almost entirely on appealing to the vanities of wannabe-Messiahs. On the other side, there's an entire shadow world devoted to manufacturing perceptions of Messianic capabilities, by 'proving' claims to charismatic leadership using hagiographic narratives.

Rao claimed that the rise of such falsely messianic leadership was due to the ability of such leaders to bewitch investors:

The de facto job of a leader is to manage perceptions on Wall Street and thereby manage the stock price. Projecting an image of charismatic leadership is the easiest way to do that. Managers fight fires out of sight, creating a perception of corporate normalcy and control, and the Glorious Leader uses that blank canvas of apparent normalcy to spin tales that mesmerize Wall Street.

Who Else Benefits

Rao wrote mainly in the context of understanding the stresses and challenges of managers (who he sees as distinct from leaders in the context above). Thus he may not have written about other factors in the etiology of falsely messianic leaders.

I hypothesize that such leaders are not only good at bewitching investors, but bewitching other constituencies and stakeholders. Most health care organization now must deal with government agencies. Non-profit health organizations must deal with groups that are interested in their ostensibly charitable missions. Having a apparently messianic leader makes it possible to bewitch these groups.

Furthermore, I hypothesize that falsely messianic leaders greatly benefit two groups within their organizations. The first is obviously their apostles, often the top layers of organizational executives just below the CEO. Such positions are now almost as personally remunerative as are CEO positions. The second is obviously the spin-doctors, that is mainly the public relations and sometimes the marketing people who help produce the theatre that creates the perception of messianic qualities.

The Final Common Pathway

Rao suggests that falsely messianic leaders are likely to lead their organizations to a bad end, even if they themselves may escape the consequences:

Charismatic theater-leadership is about to die a messy death, like Qadaffi, because the sheer amount of chaos converging in a bottom-up torrent to the CEO's office will become unmanageable very soon. The theater will become increasingly hard to sustain.

Leaders fail when their managers fail to keep up with the fire-fighting. Once the fires become visible externally, the apparent normalcy necessary for the leader to manage perceptions is gone.

At this point, the leader is an impossible situation, but the theater must continue. And so we're treated to the grand finale of the tenure of a CEO: the Big Bold Move, the Bet The Company moment.

The Big Bold Move is usually a Big Dumb Move--deciding to go after large new markets, taking on bold new product initiatives costing hundreds of millions of dollars, making major acquisitions. It's a high-stakes game with a billion-dollar ante.

And usually these moves fail because charismatic leaders are forced to make them at terrible times, with bad data, when growth has stagnated or is plummeting, and there's a need for an 11th hour business model shift to replace hundreds of millions of dollars of collapsing revenue streams. A case of too much, too late.

The leaders who fail are sacked, land safely with golden parachutes, and proceed to loudly blame 'culture' (read: 'incompetent middle management') for the failure.

Rao is writing for a general business audience. The outcomes of such failures when the falsely messianic leader is in charge of a health care organization can obviously be even worse, leading to rising health care costs, declining access and quality, and threats to patients' and the public's health.

Summary

We have seen many health care leaders praised for their brilliance and paid royally despite leadership resulting in financial distress, threats to the organizations' health care missions, poor patient care, unethical behavior, or even crime. (The most recent example as of the time this was written was here. For other examples look here.)   Yet health care CEOs are just people, sometimes smart, but almost never brilliant.  Promoting them as messianic to bewitch key constituencies, justify the remuneration of other top managers, and the hiring of more public relations flacks is likely to lead to the sort of organizational disasters and system-wide dysfunction we discuss on Health Care Renewal.  The rise of the falsely messianic leader may allow the entry of the most dangerous false messiahs, the psychopathic ones.  (We discussed the likelihood that some health care leaders are actually psychopaths here.)

Rao's theory of falsely messianic leadership (and related, and also religiously allusional theories of the "divine rights of CEOs," look here and here), suggest that the better paid the CEO, and the more expansive the descriptions of the CEOs talents, the more skeptical we ought to be. 

In the secular occupation of health care, we ought not to yearn for messiahs, but hope for reasonable leadership that draws on the collective knowledge and values of health care professionals rather than dubious "visions," and that show accountability, integrity, transparency, honesty, and ethics.

From Serving the Poor to Paying Executives Millions - Carolinas HealthCare System

A striking contrast between a large health care organization's historic mission and its current practices appeared in a series published by the Charlotte News-Observer called "Prognosis: Profits" about the Carolinas HealthCare System.

A Historical Mission to Serve the Poor

The system evolved from a public hospital meant to serve the poor.  In particular,(1)

Only 30 years ago, it was a charity hospital called Charlotte Memorial – a crowded, dreary place that lost money every year because most of its patients couldn’t pay their bills.

The hospital system is actually "a public, tax-exempt entity called a hospital authority". Because of this special status, it has the power of eminent domain, the ability to seize property albeit with compensation, and its employees have "more privacy protection that those of other public agencies."

However, in the "greed is good" 1980s, the hospital began a transformation,

The board hired [Harry] Nurkin in 1981 to revamp Charlotte Memorial’s image, attract paying patients and avoid the fate of struggling public hospitals in Atlanta and Chicago.

Until then, patients with insurance mostly chose Presbyterian Hospital or Mercy Hospital, with stately buildings at the edge of Myers Park.

With a vision of building one of the Southeast’s finest medical centers, Nurkin paid attention to details, such as wallpaper, plants and furniture. And he put the hospital in the black by improving collections from patients and insurers.

In 1983, when Nurkin unveiled the hospital’s first long-range plan, some board members sat in wonder at a slide show that accompanied his bold outline, according to 'A Great Public Compassion,' a book by writer Jerry Shinn.

The plan called for a heart institute, a doctors’ building and an 11-story, $40 million tower that would replace a 1940s wing. All of that came true – and more.

Now a Huge Hospital System

From those humble origins, Carolinas HealthCare System has now become(2)

a juggernaut. It’s now the country’s second-largest public hospital system, behind only the nationwide system of Veterans Affairs hospitals.

One of the benefits of that growth is access to quality medical care. Carolinas HealthCare offers one of five organ transplant programs in the state and operates the region’s most comprehensive trauma center, where accident victims frequently arrive via medical helicopter. Five-year-old Levine Children’s Hospital has brought new pediatric specialties to Charlotte, and Levine Cancer Institute has recruited specialists from such respected institutions as the Cleveland Clinic.

With nearly $7 billion in annual revenue, Carolinas HealthCare runs about 30 hospitals and owns more than $1 billion worth of property in Mecklenburg County alone. It has more than $2 billion in investments.

In the five-year period ending in 2011, it spent $1.8 billion on capital projects.

Forgetting the Mission: Suing Poor Patients

However, as the system grew, its mission seems to have been forgotten.

In particular, Carolinas HealthCare seems to now have a penchant for suing poor patients who cannot pay its bills. A Charlotte Observer article documented that while the hospital does not refuse poor patients care, it may later pursue them if they cannot pay. The article noted the case of a woman who was assured that the hospital had funds to pay for patients like her, but who then faced a lawsuit for $34,000 and a lien on her house. In general(3)

most N.C. hospitals are tax-exempt – a distinction that saves them millions each year. In exchange, these nonprofits are expected to provide financial help to those without the means to pay.

But thousands of times a year, hospitals are suing patients instead, an investigation by the Charlotte Observer and The News & Observer of Raleigh found.

An in-depth look at some of those cases suggests most of the patients were uninsured, and that a significant number of them should have qualified for free hospital care.

Critics contend those hospitals are financially ruining people they could afford to help. Carolinas HealthCare System, the multibillion-dollar public enterprise that owns CMC-Mercy, has generated average annual profits of more than $300 million over the past three years.

During the five years ending in 2010, N.C. hospitals filed more than 40,000 lawsuits to collect on bills.

Most of those suits were filed by just two entities: Carolinas HealthCare and Wilkes Regional Medical Center in North Wilkesboro. Each filed more than 12,000 suits over the five-year period, according to state courts data. Wilkes Regional, which is managed by Carolinas HealthCare, appears to be the state’s most litigious individual hospital.

In addition,

Often, the lawsuits hit people who are among those paying the highest rates for hospital care: the uninsured. Bills for uninsured patients are usually higher because they don’t have insurance companies to negotiate discounts on their behalf.

It’s unclear how many of the patients sued in North Carolina lacked health insurance and substantial income or assets. But in interviews with 25 of those patients, the newspapers found 17 of them were uninsured; 10 said they were never told about the hospitals’ financial assistance programs.

An editorial summarized the contrast between Carolinas HealthCare historic mission and its current practices(4)

Carolinas HealthCare, once a small, struggling operation, has become one of the top hospital systems in the country. Novant Health, owner of Presbyterian Hospital, has grown into a powerful and respected health care provider. Their successes have come thanks to an aggressive philosophy of accumulation and growth, which has led to patients in the Charlotte region having access to the latest in medical technology and research, as well as top doctors in a diversity of medical fields.

But that accumulation has contributed to the high cost of health care in North Carolina, and that growth has caused the hospitals to stray at times from their non-profit charitable mission. A Charlotte Observer and News & Observer investigation that begins today details how a hunger for money and power has caused the two hospitals to sometimes lose their way, contributing to the region’s health care cost woes and leaving thousands of patients with financially crippling bills.

Opaque, Unaccountable Governance

While the Charlotte Observer did not provide opinions about the reasons that this large health care organization appears to have forgotten its raison d'etre, its reporting suggests some familiar elements.

The governance of the organization may have been appropriate for a small, struggling public hospital, but as the system grew, lack of accountability and transparency may have become more important. It is easier to lose one's way when no one is observing one's actions.(1)

Most hospital business gets done quietly – until there is a well-planned announcement.

The system’s self-perpetuating board includes top community and business leaders whose nominations get approval from the Mecklenburg commissioners’ chairman.

Quarterly hospital system board meetings, at 7 a.m., are polite and scripted. Votes are unanimous on everything from building new hospitals to borrowing millions of dollars. Questions are worked out in private discussions, closed-door committee meetings or executive sessions.

Meetings aren’t widely publicized. Except for a couple of newspaper reporters, only board members and hospital officials attend. Future meeting dates are provided to those who attend board meetings or call the system’s main office.

State law requires public organizations with websites to post meeting times. Carolinas HealthCare had not been doing that until last week, after an Observer reporter asked about it.

The board’s agenda sets no time for public comment.

While operating so quietly, the board appears to have become a very cozy little group,

The 1943 hospital authority law intentionally kept elected officials and politics out of operations. The link is that the commissioners’ chairman must sign off on hospital board nominees.

It has been a rubber stamp.

County officials remember once in 30 years that a proposed board member was rejected. That was in 2008 when nominees included Gloria Pace King, who had been ousted as CEO of the United Way of the Central Carolinas because of public outcry over her $2 million pension package.

In December 2008, the board renominated King for a new term. But hospital officials say Roberts, then commissioners’ chairwoman, objected, and King wasn’t reappointed.

Over the years, the board has included city leaders, such as bank CEOs Hugh McColl and Ed Crutchfield, and Stuart Dickson, the retired head of the company that owns Harris Teeter. His father, Rush S. Dickson, was an original board member whose name is on the entrance to what is now Carolinas Medical Center.

Lavish CEO Compensation

As noted earlier, not only are the actions of the hospital system's governing body kept secret, but up to recently, compensation paid to all employees, including top executives was also secret.(1)

State law gives its employees more privacy protection than those of other public agencies.

For example, salaries of all state, county and city government employees are public. That’s not true for public hospital employees.

Until a 2009 change in state law, Carolinas HealthCare had for years refused to make public the total compensation for top executives. They said state law precluded them from disclosing more than basic salary.

As a result, the public hospital system wasn’t disclosing as much detail as its private counterpart, Novant Health, does in publicly available reports to the IRS.

At the urging of the Observer and other state newspapers, legislators broadened the law in 2009 to require disclosure of total compensation for top executives at public hospitals.

So it should not be any surprise that an opaque, unaccountable board run by a cozy group of insiders saw fit to allow its friends in the management make some money, a lot of money. The Charlotte Observer reported that there were nine hired managers with total compensation greater than $1 million in 2011.(5)

Michael Tarwater
CEO, Carolinas HealthCare System
Total 2011 compensation:
$4,236,305
Percentage increase over prior year:
14.10%

Joseph Piemont
President/Chief Operating Officer,
Carolinas HealthCare System
Total 2011 compensation:
$2,536,792
Percentage increase over prior year:
19.70%

Greg Gombar
CFO, Carolinas HealthCare System
Total 2011 compensation:
$1,751,798
Percentage increase over prior year:
8.90%

Laurence Hinsdale
Executive Vice President, Carolinas HealthCare System
Total 2011 compensation:
$1,693,314
Percentage increase over prior year:
44.10%

Paul Franz
Execttive Vice President, Carolinas HealthCare System
Total 2011 compensation:
$1,575,927
Percentage increase over prior year:
-1.30%

Dennis Phillips
Executive Vice President, Carolinas HealthCare System
Total 2011 compensation:
$1,351,138
Percentage increase over prior year:
12.20%

John Knox
Chief Administrative Officer, Carolinas HealthCare System
Total 2011 compensation:
$1,197,528
Percentage increase over prior year:
11.80%

Roger Ray
Chief Medical Officer, Carolinas HealthCare System
Total 2011 compensation:
$1,080,159
Percentage increase over prior year:
No data for prior year

Russ Guerin
Executive Vice President, Carolinas HealthCare System
Total 2011 compensation:
$1,060,931
Percentage increase over prior year:
3.00%

Should it be surprising that executives who can become so rich, and who are subject to so little oversight, are more interested in preserving the hospital system's operating margin which supports their wealth than in providing the care to poor people that was the hospital system's original reason to exist?

Summary

As the local NAACP pointed out, the hospital system should better uphold its mission(6)

'The Bible says we’re not supposed to burden the poor and the sick and the afflicted. We’re supposed to lift them and help them and heal them,' NAACP President the Rev. William Barber said during the Charlotte stop of a statewide tour designed to bring attention to the struggles of low-income people. '(Carolinas HealthCare) is a group with money hounding people who are just trying to make it.'

However, I submit that restoration of this organization's mission will require more than exhortation. The governance of this organization, like that of many others we have discussed, needs to regain accountability, transparency, integrity, and ethics. It must insist that the leaders it hires uphold the mission ahead of other concerns, particularly personal enrichment. It must provide these leaders with realistic incentives based on how well they uphold this mission, not on revenue or operating margin.

Until such changes are accomplished, expect this hospital system, like many other health care organizations, to contribute only to our ever rising prices, declining access, and stagnating health care quality.

References

1.  Garloch K, Alexander A. Carolinas HealthCare System's evoluation: public hospital with private attitude.  Charlotte Observer, April 21, 2012.  Link here.
2. Alexander A, Garloch K, Neff J. Nonprofit hospitals thrive on profits. Charlotte Observer, April 21, 2012. Link here.
3. Alexander A, Raynor D. Hospital suits force new pain on patients. Charlotte Observer, April 23, 2012. Link here.
4. Anonymous. Money over mission at non-profit hospitals. Charlotte Observer, April 22, 2012. Link here.
5. Anonymous. Million-dollar hospital executives in North Carolina. Charlotte Observer, April 21, 2012. Link here.
6. Alexander A. Stop suing patients, NAACP tells Carolinas HealthCare System. Charlotte Observer, May 2, 2012. Link here.

The 2011 Best Paid US CEO's Company's Latest Legal Settlement

Yet another legal settlement illustrates the contrast between rewards given to the hired managers of large health organizations and their organizations' performance. 

The New Settlement

The legal settlement in question was simple, as reported by Reuters,

McKesson Corp, one of top U.S. drug wholesalers, has agreed to pay more than $190 million to settle claims that it had violated the federal False Claims Act by reporting inflated pricing information for many prescription drugs, causing Medicaid to overpay for them.

The settlement was announced Thursday by U.S. Attorney Paul Fishman in New Jersey.

According to the government, McKesson reported inflated pricing data to First DataBank, a publisher of drug prices that most state Medicaid programs use to set payment rates for pharmaceutical products.

The government accused McKesson of marking up prices on a variety of drugs by 25 percent between Aug. 1, 2001, and March 31, 2005.

It said McKesson's conduct had caused the United States and individual states to pay inflated reimbursements on Medicaid claims submitted between Aug. 1, 2001 and Dec. 31, 2009.

'We have no tolerance for those who take advantage of that system to bring in more business by falsely increasing reimbursements to retailers,' Fishman said in a statement.

As is typical, the company denied doing anything wrong:

McKesson was not immediately available to comment.

According to settlement papers, McKesson 'expressly denies' the government's charges, as well as those of a whistleblower, David Morgan, in a related civil lawsuit filed in New Jersey federal court. The San Francisco-based company did not admit liability or wrongdoing in agreeing to settle.

It was hardly McKesson's first ethical problem.

McKesson's Track Record

This is just the latest in a long series of legal problems for this company.

The Depression-Era Scandal

Way back in 1938, there was the McKesson & Robbins scandal, one of the major scandals of the depression era. The company had been taken over by one Philip Musica, an accused bootlegger, who committed suicide before a trial (see this post).

In this century, there were:

The Securities Fraud Case

As we posted in 2009, five former executives pleaded guilty, the former CEO and Chairman Charles McCall was convicted of fraud in 2009. The company settled investor lawsuits in 2005 for $960 million.

The First Pharmaceutical Pricing Case

As the Wall Street Journal reported in 2009,

McKesson Corp., a giant drug-wholesale and -distribution company, agreed to pay $350 million to settle cases in which it was accused of helping to increase drug prices in 2001 and 2002. The money will go to health plans that pay for drugs and consumers who paid co-pays for their medicines.

The San Francisco-based company said the settlement, which is subject to court approval, includes 'an express denial of liability of any kind' but that it decided to settle the cases to avoid the uncertainty of litigation

In addition, as we noted here, the company settled with the state of Connecticut for "illegal and deceptive" pricing practices for a mere $15 million.

These settlements appear to be precursors of the just announced one.

The Propofolol Punitive Damages

As we noted here, McKesson was one of three companies to collectively pay $162 million in punitive damages in a case involving allegations that the companies sold propofolol, an injectable anesthetic, in reusable containers that were susceptible to contamination with the hepatitis C virus.

The Best-Paid CEO in America

All these legal issues notwithstanding, late in 2011, McKesson leadership made headlines for a different reason. Based on one method of computation, the company's CEO was the best-paid of an exceedingly well-paid 2011 CEO class. An article in the Daily Beast noted:

John Hammergren, [is] the CEO of the McKesson Corp., a giant medical-supply company in California. Hammergren is the $145 million man, top dog on the latest listing of the country’s highest-paid chief executives.

The details of the compensation package included,

Yet last year McKesson contributed more than $13 million just to Hammergren’s pension, according to company documents. Among the other perks he enjoys: a chauffeur to drive his company car, free use of the corporate jet for personal travel, and an extra $17,000 a year to pay for a financial planner because handling all those hundreds of millions is no doubt complicated stuff.

Also,

Then there are the assorted perks he gets each year at an annual cost of $1 million or so. Choose the perk that makes you the most jealous. Maybe it’s this line found in McKesson’s most recent proxy statement: 'For security, protection, and privacy reasons, the Board has directed our CEO to use the corporate aircraft for both business and private travel.' Or maybe it’s the bounty that awaits Hammergren on the other side of his retirement. The company discontinued its pension program for ordinary employees in 1997 but not for top executives. If Hammergren quit tomorrow, according to company filings, he would receive a pension valued at $125 million.

The party won’t stop once the 52-year-old Hammergren retires. Among his lifetime benefits: a personal assistant and office, which the company figures will cost more than $200,000 a year, and the services of a financial counselor—a perk that will eat up $350,000 in profits, according to company estimates. The goodies keep coming even after he dies. If his wife survives him, she will continue receiving his base salary for six months and will also get $2 million in cash. That cash bonus would actually cost the company nearly twice that amount, as it's promised to cover the widow’s cost of paying taxes on that money.

And then there’s a provision so outsize it’s drawn the attention of corporate-governance watchdogs like GMI, the research group that put Hammergren in the top spot of its latest survey of CEO salaries. If Hammergren loses his job due to a change in ownership, he receives an immediate $469 million payout, GMI found—giving him perverse incentive to see it happen.

Although Mr Hammergren has not been the best paid CEO every year, the Daily Beast article showed how much he has made over the years:

Hammergren’s annual total compensation payouts, taken from the company’s public filings with the Securities and Exchange Commission: $46 million in 2011; $55 million in 2010; $37 million in 2009; another $41 million in 2008. Hammergren hadn’t founded the company. Wall Street analysts covering McKesson can tell you of the disappointments and miscues that have marked his tenure. But his haul in the 13 years he has been running McKesson? More than $500 million, according to data provided by Equilar, an executive-compensation data firm.

It then contrasted this consistent largess, spiced with the 2011 results, with the company's long-term financial performance. After the scandal that eventually resulted in crimincal convictions for some McKesson executives:

'They had to give the CEO job to somebody, and basically he was the last man standing,' said an analyst who has been covering McKesson and its competitors since the 1990s. Many in the industry had never heard of Hammergren when he took over as president and co-CEO in 1999, this analyst said, 'but I guess it’s better to be lucky than good.' Hammergren became sole CEO in 2001.

McKesson’s stock had hit a high of just under $95 a share but fell below $20 after the scandal broke. Hammergren deserves credit for stabilizing the company—some might even say he rescued McKesson—but a long-term shareholder could be forgiven for feeling that the company’s board of directors has been overly generous to its chief executive. As of Friday, the stock was trading at $78 a share—still off its 1998 high. Factoring in the regular dividends the company has paid over the years, a shareholder’s investment would be worth slightly more than it was 13 years ago.

Summary

So Mr Hammergren's corpulent compensation is vastly out of proportion not only to the company's woeful ethical performance, but also to the long-term wealth created for its owners, that is, its shareholders.

So McKesson provides just the latest example of how the top hired leaders of health care organizations seem to monumentally prosper no matter how badly their organizations fare in terms of ethical performance, good done for patients and health care, or long-term financial performance. (See recent examples here and here, and our posts on executive compensation here.)  As we quoted a McGill economics professor who was writing about the global financial collapse, "all this compensation madness is not about markets or talents or incentives, but rather about insiders hijacking established institutions for their personal benefit."

To truly reform health care, we must stop this compensation madness. We must make health care leaders accountable for their organizations' effects on patients' and the public's health, and make sure they get reasonable, not royal compensation reasonably related to their organizations' performance, including ethical performance.