Leadership by Those Who "Live Insulated from the Daily Travails of Ordinary" People; the University of Washington Example

On the University Diaries blog, Prof Margaret Soltan picked up on an article on the privileges now given to university leaders, using the example of the President of the University of Washington (which includes a medical school, academic medical center, etc). At a time when the university budget was being cut, President Mark Emmert refused to take a voluntary cut in his greater than $900,000 total annual compensation. This included a $12,000 car allowance and free use of the university mansion.

From the original article comes this key quote:

How could this happen? It happened for the same reason that Wall Street types, with acquiescence of their boards and public officials, saw no reason to make any personal sacrifice at a time when others are sacrificing greatly. The UW Board of Regents, as most others at public universities, is not made up of scholars and altruists. It consists mainly of governor-appointed businessmen, lawyers, and other high-income types who themselves live insulated from the daily travails of ordinary state taxpayers.

As Froma Harrop put it, the ethos among leaders of the finance sector now seems to be "heads, I win, tails, I'm bailed out." That ethos has now infiltrated the leadership of many kinds of organizations, perhaps because in many cases the Masters of the Universe from the finance sector now lead the boards of these organizations. The result may be leaders of academia more focused on enriching and empowering themselves than on their organizations' high-minded missions.

Post Title → Leadership by Those Who "Live Insulated from the Daily Travails of Ordinary" People; the University of Washington Example

"Man's Best Hospital," Run by the Boss of a MECC (Medical Education and Communications Company)?

In January, 2009 we posted about how the CEO of Blue Cross Blue Shield (BCBS) of Massachusetts and of Partners HealthCare, made a secret oral agreement that BCBS would pay Partners at a higher rate than that given to other hospitals.

Why BCBS would want to pay so much to this one hospital system was never clear. Partners does include some extremely prestigious hospitals, including the Brigham and Womens Hospital, and the Massachusetts General Hospital, ("Man's Best Hospital" in the House of God), but there are some other very prestigious teaching hospitals in Boston that were not blessed by BCBS' largess.

We speculated about one possible cause: the leadership of the two organizations may have felt they had more in common with each other than with the constituencies of their own organizations. A few leaders of each organization had direct ties to the other. Many leaders of both organizations were simultaneously leaders of finance, the same sector that has brought us what is now called the Great Recession. Leadership of both organizations had conflicted loyalties. The organizations' CEOs at the time, and many members of their boards had divided loyalties and apparent conflicts of interest. For example, Jack Connors, the chair of the Partners HealthCare board, is also the Chairman Emeritus of marketing communications company Hill, Holliday, Connors, Cosmopoulos Inc, whose clients include pharmaceutical and pharmacy benefits manager CVS / Caremark, and is also a member of the board of directors of Covidien, a medical device company.

The Boston Globe just published a report that Mr Connors had even more intense conflicts that had not heretofore been made public.

He's chairman of New England's largest healthcare company, and that position atop Partners HealthCare has tested the limits of Jack Connors's considerable corporate dexterity.

Though he has no background in medicine, Connors has been Partners' chief overseer, champion, and its most public face for 13 years.

[One board member] is the cofounder and chairman emeritus of Partners' advertising firm. That would be Jack Connors. And that potential point of conflict has been disclosed....

But to the chagrin of some former board members, never brought up for board review was Connors's stake in a leading medical education firm whose sale in 2004 made Connors a very wealthy man.

Nor has the board notified public officials of Connors's ownership of a fledgling home healthcare firm that has directly solicited Partners' hospitals for business.

Connors and top Partners officials defended the decision not to publicly disclose Connors's potential conflicts, saying that because Partners did not directly contract with either of Connors's firms there were no conflicts to report. Connors also defended his right to be an entrepreneur in the healthcare business while also chairing Partners' board, and strongly denied ever using his position for personal or financial advantage.

The larger company, M/C Communications, grew to become the biggest commercial provider of continuing education to physicians in the decade between its inception in 1994 and when Connors sold it in 2004. It profited hugely from an exclusive commercial relationship it maintained with Harvard Medical School, whose faculty teach at seminars the company holds. Partners' signature institutions, Massachusetts General Hospital and Brigham and Women's Hospital, are major teaching affiliates of Harvard Medical School.

In addition, M/C Communications benefited financially from millions of dollars in sponsorship revenue paid it from major pharmaceutical firms eager to play to this professional audience.

Connors said he was under no obligation to disclose his ownership of M/C Communications to the Partners board. He said that while there is an 'affiliation' between Harvard Medical School and the two Partners hospitals, there is no formal contract between them.

Connors said he informed Partners executives of his ownership of M/C Communications, and that they determined it did not warrant disclosure to the full Partners board.

'There is no contract between Partners and Harvard,' Partners said in a statement to the Globe.

Connors made a name for himself as an executive with Hill, Holliday, Connors, Cosmopulos, the Boston advertising company that he helped found and guided throughout a long career. Less well known is that he made most of his fortune from M/C Communications, which he sold to Bain Capital for $450 million in 2004.

The sale was the largest of a private healthcare-related company in Massachusetts that year, according to TM Capital Corp., an investment banking company. Connors, who led an investor group that bought the firm outright for $13 million in 2000, made about $250 million from its sale.

After his 2004 windfall, he founded a company that helps elderly patients readjust to life at home after a hospitalization.

That company, Dovetail Health, has - Connors acknowledged - solicited business from hospitals owned by Partners. And Connors confirmed that after Dovetail executives failed to convince Blue Cross Blue Shield of Massachusetts to contract with the firm, he personally spoke to the giant insurer's president, Cleve L. Killingsworth, on Dovetail's behalf. Partners and Blue Cross Blue Shield regularly negotiate over $2.5 billion worth of medical business a year.

Connors acknowledged in an interview that it might have appeared 'inappropriate' to some for him to pitch Killingsworth. But he said the conversation stemmed from a shared belief that new ways must be found to reduce frequent return trips of elderly patients to the hospital. More recently, however, he said he does not believe his approach to Killingsworth was inappropriate.

So let's try to recap this.

While Jack Connors has been chairman of the board of Partners HealthCare, the largest and most prestigious hospital system in Massachusetts, he also ran an advertising agency that did business with Partners, and has been on the board of Covidien, a medical device company. Both of these relationships he disclosed to his fellow board members, although no one seemed troubled by them.

However, while a Partners board member, Connors was also the founder, and ultimately profited very handsomely from the sale of M/C Communications. M/C Communications apparently begat M/C Holding Corporation, which in turn owns M/C Communications and Pri-Med Institute LLC. M/C Communications now describes itself as " established in 1994 and has become a leading provider of medical education event management solutions for health care professionals and others around the globe." M/C Communications runs Pri-Med, which is described thus: "Pri-Med is a platform for science and medicine that includes meetings, resources, online, and new media tools designed to meet the information and education needs of today’s practicing physician." Pri-Med markets itself to industry, presumably the pharmaceutical, biotechnology, and device industry, "Sixty percent of doctors’ offices restrict rep access, making it more challenging than ever to get in front of your customers. But with Pri-Med, you get to meet clinicians in a professional environment where they seek you out. More than 66% of attendees say they come to Pri-Med events to meet you, industry representatives." So Connors' company was a medical education and communication company (MECC), which provided what appeared to be educational programs to physicians that in fact were also sold to the health care industry as marketing opportunities.

So Partners HealthCare, which includes two of the world's most prestigious teaching hospitals, has been run by the boss of a MECC? Say it ain't so.

Not only did Connors own a company that had an exclusive contractual relationship (as described above) with the Harvard faculty who staff the main Partners HealthCare hospitals, that company was engaged in marketing the products of sponsoring drug and device companies disguised as education. Finally, Connors denied that this presented any kind of conflict of interest, because Partners HealthCare has no explicit contract, just an "affiliation" with Harvard Medical School.

Finally, just to ice the cake, Connors' latest venture is a home health care company that did business with Partners, and tried to do business with BCBS, spearheaded by Connors' direct conversations with the BCBS CEO.

Jack Connors thus seems to have just become the latest poster boy for leaders of health care organizations who put their personal financial interests ahead of their responsibilities to those organizations, and function as a power elite whose collective interests trump those of the constituents of the organizations they run.

Quoting from BoardSource, the main duties of the leader of any US not-for-profit are:

Duty of Care

The duty of care describes the level of competence that is expected of a board member, and is commonly expressed as the duty of 'care that an ordinarily prudent person would exercise in a like position and under similar circumstances.' This means that a board member owes the duty to exercise reasonable care when he or she makes a decision as a steward of the organization.

Duty of Loyalty

The duty of loyalty is a standard of faithfulness; a board member must give undivided allegiance when making decisions affecting the organization. This means that a board member can never use information obtained as a member for personal gain, but must act in the best interests of the organization.

Duty of Obedience

The duty of obedience requires board members to be faithful to the organization's mission. They are not permitted to act in a way that is inconsistent with the central goals of the organization. A basis for this rule lies in the public's trust that the organization will manage donated funds to fulfill the organization's mission.

By leading companies that did direct business with Partners and its staff, and failing to disclose that he was doing so to his fellow Partners board members, Connors appeared to have violated the Duty of Loyalty.

By running a MECC that helps drug and device companies market to physicians in the guise of education, using faculty from the academic teaching hospitals that he lead, Connors seems to have mocked the mission of the academic hospitals within Partners, and thus appeared to violate the Duty of Obedience.

This episode certainly does suggest that health care, and the organizations involved in this case, are lead by an "old-boy network," as one person interviewed for the Globe article suggested. More than just an old-boy network, they seem to be lead by chummy members of the power elite whose collective personal interests supersede the missions of the organizations they are supposed to steward. When this happens, is it any surprise that health care becomes less accessible, more expensive, and of lower quality?

Yet challenging the power elite that are increasingly revealed as controlling much of health care seems to be something that one cannot talk about when discussing health care reform. However, failing to address this problem will likely doom any effort, no matter how well intentioned, to improve health care.

Hat tip to and see comments by Alison Bass on the Alison Bass Blog.

ADDENDUM (3 June, 2009) - See also comments by Dr Daniel Carlat on the Carlat Psychiatry Blog.

Post Title → "Man's Best Hospital," Run by the Boss of a MECC (Medical Education and Communications Company)?

Bio-Tech U

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Post Title → Bio-Tech U

Hospital Board Members with "the Juice" in New Jersey

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


The General Overview

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

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

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

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

Board Members' Self-Dealing

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

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

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

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

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

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

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

Political Influence Disadvantages the Competition

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

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

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

Connectedness of the Hospital's Board Members

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

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

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

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

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

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

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

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

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

Conclusions

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

Hat tip to University Diaries.

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

Post Title → Hospital Board Members with "the Juice" in New Jersey

More Gravity Defying Compensation for Not-for-Profit Health Care Leaders

Two recent articles featured more about gravity-defying compensation given to the leaders of not-for-profit health care organizations. We had recently posted about how the CEO of one not-for-profit health care insurer rose while the organization's revenue and enrollment fell. Similarly, from the Detroit News,

Blue Cross Blue Shield of Michigan -- the state's largest insurer -- gave pay hikes to six top-level executives in 2008 and doled out generous retirement packages for four former senior vice presidents, despite the nonprofit organization's loss of $144 million last year.

The organization's deteriorating financial health, a justification for Blue Cross officials wanting to raise rates on its line of individual insurance policies, had prompted widespread job cuts at the Detroit-based insurer.

In January, Blue Cross said it needed to eliminate about a 1,000 positions.

Despite those cuts, CEO Daniel Loepp received a compensation package of base salary, bonuses and other compensation totaling $1.8 million in 2008, up from $1.7 million in 2007.

The CEO's bonus last year was $727,575, up from $696,777 in 2007, according to documents filed last week with the Michigan Office of Financial and Insurance Regulation.

Blue Cross spokesman Andrew Hetzel said the 2007 to 2008 increase was to help bring Loepp's total compensation in line with CEOs at other comparable-size Blue Cross organizations nationwide.

The retirement packages -- ranging from $3.1 million to $994,132 depending on the executive -- were for four senior vice presidents who'd each been with the organization an average of nearly two decades, Hetzel said.

Hetzel added that all the senior level executives are taking pay cuts this year -- including a 5 percent reduction in their base salary.

And the compensation packages for 2008 were set by the Blue Cross board at the end of 2007, Hetzel added, well before the organization saw need to cut its work force.

Note how the pay of the top leaders of many health care organizations seems to defy gravity, going up faster than inflation, going up even when the organizations lose money, going up even when the organizations have to lay off workers. There is always an excuse. But in this case, once the miserable results of 2008 became clear, why could the board not re-assess the CEO's pay? Finally, note that even if there is a decrease in 2009, it is a decrease only compared to the elevated 2008 level.

Locally, the Boston Phoenix assessed the pay of the CEOs and other top leaders of all the states not-for-profit hospitals. Some of its main findings were -

The compensation of the CEO of the state's biggest hospital system is higher than any other New England hospital CEO:

Receiving almost $3 million in annual salary and benefits in each of the last two years, Lifespan CEO George Vecchione is the highest-paid health-care executive in New England. Vecchione collects almost $1 million more each year than the CEO at the region’s largest health care network, Partners HealthCare System in Boston, although Lifespan is much smaller than Partners, and New England’s second largest network, Caritas Christi Health Care, also in Boston. In 2007, only Lahey Clinic CEO David Barrett approached Vecchione’s compensation, thanks to a one-time supplemental retirement benefit of $1.5 million; even with that payment, Barrett received $300,000 less than the Lifespan leader.

The compensation of many RI hospital CEOs, and of other RI hospital leaders is high compared with peers in other states, and has risen much faster than inflation:

Modern Healthcare's executive compensation survey suggests that Vecchione is not the only Rhode Island health-care CEO who is paid well above the national median. When benefits, expenses, and long-term incentive plan payments are subtracted from Care New England CEO John Hynes's compensation package, the remaining $911,562 is well above the $570,000 median base pay and bonus paid to the 60 CEOs of small hospital networks surveyed in 2007.

Once benefits, long-term incentive pay, and terminated life insurance payments are subtracted, Women & Infants Hospital CEO Constance Howes received $481,625 in 2007, and Kent County Memorial Hospital's Mark Crevier collected $551,799. Meanwhile, salary and bonuses for Rhode Island Hospital's Amaral ($693,477) and Miriam's Hittner ($572,132), were more than $100,000 above the national median.

Several other Lifespan administrators received more than $500,000 in compensation in 2007: general counsel Kenneth Arnold ($623,902); treasurer Mary Wakefield ($672,057); chief physician Arthur Klein ($935,291); senior vice president for shared services Frederick Macri ($569,777); and Lifespan Physician Service Organization CEO Joel Kaufman ($542,162). No other Rhode Island hospital executives listed on the tax returns received more than $500,000.

Salaries at the smaller community hospitals present a mixed picture. Modern Healthcare's 2007 median compensation at independent hospitals with revenues under $200 million is $350,500. The CEOs of Westerly and South County hospitals and Roger Williams Medical Center were well below the median, while St. Joseph's John Keimig was slightly above. The 2007 salary and bonuses, however, for Memorial Hospital's Francis Dietz ($572,000), Landmark Medical Center's Gary Gaube ($673,164), and Rehabilitation Hospital of Rhode Island's Richard Charest (440,593) were considerably above the median.

Not only are compensation packages high, they have increased at incredible rates for some executives. Two Care New England executives watched their pay more than double over the last seven years, in part due to long-term incentive plan payments in 2007.

Butler Hospital CEO Patricia Recupero's compensation grew 117 percent, while Hynes' pay increased 107 percent. In addition, Landmark Medical Center CEO Gaube's compensation increased 107 percent as his hospital slid into financial insolvency. The compensation for three other CEOs, Memorial Hospital's Dietz, Emma Pendelton Bradley Hospital's Daniel Wall, and Lifespan's Vecchione, increased between 90 and 99 percent over the last seven years.

Three CEOs of Lifespan hospitals received lesser raises since 2000: Amaral (65 percent), Hittner (62 percent) and Newport Hospital's Arthur Sampson (55 percent). St Joseph Health Service CEO Keimig, who, like Amaral and Gaube, has resigned, received a 72 percent pay increase over seven years.

CEO compensation has risen quickly even at institutions whose finances are failing:

Increases in compensation for Gaube and Charest are among the most notable. In a December 2008 report, the state Department of Health labeled Landmark Rhode Island's financially weakest hospital. Landmark ran a small profit in 2004, but starting in 2005, the Woonsocket hospital slid into insolvency.

In June 2008, the Rhode Island Superior Court appointed a special master to run the troubled institution. Landmark also owns 50 percent of the Rehabilitation Hospital of Rhode Island, where Charest served as president, as well as second in command to Gaube at Landmark.

While the hospital ran in the red, however, Gaube and Charest continued to receive raises. A review of the hospital's tax returns indicates that Gaube's compensation increased 37 percent, or almost $200,000, from 2005 to 2007. Over the same two-year period, Charest's pay increased 32 percent, or more than $100,000.

The article does provide some insight into the thinking of those in charge of awarding these bloated pay packages. For example, regarding the pay received by the Care New England CEO:

'John Hynes earns every penny,' says Care New England board chairman Jonathan Farnum, adding, that few people have the skill set to handle the job. He describes Hynes and Vecchione as workaholics who are always on call and constantly handling crises. 'The people are well-served,' Farnum says. 'I don't think they're [the CEOs] driven to maximize their own personal salaries.'

What a peculiar argument to make in a health care context. Lots of people in health care work long hours and are on call frequently, and unlike a hospital CEO, may have to handle life and death decisions in the wee hours of the morning. And most of them make far less than Hynes, who was still not the highest paid leader in the Phoenix article. What really seems to be the rationale, in my humble opinion, is the belief that the work of executives is somehow much harder and more deserving than the work of anyone else, including physicians.

Those who set executive pay were unmoved by the arguments that medicine and health care are callings, and that not-for-profit should not pay their executives comparably to the richest for-profit corporations:

With 10,000 employees and $1 billion in revenue, Lifespan is more like a for-profit health-care institution, [Lifespan board chairman Alfred] Verrecchia says, adding, 'We wouldn't be paying any different if we were for-profit or not-for-profit.'

Verrecchia also disputes the idea that high CEO salaries may discourage donations to the hospital. 'We're not receiving funds to manage day-to-day operating procedures at the hospitals,' he says. Fundraising pays for specific programs, he explains, like a new emergency or operating room.

In response, let me just quote more of the Phoenix article:

'They may be able to persuade donors of that,' counters Alan Sager, a Boston University professor of health policy and management, 'but money is fungible. Money can be moved.' Sager adds, 'If the CEO gets $2.9 million, that's money the hospital can't use to underwrite care for uninsured or underinsured people.'

Sager notes that 30 nurses could be hired with Vecchione's salary. 'Does this person do as much good in the world as 30 nurses?' he asks. 'I find that hard to believe.'

The follow up to that may make the most important point of all:

As president and CEO at Pawtucket-based toymaker Hasbro, Verrecchia was paid $8.4 million in 2006, and $16.5 million in 2007, according to Security and Exchange Commission documents. This is another part of the problem, says Sager: The corporate lawyers and executives who sit on hospital boards form 'a club' with the hospital executives, in which six- and seven-figure salaries are normal. The result, he says, is a 'financially combustible combination' for nonprofit hospitals.

That really seems to be the bottom line. As hospitals become more like big businesses, their leaders identify more with the power elite, or the "superclass," than with their staff, much less their patients. Their sense of entitlement grows, and their understanding of the problems of ordinary people wanes. Whether their devotion to the healing (and sometimes academic) missions of their organizations can survive under these circumstances is open to question.

(Note, for full disclosure: I am a part-time voluntary teaching attending at one of the Lifespan hospitals, if my position survives this posting.)

Post Title → More Gravity Defying Compensation for Not-for-Profit Health Care Leaders

Amidst Budget Woes, University Leaders Rake In More Cash

Two stories recently appeared about the incentives given to top academic leaders.

First, from the San Francisco Chronicle, about the University of California system (which includes several medical schools and other health care related academic institutions):

UC Berkeley officials have acknowledged misleading the public in the controversial case of a high-paid executive aide who left her job at the university's headquarters and the next day began a new job on the Cal campus - qualifying for a $100,202 severance check along the way.

In November, when the severance payment became public, The Chronicle asked for an explanation of how Linda Morris Williams could get a buyout for leaving her $200,400-a-year headquarters job in Oakland and starting her new job paying the same salary in the office of UC Berkeley Chancellor Robert Birgeneau.

Williams and UC Berkeley spokesman Dan Mogulof released a statement suggesting that the Berkeley job opportunity had developed coincidentally after she had applied for the buyout.

'At the time of my Voluntary Separation Program application, the associate chancellor position on the Berkeley campus was not open and therefore played no role whatsoever in my decision making,' Williams said at the time.

In their latest statement, Williams and Mogulof apologized 'for our initial statement that unintentionally created an impression' that Williams was unaware of the possibility of future employment at the Berkeley campus.

'We sacrificed clarity and detail for the sake of brevity,' Mogulof said in an interview. 'We had no reason to be intentionally misleading.'

A review of documents and e-mails obtained under the state Public Records Act showed Williams was well aware of the UC Berkeley job when she filed for the buyout on Jan. 22, 2008 - including talks with Birgeneau.

E-mails show she had been virtually assured by Birgeneau's close aides that the job was hers and was even placed on a UC Berkeley organizational chart five days before she applied for the buyout.

This is not the first time Ms Williams has had some adverse publicity.

She had previously come to the public's attention during the university's salary scandal in 2006 after Dynes waived some rules and gave her some benefits, including a $44,000 relocation allowance and a low-interest $832,500 home loan, for which she was not otherwise entitled.

Her new responsibilities are beyond ironic:

In her new position at Berkeley, Williams oversees whistle-blower complaints and public records requests, along with crisis management duties as associate chancellor - government, community and campus liaison.

That should certainly encourage people at the University of California who might consider blowing the whistle on bad management.

Note that the University of California system is currently facing budget cuts due to the state's budget crisis. That did not seem to induce any sense of shame that a top administrator could take a generous severance package for "early retirement," then immediately sign on for another leadership position within the same university system.

Our second story is from the Miami Herald, about Florida International University, whose new medical school will be enrolling its first class this year:

At a time when Florida International University is hiking tuition, capping enrollment, cutting academic programs and eliminating jobs, outgoing President Modesto 'Mitch' Maidique negotiated new contract terms for himself and rewarded his two top executives with six-figure retention packages.

Under the contract revisions, ratified last year by the board of trustees, Maidique will receive the same base salary he currently earns as president -- $478,000 -- through 2015.

The $2.8 million, six-year package allows Maidique to take a one-year paid sabbatical before he becomes the highest-paid professor of management in the business school and head of an FIU leadership center.

In the four months before he formally announced his intended retirement in November, Maidique also altered the contracts of Chief Financial Officer Vivian Sanchez and Provost Ronald Berkman.

Records show:

• If Maidique's successor chooses to replace Sanchez, she would be entitled to another position at FIU at her current $334,090 salary through June 2012. The three-year package could be worth more than $1 million.

• If a new FIU president brings in a different provost, Berkman would receive a one-year paid sabbatical at his current salary of $334,560.

Note that Sanchez's responsibilities included "a leading role in planning for the new medical school...."

The article said Maidique "will have to relinquish his university housing, care, expense account and performance bonuses...."

Sanchez had no apology for severance package, and seemed unfazed as to how it would look at a university coping with budget cuts and lay-offs:

In an interview, Sanchez said she could easily return to higher-paying jobs in the private sector but is committed to the long-term success of FIU.

'I bust my a-- for this university," she said.

On the other hand, Leslie Frazier, new president of the faculty union, noted:

Morale at FIU is pretty low - with faculty and students - after the cuts we went through last spring. People are very concerned for their jobs and the future of the university.

Having read a bit about the global financial collapse, I noted a similarity in the thinking of Ms Sanchez at FIU and top earners in the finance sector. Consider a statement in this op-ed in the New York Times,

Without those bonuses, firms simply couldn’t attract the best and brightest and certainly couldn’t get 100-hour work weeks out of them. And when profit is created through ingenuity and hard work, it deserves to be rewarded handsomely — that is the American way.

Of course, once upon a time, people thought some of the best and brightest went to medical school, and many worked 100+ hours a week as house staff, but their hourly pay was more like minimum wage. There are many people who work very hard in all sorts of jobs, but very few get within orders of magnitude of what our fearless leaders make.

I believe both the stories above reflect the sense of entitlement that has spread from Wall Street hot shots to many people in leadership positions of large organizations, now including those to whom academic medical institutions report. Their notion seems to be that they are so special, they deserve far more than those people in the cheap seats get. As a society, we have promoted the notion that when someone is hired as an executive, rather than as a doctor, lawyer, university professor, or practically anything else, one becomes especially entitled.

Leaders' sense of entitlement, of specialness, of not being constrained by the rules lesser people have to obey seems to be at the root of what went wrong with the global financial system, and what is still going wrong with health care.

Post Title → Amidst Budget Woes, University Leaders Rake In More Cash

The Fight at the Mar-a-Lago Club: the Madoff Case Opens a Window on Medical Centers' Ties to the Rich and Famous

We just discussed how the incredible scrutiny being given to the case of Bernard Madoff, the alleged author of the financial scandal of the century, has opened many windows on the mismanagement and misgovernance of health care organizations. For example, consider the attention given to a Madoff crony, one Robert Jaffe. The Boston Globe reported,

The scene was a society party at Donald Trump's famed Mar-a-Lago Club in Palm Beach, Fla. One guest was Robert Jaffe, 64, who had recruited investors for Bernard L. Madoff, the money manager who last week admitted to a Ponzi scheme in which he lost $50 billion of his clients' money. Another was 78-year-old Jerome Fisher, founder of the upscale shoe store chain 9 West, who reportedly lost millions with Madoff and was upset by Jaffe's presence at the club Saturday night.

According to Trump, the two almost came to blows. 'It was as if these people were born to be prizefighters,' Trump said in an interview yesterday.

A second Globe article provided more detail about Jaffe's relationship with Madoff:

Even in the rarefied world of high society in Palm Beach, Robert M. Jaffe cut quite the figure. With his impeccably coiffed hair, a golf game to envy, and a $17 million waterfront mansion, he was a man to be seen.

He was also the man to see, if you wanted in on a sure thing - Bernard L. Madoff's investment fund.

Jaffe moved among the rich and richer in Palm Beach and Boston, finding suitable clients, among the many who clamored to get a piece of Madoff's irresistible, too-good-to-be-true investment returns.

And,

As vice president of Cohmad Securities Corp., a company set up primarily to bring in clients for Madoff, Jaffe offered coveted access to the legendary New York firm. Jaffe used to keep a small office on Commonwealth Avenue in Boston, but the MBA dropout functioned more as a symbol of the extraordinary wealth and status Madoff clients could achieve.

Jaffe, who drove a green 1954 MG TF British convertible, seemed to find more success doing business on the golf course than in the boardroom.

Jaffe ... focused on recruiting clients with a high net worth. Investors and potential investors say that Madoff at times made it difficult to get in, often requiring connections and an investment of more than $1 million.

Jaffe provided those connections. Although his primary residence is in Palm Beach, he also has a home in Weston and is a member of the Pine Brook Country Club. A large number of the 360 members of the Weston club had investments with Madoff, according to members and employees. Jaffe played as recently as this fall on Weston's rolling fairways, where he was known as generous tipper.

Jaffe, who also runs M/A/S Capital Corp., a family-operated investment firm in Palm Beach, told the Palm Beach Daily News in an interview last week that he would refer potential investors to Madoff. If they became clients, Jaffe would be paid 1to 2 percent of the value of the first successful trade.

He described this arrangement as 'a common approach in the business.'

But that admission has taken some people in Palm Beach by surprise. People thought the breezy socialite was helping out friends by putting them in touch with Madoff.

Looking into Mr Jaffe's relationship with Mr Madoff also provides a view of the the relationships among not-for-profit academic medical centers and wealthy donors. Jaffe, it turns out, is also a prominent fund-raiser for Boston area hospitals,

Nonetheless, despite the scores of Palm Beach residents and Bostonians who have lost money with Madoff, Jaffe is still scheduled to preside over the Discovery Ball, a gathering of socialites and philanthropists Feb. 21 at the Breakers hotel in Palm Beach. In 2006, the last time Jaffe and his wife, Ellen, cochaired the fund-raiser for Boston's Dana-Farber Cancer Institute, they helped raise $2.25 million.

Furthermore,

Some say the cloud over Jaffe raises questions about his vast philanthropic efforts and leadership roles, including positions as chairman of the Palm Healthcare Foundation, an overseer of the Beth Israel Deaconess Medical Center, and co-chair with his wife of the 2009 Dana-Farber Cancer Institute and Jimmy Fund's Palm Beach 'Discovery Ball.'

The Globe went on to report the impact of the Madoff affair and Jaffe's association with it on lavish hospital fund-raising events,

The situation highlights how the Madoff scandal has upended a crucial part of fund-raising for many of Boston's world-renowned hospitals. For years, the hospitals have gone to Palm Beach seeking donations from rich donors, many of them snowbirds or transplants from the Boston area. They hold lavish events at hotels and private parties at homes in an effort to attract donations.

Now, with many donors out millions, that strategy is being reevaluated.

Beth Israel Deaconess Medical Center, for instance, is reconsidering a March event in Palm Beach aimed at impressing donors with the hospital's latest medical advances.

'Because of the economy, we had already planned to scale back the extent of it,' said Paul Levy, Beth Israel's chief executive. 'We are considering what further steps we might take in light of the Madoff news because it affects too many people in Palm Beach. We don't need as large a place and we might want a place that's a little more modest.' At its 2007 gala, Beth Israel touted $15 million in gifts, though not all of the money was raised at the event.

'I don't know if it makes sense at all' to have the Jaffes chair the Discovery Ball, said Trump, the hotel and gambling tycoon, and a Dana-Farber contributor who attended the ball last year. 'I don't know the level of animosity or hatred, but I got a bit of it the other night.'

Other hospitals had already begun to rethink their fund-raising approaches before the Madoff scandal broke.

Tufts Medical Center, which has held a Palm Beach event for the past two years in conjunction with Tufts University School of Medicine, will not hold one this winter.

'We decided several months ago that with the economy the way it was, this wouldn't be the most productive year,' said Brooke Tyson Hynes, a spokeswoman. 'We'll reconsider it in the future.'

Children's Hospital Boston also scaled back a Palm Beach event prior to the scandal.

'We had decided before the economy was a problem not to hold an event but to instead engage in personal visits' with potential donors, said Janet Cady, president of the hospital's fund-raising trust.

The Globe article gave more of a flavor of these fund-raising events,

In the late 1980s, many of Massachusetts General Hospital's key donors who once lived in Boston and throughout New England asked the institution to hold events in and around Palm Beach, according to James E. Thompson, vice president for development at Mass. General.

The hospital holds an annual event, called an educational session, in which doctors speak about research at the hospital, followed by a reception. This year's session, scheduled for Feb. 3 at the Four Seasons Resort in Palm Beach, will go on as planned, said Thompson.

'We want to be sensitive and we've spoken to many of our key friends,' said Thompson. 'We're hearing that it's important that MGH continue to be in front of its key friends and contributors and that they want us to come. That doesn't mean all our close friends and competitors are as well off today as 12 months ago.'

Brigham and Women's Hospital is planning a series of events over three days starting Jan. 22, highlighted by a dinner at The Breakers.

'We're not changing our plans at this point,' said Jim Asp, vice president for development.

He added, 'The current uncertainty means donors are looking very carefully about the support they provide. They're taking a bit of a pause before they make some of their decisions. This is a time when it's important for us to stay close to our donors.'

But Dana-Farber has by far the biggest Palm Beach presence, with a full-time office and a schedule of events spread over five weeks, including a kick-off party, a preball dinner, 'breakfast with the doctors,' a dinner for 'major donors,' and the ball itself.

One starts to get a sense of how much academic medical centers have been caught up in the world of the rich and famous. One wonders what they gave up in order to cultivate the rich and famous. We have noted before how some teaching hospitals seem more focused on their profit margins and their CEOs' salaries, and on lavish buildings and high-tech equipment, then on general medical care, and sometimes on teaching at all. One wonders if hospital leaders have gotten distracted from their missions as they got caught up in the world of the rich and the famous.

At least the Madoff case has lead many people to question some of their assumptions about the rich and famous. First, from the New York Jewish Week, focusing on the dependence of Jewish not-for-profit organizations on a few rich donors,

Madoff’s alleged Ponzi scheme had such a devastating impact, they say, because so many organizations rely on informal networks of rich contributors who move in insular circles and operate on the basis of personal connections, not transparent fiscal procedures — the very qualities Madoff allegedly exploited to ensnare otherwise-savvy investors.

In recent years the donor bases of most major Jewish groups have shrunk as the focus shifts to small groups of big givers — a mode of fundraising that was seen, until now, at least — as more efficient and reliable than big networks of small givers.

All that may change as organizations assess the damage and struggle to recover.

'A whole ritual of the organized Jewish community is going to end: going down to Palm Beach and Boca Raton every winter, putting on a good show for these people in the country clubs and coming back with the funds you need to run your organization,'....

Madison Powers in CQ Politics on broader implications of the culture of access to the privileged,

The allegations in the pay-to-play scandal involving Illinois Gov. Rod R. Blagojevich and the admission by former NASDAQ chairman Bernard Madoff that his exclusive investment enterprise has (for more than 20 years) been nothing more than an elaborate ponzi scheme are perfect bookends to a familiar American narrative.

What both stories reveal, each in its own way, is how much American political and financial elites depend upon a series of elaborate rituals for the exchange of various forms of privileged access.

But whether illegal or not, such alleged behavior is part and parcel of a familiar political culture, and of a more general culture, in which some people routinely pay for or otherwise bargain for access, while others lacking the means — or awareness of the option — to pay, remain on the sidelines.

One problem with a culture of access for sale is that it offers no clear point at which we can agree when a line is crossed. But at some point the line is crossed, even if the boundary between what is conventionally accepted and what is not, is inherently fuzzy.

What the Madoff scandal makes clear is that the practice of buying privileged access is by no means confined to the political realm.

A culture of privileged access to economic opportunity or political power or both will always redistribute risk and reward in ways neither fair nor transparent.

Finally, Paul Krugman in the New York Times

So, how different is what Wall Street in general did from the Madoff affair? Well, Mr. Madoff allegedly skipped a few steps, simply stealing his clients’ money rather than collecting big fees while exposing investors to risks they didn’t understand. And while Mr. Madoff was apparently a self-conscious fraud, many people on Wall Street believed their own hype. Still, the end result was the same (except for the house arrest): the money managers got rich; the investors saw their money disappear.

But the costs of America’s Ponzi era surely went beyond the direct waste of dollars and cents.

At the crudest level, Wall Street’s ill-gotten gains corrupted and continue to corrupt politics, in a nicely bipartisan way.

Meanwhile, how much has our nation’s future been damaged by the magnetic pull of quick personal wealth, which for years has drawn many of our best and brightest young people into investment banking, at the expense of science, public service and just about everything else?

Most of all, the vast riches being earned — or maybe that should be “earned” — in our bloated financial industry undermined our sense of reality and degraded our judgment.

Think of the way almost everyone important missed the warning signs of an impending crisis. How was that possible? How, for example, could Alan Greenspan have declared, just a few years ago, that 'the financial system as a whole has become more resilient' — thanks to derivatives, no less? The answer, I believe, is that there’s an innate tendency on the part of even the elite to idolize men who are making a lot of money, and assume that they know what they’re doing.

After all, that’s why so many people trusted Mr. Madoff.

Now, as we survey the wreckage and try to understand how things can have gone so wrong, so fast, the answer is actually quite simple: What we’re looking at now are the consequences of a world gone Madoff.

Those are hard acts to follow, but to conclude in the health care context, we need to remember our core values, remember the calling of medicine comes before the siren songs of money and power, and stop idolizing "men who are making a lot of money," much less assume they know what they are doing.

Post Title → The Fight at the Mar-a-Lago Club: the Madoff Case Opens a Window on Medical Centers' Ties to the Rich and Famous

BLOGSCAN - Car Allowances and Country Club Membership for University Executives

On the University Diaries blog, Margaret Soltan posted on the perks afforded to top leaders, including the medical school dean, at the University of South Florida(USF). These included country club memberships, and car allowances at $650/ month. The rationale seemed to be that the administrators need to appear to be rich in order to hob-nob with the sort of rich folk needed as donors. The perks have continued even though the state-supported university is facing budget cuts.

I would comment that these perks might also be based on university executives' sense of entitlement to being at least on the fringe of the power elite, or superclass. This sense might truly be fed by their contact with even more wealthy people who might be prospective donors, and the sorts of masters of the universe who seem to have gravitated to university boards (see our posts about the Dartmouth board here and the Harvard Corporation here). But I would suggest that the perks handed out at USF might be bush-league compared to those found at the more supposedly elite universities.

I am afraid the main effect of such perks is to further isolate academic leaders from the people they are supposed to serve. After all, academic institutions are supposed to serve truth-seekers and learners. (Academic health care is also supposed to serve patients.) Country club memberships, or having a fully-staffed house and a car and driver might tend to make one feel apart from the common folk in the student body, or the patient population.

Post Title → BLOGSCAN - Car Allowances and Country Club Membership for University Executives

What Linked the Parallel Declines of Citigroup and the Harvard University Endowment?

Increasing efforts to understand the global financial collapse, or whatever history will end up calling it, may shed light on what has gone wrong with health care, and, in today's example, the management of academic medicine.

The Collapse of Citigroup

The near-collapse and putative rescue of financial giant Citigroup have raised questions of the responsibilities of one of its most prominent leaders. Two weeks ago, a lengthy investigative report in the New York Times suggested some of the bad decision making and mismanagement that humbled once one of the largest financial corporations in the world. Emphasis on short-term profit trumped concerns about risk. In particular, the risk inherent in exotic derivative investment instruments like "collateralized debt obligations" (CDOs) was underestimated and misunderstood. This may have been enhanced by incentives to leaders based primarily on short term results; and the lax oversight of risk, perhaps due to close personal ties among risk managers and traders. Poor integration after hasty mergers lead to disorganization and miscommunication. But dominant was that, as one anonymous interviewee said, "senior managers got addicted to the revenues and arrogant about the risks they were running."

The Times article highlighted the role of Robert Rubin, former US Secretary of the Treasury.

The bank’s downfall was years in the making and involved many in its hierarchy, particularly Mr. Prince and Robert E. Rubin, an influential director and senior adviser.

Citigroup insiders and analysts say that Mr. Prince and Mr. Rubin played pivotal roles in the bank’s current woes, by drafting and blessing a strategy that involved taking greater trading risks to expand its business and reap higher profits. Mr. Prince and Mr. Rubin both declined to comment for this article.

When he was Treasury secretary during the Clinton administration, Mr. Rubin helped loosen Depression-era banking regulations that made the creation of Citigroup possible by allowing banks to expand far beyond their traditional role as lenders and permitting them to profit from a variety of financial activities. During the same period he helped beat back tighter oversight of exotic financial products, a development he had previously said he was helpless to prevent.

The Times article charged that Mr Rubin had a particular role in encouraging excess reliance on risky CDOs.

[Former Citigroup CEO Charles O] 'Chuck Prince going down to the corporate investment bank in late 2002 was the start of that process,' a former Citigroup executive said of the bank’s big C.D.O. push. 'Chuck was totally new to the job. He didn’t know a C.D.O. from a grocery list, so he looked for someone for advice and support. That person was Rubin. And Rubin had always been an advocate of being more aggressive in the capital markets arena. He would say, ‘You have to take more risk if you want to earn more.’ '

Later, in 2002,

Mr. Prince and his board of directors decided to push even more aggressively into trading and other business that would allow Citigroup to continue expanding the bank internally.

One person who helped push Citigroup along this new path was Mr. Rubin.

Robert Rubin has moved seamlessly between Wall Street and Washington. After making his millions as a trader and an executive at Goldman Sachs, he joined the Clinton administration.

Mr. Weill, as Citigroup’s chief, wooed Mr. Rubin to join the bank after Mr. Rubin left Washington. Mr. Weill had been involved in the financial services industry’s lobbying to persuade Washington to loosen its regulatory hold on Wall Street.

As chairman of Citigroup’s executive committee, Mr. Rubin was the bank’s resident sage, advising top executives and serving on the board while, he insisted repeatedly, steering clear of daily management issues.

But while Mr. Rubin certainly did not have direct responsibility for a Citigroup unit, he was an architect of the bank’s strategy.

Former colleagues said Mr. Rubin also encouraged Mr. Prince to broaden the bank’s appetite for risk, provided that it also upgraded oversight — though the Federal Reserve later would conclude that the bank’s oversight remained inadequate.

Once the strategy was outlined, Mr. Rubin helped Mr. Prince gain the board’s confidence that it would work.

After that, the bank moved even more aggressively into C.D.O.’s. It added to its trading operations and snagged crucial people from competitors. Bonuses doubled and tripled for C.D.O. traders.

But as the sub-prime mortgage crisis hit, the value of the CDOs plummeted, and it all fell apart.

Soon after the Times story came out, the criticisms of Mr Rubin began.

Steven Pearlstein wrote in the Washington Post,

What is indisputable is that all of the decisions that have led to Citi's recent troubles were taken while Rubin was chairman of the executive committee, and made by executives with whom he worked closely. He defended them repeatedly and unequivocally, and as a director, he approved compensation packages that rewarded them (and himself) handsomely for judgments that proved disastrous.

Thomas Friedman wrote in the NY Times,

[The NY Times report above] exposed — using Citigroup as Exhibit A — how some of our country’s best-paid bankers were overrated dopes who had no idea what they were selling, or greedy cynics who did know and turned a blind eye.

Also,

the bank’s executives, including, sad to see, the former Treasury Secretary Robert Rubin, were clueless about the reckless financial instruments they were creating, or were so ensnared by the cronyism between the bank’s risk managers and risk takers (and so bought off by their bonuses) that they had no interest in stopping it.

Mr Rubin tried to defend himself in an interview in the Wall Street Journal, but not very successfully

Robert Rubin said ... [Citigroup's] problems were due to the buckling financial system, not its own mistakes, and that his role was peripheral to the bank's main operations even though he was one of its highest-paid officials.

After disclaiming any responsibility for Citigroup's failures, Mr Rubin did not do a good job explaining why he should have been paid $115 million for his time at Citigroup, especially given that he said

From the time Mr. Rubin joined Citigroup in October 1999, shortly after leaving the Treasury, the former Goldman Sachs Group Inc. co-chairman said he didn't want to run any of Citigroup's businesses. At the time, he told colleagues he wanted more time for activities such as fly fishing. In the recent interview, he said his task was to meet with clients and have an advisory role as an 'experienced senior person who has no ax to grind.'

This, not unexpectedly, lead to more derision.

In the Working Life Blog, Jonathan Tasini entitled a post "Robert Rubin: Coward Or Liar - Or Both?" In the Market Movers Blog, Felix Salmon said no one could read the interview "and think of him as anything other than a pompous and out-of-touch plutocrat, puffed up with more self regard than common sense." Jessica Pressler, writing in the Daily Intel Blog for New York Magazine Blog, opined,

Like a cocky serial killer on Law & Order: Criminal Intent, his determination to prove he was smarter than his investigators outweighed his common sense, and the former Treasury secretary decided to give two interviews, to The Wall Street Journal and Newsweek, to set things right. Naturally, they only made him look even guiltier.

An editorial in the Providence Journal concluded,

What a con man.

A major theme on Health Care Renewal has been the bad leadership of health care organizations. We have described how health care policy "experts" urged breaking up of the supposed physicians' "guild," and giving control of health care to bureaucrats, managers and executives. Yet the transformation of health care from a calling to a business occurred during a time of declining business ethics. We have gone from the dot.com bubble to the collapses of Enron, Worldcomm, MCI, etc, to now the global financial meltdown. The leaders of finance were once considered "Masters of the Universe." It is likely that the business-people who now lead health care have done their best to emulate them. In doing so, they may have been emulating over-rated dopes, greedy cynics, and con men.

The Collapse of the Harvard Endowment

There is, however, a somewhat more direct link between the story of Mr Rubin's humbling and the woes of academic medicine. Bear with me for a bit.

At the same time that the fortunes of Citigroup were cratering, the financial fortunes of some of the largest and most elite US academic institutions were likewise tumbling. Particularly striking was the case of Harvard University's endowment (whose medical school and teaching hospitals have lately had their troubles, as noted in these posts here and here.)

This week, the Wall Street Journal reported,

Harvard University's endowment suffered investment losses of at least 22% in the first four months of the school's fiscal year, the latest evidence of the financial woes facing higher education.

The Harvard endowment, the biggest of any university, stood at $36.9 billion as of June 30, meaning the loss amounts to about $8 billion. That's more than the entire endowments of all but six colleges, according to the latest official tally.

Harvard said the actual loss could be even higher, once it factors in declines in hard-to-value assets such as real estate and private equity -- investments that have become increasingly popular among colleges. The university is planning for a 30% decline for the fiscal year ending in June 2009.

It turns out that Harvard University, like Citigroup, had become enamored of various exotic investments. A report in Bloomberg noted that the University is seeking to quickly sell investments in a variety of private-equity funds, and that the University currently has about $4.5 billion invested in "buyout funds." This seems to be one reason that the University president expected such a large loss. The prices of such illiquid investments are set infrequently. The new prices to be set soon are likely to be much lower than previous ones. A report in the Boston Globe suggested that Harvard had diversified its endowment funds, but mainly into some risky and exotic vehicles, including 22% in foreign stocks, 18% in hedge funds, 13% in private equity, and 26% in commodities, land, and real estate, but only 11% in domestic stocks.

Who Lead Both Citigroup and Harvard?

So who was responsible for the University's risky, and now, in retrospect, unlucky strategy? The ultimate responsibility for the university's leadership resides in the Harvard Corporation, known formally as the President and Fellows of Harvard College. Its six members, according to the Harvard web-site, are:
- James Rothenberg, President and Director, Capital Research and Management Co, (part of the Capital Group Companies, investment managers)
- James R Houghton, Chairman and CEO, (actually Chairman emeritus) Corning Inc
- Nanerl Overholser Keohane, past president of Duke University and Wellesley College
- Robert Reischauer, President, the Urban Institute
- Robert E Rubin, Chair of the Executive Committee, Citigroup
- Patricia A King, Carmack Waterhouse Professor of Law, Medicine, Ethics, and Public Policy, Georgetown Law Center (and member of the board of directors of Golden West Financial from 1994 to 2006, when it was acquired by Wachovia, which failed this year)

So half of the six person Corporation are current or former leaders of financial organizations. Furthermore, its members include none other than Robert Rubin, the previously acclaimed senior leader of Citigroup, now labelled as everything from clueless to a con man for his infatuation with reckless, opaque, and ultimately mainly worthless financial instruments. Maybe that has something to do with why a university endowment, which seemingly ought to be invested conservatively to benefit generations of students and academics, was given over to the tender mercies of hedge fund and private equity managers.

We previously posted on governance issues at Dartmouth, and how the self-appointed members of its board of trustees, the vast majority of whom were also leaders of finance, have increased their own power in the name of diversity (diversity among hedge fund, private equity, and bank executives?) Now we find that half of the Harvard Corporation are also leaders of finance, including one whose own company's decline seemingly has paralleled the decline of the university's endowment.

It seems that the former Masters of the Universe were not content with driving the global finance system into the ground. Their leadership may have also lead to financial crises for American universities. One wonders whether the examples set the presence of "overrated dopes" and "greedy cynics" on university boards of trustees encouraged some of the sorry misbehavior Health Care Renewal has documented at medical schools and academic medical centers?

It seems that we need to completely rethink how we lead academic medical institutions.

Hat tip to posts by Candace de Russy and by Fred Schwarz on the Phi Beta Cons blog.

Post Title → What Linked the Parallel Declines of Citigroup and the Harvard University Endowment?

Health Care Leaders at 30,000 Feet

The Times of Trenton (New Jersey, USA) reported this insight about the leadership of large health care organizations:

Bristol-Myers Squibb [BMS] is preparing to shut down its aviation operation at Trenton-Mercer Airport, sell four aircraft and dismiss about 32 employees as the drugmaker and leading Mercer County employer seeks to cut costs, according to sources familiar with the company's plans.

The company will sell its two Gulfstream V jets and two Sikorsky S-76C helicopters, terminate pilots, mechanics and other personnel, and move out of its hangar at the airport in Ewing.

Other corporations with aviation operations at the airport include Unisys and drugmakers Pfizer, Johnson & Johnson and Merck, Hughes said.

Bristol-Myers' two jets could sell for approximately $40 million each depending on their age....

The helicopters could fetch $6 million each, according to GlobalPlaneSearch.com and other sources.

It is understandable that BMS, having some rough financial times, and operating under a corporate integrity agreement (see post here), wanted to cut costs. This post is not about criticizing the company's plans to shut down its aviation operation.

What is striking is how this short news article opens a window into the lives of the top leaders of at least some of the largest health care organizations. (Note the reference to the aviation operations of Pfizer, Johnson & Johnson, and Merck in the article.) Although the article did not explain why BMS operated two Gulfstream V jets, and two Sikorsky helicopters, it is hard to see how they might be used other than to transport top corporate leaders in the style and with the convenience to which they have become accustomed.

Thus, this aviation operation symbolizes how top health care organizations have come to serve their leadership more than any other constituency. It may reflect the belief, heavily promulgated in the last two decades, mainly by these top leaders and their advocates, that CEOs and other top leaders are not like you and me. Their work is so important, their insights so brilliant, and their time so valuable that they do ought have to deal with the more mundane tasks of life, like waiting in an airport departure lounge for a delayed connection.

The notion that corporate CEOs and other leaders are inherently so brilliant and their time is so valuable can be argued.

More important, in my humble opinion, may be the effects on these particular organizational employees' values and beliefs of how they are buffered from real life. Remember that what used to be called "ethical pharmaceuticals" are meant to relieve symptoms, mitigate disability, and even sometimes cure the diseases of individual patients. Understanding how well they do so requires some understanding of the lives of the ordinary people who take them. Yet the leaders of pharmaceutical companies have now been increasingly protected from experiencing the vicissitudes of life that their patients or clients, or employees for that matter, experience.

In fact, the leaders of smaller, and even not-for-profit health care organizations may also be protected from such vicissitudes, although perhaps not quite so much as the CEOs of large corporations. For example, many presidents of the universities that house medical schools, while they do not have access to corporate jets, do live in fully staffed houses and are transported by university supplied cars driven by university supplied drivers.

I would argue that thus the leaders of these organizations come to identify more with their fellow members of the power elite than they do with patients, clients, students, employees, and health care professionals. Hence, their ability to understand at a gut level what health care is all about is diluted, especially as they sit in the back of their chauffeured automobiles, or especially in the luxurious cabin of a Gulfstream V at 30,000 feet watching the world go by below.

(For some idea of this experience, see the Gulfstream web-site here.)

Hence, I suggest that to improve the leadership of health care organizations, we must make sure that they have a better understanding of the real life in which their products and services are used.

Hat tip to Ed Silverman on the PharmaLot blog.

(For discussion of Pfizer's fleet of aircraft, see posts here and here by Dr Peter Rost, and this post on PharmaLot.)

Post Title → Health Care Leaders at 30,000 Feet

A Motley Crew Formerly Known as the Leaders of UnitedHealth

There has been an interesting confluence of news stories lately that dealt directly or indirectly with the leadership of the US largest for-profit health insurance/ managed care corporation, the UnitedHealth Group (UHG).

UHG has not always been known for being particularly patient-, employer-, or physician-friendly. For example, 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."

We have previously discussed how UHG promised its investors it would continue to raise premiums, even if that priced increasing numbers of people out of its policies (see post here); allegations that the UHG acquisition of Pacificare in California lead to a "meltdown" of its claims paying mechanisms (see post here); charges that the UHG acquisition of Sierra Health Services would give it a monopoly in Utah, and that UHG was transferring much of its revenue out of the state of Rhode Island, rather than using it to pay claims (see post here); and numerous violations of Nebraska insurance laws by UHG (see post here).

Such anecdotes conflict with the UHG mission statement, as recently revised. The company pledged to:

* Enhance the performance of the health care system, and improve the overall health and well-being of the people we serve and their communities.
* Work with health care professionals to expand access to high-quality health care so people get the care they need at an affordable price.
* Support the physician/patient relationship and empower people with the information, guidance and tools they need to make personal health choices and decisions.

One hypothesis is that UHG has trouble adhering to its idealistic mission because of the shortcomings of its leadership.

The story of the fall of its recent CEO, Dr William McGuire, was strikingly instructive. As we have previously discussed, (see these posts here, here, and here from 2006 with links backward) Dr McGuire received outrageously lavish remuneration, which stood in stark contrast to the previous UHG mission's pledge to "make health care more affordable."

Controversy has swirled over the timing of huge stock option grants given to Dr McGuire (see post here), leading to his resignation in October, 2006 (see post here). More recently, McGuire agreed to pay back some of those options, although that would reportedly leave him with more than $800 million worth of options (see post here).

This month, Dr McGuire unveiled his defense of the stock options he received, according to the Minneapolis Star-Tribune,

A stock-option scandal cost Dr. William McGuire one of the top health care jobs in the nation. Now he says he was simply following the questionable advice of his top legal and financial advisers.

McGuire's lawyers are expected to argue later this month that the former CEO of UnitedHealth Group relied on others to assess the legality and appropriateness of backdated stock options granted to top executives and new hires.

McGuire says he did not know that the options, which were backdated to times when the stock price was lower to maximize gains, were incorrectly recorded in company books.

'Dr. McGuire has no formal training or degrees in finance, accounting or law,' the brief states. 'His only professional training is as a medical doctor with a specialty in pulmonology.'

Thus, Dr McGuire, who ultimately collected more than a billion dollars to run the country's largest for-profit managed care corporation, claims he was just a country "medical doctor," who knew little about finance, accounting or law. Then why in the world did the company hire him for any post higher than local medical director? If we take Dr McGuire's lawyers at their word - which perhaps we should not - McGuire was foolish to accept such a responsible position, and the company's board must have been even more foolish to hire him.

So what of the board members who supported just a "medical doctor," who now claims he knew little about finance or accounting, as CEO of the country's biggest health care insurer?

We had previously posted about one board member, who was particularly uncritical in her praise of Dr McGuire. This was Mary Mundinger, whose day job is Dean of the School of Nursing of Columbia University. A 2006 Pulitzer Prize winning article in the Wall Street Journal quoted her thus, "We're so lucky to have Bill. He's brilliant." Dr Mundinger's support of McGuire lead Institutional Shareholder Services (ISS) Inc. and Proxy Governance Inc, to suggest that institutional investors withhold votes for her in the 2006 board election (see post here.)

To make things even more complex, Mundinger also is a member of the boards of directors of Gentiva Health Services, and Cell Therapeutics Inc. Gentiva Health Services provides home care services. Cell Therapeutics Inc is a biotechnology company that develops cancer treatments. Dr Mundinger's duty to the stockholders of UGH conflicts with her duties to the stockholders of these two companies. Their companies' interests, to maximize profits from home care services, and to maximize profits from cancer treatments, conflict with the interests of the UnitedHealth Group to minimize what it spends paying for these services and treatments.

Recent news items indirectly raised questions about two other board members who served through 2007 (see the UHG 2007 proxy statement for its roster of board members), and who thus supported a supposedly uninformed "medical doctor" as UnitedHealth Group CEO.

One was James A. Johnson, who was just forced to resign as a member of the committee which was vetting potential candidates for the US Vice Presidency for Senator Barack Obama. The New York Times reported thus about Mr Johnson's tenure on the UHG board,

Mr. Johnson served on the boards of a number of corporations that were at the center of a furor over excessive executive compensation, a subject that has been not only a campaign cause for Mr. Obama but also the subject of major legislation he introduced in the Senate to rein in such high-dollar pay packages. Mr. Obama’s 'Say on Pay' legislation calls for greater shareholder oversight of executive compensation.

Perhaps the best-known case was Mr. Johnson’s board seat at UnitedHealthcare, a Minneapolis company where he headed the compensation committee. In that position, he oversaw and approved executive pay packages that have since come under fire, even becoming symbols of corporate excess and greed.

In addition, the Times reported other reasons to question Mr Johnson's judgment,

As chief executive of Fannie Mae, the government-sponsored organization that guarantees mortgages for millions of homeowners, Mr. Johnson earned a lucrative paycheck, even by private-sector standards. In 1998 alone, he earned $21 million, according an analysis by federal regulators.

After Mr. Johnson left in 1998, Fannie Mae was caught up in an accounting scandal in which federal regulators found that the company had manipulated its earnings to provide large bonuses for Fannie Mae executives.

While Mr. Johnson was not implicated in the accounting scandal, federal regulators said he had created a culture of arrogance at the company that contributed to its fall from grace.

In Mr. Johnson’s tenure at Fannie Mae, he became close to Countrywide, the hobbled mortgage lender now at the center of the subprime mortgage crisis. Countrywide was Fannie Mae’s largest mortgage provider, which brought Mr. Johnson into contact with Angelo R. Mozilo, Countrywide’s chief executive.

Through that relationship, Mr. Johnson received three home mortgages totaling at least $2 million at rates that appear to be lower than the prevailing mortgage rates at the time. When the story about the personal mortgages broke in The Wall Street Journal last weekend, Mr. Johnson’s business relationships began to draw greater scrutiny.

It's interesting that the Times included this aside about why Mr Johnson's actions had not previously received scrutiny,

In years past, Mr. Johnson’s ties hardly raised an eyebrow. But a combination of the ethical standards that Mr. Obama set for his campaign and an explosion of readily available information on the Internet contributed to the controversy.

Another past UHG board member was Donna Shalala, current President of the University of Miami, and former Secretary of Health and Human Services in the Clinton administration. Somewhat improbably, Shalala was nominated by current President George W Bush for the Medal of Freedom. This resurrected criticism of Ms Shalala's support of restrictions on free speech and political association in academia. A post on The Torch blog on the web-site of FIRE (the Foundation for Individual Rights in Education) noted:

We at FIRE do not take a position on whether someone deserves such an award, which can be based on a lifetime of service and achievements that are unrelated to individual rights. But in the area of individual rights, we remember Shalala for her role in two cases, FIRE's case at the University of Miami (where a conservative student group was not allowed recognition simply because it was conservative) and a speech code case at the University of Wisconsin prior to FIRE's founding. Alan Charles Kors wrote on the Wisconsin case in 1999.

The Torch also quoted an article by John Leo,

As chancellor of the University of Wisconsin in the late eighties, [Shalala] proved a fervent early advocate of campus speech restrictions. Though Shalala occasionally praised free speech, she and her team imposed not only a full-fledged student speech code, later struck down in federal court, but also a faculty code [that] was a primitive, totalitarian horror. Professors found themselves under investigation, sometimes for months, without a chance to defend themselves or even to know about the secret proceedings. One female professor said: 'It was like being put in prison for no reason. I had no idea what it was that I was supposed to have done.'

To summarize, UnitedHealth Group was previously lead by CEO who received more than a billion dollars in compensation, partially in the form of back-dated stock options. At least one of his board members proclaimed his brilliance, but now, through his lawyers, he argues that he was no more than a "medical doctor," with no training or expertise in financial matters. That board member also served on boards of companies whose interests conflict with UHG. Another member of the UnitedHealth board was cited for creating a "culture of arrogance," and apparently received questionably favorable treatment from a company at the center of the sub-prime mortgage crisis. Yet another board member sponsored what was called a "totalitarian horror" of repression on a university campus.

Why did such a motley crew lead the biggest health insurer in the US? One can only shake one's head in bewilderment. Perhaps the particular assemblage was due to allegiance members of the power elite, now called the "superclass," feel to each other even if such allegiances contradict more conventional affiliations. This might explain some of the anomalies in the stories above: a former corporate CEO and member of multiple corporate boards picked by a liberal Democratic presidential candidate to vet vice presidential prospects; a liberal "queen of PC" selected by a conservative Republican President for a Medal of Freedom?

In any event, this sort of leadership seems bound to produce overpriced, inaccessible, poor quality health care delivered by demoralized professionals. If we really want reasonably priced, accessible, high-quality care that respects professional values, we will need to find dedicated, unconflicted leaders who understand the health care context and the values that support it.

Post Title → A Motley Crew Formerly Known as the Leaders of UnitedHealth