Can Our Dysfunctional Health Care System Contain Ebola?

Not to bury the lede, I think it can, but it will be a lot harder than the talking heads on television predict.

I have been writing about health care dysfunction since 2003.  Lots of US politicians would have us believe we have the best health care system in the world (e.g., House of Representatives Speaker John Boehner (R-Ohio), here),   Much of the commentary on Ebola also seems based on this "best health care system in the world" notion.  For example, in an interview today (5 October, 2014) on Meet the Press, Dan Pfieffer, "senior White House adviser," said

There is no country in the world better prepared than the United States to deal with this.  We have the best public health infrastructure and the best doctors in the world.

However, at least the statistics say compared to other developed countries, US processes and outcomes are at best mediocre using the best of some admittedly flawed metrics (look here), yet our costs are much higher than those of comparable countries.  Furthermore, on Health Care Renewal we have been connecting the dots among severe problems with cost, quality and access on one hand, and huge problems with concentration and abuse of power, enabled by leadership of health care organizations that is ill-informed, incompetent, unsympathetic or hostile to health care professionals' values, self-interested, conflicted, dishonest, or even corrupt and governance that fails to foster transparency, accountability, ethics and honesty.

Thus there is reason to worry that it will be harder than many expect for the US to deal with Ebola.  There is already some evidence that some of the sorts of problems we have been discussing for years made it harder for the US to cope with even the so far limited incursion of Ebola.

Financialization of Pharmaceutical and Biotechnology Companies

George W Merck famously said,
 

We try never to forget that medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear. The better we have remembered it, the larger they have been.

In the pharmaceutical industry, the era of George W Merck is over.  The failure to have access to an effective Ebola virus vaccine exemplifies how things have changed.

If we were to have an effective Ebola virus vaccine, we could have likely used it to vaccinate health care workers and contacts of infected patients and likely thus halt the epidemic early.


A story in Modern Healthcare suggested that now many of the big experts on Ebola and public health are concluding having a vaccine available would be very helpful,

 As West Africa's Ebola outbreak continues to rage, some experts are coming to the conclusion that it may take large amounts of vaccines and maybe even drugs — all still experimental and in short supply — to bring the outbreak under control.

Specifically,

'It is conceivable that this epidemic will not turn around even if we pour resources into it. It may just keep going and going and it might require a vaccine,' Dr. Anthony Fauci, director of the U.S. National Institute for Allergy and Infectious Diseases, told The Canadian Press in an interview.

The main reason we do not yet have such a vaccine does not appear to be scientific, but economic.

Here we posted discussion of arguments that pharmaceutical and biotechnology companies up to now have been uninterested in developing Ebola vaccines because they did not anticipate that such vaccines would produce a lot of revenue.  About one month ago, the Independent ran yet another story about an Ebola expert who believed this was the main reason for the lack of effective vaccine development up to now.

The scientist leading Britain's response to the Ebola pandemic has launched a devastating attack on 'Big Pharma', accusing drugs giants including GlaxoSmithKline (GSK), Sanofi, Merck and Pfizer of failing to manufacture a vaccine, not because it was impossible, but because there was 'no business case'.

West Africa's Ebola outbreak, which has now claimed well over 2,000 lives, could have been 'nipped in the bud', if a vaccine had been developed and stockpiled sooner – a feat that would likely have been 'do-able', said Professor Adrian Hill of Oxford University.

The US health care system is now heavily commercialized.  Health care corporations, including pharmaceutical and biotechnology companies, are often lead by generic managers who subscribe to the business school dogma of the "shareholder value theory," which seems to translate into putting short-term revenues ahead of all other goals.  Thus they have been "financialized."  At least in the pharmaceutical and biotechnology sector, such financialization appears to now be global. 

It may now be too late to contain this particular Ebola virus epidemic using a vaccine.  But unless we change how decisions are made about vaccine development, and end the dominance of financialization over drug and vaccine development, we may not be able to control the next deadly epidemic using vaccines either.

Generic Management Deluded by Business School Dogma

On 2 October, 2014, InformaticsMD posted on Health Care Renewal his speculation that the Ebola patient now hospitalized in Dallas was not identified on his first emergency department visit to Texas Health Presbyterian hospital even though a nurse apparently found out he had recently traveled from Liberia because of problems with how the hospital's electronic health record (EHR) transmitted or displayed this information.  This supposition was later apparently confirmed, but then the hospital system CEO retracted this explanation, leaving the reason he was sent home from the ED, thus risking infection of more contacts, unclear (see this post).

I now speculate that the larger reason for the problems the hospital had and is having both handling this patient, and explaining how it handled the patient is hospital leadership by generic managers who do not really understand the relevant health care issues.


Mr Barclay E Berden, the CEO of Texas Health Resources, has had a long career in hospital management.  However, his most advanced degree was "a master's degree in business administration with a specialization in hospital administration from the University of Chicago Graduate School of Business."   His official biography suggests that he has no direct experience or training in medicine, health care, or biological sciences.  Nonetheless, when he became CEO this year, according to Modern HealthCare, the chairperson of the hospital system board thought he was fully qualified,

'He brings a well-rounded perspective and unique leadership strengths to the CEO position,' board Chair Anne Bass said in a news release. 'At the same time, he represents stability and continuity that will be critical to advancing our strategy as we confront the challenges of a rapidly changing healthcare environment.'

Nonetheless, the hospital systems seems to have had trouble confronting the challenges of the change in environment due to Ebola.  Also, according to a very recent story in the Dallas Morning News, there have been performance issues at Texas Health Resource hospitals, and specifically at Texas Health Presbyterian,

Texas Health Presbyterian Hospital — under fire for releasing a Liberian man who later turned out to have the Ebola virus — has lagged behind its peers on emergency room care and lost some federal funds the past three years because it had high discharge rates of patients who later had to return for treatment.

The hospital scored significantly worse than the state and national averages in five of six emergency care indicators, with emergency room wait times twice as long as the averages, according to data from the U.S. Centers for Medicare & Medicaid Services.

The hospital also was the most penalized in Dallas under a three-year program designed to reduce the number of patients readmitted for care, according to the data.

The delays in patient treatment in the emergency room, in particular, raise important questions about Presbyterian’s emergency care, said Dr. Ashish Jha, a professor at Harvard University’s School of Public Health and a practicing general internist.

In 1988, Alain Enthoven advocated in Theory and Practice of Managed Competition in Health Care Finance, a book published in the Netherlands, that to decrease health care costs it would be necessary to break up the "physicians' guild" and replace leadership by clinicians with leadership by managers (see 2006 post here). Thus from 1983 to 2000, the number of managers working in the US health care system grew 726%, while the number of physicians grew 39%, so the manager/physician ratio went from roughly one to six to one to one (see 2005 post here). As we noted here, the growth continued, so there are now 10 managers for every US physician. 

We have frequently discussed how generic managers in charge of health care organizations may follow business-school dogma at the expense of patients' and the public's health.  In particular, they may also prioritize short-term revenue ahead of all other concerns, and hence may favor high-technology and procedural care, often performed electively, ahead of the the less glamorous and remunerative parts of health care, e.g., ED care of poor, uninsured, febrile patients.

Unfortunately, much of the country's efforts to ward off Ebola are likely to be lead by generic managers who may have little understanding of epidemiology, public health or virology, and little understanding of the state of health care at the sharp end.  So unfortunately I expect continuing "glitches," or worse.  Hopefully, the country, although not every single one of its inhabitants, will survive them.  Then we need to seriously reflect on the wisdom of handing control of health care over to generic managers, rather than health care professionals. 


Commercialization of Health Care Leading to Neglect of Routine Acute Care and Public Health 

Just as national politicians and government leaders have repeated the meme of the US health care system being "the best in the world," now that Ebola has come to Texas, state leaders have sung the same song.  For example, an editorial in the Baltimore Sun quoted the state health commissioner,

'This is not West Africa,' Texas health commissioner Dr. David Lakey said Wednesday at a news conference designed to dispel Texans' (and Americans') fear of an Ebola outbreak after a man there was diagnosed with the disease. 'This is a very sophisticated city, a very sophisticated hospital.'

The Texas Tribune ran a story produced in cooperation with Kaiser Health saying,

At a Wednesday press conference to discuss the Ebola case, Gov. Rick Perry said he was confident in the state’s preparedness. 'There are few places in the world better equipped to meet the challenge that is posed in this case,' he said. 'We have the health care professionals and the institutions that are second to none.'

However, another Dallas Morning News story recounted various problems in the public health response to the Dallas Ebola patient, including,

Delay in blood testing
After Duncan was admitted to the hospital, health officials waited nearly two days to test his blood for the Ebola virus. This may have delayed containment of people who had contact with him.
Slow containment and cleanup
Health officials left some of Duncan’s close contacts in the apartment where soiled linens and towels that he had used remained.
Failure to avoid contact with emergency workers
Ambulance workers and sheriff’s deputies are among those being monitored.

So, there is reason to suspect that the public health system in Texas may not exactly be the best in the world.  In fact, there seem to be systemic problems with public health in Texas that the Ebola scare is bringing to increased public notice.  The Texas Tribune/ Kaiser story went on to explain that in Texas, a state in which distrust of central government is great, and confidence in the private sector is high, public health is both decentralized and often poorly funded,

'We don’t really have a unifying construct for public health in Texas that’s comprehensive,' said Dr. Eduardo Sanchez, the former commissioner of the Texas Department of State Health Services (DSHS) and current chairman of the Texas Public Health Coalition. 'The system is not as connected as it could be.'

Furthermore,

But public health experts argue that the state’s response system is 'fragmented' and vulnerable to local budget cuts, which they say could hamper crisis-response efforts in the case of diseases that are more easily transmitted.

Texas’ local health departments, which provide services like immunizations and disaster response planning, operate autonomously and are funded primarily by local taxes but may be supplemented by state and federal grants. Because local health departments are not held to a single standard, their services and budgets vary tremendously around the state.

A report critical of the state’s public health system, prepared by the Sunset Advisory Commission, found that 'the roles and responsibilities of DSHS and local health departments remain undefined.' The Sunset Commission is tasked with highlighting inefficiencies at state agencies and recommending legislative action.

'A ‘local health department’ can be a few staff conducting restaurant inspections and animal control duties, or a large agency directing sophisticated disease surveillance, operating a public health laboratory and providing direct services to citizens,' according to the report.>

Some public health officials have criticized the state’s model as disjointed. Many local health departments operate independently; however, if local budget cuts to a public health department force it to discontinue a health service, DSHS is often required to step in and take responsibility for that service. The state is then left to foot the bill.

'In the event of a public health emergency ... the resources necessary to adequately respond to that are not all in the control of the health department,' Sanchez said. 'You have to have the money and the authority — whether it’s informal or formal — to actually lead a response and take care of business.'

Local entities have slashed funding for health departments in recent years, said Catherine Troisi, an epidemiologist at the University of Texas School of Public Health in Houston. Thirty-six percent of local health departments in Texas laid off staff as a result of budget cuts between 2008 and 2013, according to the National Association of County and City Health Officials.

'Public health is politics,' Troisi said.

In the US, we have pushed commercialization of health, health care and public health.  Much of our health insurance is provided by for-profit corporations.  Some of our hospitals and other organizations that provide direct patient care are for-profit.  As we noted above, most of our health care organizations are now run in a "business-like" manner by managers trained in business, but not necessarily in health care or biological science.  The thus revenue-focused health care system has emphasized procedures and high-technology, often at the expense of the basics.  So it should not be s surprise that Reuters just reported,

 Nurses, the frontline care providers in U.S. hospitals, say they are untrained and unprepared to handle patients arriving in their hospital emergency departments infected with Ebola.

Many say they have gone to hospital managers, seeking training on how to best care for patients and protect themselves and their families from contracting the deadly disease, which has so far killed at least 3,338 people in the deadliest outbreak on record.

Furthermore, using as an example Medstar Washington Hospital Center, the largest hospital in Washington, DC,

Nurses argue that inadequate preparation could increase the chances of spreading Ebola if hospital staff fail to recognize a patient coming through their doors, or if personnel are not informed about how to properly protect themselves.

At Medstar, the issue of Ebola training came up at the bargaining table during contract negotiations.

'A lot of staff feel they aren't adequately trained,' said [Emergency Department nurse Micker] Samios, whose job is to greet patients in the emergency department and do an initial assessment of their condition.

So Young Pak, a spokeswoman for the hospital, said it has been rolling out training since July 'in the Emergency Department and elsewhere, and communicating regularly with physicians, nurses and others throughout the hospital.'

Samios said she and other members of the emergency department staff were trained just last week on procedures to care for and recognize an Ebola patient, but not everyone was present for the training, and none of the other nursing or support staff were trained.

'When an Ebola patient is admitted or goes to the intensive care unit, those nurses, those tech service associates are not trained,' she said. 'The X-ray tech who comes into the room to do the portable chest X-ray is not trained. The transporter who pushes the stretcher is not trained.'

If an Ebola patient becomes sick while being transported, 'How do you clean the elevator?'

Nurses at hospitals across the country are asking similar questions.

A survey by National Nurses United of some 400 nurses in more than 200 hospitals in 25 states found that more than half (60 percent) said their hospital is not prepared to handle patients with Ebola, and more than 80 percent said their hospital has not communicated to them any policy regarding potential admission of patients infected by Ebola.

Another 30 percent said their hospital has insufficient supplies of eye protection and fluid-resistant gowns.

So up to now, it appears that in the state of Texas, and across the country, the preparedness of public health systems and of front-line hospitals to deal with Ebola is unclear.  This may be due to political cuts in funding of public agencies, a payment system that favors procedures and high-technology over basic care, and leadership by generic managers who prioritize making money short-term over less financially advantageous priorities like preparedness for epidemics.  

Summary
Thus again there is reason to fear that our commercialized health care system run by generic managers, and our neglected public health system scorned because it is not "business-like" may not be fully up to the task of containing Ebola.  Again, hopefully this too will pass, without too many casualties.  However, one, maybe the only silver lining in the dark clouds of the Ebola crisis seem to be its capacity to challenge the pompous certainty by those invested in the status quo that we have the best health care system in the world.

The Ebola crisis should, again, lead to serious reflection on true health care reform, reform that would address concentration and abuse of power, reform that would enable leadership of health care by  well-informed people who are devoted to patients' and the public's health, who are honest and ethical, who are willing to be held accountable, and would shrink the size and power of individual health care organizations to make them truly responsive to patients' health care needs and the public's health needs. 

ADDENDUM (10 October, 2014) - This post was re-posted on the Naked Capitalism blog, and on OpEdNews.com

9:37 AM

Value Extractors, "Super-Managers," Vampires and the Decline of the US and US Health Care

Appearing during the last few weeks were a series of articles that tied the decline of the US economy to huge systemic problems with leadership and governance of large organizations.  While the articles were not focused on health care, they included some health care relevant examples, and were clearly applicable to health care as part of the larger political, social, and economic system.  The articles reiterated concerns we have expressed, about leadership of health care by generic managers, perverse executive compensation, the financialization of health care, in part enabled by regulatory capture, and the abandonment by effective stewardship by boards of directors, but with new takes on them.

The articles included "Profits Without Prosperity," by William Lazonick in the the Harvard Business Review,  "Why Have US Companies Become Such Skinflints," by Paul Roberts in the Los Angeles Times, and "How Business Leaders Turned Into Vampires," by Steve Denning in Forbes, which in turn was partially based on "The Rise (and Likely Fall) of the Talent Economy," in the Harvard Business Review.

Let me summarize the main points, and discuss some health care examples.

"Super-Managers" as Value Extractors

Steve Denning's article contrasted people who  add value to the economy versus those who extract value.  The first species of value extractor he listed was:

 ‘Super-managers’ are people who hold administrative positions in the C-suite of private-sector bureaucracies but are masquerading as entrepreneurs. They are, to use Thomas Piketty’s slyly ironic term, “super-managers.” As such, they have been able to extract extraordinary levels of compensation. They have been lavished with stock and stock options and have been able to 'manage' the share price of their firms with massive share buybacks and other financial engineering so that they receive massive bonuses. As Bill Lazonick documented in the September 2014 issue of HBR, the net effect of their activities is to extract value, rather than create value [see below]. 

Presumably, "super-managers" as health care executives are also likely to be generic managers, unlikely to have much actual knowledge of caring for patients, unsympathetic to the values of health care professionals, and hence unlikely to uphold the health care mission.

He noted that

 there is a tendency to dismiss the activities of ‘vampire talent’ as de minimis. 'That’s capitalism, right? Every man for himself. It’s no big deal if there’s an occasional bad apple in the barrel. The ‘invisible hand’ of capitalism will make everything come out right for society in the end.'

However,

 The problem today is that the super-sized executive compensation, the gambling and the toll-keeping of the financial sector aren’t tiny sideshows. They have grown exponentially and are now macro-economic in scale. They have become almost the main game of the financial sector and the main driver of executive behavior in big business. When money becomes the end, not the means, then the result is what analyst Gautam Mukunda calls 'excessive financialization' of the economy, in his article, 'The Price of Wall Street Power,' in the June 2014 issue of Harvard Business Review.

Mr Denning further asserted that the value extraction of super-managers is augmented by the value extraction of two different groups of players, hedge funds that speculate with other peoples' money, and "tollkeepers" who extract rents through the financial system.

Furthermore, Mr Denning stated that

 The growth of super-sized executive compensation is inversely related to performance. The super-managers are in effect being rewarded for doing the wrong thing.

Of course, if executives in health care, like those in other sectors, are mainly concerned with enriching themselves in the short-term, than they are not mainly concerned with patients' and the public's health, or the values of health care professionals, and hence the performance of their organizations in terms of health care processes and outcomes will suffer. 

Furthermore, the ability of commercial health care firms to actually make a positive impact on health care will be decreased as they are whipsawed by other value extractors like hedge funds and tollkeepers.

Example - Renaissance Technologies

Mr Denning's first example of tollkeepers' value extraction was:

James Simons, the founder of Renaissance Technologies, ranks fourth on Institutional Investor’s Alpha list of top hedge fund earners for 2013, with $2.2 billion in compensation. He consistently earns at that level by using sophisticated algorithms and servers hardwired to the NYSE servers to take advantage of tiny arbitrage opportunities faster than anybody else. For Renaissance, five minutes is a long holding period for a share.

In fact, as we noted here, Renaissance Technologies does not hesitate in trading health care firms.  Furthermore, that company has a noteworthy direct tie to health care.  Its current co-CEO, Peter F Brown, is married to the current Commissioner of the US Food and Drug Administration (FDA).

Value Extraction and Share Buybacks

William Lazonick's article also emphasized how corporate leadership is now focused on extracting value from their companies for their own personal benefit, rather than promoting growth, innovation, better products and services, etc.  In particular, large public for-profit companies now tend to use their surplus capital to buy back shares of their own stock, rather than invest in new facilities, equipment, employees, etc.  Perhaps we should not be surprised that this was facilitated by changes in US government regulation, that is deregulation, in this case instituted during the Reagan administration:

Companies have been allowed to repurchase their shares on the open market with virtually no regulatory limits since 1982, when the SEC instituted Rule 10b - 18 of the Securities Exchange Act.

Note that

The rule was a major departure from the agency's original mandate, laid out in the Securities Exchange Act of 1934.  The act was a reaction to a host of unscrupulous activities that had fueled speculation in the Roaring '20's, leading to the stock market crash of 1929 and the Great Depression.

Given the context, and that the deregulation was implemented by an SEC chair who was "the first Wall Street insider to lead the commission," this seems to be an example of regulatory capture in service of corporate insiders.

The issue here is that while it might make some financial sense for companies to buy back their own shares if they are priced at bargain rates, after this change they could buy shares at any price without supervision.  On one hand, such purchases could lead to short-term bumps in stock prices. On the other hand, a major reason for these buybacks appears to be that they enrich corporate insiders, particularly top hired executives, who now receive much of their pay in the form of stock and stock options, and often can get bonuses based on short-term increases in stock prices.  Lazonick wrote,

Combined with pressure from Wall Street, stock-based incentives make senior executives extremely motivated to do buybacks on a colossal and systemic scale.

Consider the 10 largest repurchasers, which spent a combined $859 billion on buybacks, an amount equal to 68% of their combined net income, from 2003 through 2012. (See the exhibit “The Top 10 Stock Repurchasers.”) During the same decade, their CEOs received, on average, a total of $168 million each in compensation. On average, 34% of their compensation was in the form of stock options and 24% in stock awards. At these companies the next four highest-paid senior executives each received, on average, $77 million in compensation during the 10 years—27% of it in stock options and 29% in stock awards. Yet since 2003 only three of the 10 largest repurchasers—Exxon Mobil, IBM, and Procter & Gamble—have outperformed the S&P 500 Index.

Example - Pfizer

Mr Lazonick's noted some potential outcomes of the frenzy of stock buybacks affecting the US pharmaceutical industry and hence the US health care system.

In response to complaints that U.S. drug prices are at least twice those in any other country, Pfizer and other U.S. pharmaceutical companies have argued that the profits from these high prices—enabled by a generous intellectual-property regime and lax price regulation— permit more R&D to be done in the United States than elsewhere. Yet from 2003 through 2012, Pfizer funneled an amount equal to 71% of its profits into buybacks, and an amount equal to 75% of its profits into dividends. In other words, it spent more on buybacks and dividends than it earned and tapped its capital reserves to help fund them. The reality is, Americans pay high drug prices so that major pharmaceutical companies can boost their stock prices and pad executive pay.

Moreover, during approximately the same period Pfizer compiled an amazing record of legal misadventures including settlements of allegations of unethical behavior, and some convictions, including one for being a racketeering influenced corrupt organization (RICO), as most recently reviewed here, and then updated here.  So while it was putting huge amounts into buybacks, it also put billions into legal fines and costs. This suggests that note only does executive compensation not correlate with "performance," it may also correlate with corporate bad behavior.

The "Shareholder Value" Dogma

In explaining how US corporate executives turned to stock buybacks to boost their own pay, at the expense of essentially everyone else, Mr Lazonick sounded some familiar themes.  One was focus on short-term revenues and short-term stock performance drive by the "share-holder value" dogma out of business schools,

the notion that the CEO's main obligation is to shareholders. It's based on a misconception of the shareholders' role in the modem corporation. The philosophical justification for giving them all excess corporate profits is that they are best positioned to allocate resources because they have the most interest in ensuring that capital generates the highest returns. This proposition is central to the 'maximizing shareholder value" (MSV) arguments espoused over the years, most notably by Michael C. Jensen. The MSV school also posits that companies' so-called free cash flow should be distributed to shareholders because only they make investments without a guaranteed return -- and hence bear risk.

But the MSV school ignores other participants in the economy who bear risk by investing without a guaranteed return. Taxpayers take on such risk through government agencies that invest in infrastructure and knowledge creation. And workers take it on by investing in the development of their capabilities at the firms that employ them. As risk bearers, taxpayers, whose dollars support business enterprises, and workers, whose efforts generate productivity improvements, have claims on profits that are at least as strong as the shareholders'.

Mr Denning similarly noted

The intellectual foundation of all this behavior is the notion that the purpose of a firm is to maximize shareholder value. Unless we do something about this intellectual foundation, the problem will remain. Changes in a few regulations or the tax code won’t make much difference. ‘Vampire talent’ will find ways around them.

Nor will change happen merely by pointing out that shareholder primacy is a very bad idea. Bad ideas don’t die just because they are bad. They hang around until a consensus forms around another idea that is better.

Mr Roberts' article "Why Have US Companies Become Such Skinflints," went at this issue from a slightly different angle, noting first

The bigger story here is what might be called the Great Narrowing of the Corporate Mind: the growing willingness by business to pursue an agenda separate from, and even entirely at odds with, the broader goals of society.

He attributed this to the notion promulgated by

conservative economists, [that] the best way for companies to help society was to ditch the idea of corporate social obligation and let business do what business does best: maximize profits.

He noted that this focus on short-term revenues has led to the decline in long-term results,

 But because management is so focused on share price and because share price depends heavily on current company earnings, strategic focus has grown ever more short term: do whatever is needed to hit next quarter's earnings target. And since cost-cutting is a quick way to boost near-term earnings, layoffs and other downsizing once regarded as emergency measures are now routine.

And here is the paradox. Companies are so obsessed with short-term performance that they are undermining their long-term self-interest. Employees have been demoralized by constant cutbacks. Investment in equipment upgrades, worker training and research — all essential to long-term profitability and competitiveness — is falling.

Of course, this is antithetical to the "innovation" that current corporate boosters proclaim as the goal of drug, biotechnology, medical device companies and other players in the brave new world of corporate health care.  


The Incestuous Mechanisms Used to Set Executive Compensation

Another explanation for the rise in value extraction, and specifically the use of share buybacks to reward top corporate hired executives, was the incestuous way in which corporations set pay for top hired executives. Mr Lazonick wrote,

Many studies have shown that large companies tend to use the same set of consultants to benchmark executive compensation, and that each consultant recommends that the client pay its CEO well above average. As a result, compensation inevitably ratchets up over time. The studies also show that even declines in stock price increase executive pay: When a company's stock price falls, the board stuffs even more options and stock awards into top executives' packages, claiming that it must ensure that they won't jump ship and will do whatever is necessary to get the stock price back up.

This is enabled by boards of directors who seem to represent the 'CEO union,' not stockholders, and certainly not other less favored employees, customers, clients or patients, or society at large,

Boards are currently dominated by other CEOs, who have a strong bias toward ratifying higher pay packages for their peers. When approving enormous distributions to shareholders and stock-based pay for top executives, these directors believe they're acting in the interests of shareholders.

Once again, this was also enabled by the dergulation that started with during the Reagan administration, and continues this day (although the specific relevant deregulatory change occurred during the Clinton administration),

 In 1991 the SEC began allowing top executives to keep the gains from immediately selling stock acquired from options. Previously, they had to hold the stock for six months or give up any 'short-swing' gains. That decision has only served to reinforce top executives' overriding personal interest in boosting stock prices. And because corporations aren't required to disclose daily buyback activity, it gives executives the opportunity to trade, undetected, on inside information about when buybacks are being done. 

Summary

Note that while all the discussion above has been about for-profit corporations, we have seen that in health care, various non-profit organizations, particularly hospitals, hospital systems, academic medical institutions, and health insurers, which all now operate in the current market fundamentalist environment, are acting more and more like for-profits.  So while non-profit corporate executives cannot do stock buybacks, they are also all too often generic managers, given huge compensation, but not often for upholding the mission, putting patients' and the public's health first, or upholding health care professionals' values.  

It is striking that we are beginning to see protests like those above not in radical publications, but in the Harvard Business Review and Forbes.  It is more striking that these protestors are beginning to fear the worst.  Mr Roberts wrote,

Sooner or later, markets punish such myopic behavior. Companies that neglect innovation run out of things to sell. Companies that demoralize workers see performance lag. 

Although Mr Denning hopefully wrote,

We are thus about to witness a vast societal drama play out. That’s because we have reached that key theatrical moment, which Aristotle famously called 'anagnorisis' or 'recognition.'  This is the moment in a drama when ignorance shifts to knowledge.  

He then warned,

As usual with anagnorisis and the shock of recognition at a disturbing, previously-hidden truth, there is a disquieting sense that the accepted coordinates of knowledge have somehow gone awry and the universe has come out of whack. This can lead to denial and a delay in action, even though the facts are staring us in the face.

If the recognition of our error comes too late, as in Shakespeare’s Lear, the result will be terrible tragedy. If the recognition comes soon enough, the drama can still have a happy ending. We are about to find out in our case which it is to be.

Let us hope that anagnorisis is really beginning, the anechoic effect is fading, and the drama may yet have a happy ending. 

ADDENDUM (29 September, 2014) - This post was re-posted on the Naked Capitalism blog. 

11:51 AM

Merging Finance and Health Care Leadership - Robert Rubin Proteges Running DHHS, Spouse of Hedge Fund Magnate Running the FDA

Hidden between the lines of some not very prominent news stories were reminders of how close health care and financial leadership have become in these times of continuing economic unrest after the global financial collapse/ great recession.

After the events of 2008, it became more apparent that the dysfunction in academics and health care  paralleled that seen in finance.  One reason may have been the overlapping leadership of finance and health care.  For example, in 2008 we first posted about how Robert Rubin, who was then a Fellow of the Harvard Corporation, the top group responsible for the governance of that great academic and medical institution, bore responsibility for the global financial collapse/ great recession.  Mr Rubin as Treasury Secretary was a proponent of financial deregulation in the Clinton administration.  Later, he became a top leader of Citigroup, whose near collapse helped usher in the crisis of 2008 (look at our 2008 post here and our 2010 post here.  Rubin just stepped down from his Harvard position this year,)  Since 2008 we found many other links among the leadership of Wall Street and of academic medicine and of big health care corporations.  These links, if anything, seem to be getting stronger. 

From the Department of Health and Human Services to Citigroup and then back to the Department of HHS

A tiny, four sentence Reuters story noted an apparently routine appointment to upper management at the US Department of Health and Human Services.  The first three sentences were:

U.S. Health Secretary Sylvia Burwell named Citigroup Inc executive Kevin Thurm as senior counselor of the U.S. Department of Health and Human Services (HHS), which is implementing the controversial U.S. Affordable Care Act.

Thurm has served in a number of roles at Citi since joining the bank in 2001, including senior adviser for compliance and regulatory affairs and deputy general counsel.

Before joining Citi, Thurm, a former Rhodes scholar, was the deputy secretary of the U.S. Department of Health and Human Services.

Why is that significant?  First, the near bankruptcy of the huge, badly led Citigroup was widely acknowledged to be a cause of the global financial collapse.  A 2011 New Yorker article on the role of the revolving door between Washington and Wall Street ("Revolver," by Gabriel Sherman) summarized the plight of Citigroup and the role of Robert Rubin in it,

Citigroup was the most high-profile of Wall Street’s basket cases, the definitionally too-big-to-fail institution. With massive exposure to the housing crash and abysmal risk management, the firm cratered, surviving as a virtual ward of the state after the government injected billions and took a 36 percent ownership position. Along with AIG and Fannie and Freddie, Citi came to be seen as a pariah institution, felled by management dysfunction and heedless greed in pursuit of profits. Complicating matters for Citi, the wounded bank found itself tangled in the populist vortex that swirled in the crash’s wake. On the left, there were calls that Citi should be outright nationalized, stripped down, and sold off for parts. Pandit was called before irate congressional-committee members to answer for Citi’s sins, an ignominious inquisition captured on live television. In January 2009, under pressure, Citi canceled an order for a new $50 million corporate jet.

There was plenty of blame to go around at Citi. Chuck Prince, a lawyer by training who succeeded Citi’s outsize former CEO Sandy Weill, had little grasp of the complex mortgage securities Citi’s traders were gambling on. As late as the summer of 2007, when the housing market was in free fall, Prince infamously told the Financial Times that 'as long as the music is playing, you’ve got to get up and dance.'

Bob Rubin himself pushed the bank to take on more risk in order to increase its profitability, a move that Citi’s dismal risk management was ill-equipped to handle. Pandit, whom Rubin had helped to recruit in 2007 just as the economy began to unravel, was tasked with cleaning up the mess when he became CEO in December of that year, and his early tenure had a deer-in-headlights character. Eventually, he realized that the asset class Citi lacked most was human capital, of the blue-chip variety.  

The article also summarized Rubin's role in the fervor of deregulation in service of market triumphalism that lead to the financial collapse,

In tapping Rubin to run Treasury, Clinton was sanctioning a revolution in the Democratic Party, one that fundamentally redefined the party’s relationship with Wall Street. Rubin, along with Alan Greenspan and Larry Summers, believed in an enlightened capitalism, which would spread prosperity widely. This enchantment with the beneficence of markets became the dominant view in Democratic Washington, hard to argue with when the economy was booming, as it was in the second half of the nineties. Rubin recognized that derivatives posed a risk but effectively blocked efforts to regulate them and pushed for the repeal of the Glass-Steagall Act, the Depression-era legislation that prevented commercial banks from merging with investment and insurance firms (the new law essentially legalized the $70 billion merger in 1998 of Citicorp and Travelers Group that created Citigroup).

Circling back to recent events, Once he got to Citigroup, Rubin assembled a team, partially from his old associates in the Clinton administration,

He also recruited several former Clinton aides to Citi, including former Health and Human Services deputy secretary Kevin Thurm....

So Kevin Thurm became something of a Robert Rubin protege at Citigroup. In fact, he rose to an important leadership position at the same time Citigroup was getting ready to become a "basket case," in part apparently because of the advice of Robert Rubin.  According to a 2013 version of Mr Thurm's official Citigroup bio,

Kevin L. Thurm is Senior Advisor for Compliance and Regulatory Affairs at Citigroup.

Previously, Thurm served as the Chief Compliance Officer of Citi. In that role, Thurm led Global Compliance which protects Citi by helping the Firm comply with applicable laws, regulations, and other standards of conduct, and is responsible for identifying, evaluating, mitigating and reporting on compliance and reputational risks and driving a strong culture of compliance and control. Since joining Citi in 2001, Thurm has also served as Deputy General Counsel of Citi, where he led the Corporate Legal group, overseeing a number of Company-wide Legal functions and providing support on day to day matters, including issues involving the Board, senior executives, and regulators; Chief  Administrative Officer of Consumer Banking North America, where he helped lead the business group and was responsible for a variety of functions including Community Relations, Compliance, Legal and Public Affairs; Director for Administration in the Corporate Center; Chief of Staff to the President and Chief Operating Officer of Citigroup; and as the Director of Consumer Planning in the Global  Consumer Group.

To recap, Mr Kevin Thurm was a top compliance executive of Citigroup while the company was imploding, and being a protege of Robert Rubin, an architect of the financial deregulation that led to the global financial collapse, and a leader of Citigroup responsible for the risky behavior of that company that led to its near collapse, which was another precipitant of the global financial collapse or great recession.  It is not obvious that these are great qualifications to be Senior Counselor at DHHS.

Moreover, Mr Thurm's responsibilities at DHHS would not be limited to compliance or financial leadership.  According to the official DHHS press release announcing his appointment,

As a Senior Counselor, Thurm will work closely with the Department’s senior staff on a wide range of cross-cutting strategic initiatives, key policy challenges, and engagement with external partners.

Yet, there is nothing in Mr Thurm's public record to indicate that he has any actual experience in health care, medicine, public health, or biologic science.  So it is not obvious why he should be entrusted with leading "cross-cutting strategic initiatives, [and] key policy challenges."

On the other hand, Mr Thurm might be simpatico with the new Secretary of DHHS, Ms Sylvia Burwell.  According to a Washington Post article at the time of the hearings about her nomination,

despite her Washington experience, ... is not well known in health-policy circles, and, during her confirmation hearings, she gave little concrete sense of the direction in which she will take the complex department she will inherit.

This seems to be a polite way to see she also has no actual experience in health care, medicine, public health, or biologic science.   Her official biography lists no such experience.  However, she was also a Robert Rubin associate, and perhaps protege, during the Clinton administration,

During the Clinton administration, Burwell held several economic roles — as staff director of the White House National Economic Council, as chief of staff under then-Treasury Secretary Robert Rubin,...

To summarize so far, the new Secretary of the Department of Health and Human Services, and now her new Senior Counselor, were both closely associated with Robert Rubin, who seems to bear major responsibility for the global financial collapse, and the new Senior Counselor worked with Rubin at Citigroup, whose near bankruptcy helped accelerate that collapse.  On the other hand, neither of these leaders has any experience in health care, public health, medicine, or biological science. 

Hedge Funds, Tax Avoidance, and the US Food and Drug Administration

This story is even less obvious.  A July, 2014, report in Bloomberg recounted plans for a Senate hearing on tax avoidance by huge, lucrative hedge funds.  The basics were,

A Renaissance Technologies LLC hedge fund’s investors probably avoided more than $6 billion in U.S. income taxes over 14 years through transactions with Barclays Plc and Deutsche Bank AG, a Senate committee said.

The hedge fund used contracts with the banks to establish the 'fiction' that it wasn’t the owner of thousands of stocks traded each day, said Senator Carl Levin, a Michigan Democrat and chairman of the Permanent Subcommittee on Investigations. The maneuver sought to transform profits from rapid trading into long-term capital gains taxed at a lower rate, he said.

An accompanying Bloomberg/ Businessweek story described testimony at a Senate hearing by the Renaissance co-Chief Executive Officer Peter F Brown,

Renaissance was founded by the mathematician James H. Simons, whose fortune is now estimated by Bloomberg Billionaires Index at about $15.5 billion.

Brown became co-CEO with Robert L. Mercer in 2010 after Simons retired and became non-executive chairman. Before joining the firm in 1993, he was a language-recognition specialist at International Business Machines Corp.

Mr Brown testified that the company was not so much trying to avoid taxes by the complex strategy but simply to make even more money.    But, per the New York Times, Senator Levin

focused on the lucrative nature of the transactions, most of which took place using Renaissance employees’ money. Between 1999 and 2010, the fund used basket options to produce profits of more than $30 billion, Mr. Levin said. Barclays and Deutsche Bank together made more than $1 billion in revenue.

Mr Brown's firm seems, unlike Citigroup, to have a record of financial success, and no one is accusing Mr Brown or his firm of being responsible for the global financial collapse.  However, Mr Brown is certainly a very rich Wall Street insider.  Also, as we noted in 2009, his firm clearly has had major involvement in health care investments.   And the current hearings emphasize concerns that his firm has been executing questionable tax avoidance strategies.

Mr Brown has one other very major tie to health care.  As  noted in 2009 on Health Care Renewal, but apparently only parenthetically by one recent news article, (again from Bloomberg, written before the Senate hearing),

Brown lives in Washington with his wife, Margaret Hamburg, the commissioner of the U.S. Food and Drug Administration. She was appointed by President Barack Obama in 2009.

In 2009, we noted that as a condition of Dr Hamburg's leadership of the US FDA, her husband, Mr Brown, would have to divest his shares of four Renaissance funds.  However, it is obvious that he remained at and became the co-CEO of Renaissance since. 

While the current leader of the FDA clearly has medical and health care experience, she is also steeped in the culture of finance and Wall Street.

Summary

Thus we have two recent stories of how top health care leadership positions in the US government are held by people with strong ties to the world of finance, but not always with any direct health care or public health experience.  Why was the wife of a hedge fund magnate the best person to run the FDA?  Why was a person not known in "health policy [or health care] circles" the best person to run the Department of Health and Human Services?  Why was a Robert Rubin protege from Citigroup the best person to be a Senior Counselor at DHHS?  Presumably there were many plausible candidates for these government positions.  Why was it not possible to find people to fill them who were not tied to Wall Street?  Why was it not possible to find people with profound understanding of and sympathy for the values of health care and public health to fill all of them?   

The leadership of health care and finance continue to merge.  This seems to be one broad explanation for why both fields continue to be notably dysfunctional.  While Wall Street has spread around plenty of money to influence public opinion and political leaders, many still remember how its foolish and greedy leadership nearly caused another great depression.  It is likely that the influence of Wall Street culture on the leadership of health care organizations, be they governmental, academic, other non-profit, or commercial, has fostered the continuing financialization of health care, with its focus on "shareholder value," that is, putting short-term revenue ahead of patients' and the public's health.

I strongly believe health care would be better served by leadership that puts patients' and the public's health first.  Occasionally people with such values may come from a finance or economics background.  However, in an era where many people continue to believe "greed is good," we at least ought to confirm that health care leaders really are about health care first, and money a distant second.

ADDENDUM (20 August, 2014) - This was re-posted on the Naked Capitalism blog.

8:27 AM

"Why Do We Always Need to Blame Somebody?" - An Investment Banker Pushes Back Against Health Care Leadership Accountability

One of the many dramatic stories generated by the destructive Hurricane Sandy illustrated, oddly enough, the influence of big finance on American academic medicine.

Vivid video showed patients being carried down darkened stairways after flooding and a power failure at Langone Medical Center in New York (for example, see this CNN story.)  Amazingly, all the patients survived, thanks to heroic work by health care professionals and first responders.  CNN noted, "Some 1,000 staff members -- doctors, nurses, residents and medical students -- along with firefighters and police officers evacuated the patients."

The medical center suffered significant damage beyond that caused by the blackout.  A New York Times story about the problems was entitled, "A Flooded Mess that was a Medical Gem."  It noted the hospital's basement flooding destroyed major equipment like MRI machines, a linear accelerator and a gamma knife.  An animal research facility was destroyed and most of the animals died.  A renovated lecture hall and the library were ruined.

What Went Wrong?

However, soon after the debate began about why the hospital flooded and power failed.  A Bloomberg story stated,  

New York University Langone Medical Center, the 705-bed hospital in lower Manhattan that assured city officials it was ready for Hurricane Sandy, stood dark and empty a day after the storm rolled through.

That story raised questions whether hospital leadership gave adequate priority to infrastructure like generators, or put too much emphasis on spending likely to produce more rapid rewards.

Blame is being placed on the building’s outdated backup power system, which has raised concern that aging infrastructure at U.S. hospitals has created a risk for similar outages that jeopardize patient care.


'Hospitals are careful to get the latest and greatest medical equipment, but then they don’t spend on the infrastructure,' Michael Orlowicz, a principal at consulting company Lawrence Associates LLC, said....

A story on ProPublica (available on Salon) noted,

Experts say such failures are troubling but not entirely surprising. Dr. Arthur Kellermann founded the emergency department at Emory University and headed it from 1999 to 2007. Now, he’s Paul O’Neill-Alcoa Chair in Policy Analysis at RAND Corporation think tank.


The other night, as the NYU evacuation was unfolding, he tweeted, 'Hospital preparedness and well-functioning backup systems are a costly distraction from daily business, until they are needed. Like now.'


In an email interview with ProPublica, Kellermann elaborated: 'I have no doubt when the hospital assured the Mayor that their backup systems were ready, they believed they were. They were wrong. What I find most remarkable about this story is that [more than seven] years after Hurricane Katrina, major hospitals still have critical backup systems like generators in basements that are prone to flooding.'

Similarly, a Reuters story included another quote from Dr Kellermann,

'I've been asking hospitals to look at their own survivability' after a natural or manmade disaster, 'and I just can't get it on their radar screens,' said Dr. Art Kellerman,...

 
It added,

For hospital administrators trying to keep their institutions in the black, disaster-resistant infrastructure is expensive and lacks the sex appeal of robotic surgery suites and proton-beam cancer therapy to attract patients.

'People don't pick hospitals based on which one has the best generator,' Kellerman said. 

The notion that hospital leaders may put short-term revenue ahead of long-term infrastructure development, even when such development might be critical for patient safety, should not surprise Health Care Renewal readers.  Hospitals are often lead or influenced by those who believe maximizing short-term revenue should be the main goal of all management, an over-generalization of the idea promoted in business schools for a generation that business leaders should maximize "shareholder value," which has come to be defined as short-term stock price (see this post).

  Who Defended the Disaster Planning

 In response to this or anticipated criticism, leaders of Langone Medical Center deployed.  Not unexpectedly, one was Richard Cohen, the vice president for facilities, as reported by ProPublica, via the Huffington Post,  

After Hurricane Irene, officials at NYU Langone Medical Center spent several million dollars protecting its backup power system from flooding, according to Richard Cohen, vice president of facilities operations.

The hospital removed a fuel tank and a set of emergency generators at street level and chose to depend on what Cohen termed an 'extremely modern, extremely reliable' system of rooftop generators.

The hospital also built a new, flood-resistant house for pumps that draw fuel from the hospital's sealed underground tank and feed it to the generators that make electricity when New York City's power fails.

One vulnerability remained, and it proved to be the system's Achilles Heel. A portion of the hospital's power distribution circuits, which direct the generated electricity out into various areas of the hospital, were located in the hospital's basement.

'It's like what happens when you have a flood in your basement and the electrical panel is in your basement,' Cohen said.

Oops.  Why a crucial component of the system meant to protect the back up power system from threats including flooding was placed in an area at risk from flooding was not clear.   Only one story I could find (in the NY Times) included a response by the Dean of the Medical School and CEO of the Medical Center Dr Robert I Grossman.

At this point, Dr. Grossman said, he could only theorize as to why the generators had shut down. All but one generator is on a high floor, but the fuel tanks are in the basement. The flood, he said, was registered by the liquid sensors on the tanks, which then did what they were supposed to do in the event, for instance, of an oil leak. They shut down the fuel to the generators.

Oops again.  Why an effort to flood proof the hospital included an undeground fuel tank which could not be operated if water got near it was also not clear. 

The most voluble defender of the hospital's management proved to be one Mr Kenneth Langone.  As noted in a blog post in the Wall Street Journal, Mr Langone is the medical center's "board chair and benefactor."  In fact, as the NY Times reported in 2008,

Kenneth G Langone, a billionaire financier and founder of Home Depot, is giving another $100 million donation to New York University Medical Center, matching the one he made anonymously in 1999. 

In return, the university plans to name the medical center the N.Y.U. Langone Medical Center,....

The WSJ blog post asserted,

Langone said the hospital 'frequently' tested its generators and they had passed the tests, and the hospital was prepared for a 12-foot storm surge. 'We anticipated 12-foot surges, which we knew we could handle. We got 14-foot surges,' he said.


Some of the hospital generators were in the basement, which flooded. Langone acknowledged that the generators were 'not in the right location,' but that was an artifact of aging facilities undergoing an extensive upgrade. 'They’ve been there for years,' he said of the generators in the basement. As part of a $3.2 billion modernization, NYU Langone was planning on buying new generators and locating them in better locations than the basement, Langone said.

Oops one more time.  Mr Langone seemed to only offer inertia as an excuse for why some generators remained in the basement after an effort to flood proof the back up electrical system.
Langone was quoted in the CNN story mentioned above,

Kenneth Langone, the chairman of the hospital's board of trustees who also happened to be a patient there until he was discharged Tuesday morning, said that regulations require the generators to be tested regularly and that they've worked every time.


Langone said the hospital is in the midst of an 'enormous' building campaign. The generators are going to be replaced in a renovation, he said.

In a Bloomberg story, Langone was quoted again,

'We believed the machines would work, and we believed everything we were told about the scope and size of the storm,' Langone said.

 In that story, he tried to deflect attention from tha apparent infrastructure failure, and presumably the responsibility of the organization's leadership for it, to the efforts of health professionals,

'The backup generators failed, it’s that simple, but the story here is the magnificence of the effort of all of our people and what they did,' Langone, 77, said yesterday....

He also defended the relatively silent Dean and medical center CEO,

'What this dean has done is nothing short of spectacular, in every respect,' Langone said of Grossman. 'So last night God decides to give us a test and our machines failed.'

The story ended with yet another of his attempts to deflect attention to management's responsibility,

'Machines fail, airplanes take off in great shape and they have malfunctions,' Langone said. 'Why do we always need to blame somebody for something that could just have happened? Why not write a story about what people did because things happened? Let’s be a little positive once in a while.'

And in the WNYC News Blog, Langone appeared yet again with this apologia, 

He said hospital pumps failed, because they were overwhelmed by an event that was 'unprecedented' and 'an act of god.'


'The generators are on the seventh floor, and the fuel supply is in cement vaults in the basement, where they're supposed to be according to code,' Langone said. 'Moisture sensors shut down the pumps, but they did what they're supposed to do.'

Summary

Certainly the survival of all the former patients at Langone Medical Center due to brave efforts by health care professionals and first responders ought to be celebrated.  From the discussion so far, it is not clear whether the infrastructure failures were unavoidable due to the scope of a huge natural disaster, or whether the failures were the results of poor planning and insufficient attention to and investment in infrastructure.  Celebration of personal and professional dedication, however, ought not to distract from determining what lessons could be learned about making health care infrastructure safer in cases of natural disaster. 

It also ought not to distract from concerns about management accountability.  In this day and age, it is not surprising that no executive at Langone Medical Center would accept any responsibility for an effort to protect its electrical back-up power from flooding that included an underground fuel tank which would be shut down if any water affected it.  However, these executives are rewarded handsomely supposedly for their "spectacular" leadership.  (Dean Grossman received $1,744,780 in the 2010-2011 period according to the NYU Hospitals Center 2010 form 990.  That document listed four other executives who made over $1 million.)  One would think they would at least try to substantively address how their patients got put into such a precarious situation.

It is surprising that the silence from management was supplanted by the opinions of a very wealthy board chairman who paid hundreds of millions for some of the improvements to the hospital that were destroyed by the storm, but improvements that may not have included fully flood proofing the hospital's back up electrical system.  Why he may well be disappointed about the loss of what he spent so much to build, it is not clear why his opinions about technical aspects of disaster preparation should replace responses from those who were responsible for disaster preparedness.  After all, Mr Langone, while very wealthy, has no evident expertise in engineering, science, or anything pertaining to protecting infrastructure from natural disasters.  (Mr Langone's biography showed his background seems to be only in investment banking and finance.)  One wonders whether Mr Langone's prominence in the discussion suggests how influential the views of investment bankers, versus those of health care professionals, engineers and scientists, have become in the operation of health care systems.

Again, it appears that the culture of finance has intruded progressively into the cultures of health care and academics during an era in which finance has been increasingly irresponsible, as shown by the global financial collapse and our current economic woes.  Instead, true health care reform would develop leadership and governance that upholds health care professionals' values rather than worshiping short term revenue.

2:03 PM

More Reasons to Doubt How CEOs are Chosen and Paid

Health Care Renewal is about problems with the leadership and governance of health care organizations.  Since the global financial collapse/ great recession began in 2008, it became evident that the problems we saw affecting health care leadership were similar to problems affecting other large organizations, notably financial firms.  Recently, I spotted a series of articles that raise more questions about how business leaders, and by extension, leaders of health care organizations are chosen and paid.

Doubts about Generic Managers

We have often questioned the wisdom of having health care organizations lead by people with little if any direct health care experience, little knowledge of health care on the ground, and little commitment to health care's core values.  We have called such leaders generic managers.

A New York Times article by Gretchen Morgenson from September, 2012, cited new academic work that questioned the abilities of generic managers.  The source article was Elson CM, Ferrere CK.  Executive superstars, peer groups, and overcompensation - cause, effect and solution.  Ms Morgenson summarized,

Mr. Elson and Mr. Ferrere conclude, contrary to the prevailing line, that chief executives can’t readily transfer their skills from one company to another.

Furthermore, Ms Morgenson interviewed Mr Elson, who said,

But we found that C.E.O. skills are very firm-specific. C.E.O.’s don’t move very often, but when they do, they’re flops.

Also,

But there is little evidence, according to Mr. Elson and Mr. Ferrere, that a hot market exists for interchangeable chief executives. First, they note numerous academic studies indicating that C.E.O.’s selected from within a company perform better than outsiders, especially in the creation of long-term shareholder value.

'There is no conclusive empirical evidence that outside succession leads to more favorable corporate performance, or even that good performance at one company can accurately predict success at another,' the authors conclude. 'In short, executive skills cannot pass the most basic test of generality: transferability.'

To be sure, this flies in the face of the widely held view that skilled managers have become generalists and are therefore far more interchangeable than in previous years. Proponents of this thesis argue that top managers today can accumulate a broad knowledge of economics, finance and management science, giving them the ability to manage any type of company effectively. Technological advancements also give chief executives access to untold amounts of data about a particular company that in previous times would have taken years to amass and synthesize, this view holds.

But the data on actual C.E.O. moves raises questions about just how portable C.E.O. skills really are. The Delaware paper cites several studies indicating that relatively few chief executives land new top jobs elsewhere. One study, a 2011 analysis of roughly 1,800 C.E.O. successions from 1993 to 2005, found that less than 2 percent had been public-company chief executives before their new jobs.

This data and these observations seem to broadly apply to business executives, but there is no reason to think they do not apply to executives of health care corporations.  Furthermore, given that on its face, health care is less like making automobiles than, say, the restaurant business is, there is no reason to think doubts this raises about the abilities of generic managers should not be even bigger in health care, and should apply not just to for-profit, but to not for profit corporations.  Yet the trend in health care seems to increasingly favor generic managers of not just for-profit health care corporations, but also hospitals and hospital systems, non-profit health insurers and managed care organizations, health care charities, disease advocacy groups, and even medical associations, medical schools, and their parent universities.  

Doubts about Executive Compensation

Peer-Group Benchmarking

We have often posted about amazingly generous compensation given to top leaders of health care organizations.  Health care corporate CEOs can make tens of millions of dollars, occasionally even more.  While CEOs of not for profit health care organizations make less, they still now can makes millions of dollars.  Ms Morgenson called the usual justification for these huge amounts of compensation the "pay-'em-or-lose-'em" myth.

Corporations are forever defending big executive paydays. If we don’t pay up, the argument goes, our sharpest minds will jump to our rivals.

This notion, or myth, depends on the argument that generic managers are the best managers, which appears to be largely unsubstantiated, as we noted above.

 In other words, the argument that C.E.O.’s will leave if they aren’t compensated well, perhaps even lavishly, is bogus. Using the peer-group benchmark only pushes pay up and up. 

Furthermore,

Importantly, the study disputes the notion that executive pay today is a result of an efficient bidding process for finding and retaining a scarce and valuable commodity: managerial talent. 'In essence, this process creates a model of a competitive market for executives where it otherwise does not exist,' the authors wrote. 'Through the operation of a market, it is argued, wages are bid up to an executive’s outside opportunities.'

Instead, as noted above, since the skills needed to run one sort of company or organization may not readily transfer to other companies and organizations, even seemingly similar ones, such a market does not exist. 
 
 Incentives Based on Short-Term Financial Results

We have also previously discussed (look here) how contemporary economic dogma suggest that the only measure of success of a for-profit corporation is "shareholder value," which has come to mean the stock price over the short term.  There is reason to think that this focus on short-term economic performance has also become the major measure of success of health care organizations.  Another word for this phenomenon is "financialization."  

An op-ed in the UK Independent questions this focus because of its economic effects.  Anthony Hilton wrote about the views of Andrew Smithers,

His starting point was that the economy was floundering because of inadequate demand. Personal spending is flat for obvious reasons but the real culprit is the companies who are hoarding cash and refusing to invest.

Others have noticed the cash hoarding but explain it away by saying we live in uncertain times and companies will start investing again once they become more confident about the economic outlook. Smithers disagrees fundamentally with this. He says companies are not investing because executives are bonused to deliver short-term profits. Costly spending on investment projects is therefore anathema to them. Investment may deliver long-term prosperity but by that time they will have left the company. It also depresses short-term profits while they are still there.

We have in the last two decades, under the mantra of shareholder value and aligning the interests of management with shareholders, created a new breed of management incentivised to believe that what is good for them is good for the business. They dislike investment because it reduces their bonuses .

They don't invest surplus cash. They hoard it or they use it to buy back their own company's shares.

When the majority of the managements in publicly quoted companies start behaving this way, as they now do, we have a serious problem. They are sitting on cash which is the equivalent of six per cent of GDP. This deadweight of unused resources prevents lift-off and threatens to leave the economy forever trapped in the mire.

Smithers says this behaviour by management is a structural change — meaning it is something which won't go away. It makes this down- turn different from all that have gone before.

There is no reason to think that health care corporations are not hoarding money in the sense described above.  If so, they may be failing to invest in drugs or devices that would have helped patients in the future.

Because of the limited reporting required of large health care non-profit organizations in the US, it may be very hard to tell if they are similarly hoarding money, but if they are, the effects again might be to fail to provide patients long-term benefits they might otherwise have enjoyed.

The Ultimately Self-Destructive Outcome

Meanwhile, writing in the New York Times, Chrystia Freeland, the author of Plutocrats: the Rise of the New Global Super-Rich and the Fall of Everyone Else, explained why picking the wrong leaders  and paying them too much may be bad for everyone.  We have noted that an increasing fraction of the wealthiest one percent of the US are current and former corporate executives.  Ms Freeland wrote how domination by an increasingly wealthy and powerful elite usually dooms the countries they dominate.

what separates successful states from failed ones is whether their governing institutions are inclusive or extractive. Extractive states are controlled by ruling elites whose objective is to extract as much wealth as they can from the rest of society.

So

it is the danger America faces today, as the 1 percent pulls away from everyone else and pursues an economic, political and social agenda that will increase that gap even further — ultimately destroying the open system that made America rich and allowed its 1 percent to thrive in the first place.  

Furthermore,

It is no accident that in America today the gap between the very rich and everyone else is wider than at any time since the Gilded Age. Now, as then, the titans are seeking an even greater political voice to match their economic power. Now, as then, the inevitable danger is that they will confuse their own self-interest with the common good. The irony of the political rise of the plutocrats is that, like Venice’s oligarchs, they threaten the system that created them.

So it is not merely that overcompensating generic executives has likely been one of the major reasons our health care is so expensive, inaccessible, and mediocre.  The larger problem of overpaying under skilled executives threatens to destroy our whole society.  How cheerful

Summary

The way forward seems clear.  It is just blocked by the interests of the rich and powerful elite which our current foolish policies have created.

In a health care context, leaders of organizations should only be those with clear knowledge of, experience in, and commitment to the values of health care.  Their compensation should be reasonable, and based on their ability to uphold these values first, with financial goals clearly second, and short-term financial goals probably not at all.  Pay should not be bench-marked to compensation of leaders of other organizations, especially not of vastly different kinds of organizations.

Whether there is any chance of such changes happening while corporate boards of directors, and non-profit boards of trustees are dominated by executives of other organizations is doubtful.  Thus we also need to change the governance of for-profit health care corporations to clearly reflect the long-term interests of the stockholders, who will only prosper if in the long run their companies provide products and services that help patients at a fair price and with minimal risks.   Thus we further need to need to change the governance of health care non-profits to reflect the needs of patients, their communities and other key constituencies.  That should keep us all busy for a while. 
 

6:08 PM

The Rise of the Corporate Physician, and the "Metastasis of Big Corporations"

Public discussion has raised more questions over the last few months about physicians taking care of patients as corporate employees. 

More Physician Practices Taken over by Large Corporations

This year, more stories have appeared about large corporations taking over physician practices.  In February, there was an account of efforts by competing nominally non-profit health insurance company Highmark and nominally non-profit hospital system UPMC in Pittsburgh in a "race to gobble up private physician practices," per the Pittsburgh Tribune-Review.  In March, the Washington Post featured a first-person account of what it is like for a physician in a private practice to try to hold out against the trend towards corporate practice.  In May, the Los Angeles Times noted how for-profit dialysis provider Da Vita purchased a large, but already for-profit operator of physician groups.  In October, Reuters reported how the recently announced acquisition by giant for-profit insurance company UnitedHealth of the biggest Brazilian for-profit managed care company will result in UnitedHealth owning an operating a Brazilian network of hospitals and clinics.

Concerns about Concentration of Market Power and Prices

In an increasingly financialized country, the media has featured concerns that the trend towards corporate physician practice might result in increasing market power for a few large corporations, and hence increased prices.  For example, in August, Anna Wilde Matthews reporting for the Wall Street Journal, noted

 Hospitals say the acquisitions will make health care more efficient. But the phenomenon, in some cases, also is having another effect: higher prices. 

As physicians are subsumed into hospital systems, they can get paid for services at the systems' rates, which are typically more generous than what insurers pay independent doctors. What's more, some services that physicians previously performed at independent facilities, such as imaging scans, may start to be billed as hospital outpatient procedures, sometimes more than doubling the cost.
 
The result is that the same service, even sometimes provided in the same location, can cost more once a practice signs on with a hospital.

Major health insurers say a growing number of rate increases are tied to physician-practice acquisitions. 

As Ms Matthews also reported for the Wall Street Journal, state regulators are beginning to worry about acquisitions of doctors' practices by hospital systems may drive up prices.

California's attorney general has launched a broad investigation into whether growing consolidation among hospitals and doctor groups is pushing up the price of medical care, reflecting increasing scrutiny by antitrust regulators of medical-provider deals.

Concerns about Care Quality

Concerns about whether physicians who must practice under the command of corporate executives will be able to put patient care ahead of corporate interests are also appearing, but not yet as prominently.

For example, Steve Twedt, writing for the Pittsburg Post-Gazette in September, looked into whether the multiple practice acquisitions by the area's two biggest ostensibly non-profit health care corporations might affect patient care.  He first noted "competition between Highmark and UPMC for doctors, and health care overhaul that is steering doctors into larger systems...."  Then he suggested that this has lead to marked discontinuities in patient care when physicians switch employment,

Out of the blue, people will learn their doctor has left a practice with little or no explanation, and without a forwarding address. When a physician effectively disappears, the cause usually is tied to the physician's employment contract, says a local health care attorney.

These cases of apparently vanishing physicians may be due to the contracting practices of physician employers, particularly large health care corporations.  The lawyer Mr Twedt interviewed explained,

most physician contracts now contain clauses that prohibit doctors from soliciting patients if they leave a practice.

While it's not always clear what constitutes 'solicitation,' it generally means departing physicians cannot contact their patients to invite or entice patients to follow them to their new location. They also cannot take their patient list with them, since that is property of the practice.

'I would imagine the doctor wouldn't contact them because he can't, or he doesn't have their address,' said Mr. Cassidy.

Contracts also often require that doctors cannot practice medicine within 10 miles of the previous practice office, and sometimes the required distance is even greater. Nor can they give out information about the practice they're leaving. Violating these contract terms could mean a financial penalty, such as loss of severance pay.

Finally, and most troubling, cardiologist blogger Dr Melissa Walton-Shirley recounted in some much more colorful language some consequences of cardiology practices which were acquired by large hospital systems.  She noted...

 

Referral Decisions Influenced by Management Edicts, but Maybe Not Patients' Needs

 

Physicians may be

sweating bullets over whether they are going to hit their benchmarks to retain their salaries. My anxious friends are now calling me for more referrals and more practice support.  They take any transfer I give them....

They may

 morph from human flesh into a Rubik's cube of relative value units (RVUs), the formula through which all future salaries and bonuses are calculated.

Resulting Loss of Continuity

Independent cardiologists opened office doors to find their patients who were anticipating decisions on timing of defibrillators, caths, or medical therapy had undergone testing at other facilities. Those tests were interpreted by cardiologists who were in no way connected to their care, their referrals to unfamiliar testing venues now incentivized by hidden contractual microformulas. They were evaluated far away from the familiar eye of their long-time cardiologists.

Summary

Back in the day, most physicians who took direct care of patients did so out of practices they or other physicians ran and owned.  The majority of physicians who took care of physicians as employees worked for the military or the Veterans Administration, or took care of patients only part-time as faculty of medical schools.  In a country increasingly prodded by market fundamentalism, the last few years has seen a major change in health care:  more and more physicians are taking care of patients as employees of large corporations, more often for-profit.

 I should add, though, that the recent push towards corporate practice was not just due to market fundamentalism, but also seems to in part be due to provisions of the recent attempt at US health care reform, the Affordable Care Act, which called for care by large organizations called accountable care organizations (ACOs).   However, like some other major changes in health care in the US over the last few years pushed by the increasing dominance of large corporations, this one happened without any rigorous assessments of whether the benefits for individual patients or public health would outweigh the harms, and justify the costs. 

Justified by the realization, now mostly forgotten, that health care is nothing like an ideal free market (look here), direct health care used to be almost entirely provided by health care professionals, often working in small, non-profit community hospital settings.  In fact, the American Medical Association used to condemn the corporate practice of medicine.  In addition, the corporate practice of medicine used to be illegal in many US states (look here).

We have changed all that, without too much thought, and without any rigorous assessment.  Now it seems increasingly likely that these changes are just increasing health care costs, and probably will cause worsening patient care and will worsen patients' and the public's health. 

As Dr Melissa Walton-Shirley wrote more vividly,

Monopolies never meant to be planted in gardens so small grew like bull thistles, literally overtaking all the good things that small community medicine had to offer. They are now barely recognizable small towns with the crabgrasslike metastasis of big corporations....

Will there be time to rethink this headlong rush before our health care options are restricted to that provided by one of a few huge corporations?  

True health care reform would reverse the trend to organize health care within ever larger, more bureaucratic, more monolithic, more dominant organizations.  Such reform is unlikely to happen until we see the nadir produced by the current bandwagon. 

9:38 AM