"Conspiracy Theory" Proven - Taking UCSF Private

Students and faculty at the University of California have come up with a vivid, and prescient example of how the hired executives and bureaucrats have taken over higher and health care education. 

"Run in the Interests of the Administration"

Two weeks ago, the Orange County Register reported:

Over the past few months, the University of California has raised undergraduate tuition by 18 percent, awarded raises of as much as 23 percent to a dozen high-ranking administrators and announced a possible 81 percent tuition increase over the next three years.

Students haven't taken the news well.

At campus rallies across the state, thousands of students and their faculty supporters have decried the actions, staging raucous rallies and 'Occupy'-style sit-ins that in some cases have ended in clashes with law enforcement. They've also descended en masse on UC regents' meetings, disrupting proceedings and even forcing officials to retreat to a private room.

Behind the angry chanting and acts of civil disobedience is a growing sense that the 10-campus UC system is no longer a public institution accessible to the middle class, but rather a sprawling bureaucracy of hospitals and auxiliary research institutions buffeted by an ever-expanding roster of administrators.

The problem, as the student activists see it, is that none of these functions translates directly into expanded course offerings or improved student-to-faculty ratios, even as their tuition dollars help sustain the system.

'The university is now being run in the interest of the administration,' said UC Irvine student activist Anne Kelly, a Ph.D. candidate in earth system science. 'They're promoting their own internal growth, asking us to sacrifice with higher tuition – but administrators have had raises.'

In higher education, as well as in health care education and in health care in general, the pattern is the same: rising costs without any obvious increase in quality or quantity of services. As in health care, however, the pain never seems to extend to administrators/ managers/ bureaucrats/ executives. Worse, as their numbers grow, these insiders seem to run organizations more for their own benefit, and less for the mission.

One Manager Per Faculty Member

Furthermore, UC faculty have data:

The students' growing frustration is fueled by UC employment data that show that almost three-fourths of UC's 152,500 employees last year were designated 'non-academic personnel,' according to an annual UC employment report.

In the report, UC characterizes the growth in its non-academic staff as the inevitable byproduct of 'an increasingly complex university system that 'requires greater professionalization of its staff, who must meet higher technical and competency standards.' Non-academic personnel includes everyone from custodians and food-service workers to accountants and plant operators. [The question begged is whether it was the managers and executives that caused this complexity - Ed.]

UC Davis horticulture researcher Richard Evans, who has independently analyzed UC personnel data, offered a different take on the data, publishing a tongue-in-cheek piece for UC faculty in 2010 entitled 'Soon every faculty member will have a personal senior manager: Is this a good way to spend money?'

'Data available from the UC Office of the President shows that there were 2.5 faculty members for each senior manager in the UC system in 1993,' Evans wrote in his piece. 'Now there are as many senior managers as faculty. Just think: Each professor could have his or her personal senior manager.'

In his analysis, Evans compared the number of UC employees classified as either 'senior management' or 'managers and senior professionals' with the number of tenure-track UC faculty members.

As of spring 2011, UC employed 8,144 senior managers, managers and senior professionals, and 8,521 tenure-track faculty members, according to the latest available UC data.

This pattern is similar to that seen in some data we discussed a long time ago about the ever rising numbers of administrators/ managers/ bureaucrats/ executives in health care.  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). Health care went from being controlled by clinicians to controlled by a growing volume of managers.  Most of these managers were generic, in that they had little if any knowledge of, experience in, or sympathy to the values of health care. These generic managers have used the same techniques advocated for the management of supermarkets or automobile manufacturers to manage health care organizations, despite all the obvious differences in context, goals, values, and people involved.

A "Conspiracy Theory" About the Privatization of the University

At the University of California, the Register reported that there is a "conspiracy theory" about the next step to increase the domination of the managers:

The salaries and size of UC's administrative staff, in particular, have fueled conspiracy theories among students and faculty that the system has deliberately sought to 'privatize' itself – in other words, to compete with private universities on all fronts, from the scope of its non-instructional programs to executive compensation to the amount of tuition that students pay.

Three years ago, the head of a UC faculty group advanced the privatization theory in a multi-part series called 'They Pledged Your Tuition.'

Of course, the administrators denied, sort of, anything so far-fetched:

For its part, UC denies all such allegations, saying that while the university has arguably become privatized, outside influences beyond its control are entirely to blame.

"It is not something we advocate, not something we want,' Klein said. But, 'he added, 'times have changed; the economic model has changed.'

Not Just a "Conspiracy Theory" - UCSF Chancellor Advocates Privatization

It only took two weeks, however, for the notion of administrators taking the university private to go from "conspiracy theory" to official plan. Yesterday, the San Francisco Chronicle reported,

UCSF Chancellor Susan Desmond-Hellmann told the regents, delicately, that she wants out.

Under her proposal, UCSF's medical school, hospital, clinics and research facilities would remain a public university connected to UC, the chancellor assured the regents. But the tendrils connecting the two entities should be thinner than they are today.

Desmond-Hellmann said she envisions a relationship like those of UC Hastings College of the Law, Lawrence Livermore National Laboratory and Lawrence Berkeley National Laboratory, which contract with UC for health and pension services. While ultimately accountable to the regents, they are autonomous with their own boards of directors.

Referring to 'alternative governance models' and 'examining UCSF's financial relationship with UC,' the chancellor and campus executives talked of their ambition to become the world's leading innovator in the health field - a goal better achieved, they hinted, without the rest of the university weighing it down.

To Health Care Renewal readers, that UCSF would be proposed as the first part of the University of California to privatize should not come as a shock. After all, Chancellor Desmond Hellmann came not from academia, but from the world of for-profit biotechnology. She was a former president for drug development for Genentech.

Two and one half years ago I suggested that "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." Furthermore, three months ago I noted that Dr Desmond Hellmann seemed be advocating that the university's focus turn to product development, so that it would start to emulate a contract research organization. Now it appears that Dr Desmond Hellmann wants to traverse the line between government and the private sector, so that the organization could "make a ton of money," and "focus on spinning innovations into business deals," according to the San Francisco Chronicle.

What any of this has to do with the university's fundamental mission to discover and disseminate knowledge, and with this health care university's mission to take the best possible care of its patients is not clear.

Summary

Turning UCSF into a private, quasi contract research organization might conceivably yield some good research and drug development. Why a formerly academic organization would be better at this than a purpose-built CRO is hardly proven. Whether UCSF recast as a CRO would yield better research, leading to better patient outcomes than would have resulted if it continued as a state government sponsored health care university is also hardly proven.

Turning UCSF into a quasi CRO, however, would likely be very much in the self-interest of its administrators/ managers/ bureaucrats/ executives who would be freed from any constraints on their incomes, and the disclosure of same that were previously obligated by the messy representative democracy to which they formerly had to answer.

On the other hand, it is hard to conceive of how such a privatization would be good for students or patients. In fact, it is not the least bit clear why a medical, nursing, or other health professional student would want to study within what would basically be a contract research organization. It is also unclear whether patients seeking care from such an organization could trust it to put their interests, rather than the organization's revenue and the self-interest of its administrators/ managers/ bureaucrats/ executives first.

We are now a good 30+ years into our ill-fated American experiment about the effects of turning medicine commercial and making health care a commodity. So far, it has yielded the highest costs in the world, but declining access, mediocre quality, and demoralized professionals. Turning one of our once proud and  prestigious state government sponsored academic medical institutions into a private contract research organization would be a powerful symbol of our final national health care decline.

Let us hope that the students and faculty whose "conspiracy theory" about privatization proved true will now mount a more effective protest before UCSF falls into the muck.

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Hospital Executives - What Will They Think of Next?

Health care organizations are now most often run by people with management, not clinical backgrounds.  It seems like business schools have taught managers to sign on to whatever the latest management fashions are.  So what are the latest fashions in hospital management?  Here are a few hot items.

Retreading Pharmaceutical Representatives

My jaundiced reading of the business news suggests that most executives think that marketing is the most important part of their organizations, and that clever marketing can sell any product or service. For example, the pharmaceutical industry spends about twice as much on marketing as it does on research and development (despite pharma executives' protestations that they run research driven businesses) (see this post). So it should be no surprise that now hospitals are using "hospital representatives" to market referrals to their institutions to doctors.

From last week's USA Today:

n northwest Indiana, Carrie Sota visits five or six doctors' offices every workday as part of her new sales job.

But Sota isn't selling the physicians on a prescription drug or a medical device. She's promoting her hospital — the University of Chicago Medical Center.

Sota, 30, is one of four employees the academic medical center has hired in recent months to make 'sales calls' on physicians in the hope that they will send more patients to the hospital. 'We are trying to build meaningful relationships,' said Sota, who was previously a saleswoman for a small medical device company.

The University of Chicago Medical Center is one of a growing number of hospitals nationwide hiring former drug and device sales reps to visit doctors' offices to persuade them to use their services over competing facilities.

Rather than handing out samples of prescription drugs, the sales reps call on doctors armed with the latest information on how their facility is reducing hospital-acquired infections and improving patient-satisfaction scores.

In visits that can last five to 20 minutes, reps try to win doctors' loyalty by helping them get better times on operating room schedules or easier patient referrals to hospital-based specialists. The sales reps can also carry messages back to the hospital, such as a doctor's request for a new medical device to be available in surgery.

The article suggested a few problems with this approach. First, the point of the marketing is not to improve the match between patients' needs and the services the hospital provides. Rather, it is to generate referrals that have the potential to provide the maximum revenue:

While hospitals have always tried to woo doctors to refer patients to them, the institutions are growing more direct in their efforts. The hospitals mine data to see which doctors have the most profitable, well-insured patients, and then they assign those doctors to a sales rep.

So in particular,

Many of the physician liaisons focus on specialists, who bring in patients for services with the highest profit margins, including orthopedics, cardiac care and cancer care, [Duke University Health System physician liaison manager Christine] Perry said.

Second, the hospital reps have incentives based on revenue, not on value to the patient:

About two-thirds of Tenet's liaisons are former drug and device sales reps, and they can make tens of thousands of dollars in bonuses if doctors increase their referrals to the hospitals.

Third, across the system, the revenues generated may be much less than the costs incurred, since most of the marketing will only succeed in moving patients from one hospital to another:

Paul Ginsburg, president of the non-partisan Center for Studying Health System Change, said, 'When you look at the health system, this is a waste of resources. It's a zero-sum game.'

He added: 'The net results of changing physician-referral patterns is that one hospital gains at a cost of others, and all the hospitals burn resources to pay (sales)people who take up the doctor's time.'

Of course, the reps could succeed in persuading doctors to refer patients to specific hospitals for services the doctors originally did not think the patients needed. That would be good were the patients to need those services, but bad if they were not.
Fourth, we have discussed (for example, here and here) how pharmaceutical representatives use sophisticated psychological and emotional manipulation, despite claims that all they do is provide unbiased information and educational, to influence physicians to prescribe drugs. Again, this may result in patients getting drugs whose benefits do not outweigh their harms. It is possible that hospital representatives will do something similar:

'These people are really good and really assertive and very sophisticated,' said Stephen Newman, Tenet's chief operating officer.

Unbundling Payments

The airlines decided a while ago that they could make more money by charging passengers for each checked bag, and even for those little meals on plastic trays. It looks like hospital executives have discovered a new way to unbundle.

As reported last month by the St Louis Post-Dispatch, hospitals have begun charging often hefty "facility fees" for patients seen as outpatients in hospital clinics or hospital owned practices, even for very minor procedures or just office visits, and even for Medicare patients. (Private physicians who see patients in their own offices cannot charge such fees to Medicare patients, and most private insurance companies will not cover such fees.):

A few weeks after Allison Zaromb took her 4-year-old son Meir to see a dermatologist in an outpatient office at the SSM Cardinal Glennon Children's Medical Center campus, she received separate bills from the doctor and the hospital.

The cost for a 3-minute procedure to treat Meir's warts totaled $538, which included a $220 bill for physician services - and a separate bill for a $318 hospital 'facility fee.'

Zaromb, a periodontist who lives in University City, is now suing SSM Health Care Corp. and Cardinal Glennon Children's Medical Center in a proposed class action lawsuit on behalf of other patients

More generally,

With the proliferation of hospital-owned outpatient centers and hospital-owned physician practices, hospital 'facility fees' have become increasingly common. Such hospital facility fees often involve greater dollar amounts than the fees charged by physicians.

Technically, it all appears to be legal:

Under federal regulations, health systems are permitted to charge a hospital facility fee for an outpatient service if it's done in a clinic that is 'hospital-based' - meaning that the clinic is owned and operated as part of a hospital or health system, regardless of whether the clinic is physically located on the hospital grounds.

This technique does seem to be a way to increase revenue. But one person's revenue is another person's cost, so it also seems to be a great way to further increase the already high cost of US health care. It is not obvious, however, that these increased costs will lead to increased quality of care or value for the patient:

'From a consumer's perspective, when you go see your doctor, you go see your doctor - whether it's in an office inside a larger hospital complex or right across the street,' [Zaromb's lawyer John] Phillips said. 'The doctor's practice remains the same. ... They're making the doctor's office a ‘hospital-based' clinic for one reason: to make money by charging a facility fee, not to improve consumer service.'

Negotiating the Costs of Medical Devices

One of the favorite topics on Health Care Renewal, at least before we found even more outrageous subjects, was the stratospheric cost of medical devices. For example, look at posts from 2005 here, here, here, and here. So last month we found out that hospital executives have come up with a revolutionary idea to combat the high cost of devices. They will actually try to see what prices the device companies charge other hospitals, and then negotiate the prices down, as Reuters reported as big news in late November:

Implantable devices make up a sizable chunk of typical hospital budgets, and administrators are devising new ways to limit that cost as they brace for cuts to government reimbursement and treat more patients who can't pay for care.

That means methodically working through each category of device, from heart valve replacements and stents to spinal products, to see where they can negotiate lower prices. It also means creating databases of shared information on pricing between hospitals.

Imagine that! Of course, the notion that buyers ought to bargain with sellers to get the best price goes back a few years. However, only in 2011 did it apparently occur to hospital executives that they ought to negotiate the prices of one their most expensive purchases. This suggests that there has been something profoundly wrong with the basic assumptions underlying the commonly accepted wisdom that making the health care system more of a market will lead to more financially efficient care. 

Summary

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). Health care went from being controlled by clinicians to controlled by a growing volume of managers.  Most of these managers were generic, in that they had little if any knowledge of, experience in, or sympathy to the values of health care. These generic managers have used the same techniques advocated for the management of supermarkets or automobile manufacturers to manage health care organizations, despite all the obvious differences in context, goals, values, and people involved.

So these generic managers have brought us such "innovations" as the "hospital (marketing) representative," and the "facility fee" for outpatient visits, but only thought to negotiate device prices in 2011. But that is why we pay them the big bucks.

How many more arguments do we need that health care organizations ought to be lead by people who understand the health care context, share its core values, and are accountable for how these organizations affect patients' and the public's health?

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John Wiley and Sons Director Apologizes for Pepper Spray - An Example of the Proximity of the One Percent to the Leaders of Academic Medicine

The title of this post has not been hacked.  All will be revealed soon.

Review: the University of California - Davis Pepper Spray Incident

We just discussed the now infamous pepper spraying of peaceful student protesters at the University of California.  We noted our previous concerns about the leadership of the university Chancellor who presided over this incident because she had previously seemed disconnected from the prime mission of the university (but instead pushed its role as a developer and marketer of biotechnology) (see this post), and defended the nearly one million dollar compensation for the medical center CEO at a time when the university's finances became increasingly fragile (see this post).

Since then, the Chancellor, Linda P B Katehi, vaguely apologized for the incident at a student rally where many speakers called for her resignation (see, for example, this story in the San Francisco Chronicle).

A University Chancellor in Proximity to the One Percent as Director of John Wiley and Sons

There is a certain irony to all this.  While the overriding theme of the "occupy" movement has been to advocate for the "99 percent" of Americans who feel increasingly powerless, the original protest at UC-Davis was not so much against the plutocratic one percent, as against "tuition increases and state cuts in higher education," (per the Chronicle)   Yet the person who is now at the focus of the Occupy UC-Davis group's wrath is closer to the one percent than most protesters realized.

A quick search on Google revealed that Chancellor Katehi started a new part time job in 2011.  She is now a member of the board of directors of John Wiley and Sons, Inc, a $2.8 billion market market capitalization "global  publisher of print and electronic products."  Note that this position on not listed on her official bio on the UC - Davis web-site as of 23 November, 2011, nor on her official curriculum vita (from 2010) available on that web-site. 

As a board member, she can expect over $100,000 yearly as compensation, based on fees paid in 2010 reported in the 2011 company proxy statement.  Since last year, the board approved compensation for the five highest paid executives ranging from over $1.8 million to over $5.3 million.  So a position on the board certainly put Ms Katehi in the proximity of the one percent.

Furthermore, as we have noted previously, compliant, if not crony board members have been blamed for the huge increase in the compensation of top corporate executives who now make up the majority of the "one percent."  Since most board members seem to be current or retired high-ranking executives, their enthusiasm for raising their fellow hired executives' compensation should not be surprising.  Note that Ms Katehi is effectively the "CEO" of UC- Davis.

A Conflict of Interest

In some cases, board members' disinclination to challenge the executives they are supposed to be supervising may arise from conflicts of interest.  Note regarding the current example that John Wiley and Sons is a leading publisher of text books and professional journals in medicine, the life sciences, and many other subjects relevant to the curriculum of many of the schools and departments at UC-Davis, and particularly to the medical school and academic medical center.  More importantly, as we noted here, John Wiley and Sons' Wiley-Blackwell subsidiary includes a medical education and communications unit. 

On its website, this entity promises:

Our Global Corporate Sales Team of more than 100 people is dedicated to serving the publishing and communication needs of your industry. Through our extensive range of clinical and professional publications, we can develop a customized communications plan to support your promotional strategy, maximizing the impact of your brand.

Whether you are looking for global or localized campaigns, for strategic or tactical support, our publishing teams are knowledgeable at all levels and are easy to reach in your time zone by phone, email or in person.

We provide an expert service, competitive pricing, dedicated project management and the flexibility to provide peer-reviewed support for your brand from pre-launch to maturity, achieving strong credibility.

Among the services provided are "continuing professional development," including "conferences and training schemes," and establishing "advisory boards to provide direction on issues surrounding new products or developing brands. We draw on our close relationships with industry leaders...." Thus, like other medical education and communication companies (MECCs), this subsidiary can use a variety of tactics to infiltrate marketing messages into what appears to be medical education. 

By accepting a position on the board of directors of an academic and medical publisher that also runs a MECC, Ms Katehi has taken on fiduciary responsibility for the company, and thus seems to have a potentially intense conflict of interest, particularly affecting her leadership of a medical school and academic medical center (see our first discussion of what then appeared to be a "new species" of conflict of interest due to academic medical leaders' membership on a board of a health care corporation here.) 

Summary

I can only speculate that proximity to the one per cent, and the conflict of interest induced by fiduciary responsibility for the stewardship of an academic and medical publisher and a medical education and communication company might have left Ms Katehi feeling distant from protesters who claimed "we are the 99 per cent," and hence more inclined to support clearing them from the campus by whatever means.

In any case, it turns out that Occupy UC -Davis took on a more appropriate opponent than they realized. 

This case illustrates how the complex web of relationships among the top leaders of society, including leaders of health acre organizations, is more sticky and pervasive than was heretofore apparent. 

In any case, it underlines our repeated call....  To reform health care, we must reverse the managers' coup d'etat, and restore leadership of health care organizations that puts the mission, and the health of patients and the population first, and is accountable to corporate owners (when applicable) and to patients and the public.  But that will mean now going up against those who have made themselves the richest and most powerful people in the country and the world, who will not lightly give up their oligarchy.

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CEO Compensation: Nothing to See Here, Just Move Along

An article in the Washington Post showed how uncomfortable executives of big corporations, including health corporations, are about making their outsize compensation transparent. 

Here’s one financial figure some big U.S. companies would rather keep secret: how much more their chief executive makes than the typical worker.

Now a group backed by 81 major companies — including McDonald’s, Lowe’s, General Dynamics, American Airlines, IBM and General Mills — is lobbying against new rules that would force disclosure of that comparison.

The lobbying effort began more than a year ago. It involved some of the biggest names in corporate America and meetings with members of both parties on the House Financial Services Committee and Senate banking committee.

The companies and their Republican allies in Congress call comparisons between the chief and everyone else in the company 'useless.'

It's not just useless, they also claimed:

Disclosing such comparisons 'can mislead or confuse investors,' said Rep. Nan A.S. Hayworth (R-N.Y.), who filed the bill to repeal the disclosure. 'It creates heat but sheds no light.'

She also said the calculation of the ratio would be a burden for companies, especially those with global operations.

One apparent reason for their discomfort is that the pay of top hired executives has been skyrocketing while the pay of most other employees stagnates:

'The real reason House Republicans want to keep the typical worker’s pay secret is that it may embarrass some companies to reveal that they pay their CEO in the range of 400 times what they pay their typical worker,' said Sen. Robert Menendez (D-N.J.), who added the requirement to the financial regulatory overhaul bill that passed last year.

Executive compensation at the nation’s largest firms has more than quadrupled in real terms since the 1970s, according to research by Carola Frydman of MIT’s Sloan School of Management and Raven E. Molloy of the Federal Reserve, even as pay for 90 percent of American earners has stalled.

In 1970, average executive pay at the nation’s top companies was 28 times the average worker income, according to the Frydman-Molloy data and numbers provided by Emmanuel Saez at the University of California at Berkeley. By 2005, executive pay had jumped to 158 times that of the average worker.

Behind the repeal effort are some of the largest US companies:

The Center on Executive Compensation has led the criticism of the provision. The group is part of the HR Policy Association, which represents the human resources executives at 325 large companies.

The thrust of the group’s criticism is that the information would have little value for investors comparing firms, because companies have workforces that differ in skills and expected pay. Wages also vary across regions and industries.

Current rules already require disclosure of executive compensation; the new requirement calls for the additional disclosure of median worker pay. Critics say that would add little to what is already known.

'You can already tell where a CEO falls relative to his peers,' said Tim Bartl, senior vice president and general counsel for the Center on Executive Compensation. 'You can already tell where he falls relative to the average worker in the industry. What is this number going to tell us?'

Last year, the HR Policy Association paid Bartl’s law firm, McGuiness & Yager, more than $1.5 million for lobbying, according to OpenSecrets.org.

The HR Policy Association's board of directors includes executives from some of the biggest health care corporations, including pharmaceutical and device firms (Amgen, Johnson and Johnson, and Merck), commercial health insurance companies and managed care organizations (Aetna, CIGNA, and Humana), and other firms with major health care interests (General Electric, Procter and Gamble).

Note that Mr Bartl's concession that calculation of the ratio would be simple seemed to contradict Rep Hayworth's claim that the calculation would be burdensome.

Summary

It certainly appears that top hired managers of big corporations are not happy about the common people seeing how huge their pay is compared to that of other workers. They seem particularly unhappy to have their own stockholders, the common people who actually own their companies and to whom they theoretically report see how much they are making. Perhaps they fear the realization that they may be running their companies more for their personal advantage than in the interests of their supposed owners, much less the other, lesser employees, much less their customers, clients and patients, much less the public at large.

The ability of small cabals of top executives at big corporations to set their own pay independent of the wishes and interests of the corporations' owners would seem to be the fundamental threat to the capitalistic and free market ideal. After all, in my humble and perhaps naive opinion, private ownership is central to capitalism, and the apparent managers' coup d'etat seems to be a existential challenge to private ownership. (For much more informed commentary on how executives have wrested control from owners, see the blog Naked Capitalism and Robert A G Monks' website.) One wonders why so few of the many vocal supposed supporters of capitalism and free markets fail to see this as a problem.

Even though it is increasingly informative to see what has happened to health care within the context of the larger political economy, Health Care Renewal, however, is about health care issues first. So to put this in health care terms....

First, we see again how top leaders of health care organizations prefer opacity to transparency, especially when that opacity increases their ability to put self-enrichment ahead of their organizations' missions and ultimately individuals' and the public's health. They embrace opacity when it protects the perverse incentives that likely are the major cause of increasing health care costs, declining access, and worsening quality.

To repeat, and repeat, and repeat.... to reform health care, we must reverse the managers' coup d'etat, and restore leadership of health care organizations that puts the mission, and the health of patients and the population first, and is accountable to corporate owners (when applicable) and to patients and the public.  But that will mean now going up against those who have made themselves the richest and most powerful people in the country and the world, who will not lightly give up their oligarchy.

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The Managers' Coup: How the "Hired Hands" Got "Paychecks as Big as Tajikistan"

We have frequently discussed the perverse incentives provided to the leaders of health care organizations.  They almost never pay a penalty for presiding over organizational actions that are unethical, harmful to patients, or even criminal (e.g., see posts here and here for some very recent examples.)  However, they often collect outrageously huge compensation disproportionate to any reasonable measure of their organizations' performance.  (e.g., see posts here and here for relevant recent examples.)

Now two news articles, based in turn on research studies, further illuminate how hired managers and executives have become so wealthy and unaccountable.

The first news article was in the New York Times, and was in turn based on an accounting study.  In summary,

a recent, immensely detailed report in The Analyst’s Accounting Observer, a publication of R. G. Associates, an independent research firm in Baltimore. Jack Ciesielski, the firm’s president, and his colleague Melissa Herboldsheimer have examined proxy statements and financial filings for the companies in the Standard & Poor’s 500-stock index. In a report titled 'S.& P. 500 Executive Pay: Bigger Than ...Whatever You Think It Is,' they compare senior executives’ pay with other corporate costs and measures.

Here are some of the major comparisons the report makes:

- Paid More than the GDP of Tajikistan

Total executive pay increased by 13.9 percent in 2010 among the 483 companies where data was available for the analysis. The total pay for those companies’ 2,591 named executives, before taxes, was $14.3 billion.

That’s some pile of pay, right? But Mr. Ciesielski puts it into perspective by noting that the total is almost equal to the gross domestic product of Tajikistan, which has a population of more than 7 million.

Again, note that all comparisons below refer only to these 2591 most highly paid executives of 483 companies, not all the companies' executives.

- Paid More than Audit Expenses

158 companies paid more in cash compensation to their top guys and gals last year than they paid in audit fees to their accounting firms.

- Paid More than Income Taxes

Thirty-two companies paid their top executives more in 2010 than they paid in cash income taxes.

- Pay Rises While Stock Prices Fall

The report calculated that at 179 companies in the study, the average value of stockholders’ stakes fell between 2008 and 2010 while the top executives at those companies received raises.

- Paid a Substantial Fraction of Total Operating Revenue

It identified 24 companies where cash compensation last year amounted to 2 percent or more of the company’s net income from continuing operations.

The article used a health care example to illustrate this one:

Topping this list is Allergan Inc., the health care concern whose top executives received, after taxes, an estimated $2.6 million in salaries last year. That amounted to 50 percent of what the company earned from continuing operations, the report said.

Further details made this a particularly telling example of perverse incentives given to executives:

Caroline Van Hove, an Allergan spokeswoman, said that the salaries were large when compared with net income in 2010 because one-time charges reduced earnings significantly that year; in previous years, she noted, earnings were far higher than executives’ pay. She also said the company’s C.E.O. had not received an increase in salary over the past three years.

Parenthetically, some of the charges that affected Allergan's earnings were clearly due to a $375 million fine after a guilty plea to a federal misbranding charge and $225 million related civil penalties the company paid in 2010. As we noted in this post, the US Department of Justice alleged that Allergan paid kickbacks to promote a drug for unapproved uses. Thus, what cost the company a major piece of its revenues were costs related to unethical behavior including one federal misdemeanor, and allegedly paying kickbacks to doctors to promote a drug for unapproved uses. However, while this behavior caused a marked drop in earnings, the research above showed the impunity of the executives who presided over this behavior, whose compensation held steady or rose.

- Paid a Substantial Proportion of Research and Development Expenses

Moving on to R.& D. costs, the report examined the 62 technology companies in its sampling that reported such an expense, excluding certain costs associated with acquisitions.

Mr. Ciesielski found that the median level of executive pay was equal to 5.3 percent of these companies’ R.& D. expenditures.

- Pay Equal to a Substantial Proportion of Market Capitalization

Finally, there’s the comparison of executive pay with market capitalization. As Mr. Ciesielski noted, this calculation provides the biggest shock value.

Eleven companies analyzed in the report gave top executives a combined pay package amounting to 1 percent or more of the companies’ average market value over the course of the year.

To put it a different way, for a few corporations, the pay of the top five executives was equal to at least one percent of the total value of the corporations as measured by the value of all stock shares outstanding.

In summary, the R. G. Associates' report suggests that the salaried executives, who the NY Times article reminded us are "hired hands," were generally paid amounts that seemed outrageously disproportionate to every metric used.

Furthermore, a second article in the Washington Post provided an even more astonishing comparison.

- Paid Enough to Become a Majority of the Richest Americans

The largest single chunk of the highest-income earners, it turns out, are executives and other managers in firms, according to a landmark analysis of tax returns by economists Jon Bakija, Adam Cole and Bradley T. Heim. These are not just executives from Wall Street, either, but from companies in even relatively mundane fields such as the milk business.

The top 0.1 percent of earners make about $1.7 million or more, including capital gains. Of those, 41 percent were executives, managers and supervisors at non-financial companies, according to the analysis, with nearly half of them deriving most of their income from their ownership in privately-held firms. An additional 18 percent were managers at financial firms or financial professionals at any sort of firm. In all, nearly 60 percent fell into one of those two categories.

Summary
So now it appears that the disproportionate compensation given to hired executives of large corporations, including health care corporations, have made them the majority of the very rich.  Most of the very rich are thus hired corporate employees, not company owners, not entrepreneurs, not even those who inherited wealth, or who are sports stars or rock musicians. This transformation of the face of the very wealthy has occurred at a time when the other employees of those corporations have generally stagnant incomes, and when those who have invested in those corporations, including many in the middle-class who have invested their retirement savings, have barely made money.

So it turns out that in large corporations, including large health care corporations, it has become all about the top bosses.  The top bosses are likely to be paid enough to make them some of the richest US citizens.  Their pay likely comes off the top, so it has priority over profits and stock-holders gains, much less the pay of the lesser employees. 

So it is clear that hired executives of large corporations have engineered perverse incentives for themselves that means never having to say they're sorry, never having to be accountable for anything the company does wrong.  Hence, there should be no mystery why US health care is the most expensive in the world, and despite its expense, is not very accessible and not of good quality.  The main culprit is a peculiar perversion of laissez faire capitalism in which the top managers have staged a coup, and have become the new oligarchs and plutocrats, and thus put their interests ahead of all others. 

So to reform health care, we must reverse the managers' coup d'etat, and restore leadership of health care organizations that puts the mission, and the health of patients and the population first, and is accountable to corporate owners (when applicable) and to patients and the public.  But that will mean now going up against those who have made themselves the richest and most powerful people in the country and the world, who will not lightly give up their oligarchy.

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