Rendering Unto Caesar - What the Abramson Family Cancer Research Institute vs Thompson Says About the Loss of the Academic Medical Mission

A case, reported by the New York Times as involving an intellectual property dispute, should create a lot of cognitive dissonance about the state of the academic medical mission.

Litigation Involving the Abramson Family Cancer Research Institute and Dr Craig B Thompson

Here is how the Times outlined the story:

The president of Memorial Sloan-Kettering Cancer Center in New York is in a billion-dollar dispute with his former workplace, a cancer institute at the University of Pennsylvania, over accusations that he walked away with groundbreaking research and used it to help start a valuable biotechnology company.

In a lawsuit, the Leonard and Madlyn Abramson Family Cancer Research Institute at Penn described its former scientific director, Dr. Craig B. Thompson, as 'an unscrupulous doctor' who 'chose to abscond with the fruits of the Abramson largess.'

In particular,

In the suit, the Abramson cancer institute, which has received more than $100 million from the philanthropist Leonard Abramson and his family, says that Dr. Thompson concealed his role in starting Agios, which has attracted investors with a potentially new way to treat cancer. The institute says Dr. Thompson’s actions deprived it of proceeds that could support future research, causing it damages that could exceed $1 billion.

So presumably the Abramson Institute is alleging that Thompson took its intellectual property and put it into Agios, and the Institute therefore wants compensation. Note that the Institute does not appear to be alleging either that Thompson was supposed to be its employee, but actually was working for Agios at the time he was supposed to be working for the institute; or that Thompson hid a a conflict of interest created by his financial relationship with Agios that could have affected how he fulfilled his professional responsibilities there.

Note further that certain other parties declared that they are not part of this dispute. These included Dr Thompson's current employer:

Sloan-Kettering declined to comment, saying it was not a party to the lawsuit....

These also included the University of Pennsylvania:

Susan E. Phillips, senior vice president for Penn Medicine, said that the suit had been filed not by the university but by the research institute, a separate entity. She said the university was investigating the accusations.

The nature of this dispute ought to generate several kinds of cognitive dissonance.

Protecting Intellectual Property vs Upholding the Academic Mission at the University of Pennsylvania

On one of its web pages, the Abramson Family Cancer Research Institute describes its history:

The Abramson Cancer center of the University of Pennsylvania provides each patient with exemplary care though a comprehensive team approach, personalized service, education and outreach, and nationally recognized cancer research programs.

The web page describes the institute as simply part of the larger University of Pennsylvania cancer center, which came to be named for the Abramson family:

Penn's Cancer Center was renamed in 2002 as the Abramson Cancer Center of the University of Pennsylvania, recognizing the Abramson family's $100 million commitment to support comprehensive cancer research and care.

Thus it seems that the Abramson institute is simply a piece of a traditional academic medical center.

The academic mission is traditionally described as the creation and teaching of knowledge. Thus, if an academic institution creates new knowledge, its should then disseminate it, not own it. Of course, in the US, since the Bayh-Dole act was passed, academic institutions were given the ability to patent their discoveries, and began to protect and sequester the knowledge they contained, rather than disseminating it.

In this case, however, one part of a large university and a large academic medical center seems to be concentrating entirely on its right of ownership of intellectual property, not the traditional academic mission. The fact that this dispute has lead to litigation suggests that the academic organization is now intent on protecting, rather than disseminating knowledge. The dispute appears to be between a commercial research company and its allegedly errant former hired manager.

The Abramson Institute: Part or Independent of the Academic Medical Center?  

A little more digging suggests that the nature of the Abramson institute is not as clear as is described in its web-page. A GuideStar search revealed that the institute is actually legally independent from the university. It filed its own 990 form (latest version, covering 2009-2010, here.)

The filing did list various entities, including the Clinical Care Associates of the University of Pennsylvania Health System, and the Trustees of the University of Pennsylvania as "related tax-exempt organizations."

However, this filing should create cognitive dissonance about what the underlying nature of the Institute? Is it part of the University of Pennsylvania and its medical center, or is independent but cooperating?

This dissonance is only enhanced by the ambiguous response of the University of Pennsylvania to the lawsuit. If the Institute is part of the University, then the University ought to be party to the lawsuit, it would seem.

This filing with the US government did underline the Institute's commitment to disseminating research. A description of its tax "exempt purposes" included:

Education - scientists at the Institute actively share their discoveries with the research community, physicians, and students.

As above, this statement of purpose appears not to fit with the filing of a lawsuit to obtain damages due to the alleged taking of intellectual property. If this really were the Institute's mission, would not they want the intellectual property liberated so it could be actively shared? The cognitive dissonance about the mission of the Institute and of the University versus the protection and sequestration of intellectual property is thus increased.

Upholding the Academic Mission vs Staying Uninvolved at Memorial Sloan-Kettering Cancer Center

As an aside, note that Dr Thompson is now not just working for Agios. In fact, he has been President of the Memorial Sloan-Kettering Cancer Center since 2010 (look here). Just like the Abramson Cancer Center, Sloan-Kettering is an academic medical center with the traditional mission of teaching, research, and patient care. Here is its mission statement:

As one of the world's premier cancer centers, Memorial Sloan-Kettering Cancer Center is committed to exceptional patient care, leading-edge research, and superb educational programs.

So one would think that people there ought to be concerned by allegations that its current president took intellectual property without authorization, and that he is "an unscrupulous doctor." If these allegations were to be proven false, they seemingly would represent a major, unwarranted slur on its and his reputation. If they were to be proven true, they would indicate that current leadership might not have the character to uphold the mission. Either outcome would be serious and have serious implications. However, at the moment, this noted academic medical institution has expressed neither outrage about possibly false accusations nor resolve to investigate the matter and then weed out any leaders not devoted to the mission.

Thus, the apparent intention of the leadership of Memorial Sloan-Kettering to stay uninvolved with this case ought to generate more cognitive dissonance.


Summary

The cognitive dissonances evoked by the case of the Abramson Institute vs Dr Thompson ought to inspire questions about what our academic medical institutions have become.  While they proclaim their devotion to research and teaching to improve health and health care, and advance science, they may increasingly act like commercial research organizations whose main goal is to generate increased revenue from products and services, and in this case, from intellectual property. 

It is hard to see how this emphasis on holding onto rather than disseminating new knowledge will be good in the long run for science, learning, or patient care.

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.  Squabbling among top researchers and leading academic medical institutions over the ownership of intellectual property for the sake of revenue, not dissemination, is the latest symbol of the decline of our health care.

I can only hope that all the parties involved suddenly remember that they are supposed to be creating and disseminating knowledge, not just getting rich. 

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Just Business - Employee Control Fraud, Gresham's Dynamic, and the Race to the Bottom in Health Care

Since Enthoven called for the break up of the physicians' "guild," and handing over its supposed power to managers, (see post here) managers have taken over from physicians and other health care professionals as leaders of health care organizations.  Unfortunately, most of these managers are generic, often lacking knowledge and experience in health care, and understanding of its core values.  Instead, such generic managers may rely on the current management dogma.  The perils of doing so are illustrated by an analysis of the recent expose of conditions at Apple manufacturing plants in China.

The Apple Expose

The New York Times summarized in a landmark article how bad it is to work in factories building Apple products under contract in China.  Workers endure harsh conditions, toiling up to six days a week, 12 hours a day.  Meanwhile, banners remind them to "work hard on the job today or work hard to find a job tomorrow."  Workers may be exposed to hazardous, even poisonous materials (like n-hexane used to clean components).  Workers have died in explosions due to inadequate control of combustible dust. Over 18 workers at one factory attempted or committed suicide within two years.

The article suggested that while Apple managers may be well-intentioned, and "want to improve conditions in factories," the bottom line is more important:

that dedication falters when it conflicts with crucial supplier relationships or the fast delivery of new products.

In fact, because of its rigid insistence on cost control, its suppliers are sorely tempted to push their workers too hard:

Apple typically asks suppliers to specify how much every part costs, how many workers are needed and the size of their salaries. Executives want to know every financial detail. Afterward, Apple calculates how much it will pay for a part. Most suppliers are allowed only the slimmest of profits.

So suppliers often try to cut corners, replace expensive chemicals with less costly alternatives, or push their employees to work faster and longer, according to people at those companies.

'The only way you make money working for Apple is figuring out how to do things more efficiently or cheaper,' said an executive at one company that helped bring the iPad to market. 'And then they’ll come back the next year, and force a 10 percent price cut.'

So,

'You can set all the rules you want, but they’re meaningless if you don’t give suppliers enough profit to treat workers well,' said one former Apple executive with firsthand knowledge of the supplier responsibility group. 'If you squeeze margins, you’re forcing them to cut safety.'

William Black's Analysis: Employee Control Fraud and the Race to the Bottom

Writing in the Huffington Post, William K Black showed how Apple executives' relentless focus on cost could drive a race to the bottom. He began by analyzing Apple executives' explanation for out-sourcing their production:

'We shouldn't be criticized for using Chinese workers,' a current Apple executive said. 'The U.S. has stopped producing people with the skills we need.'

He noted that it is absurd to suggest that the US does not have workers with the technical skills necessary to build Apple products. He suggests, however, that these are not the skills that matter.

The suppliers want engineers and managers who will selectively apply their substantive skills. American engineers and managers cannot be counted on to provide the necessary selectivity. Apple's suppliers' often seek managers willing to order their workers to exceed the lawful workweek, to refuse to pay them for significant portions of the wages they have earned, to unlawfully employ child labor, and even to coerce abortions.

So, in the n-hexane example,

The engineer did not order the workers to use the nerve poison because he hated the workers. It was 'just business.' The nerve poison reduced cleaning time, so an engineer knowingly ordered the workers to use it and scores of other engineers did nothing to prevent the usage.

Note that Black calls this employee control fraud, deceiving the employee that he or she is working in a reasonably safe environment, and that employee health and safety is a concern, when in truth the only concern is the bottom line.

So what Apple executives, and by analogy, other multi-national corporate executives want are underlings, particularly middle and line managers who will do anything, anything to cut costs and improve the bottom line. This will produce the race to the bottom:

What we are observing is the essence of a Gresham's dynamic in which bad ethics drives good ethics out of the market.

Two aspects of this Gresham's dynamic are obscene, and both are produced by neoclassical economics dogma. Calling this process 'creative destruction' is baseless and dishonest. It is the fraudulent destruction of honest businesses, professions, and labor.

Black concluded:

firms that are anti-employee control frauds are likely to commit other forms of control fraud. Apple and its Western counterparts have driven the creation of an Asian network of fraudulent firms that has distorted international trade, hollowed out U.S. manufacturing, and created a bizarre hybrid: quasi-communist crony capitalism. It boggles the mind that theoclassical economists celebrate the corrupt result as the essence of creative destruction. The network is corrupt. It will not play by the rules. Firms like Apple help create the perverse incentives that encourage the network to cheat. Surviving U.S. manufacturing firms are whipsawed by the powerful Gresham's dynamic that the frauds produce. U.S. firms and workers are constantly pressured to reduce wages and workforce to try to compete with the foreign frauds. This is the 'Road to Bangladesh' strategy that has caused U.S. working class wages to stall for decades. Europe is retreating along this same road at an even more rapid rate. The Gresham's dynamic tilts the world in favor of fraudulent firms operating in fraud-friendly nations.

The Race to the Bottom in Health Care
Note that we have written about numerous examples of executives of US health care organizations putting revenue ahead of the health care mission, ahead of workers' morale, ahead of patients' and the public's health. Some of these examples involve executives of nominally non-profit organizations that are supposed to have charitable purposes. (Look under our heading of mission-hostile management.)

In fact, just yesterday, Dr Carl Elliott, writing for the Chronicle of Higher Education, summarized how pharmaceutical companies have out-sourced clinical research. The resulting commercial clinical research have generated conditions as bad for the research subjects as those endured by the Chinese electronics workers above:

If the past decade had an emblematic moment for clinical research, it was probably November 12, 2005, the day when Bloomberg Markets published its cover story, “Big Pharma’s Shameful Secret.” In that issue, Bloomberg reporters laid out the story of SFBC International, a contract research organization in Miami that was paying undocumented immigrants to test the safety of new drugs in a seedy motel. The SFBC owners had converted the lobby into a large waiting area with plastic chairs, and they were housing their research subjects six to a room. The medical director of the research site was unlicensed to practice medicine; the Institutional Review Board that approved many of the studies was owned by the wife of the company vice-president; and the converted motel, which had been cited for fire and safety violations, was eventually demolished. Nonetheless, SFBC had become an astonishingly successful enterprise. Just a few years before the Bloomberg Markets report, Forbes had named SFBC one of the most admired small businesses in America. Virtually every major pharmaceutical company had tested drugs with the company. In fact, with 675 beds, the converted motel was the largest research facility in North America.

Note: see our relevant posts here on SFBC International, and on contract research organizations.

Moreover, such out-sourcing has produced the sort of race to the bottom described by Black, but this time involving one of the US most important health care institutions, academic health care:

the more important reason is money. In medical schools, faculty members are often expected to generate their own salaries, either by seeing patients or getting grants and contracts. Likewise, academic departments are often expected to be financially self-sufficient, with as little support as possible from central administration. 'Eat what you kill' is the phrase used, without irony, by medical school deans and department heads. And if you are not killing it with NIH grants, you probably need to be killing it with AstraZeneca or Pfizer.

This system has not been good for human subjects, but it has not been good for academic physicians either. According to a recent study of over 5,000 faculty members at U.S. medical schools, 51 percent of respondents said that the administration is only interested in me for the revenue I generate.' Thirty-one percent said that their institution discourages altruism; 27 percent said that it does not reward clinical excellence; and over half said that it does not value teaching. Nearly half of respondents were considering leaving their current jobs; almost a third were considering leaving academic medicine altogether. Asked if their values lined up with the medical schools where they worked, over half said no. And just in case you are wondering why these physicians are not standing outside the building with picket signs, protesting the injustice of the system, the survey offers another clue. Thirty percent of respondents agreed with the statement, 'I am reluctant to express my opinion for fear of negative consequences.' [This was from an abstract by Pololi L et al.  See our relevant post here.]

Of course, this survey does does not exactly match up with the happy propaganda disseminated by the media-relations offices at most medical schools. Instead, it offers a picture of alienated, demoralized physicians, unhappy in their jobs, pressed to work according to values that repel them in order to prop up an institution that views them primarily as instruments to generate profit. In this environment, contract research makes perfect sense. It may not require much intellectual work, but it pays the bills and keeps the authorities happy. And if medical schools don’t really value intellectual work anyway, that may well be enough.

So the pressures on medical school faculty are little different from those on corporate middle management.  Their only role is to make money, mainly so that the top leaders can become multi-millionaires, and woe unto them if they object.
Summary

What is missing in all this is any organized opposition to the race to the bottom. As long as top executives can make nearly unlimited money, as long as they can do so by making their subordinates put revenue ahead of all else, as long as there are no countervailing forces, the race to the bottom will continue.

To stop it, we need some combination of efforts by honest government regulators, professional and trade organizations, civil society organizations including non-profit organizations and NGOs that really care about patients' and the public's health, and finally an activated, and properly outraged public.

As long as we think that a laissez faire policy allowing continual market dysfunction to continue, the good times for executives will keep rolling, over all of the rest of us.

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"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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"Barbarians at the Gate" - Making Private Equity Less Private, and Understanding Its Effects on Health Care

One good byproduct of the tumultuous everlasting 2012 campaign for the US presidency has been to shed light on a number of political and economic issues that had previously been ignored, especially those relating to the global financial crisis or great recession.  In turn, many of these issues may be relevant to our understanding of our ongoing health care dysfunction. 

The latest issue to achieve prominence was the nature of private equity firms.  Current presidential contender Mitt Romney used to work for Bain Capital, a private equity group.  As we discussed here, Bain Capital owned a variety of companies, including some important health care corporations.  More importantly, attacks on Mr Romney's record at Bain by other candidates have lead to a broader discussion of the nature of private equity.  This discussion is very relevant to health care, since private equity firms have taken over a number of important health care corporations, and more recently, have begun to take over formerly non-profit health care organizations.

Therefore, we will summarize what has become known about private equity, and then consider its implications for health care.

Understanding Private Equity as Re-Branded Leveraged Buy-Out Firms

- Private Equity Firms are Just Re-Branded Leveraged Buyout Firms

The first good statement to this effect I found was by Merrill Goozner in the Fiscal Times(1):

Private equity is actually a misnomer, since the modus operandi of those investors is no different than the leveraged buyout firms that pioneered junk-bond financing in the 1980s.

As reported by the Los Angeles Times(2):

'Being known as a leveraged-buyout-deal shop wasn't the most attractive label out there,' said Colin Blaydon, director of the Center for Private Equity and Entrepreneurship at Dartmouth's Tuck School of Business. 'Private equity has a much nicer ring to it.'

In fact, according to Forbes columnist Robert Lenzer,(3) the famed investor Warren Buffet called this re-branding

'Orwellian': Buffett wrote that 'private equity' is a 'name that turns facts upside-down: A purchase of a business by these firms almost invariably results in dramatic reductions in the equity portion of the acquiree’s capital structure compared to that previously existing.'

I must admit I always thought private equity firms simply collected large amounts of capital from investors, then used the pooled capital to buy out troubled firms. I assumed that because these investors therefore had a large personal stake in these firms, they would want to increase at least their financial value. I also thought that leveraged buy-out firms ceased to exist after all the bad press they got in the 1980s. It turns out I was wrong on all counts. Probably, a lot of other peoples' beliefs about private equity were similarly wrong.

Once the equation of private equity and leveraged buyout firms is made, understanding what they do and its implications are easier.

- Leveraging the Buy-Out

The modus operandi of leveraged buyout firms is to make their purchases of troubled corporations mainly with borrowed money. As Merrill Goozner put it(1),

Private equity firms generally finance anywhere from 60 to 90 percent of their purchases with borrowed cash.

Note that,

Interest payments on those debts are treated just like any other expense, and are therefore deductible from earnings.

- Then Leveraging the Acquired Company

If this leveraging were the only leveraging done in a leveraged buy-out, the implications might not be that big, except for the acquiring firm. After all, when the leveraged buy-out firm borrows the money, it then becomes obligated to pay it back. However, then comes the tricks.

One important trick was described in the following example by economist Dean Baker on the Beat the Press blog(4),

To take a simple example, suppose a public company (let's call it Gingrich Inc.), has $1 billion a year in profits. If Gingrich Inc. paid taxes at the full 35 percent rate (fat chance), it would have $650 million [thanks Robert] a year to either keep as retained earnings or to pay out as dividends to its shareholders.

Now suppose that a PE company (we'll call it Romney Capital) steps in. The current price to earnings ratio in the stock market is around 14, so Gingrich Inc. would have a pre-takeover market value of approximately $9.2 billion (14*$650 million). Romney Capital then arranges for Gingrich Inc. to borrow $6 billion which it pays out as a dividend to itself. This means that the Romney Capital has just gotten back almost two-thirds of its investment.

A somewhat less vivid description of the process appeared in a post by Robert K Lifton on the Huffington Post(5):

Most often, in order to increase the return on capital invested by the fund, the fund will borrow a significant portion of the purchase price of the business. And sometimes, if it can, the fund will take back as a distribution immediately upon closing the purchase of the business, a portion of its investment in the purchase price, reducing its own investment and enhancing its return on the investment left in the business. This distribution may come from the company's existing cashable assets or from money that the company is caused to borrow.

Thus, it appears that while the leveraged buy-out (or private equity) firm borrowed money to finance the purchase of a company, it can almost immediately get out of its obligation to pay off that loan, by making the acquired company its own loan, and using proceeds from that to end the LBO firm's debt. The leverage, and the obligation to pay back a debt has almost magically been transferred from the LBO or private equity firm to the acquired company. That has big implications, as Lifton wrote(5):

This additional leverage also creates additional risk; if things don't go right the business will not be able to pay the carrying costs of the debt, the lender will take over the business and the fund will lose its investment. Sometimes, that results in the acquired company placed in bankruptcy proceedings either to liquidate its assets to pay off the debt or to restructure, a process Bain also experienced.

- Selling Assets to Further Reduce the Private Equity Firm's Debt

LBO firms have another trick up their collective sleeves. As Dean Baker continued his example(4),

Now suppose that the Romney Capital arranges to sell off some of Gingrich Inc.'s assets, such as real estate or a highly profitable subsidiary, and then uses the proceeds to make a payment to the Romney Capital rather than leaving the money under the control of Gingrich Inc. Such sales may allow Romney Capital to recoup the rest of its investment and possibly more.

Of course, the result is

Gingrich Inc. is then left as a highly indebted company with few assets.

In this story, Romney Capital may have earned a substantial profit on a limited investment (it recouped most of its money almost immediately when it loaded Gingrich Inc. with debt), without doing anything to improve the operation of Gingrich Inc. If Gingrich Inc. manages to stay in business and generate profits, then this will increase the return. Romney Capital may be able to resell the company and treat the whole sale price as profit.

On the other hand, if Gingrich Inc. goes bankrupt, this will primarily be a problem for creditors, since Romney Capital has already gotten its investment back. In effect, Romney Capital might have secured large gains entirely by financial engineering, while creating no value whatsoever.

Let me underscore that. The LBO model (now also the private equity model) enables the acquiring LBO firm to avoid any losses, by shifting all the risk and obligations to the acquired firms. This puts these firms at considerable jeopardy.

- Tactics to Prepare Acquired Firms for Sale

Of course, LBO/ private equity firms want to do more than not lose money. To make real money, they must be able to sell off the firms they acquire. To do so, they must make these firms, or their components, seem attractive, at least in the short term. To do this, they employ a standard set of tactics out of the generic management playbook.

So, per the LA Times(2),

layoffs are part of the playbook that elite investment firms use to squeeze cash out of struggling companies.

Also, per Lifton(5),

To increase the profits of the acquired company, the fund may reduce the number of employees, reduce pay levels or curtail work time.

In addition, per Josh Barro writing for the Forbe blog(6), other tactics can include

downsizing, increased automation, offshoring, and the like.

- The Private Equity/ Leveraged Buy-Out Version of the Anechoic Effect

It is striking that while Mitt Romney worked at Bain Capital in the last century, and private equity has been around, if not growing, since then, the current presidential campaign seems to be the first occasion which prompted any real public discussion about the nature of private equity, and its significance for the larger political economy. Thus private equity/ LBO seem to have been anechoic for a very long time (like much about how our current health care system operates seems to be anechoic.)

This version of the anechoic effect seems to have been deliberately created by the private equity/ LBO firms.

A Washington Post commentary(7) quoted Mitt Romney,

You know I think it's fine to talk about those things in quiet rooms,...

As a New York Times story(8) put it, these firms are lead by

a group of Wall Street executives who prefer to operate out of the spotlight

A story in Politico(9) called private equity/ leveraged buy-out firms

one of the most secretive redoubts of the American economy

The article went on to suggest that these firms may well have something to hide:

Josh Kosman, author of 'The Buyout of America: How Private Equity Is Destroying Jobs and Killing the American Economy.' [said] 'Most private equity firms are because once you look behind the numbers, there is much they don’t want you to see.'

Furthermore,

Private equity companies often tend to have confidentiality agreements with their investors (Bain would not comment on what agreements it has). Several equity experts interviewed for this story thought any disclosures from Bain were likely to spook its investors.

The private equity business model is based on taking companies out of the public markets, where reporting requirements are strict and investors punishing, making changes that will hopefully make them more profitable and then selling them or taking them public through an IPO.

The part that happens behind the curtain is not always pretty, and private equity firms have learned over the years that it’s hard to tell a complicated story in the media. The goal of private equity is to keep things private.

'It’s had very little consciousness in the political realm until Romney came along because these guys are smart enough not to try to become Treasury secretaries,' said Bill Cohan, a former Wall Street banker-turned-investigative journalist who wrote 'Money and Power: How Goldman Sachs Came To Rule The World.'

In addition, Dean Baker suggested that the confidentiality is used to hide how private equity/ leveraged buy-out firms remove capital from acquired companies(4),

The sort of asset stripping described here, which harms creditors by taking away potential collateral for their loans, violates the law. However it is extremely difficult to prevent, especially with private equity companies that have to make few public disclosures.

Thus secrecy/ confidentiality/ deception should be regarded as one of the main tactics used by private equity/ leveraged buy-out firms.

Implications for Health Care

Mitt Romney's candidacy has generated a surprising amount of discussion about the effects of private equity/ leveraged buy-out firms on the political economy. Many are worried that despite his claims, such firms cause more job loss than job creation. In the Huffington Post(10), Robert Creamer wrote that private equity/ LBOs have contributed to the sense that ordinary people who play by the rules suffer while well-connected insiders prosper:

It just doesn't make sense to them that a relatively tiny number of people -- who don't build a product or create a service -- can make massive amounts of money, while ordinary people who work hard and play by the rules see their incomes flat-line.

Their view is simple. They create cars, or food, or houses or computers -- or they provide police protection, or care for sick people, or teach our kids. Why should they be asked to sacrifice when guys who basically gamble for a living -- as Wall Street speculators -- make incomprehensibly large sums of money?

There seems to be a good argument that the tactics used by private equity/ leveraged buy-out firms might be bad for the general political economy.

Moreover, these firms often take over health care corporations, drug and device companies, health care information technology companies, health insurance companies, for-profit hospital chains, etc. There is reason to think that their standard tactics used on such targets are likely to be particularly bad for health care.

Many health care corporations depend on a long-term view to be successes. To develop new products, drug, device, and health care IT companies must pursue research and development projects that take years. All health care companies depend on highly trained, specialized workers and professionals. To sustain these sorts of employees requires a long-term attention to their development. So private equity/ leveraged buy-out firms' short-term focus, transfer of debt and risk to the acquired companies, and emphasis on short-term generic management cutting costs techniques including lay-offs, outsourcing, etc clash with the sophisticated long-term focus these companies require.

These health care organizations often require the complex interplay of many components. Private equity/ leveraged buy-out firms' efforts to sequester and sell particular assets may disturb this complex system.

Health care quality, and successful research and development require transparency. Extreme emphasis on secrecy by private equity/ leveraged buy-out firms threatens such transparency.

Even more pointed concerns may arise when private equity/ leveraged buy-out firms endeavor to take over non-profit health care organizations. We plan to discuss these in a subsequent post.

The NY Times(g) noted that in the 1980s, leveraged buy-out firms

were branded as 'barbarians at the gate' - the title of a book [by Burrough and Helyar, link here] about the takeover of RJR Nabisco by Kohlberg Kravis Roberts.

Now 30 years later we are finally having a conversation about the role of these firms in the greater political economy. We in health care should be having a parallel discusion about their role in our sphere. I submit that their role was not likely productive. Since health care should not merely be looked upon as a means to make money, but as a public good, we ought to be talking about how to restrain private equity/ leveraged buy-out firms from doing it more damage.

References

1. Goozner M. Private equity's edge: buy now, deduct taxes later.  Fiscal Times, Jan 9, 2012.  Link here.
2, Hamilton W. Private equity industry: a bad rep, but is it deserved. Los Angeles Times, Jan 12, 2012. Link here.
3. Lenzer R. Why Warren Buffet disdains the private equity crowd. Forbes, Jan 14, 2012. Link here.
4. Baker D. NPR does fluff piece for private equity. Beat the Press, Jan 13, 2012. Link here.
5. Lifton RK. Mitt Romney and Bain Capital: understanding the reality. Huffington Post, Jan 13, 2012. Link here.
6. Barro J. The discussion we should be having about Bain. Forbes, Jan 12, 2012. Link here.
7, Robinson E. Reexamining the myth of no-fault capitalism. Washington Post, Jan 16, 2012. Link here.
8. Lattman P, Lowrey A. As Romney advances, private equity becomes part of the debate. New York Times, Jan 10, 2012. Link here.
9. Hagey K. Mitt Romney's Bain Capital days: a black box. Politico, Jan 11, 2012. Link here.
10 Creamer R. Why the Bain Capital controversy is so damaging to GOP chances this fall. Huffington Post, Jan 16, 2012. Link here.

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The Corporate Psychopaths Theory of Health Care Dysfunction

A new article in the Journal of Business Ethics suggested that the global financial crisis, or great recession, was primarily due to a fundamental flaw in the leadership of financial organizations, one that has important implications for health care organizations. 

The article, Boddy CR. The corporate psychopaths theory of the global financial crisis.  J Bus Ethics 2011; 102: 255-259 is here.  Its premise was:

The Corporate Psychopaths Theory of the Global Financial Crisis is that Corporate Psychopaths, rising to key senior positions within modern financial corporations, where they are able to influence the moral climate of the whole organisation and yield considerable power, have largely caused the crisis.

Note that in 2004 we first posted about the possibility that a proportion of corporate managers, including those in health care, could be psychopaths, raised then by two experts on psychopathy, Paul Babiak and Robert Hare. In 2006, they published Snakes in Suits, about the dangers of psychopaths as executives and managers (see post here). However, the issue got scant attention in those days of letting the good times roll.

Defining Corporate Psychopaths

Boddy described psychopaths as:

the 1% of people who have no conscience or empathy and who do not care for anyone other than themselves. Some psychopaths are violent and end up in jail, others forge careers in corporations. The latter group who forge successful corporate careers is called Corporate Psychopaths.

Corporate Psychopaths as Leaders

Such people do not make good leaders:

Although they may look smooth, charming, sophisticated, and successful, Corporate Psychopaths should theoretically be almost wholly destructive to the organizations that they work for. The probable mal-effects of the presence of psychopaths in the workplace have been hypothesized about in recent times by a number of leading experts and commentators on psychopathy.

Researchers report that such malevolent leaders are callously disregarding of the needs and wishes of others, prepared to lie, bully and cheat and to disregard or cause harm to the welfare of others. Corporate Psychopaths are also poorly organized managers who adversely affect productivity and have a negative impact on many different areas of organizational effectiveness.

How Corporate Psychopaths Could Have Become Prevalent
Despite the dangers posed by such leadership, corporate psychopaths may rise quickly in management:

Psychologists have argued that Corporate Psychopaths within organizations may be singled out for rapid promotion because of their polish, charm, and cool decisiveness. Expert  ccommentators on the rise of Corporate Psychopaths within modern corporations have also hypothesized that they are more likely to be found at the top of current organisations than at the bottom.

The nature of current corporate culture may facilitate the rise of corporate psychopaths:

These Corporate Psychopaths are charming individuals who have been able to enter modern corporations and other organisations and rise quickly and relatively unnoticed within them because of the relatively chaotic nature of the modern corporation. This corporate nature is characterized by rapid change, constant renewal and quite a rapid turnover of key personnel. These changing conditions make Corporate Psychopaths hard to spot because constant movement makes their behaviour invisible and combined with their extroverted personal charisma and charm, this makes them appear normal and even to be ideal leaders.

The destabilization of modern corporations likely lead to the ascendancy of the corporate psychopath:

However, once corporate takeovers and mergers started to become commonplace and the resultant corporate changes started to accelerate, exacerbated by both globalisation and a rapidly changing technological environment, then corporate stability began to disintegrate. Jobs for life disappeared and not surprisingly employees’ commitment to their employers also lessened accordingly. Job switching first became acceptable and then even became common and employees increasingly found themselves working for unfamiliar organisations and with other people that they did not really know very well.

Rapid movements in key personnel between corporations compared to the relatively slower movements in organisational productivity and success made it increasingly difficult to identify corporate success with any particular manager. Failures were not noticed until too late and the offending managers had already moved on to better positions elsewhere. Successes could equally be claimed by those who had nothing to do with them. Success could thus be claimed by those with the loudest voice, the most influence and the best political skills. Corporate Psychopaths have these skills in abundance and use them with ruthless and calculated efficiency. In this way, the whole corporate and employment environment changed from one that would hold the Corporate Psychopath in check to one where they could flourish and advance relatively unopposed.

The Harms Caused by Corporate Psychopaths as Executives

Thus, Boddy hypothesized the rise of management by corporate psychopaths lead directly to the global financial crisis or great recession:

As evidence of this, senior level remuneration and reward started to increase more and more rapidly and beyond all proportion to shop floor incomes and a culture of greed unfettered by conscience developed. 

Corporate Psychopaths are ideally situated to prey on such an environment and corporate fraud, financial misrepresentation, greed and misbehaviour went through the roof, bringing down huge companies and culminating in the Global Financial Crisis that we are now in.

Writing in 2005, this author commentating on Corporate Psychopaths predicted that the rise of Corporate Psychopaths was a recipe for corporate and societal disaster. This disaster has now happened and is still happening.

What Could be Next

Worse, if this hypothesis is true, as long as it is not addressed, things will get worse:

The very same Corporate Psychopaths, who probably caused the crisis by their self-seeking greed and avarice, are now advising governments on how to get out of the crisis. That this involves paying themselves vast bonuses in the midst of financial hardship for many millions of others, is symptomatic of the problem. Further, if the Corporate Psychopaths Theory of the Global Financial Crisis is correct then we are now far from the end of the crisis. Indeed, it is only the end of the beginning.

Some Agreement

The plausible theory that corporate psychopaths ascending to top management positions in finance caused the global financial crisis has been noticed by a few prominent financial pundits. Writing in Bloomberg, William D Cohan agreed with Boddy's suggestion that "anyone who makes decisions that affect significant numbers of other people, concerning issues of corporate social responsibility or toxic waste, for example, or concerning mass financial markets or mass employment, should be screened to make sure that they are, at the very least, not psychopaths and at most are actually people who care about others."

Brian Besham, writing in the Independent, suggested that Richard Fuld, former CEO of Lehman Brothers, whose bankruptcy kicked off public awareness of the global financial collapse, saying he wanted to eat the hearts of those selling his company's stock short (see this post), was a "terrifying" example of corporate executive psychopathy. Worse, Besham noted that he had discovered an case of an investment bank which "psychometric testing to recruit social psychopaths because their characteristics exactly suited them to senior corporate finance roles."  It may be that corporate psychopaths are actively recruiting their fellows.

Implications for Health Care

This is chilling. It also unfortunately is highly relevant to health care. As we noted, most recently here, leaders of big finance firms, including those whose failures were most spectacular, now often sit on boards of trustees of hospitals, academic medical centers, medical schools, and their parent universities. Thus, the likelihood that a good proportion of the stewardship of our most prominent not-for-profit health care organizations may be in the hands of psychopaths is not negligible.

Furthermore, health care organizations have become as unstable and chaotic, in the way these terms were used by Boddy, as finance firms. This would suggest that their current nature would make it as easy for psychopaths to rise to positions of power in them as they may have in financial firms. In health care we certainly have seen the consequences he suggested were due to psychopathic managers, including

- intimidation (per Boddy, corporate psychopaths are "prepared to lie, bully and cheat and to disregard or cause harm to the welfare of others");
- self-interest ("pursuit of self-enrichment and self-aggrandizement") leading to outrageous executive compensation ("senior level remuneration and reward started to increase more and more rapidly and beyond all proportion to shop floor incomes")
- fraud and other crime ("corporate fraud, financial misrepresentation, greed and misbehaviour went through the roof,... ")

So as we noted in 2006, "a high prevalence of psychopathic managers could explain the prevalence of mismanagement, conflicts of interest, and corruption in the leadership of health care organizations that we have often discussed on Health Care Renewal."

Boddy's first suggestion to deal with the problem in finance was:

Measures exist to identify Corporate Psychopaths. Perhaps it is time to use them.

However, it is as hard to imagine top health care leaders willingly and honestly submitting to the use of instruments designed to identify psychopaths as it is to imagine finance leaders doing so. Furthermore, it is easy to imagine how corporate psychopaths in positions of leadership would ruthlessly deploy their legions of public relations personnel and lawyers to quash any challenge should the notion that they are so dominant gain any credibility.

However, if there is any significant prevalence of corporate psychopaths among the leaders of health care, woe will be unto us until we identify and remove them.

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New York - Presbyterian Hospital Trustee Advocated Novel Cardiac Procedure - "Reach In, Rip Out Their Heart, and Eat It Before They Die"

The dominant theme of Health Care Renewal has been how problems with the leadership of health care organizations have lead to our current state of health care dysfunction.  We have discussed examples of ill-informed, mission-hostile leadership rewarded with excess compensation, exhibiting impunity in the face of alleged misbehavior, and at times descending into corruption.  The cause of these problems is doubtless multi factorial.  However, one possible cause is that rather than exercise stewardship and hold leadership accountable, those in charge of governance of health care organizations, that is, boards of directors or trustees, have instead infected the organizations with the amoral culture now dominant in much of the business world, especially finance.  We have discussed, most recently here and here, how the boards of health care corporations often include heavy representation of leaders of finance, including many of those who seemed responsible for the global financial collapse, great recession, or whatever we will end up calling it. 

I recently stumbled upon a particularly graphic example of the sort of predatory culture that now exists on the boards of health care organizations.  (More on how I did so later.)  Below is an embedded YouTube video of a speech made by a current Trustee of New York - Presbyterian Hospital (who has been on the board since 2007).  He is Richard Fuld, the former CEO of Lehman Brothers, whose continuing role on the hospital board, despite his failed leadership of one of the financial firms whose bankruptcy ushered in the global financial collapse, we discussed first here.



Just to underline it once more, Mr Fuld, referring to short sellers of his company's stock, said he "what I really want to do is I want to reach in, rip out their heart, and eat it before they die." 

Can there be a more stark reminder of what has gone wrong with the governance of health care?  Can anyone watch this video and argue that Mr Fuld ought to be on the board of a hospital system?  Why is he still on the board in January, 2012, when this video was released in October, 2011?

While I suspect not many other hospital system board members have been videographed displaying equally brutal sentiments, there are likely others with similarly barbaric tendencies.

So, on a more positive note.... The boards of hospitals, hospital systems, medical schools, and their parent universities ought to be populated with people who take their stewardship roles seriously.  They ought to be people who understand, agree with, and support the organizations' mission, and their dedication to patient care and teaching.  They ought to understand what good leadership of health care organizations entail.  Needless to say, they ought to be of good character and above any ethical reproach.  In short, they ought to be the opposite of the sort of person displayed in the video above.

It should now be obvious that grievous problems with the leadership and governance of health care organizations are principle causes of the dysfunction in our health care system.  True health care reform will require wholesale changes in health care leadership and governance.

PS - In case the video above seems too short on context, see the one below:

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The Center for Medicare and Medicaid Services' Quiet Coziness with Wall Street

An article from the Project on Government Oversight (POGO) reveals a new aspect of the growing coziness between the US government and big corporations with obvious relevance to health care.

CMS' Coziness with Leaders of the "Capital Markets"

Here is the introduction and the example most relevant to health care:

Nearly a dozen senior staff at the Centers for Medicare and Medicaid Services (CMS), the giant agency that administers hundreds of billions in federal health care dollars, had been called to a meeting. After a discussion with five Wall Street professionals that lasted nearly two hours, one senior CMS analyst filed an ethics complaint that later went to the Office of Inspector General (OIG) of the Department of Health and Human Services (HHS).

His beef: that a handful of deep-pocketed investors had won a private hearing to probe whether the agency would allow Medicare reimbursement for specific medical devices manufactured by companies in which they already held a stake or might put new money. The market for one device, already approved for Medicare, was rapidly heading toward $1 billion annually; the agency’s impending decision to reimburse competing devices could have major market impact, a shift potentially worth hundreds of millions of dollars.

'This meeting forced agency staff to redirect their attention toward a select group from Wall Street, when neither competing investors nor patient-oriented stakeholders were present,' the whistleblower told the Project On Government Oversight (POGO). 'They got to probe us for hours in private about what we planned to do and how we approached procedures for reimbursing medical devices, the mechanics and psychology of CMS decision-making, in general and with respect to these specific devices.'

The meeting was set up by a former CMS employee working for the Marwood Group, an asset manager that counsels big health-care industry investors, the whistleblower says. The firm’s president is Edward 'Ted' Kennedy Jr., son of the late Massachusetts senator and a major supporter of President Obama’s health care reforms, and includes Kennedy cousins Robert F. Kennedy, Jr. and Stephen E. Smith, Jr., as senior advisors. The firm’s website highlights its staff recruitment among Congressional aides, the Executive Office of the President and CMS. One CMS veteran who joined Marwood after the 2009 meeting with Wall Streeters is Barry Straub, the agency's former Chief Medical Officer, who is also an expert on Medicare reimbursement, the website says. A company spokesman had no comment.

A supervisor at CMS’s Coverage Advisory Group, which decides which services the agency will pay for, also helped organize the session with investors. The whistleblower says he was told by a supervisor that such get-togethers are 'a routine practice at CMS.' At the time, in 2009, CMS’s top administrator had an aide with the title, 'capital markets advisor,' tasked with tracking investment community activity in Washington and elsewhere.

At the investor meeting, Wall Streeters asked a range of questions 'about confidential CMS information.' The whistle blower says he does not believe they received illegal disclosures, though they peppered CMS analysts with queries about the agency’s decision-making process and other sensitive matters which, if answered, could have violated the law or related regulations that bar the sharing of internal deliberations and decisions.

The whistleblower first filed his complaint in April 2009. He was terminated in 2011 for being disloyal to the agency mission after he made a series of internal protests, including the objection to what he calls a pattern and practice of unfettered access to CMS staff by Wall Street investors. He says he is currently fighting his dismissal through all available legal and administrative channels.

Implications and Summary

As the POGO article put it,

CMS does have a set of 'Open Door' policies and affords a variety of avenues for public access. The disclosure of payments to physicians and teaching hospitals by pharmaceutical companies and other interests are required under President Obama’s health reform. In practice, however, the public, not to mention competing investors and stakeholders, rarely get the kind of information and insight available in meetings like the whistleblower described.

In general,

A balance is necessary between the danger of too much insider access, and imposing excessive limitations. Indeed, the biggest problem with special access for Wall Street insiders is not just that they seem to get meetings and acquire information that may be privileged and non-public, but that others, including other investors, do not get a crack at the same material.

The activities above have all the usual elements of excess corporate - government coziness.  These include enhanced access for corporate leaders beyond what any ordinary members of the public might achieve; the revolving door between government service and corporate leadership; the participation of well-connected inside the beltway types, etc, etc. 

It also includes the apparent formalization of representation of corporate interests, e.g., the "Capital Markets Advisor," with no parallel formalization of the public's or patients' interests.  Even more worrisome is that an effort to make this all less anechoic resulted in alleged intimidation of a whistle-blower.

So, let's see, CMS, the Center for Medicare and Medicaid Services, the US Department of Health and Human Services (DHHS) branch which controls the Medicare and Medicaid programs, the government run single-payer programs for the elderly, the disabled, and the poor, does not seem to be able to afford to figure out in-house how to pay physicians for specific services.  Instead, it has effectively farmed out this task to a private committee, the American Medical Association's RBRVS Update Committee (RUC).  As we have discussed many times, this obscure and secretive committee likely had a major role in structuring the financial incentives that favor procedures and disfavor primary care. leading to excess costs, declining access, and degrading quality.  However, CMS can afford to have a "Capital Markets Adviser" and to use up staff time briefing wealthy investors and hedge fund types.  What is wrong with this picture?

In my humble opinion, government health care agencies ought to put the public's and patient's health first. They should not give special consideration to the rich, the powerful, the well-connected, whom some now call the one percent. Yet in the US we seem to have an increasingly corporatist state in which government and the plutocrats work together for their mutual interests, regulatory capture writ large.

We need to restore government, and our health care agencies to being of the people, by the people, and for the people.  Obviously, true health care reform would start with the government and its officials putting patients' and the public's health first, way ahead of the financial comfort of corporate leaders.

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The UC-Davis Pepper-Spray Case as Illustrative of Problems with the Leadership of Health Care

The aggressive actions by University of California-Davis police against unarmed, peaceful student protesters turn out to be the latest illustration of the problems with leadership and governance we discuss on Health Care Renewal. 

The University of California - Davis Pepper Spray Incident

To summarize the current episode, I start with quotes about its background from Reuters,

Student protesters at Davis had set up an encampment in the university's quad area earlier this month as part of the nationwide Occupy movement against economic inequality and excesses of the financial system.

Their demonstrations, which had been endorsed by a faculty association, included protests against tuition increases and what they viewed as police brutality on University of California campuses in response to recent protests.

The students had set up roughly 25 tents in a quad area, but they had been asked not to stay overnight and were told they would not be able to stay during the weekend, due to a lack of university resources, [university Chancellor Linda] Katehi said.

Some protesters took their tents down voluntarily while others stayed.

Then,

The pepper spray incident appeared to take place on Friday afternoon, when campus police moved in to forcibly evict the protesters.

Then, as per the (London, UK) Independent,

A police officer saunters up to a group of young protestors who are sat in a line on the ground, with their arms linked. Then he removes a canister of pepper spray from his belt, with a flourish, before casually proceeding to unload its contents into their faces.

The demonstrators remain silent and motionless, with their heads bowed. So the policeman carries on, methodically covering them, from point blank range. By the time he’s finished, their heads and faces are covered in a thick layer of the toxic red liquid.

The actual video is below:


The UC-Davis Chancellor's Defense of the Police Actions

The Independent's coverage emphasized that initially the leadership of the campus police defended the use of pepper spray on apparently unarmed, peaceful students:

Annette Spicuzza, the head of the UC Davis Campus Police, who were responsible for Friday’s incident .... told reporters that her officers had been 'forced' to use the pepper spray, after demonstrators surrounded them. Lt Pike gave his victims sufficient warning of the impending attack, she added, and emptied the canister with a sweeping motion, in keeping with official procedures.

'When you are encircled by 200 individuals, I don’t know if I want to say ‘afraid,’ but I think they were quite concerned about their safety,' she said, regarding the circumstances her officers faced. 'There was no way out of that circle... It's a very volatile situation.'

That coverage also made clear that the directive to clear the demonstrators came from the top:

Linda Katehi, the Chancellor of UC Davis ... had asked the police to clear demonstrators from her campus, a couple of hours north of San Francisco. In the aftermath of the incident, she had initially joined Spicuzza in defending the force's methods, saying that they had 'no option' but to adopt a hard line.

Ms Katehi later backed off, but only after her first response

sparked immediate outrage, and within hours, the university’s Faculty Association, representing Ms Katehi’s employees, issued a statement called for her resignation, saying that her authorisation of 'excessive' force had amounted to a 'gross failure of leadership.'

Nathan Brown, an assistant English professor who witnessed the incident, wrote in an open letter: 'Several of these students were hospitalized. Others are seriously injured. One of them, forty-five minutes after being pepper-sprayed down his throat, was still coughing up blood... You are responsible.'

Other comments likened the police actions to something "coming from some riot-control unit in China, or in Syria," [James Fallows in the Atlantic] called them indicative of "a police state in its pure form," [Glenn Greenwald in Salon], or otherwise denounced them as "outrageous" or "awful." (Clark McPhail, professor emeritus of sociology at the University of Illinois, and Greg Lukianoff, President of the Foundation for Individual Rights in Education, respectively, via Inside Higher Ed.)

This aggressive, violent response to peaceful protest seems to be the latest example of the arrogance of some current leaders of our important organizations.

Our Previous Discussion of the Chancellor in Health Care Renewal

This case appears directly related to the problems in leadership and governance we discuss on Health Care Renewal Ms Katehi has the distinction of having been already written up twice on Health Care Renewal for questions about her leadership.

On her arrival at UC-Davis in 2009, she promised to "help UC Davis to become more aggressive in taking new biotechnology and agriculture products to market." This indicates at best ignorance of, at worst hostility to the fundamental university mission, which is hardly developing and particularly marketing products, but discovering and disseminating knowledge (see this post).

At that time, I called this an example of "how the leaders of academic institutions seem to be forgetting or radically deconstructing their academic missions."

In 2011, Ms Katehi defended the payment to the medical center CEO, whom she called a "great CEO,' of nearly a million dollars yearly in compensation. However, that CEO was part of a group of top university leaders demanding large increases in their pensions at a time when the university was under great financial distress. For that, some called them not great leaders, but greedy and "despicable." Thus, Ms Katehi seemed to stand up for top leaders' privilege and exceptionalism, including their entitlement to huge compensation whatever the circumstance, even in a time of financial travail (see this post).

I could not have predicted that Chancellor Katehi would preside over the pepper spraying unarmed students for peaceful, legitimate protest. However, it is not surprising that a leader who does not understand the fundamental academic mission and who supports executive privilege and exceptionalism would foster an authoritarian climate in which such an incident could happen.

This example clearly illustrates the issues we have been discussing on Health Care Renewal for a long time. In particular, leaders who are more dedicated to their own and their fellow executives' privilege and exceptionalism than their organizations' missions are likely to end up promoting actions that threaten those  missions.

The Moral of the Story

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

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

You heard it here first on Health Care Renewal .

Keep your eye on Health Care Renewal for continued discussion of parallels between problems in health care and in the larger political economy.

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If a Medical School is Just Part of the "Biomedical Industry," Who Will Do Medical Education?

A little while ago, we discussed questions raised by the pre-existing financial relationships of Dr Laurie Glimcher, the new incoming Dean of Weill Cornell Medical School. Dr Glimcher is also the longest serving director of Bristol-Myers-Squibb, and has a number of other financial relationships with drug and device companies.

A new interview with Dr Glimcher suggested that what is most interesting about the coverage of her ascension to the Cornell Deanship is what it did not mention, especially whether she has any goals other than promote relationships with and do product development for corporate health care.

So let me review what has been made public about the interests and goals of Weill Cornell Medical College's new Dean.

The New York Times: To Develop "Research Capacity" and a "New High-Tech Campus"

The New York Times article focused on the new Dean's conflicts of interests, but found no doubts about these conflicts among the university leadership to whom the new Dean would report. Instead,

Cornell University’s president, Dr. David J. Skorton, said he believed Dr. Glimcher had the skills to carry out the medical school’s plan to double its research capacity and to help the university compete to develop a new high-tech campus proposed by the Bloomberg administration.

However, while it emphasized how university leaders defended Dr Glimcher's conflicts of interest, the New York Times article said nothing about the university leadership's educational or clinical expectations for Dr Glimcher.

The Cornell Sun: To "Strengthen its Relationship with Biotechnology and Pharmaceutical Companies"

Similarly, according to the Cornell Daily Sun, the university leadership regarded the new Dean's relationships with industry as strengths, not weaknesses,

As the longest-standing member of the corporate board of biopharmaceutical company Bristol-Myers Squibb, [Dr Laurie] Glimcher has 'extensive experience' in corporate finance, governance and management, according to a University press release.

So,

Under Glimcher’s leadership, Weill hopes to strengthen its relationship with biotechnology and pharmaceutical companies, develop innovative cures and bolster research, the University stated.

The Sun did briefly note,

In a press release, [Cornell University President David J] Skorton said he was 'honored and delighted' that Glimcher accepted the position.

'Her passion for accomplishment and her many research and clinical strengths make her ideally suited to build on Tony Gotto’s strong foundation and lead Weill Cornell’s bright future in clinical care, education and translational research,' Skorton said.

However, there were no further details about what Dr Glimcher would do for clinical care or education.

The Cornell Press Release: To Achieve "Preeminence in the Biomedical Sciences"

This press release emphasized Dr Glimcher's corporate skills even more than did the Times or Sun articles,

Her service with the biopharmaceutical company Bristol-Myers Squibb, where she is the longest-standing member of the corporate board of directors and of its audit committee, has afforded her extensive experience in management oversight, corporate governance, corporate finance, accountability, leadership and the practical aspects of running a business and bringing therapeutics to the marketplace.

'This is great news for the medical school and for the city,' said Sanford I. Weill, chairman of the medical college's board of overseers and a member of the board of trustees of Cornell University. 'With her thorough appreciation of the management and financial challenges of complex organizations, I am confident she will lead the college with the same creativity and acumen she demonstrated when she pioneered the establishment of Bristol-Myers' science and technology committee, which is widely credited for transforming its stake in research. With a state-of-the-art biomedical research facility under construction and Dr. Glimcher at the helm, Weill Cornell and New York are on course to achieve a preeminence in the biomedical sciences that has already been achieved in clinical medicine and first-rate medical education.'

However, it said nothing substantive about Dr Glimcher's educational or clinical goals or interests. (Perhaps, because Mr Weill thought that the school had already achieved preeminence in these areas, he also thought no further goals in these areas are needed.)

Crain's New York Business: "Critical that the Pharmaceutical Industry has Input from the Biomedical Industry"

Now Crain's New York Business just published an interview with Dr Laurie Glimcher, the Dean to be of the Weill Cornell Medical College with a singular emphasis.  It introduced Dr Glimcher thus,

She is the longest-serving member of the board at Bristol-Myers Squibb and has been a big earner from her work with drug companies. Snaring Dr. Glimcher is a coup for Cornell University, which is using her status to bolster its proposal to build a science and engineering campus on Roosevelt Island.

The interviewer asked, can New York become "a more competitive research hub?"  Dr Glimcher opined,

I think New York City is going to be the next greatest center for biomedical research.

Then, with an instructive tilt, why are you so comfortable taking research funding from drug makers?  Her answer included the usual rationale, but with a twist:

I think it's critical that the pharmaceutical industry has input from the biomedical industry. I believe it is essential to have partnerships to accomplish our goals.

The implication, and the twist is that she apparently sees herself as leading not a medical college, but an entity within the "biomedical industry."

The next question was, does this mean that more collaboration with drug companies are ahead for Weill Cornell?  Her answer was no surprise,

Harvard probably has more ties to pharmaceutical companies than Weill Cornell, but Weill Cornell definitely has connections that I hope we can leverage.

At this point, it should be no surprise that this interview of this erstwhile leader of "biomedical industry" mentioned nothing substantive about clinical care or medical education.

Summary: Education and Patient Care Disappear into the Maw of the "Biomedical Industry"

In summary, so far, all the hoopla about the new Dean of Weill Cornell Medical College has been about her anticipated ability to align the school with the pharmaceutical and biotechnology industry. Amidst the hoopla, neither the new Dean nor anyone within the Cornell leadership has said anything about her interests, goals, or positions relevant to education or clinical care. Yet education is the most fundamental mission of a medical school and of academic medicine. Instead, on one occasion, the new Dean suggested that she would be leading not a medical school, but part of the "biomedical industry."

So it appears that the brave new version of the Weill Cornell Medical College is not merely more focused on doing product development for industry than on its traditional mission of education, research more broadly defined, (e.g., which also may include basic biomedical research, clinical research, and epidemiological and public health research), and patient care. It appears that applied research for product development has become its only important goal. How else should one interpret what the new Dean and her supervisors have said? Not one of them has said anything about education or patient care other than to acknowledge that these endeavors exist.  (Also, not one of them discussed the other kinds of research that medical schools and academic medical centers have traditionally done.)

If Cornell's Board Chairman, President, and Medical College Dean are only interested in being part of the "biomedical industry," why should anyone want to attend what is still called their "Medical College?" Why should anyone want to serve as a house officer in one of the "Medical College's" hospitals? Why should anyone want to attend one of the "Medical College's" continuing medical education courses? If Cornell's Board Chairman, President, and Medical College Dean are only interested in being part of the "biomedical industry," that is, doing applied research for product development, why would any patient want to go to their hospital,s clinics, and other facilities?

We now see not merely academic medical leadership chosen because of, not despite their conflicts of interest with health care corporations. We now also see academic medical leadership who appear only interested in corporate product development, and not even interested in talking about education or patient care (or traditional biomedical, clinical, and epidemiological research.)

Of course, all this discussion is based only what has been published so far about the new leadership of Weill Cornell. Maybe the publications have been woefully incomplete and full of errors. I eagerly hope that to be the case (nooffense intended to the journalists involved.) But I fear that we are seeing the final common pathway for the corporate academic medical center, its transformation into the "Biomedical Industry."

If academic medical leaders no longer care about education or patient care, the downward spiral of our health care system has only just begun.

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