What Me Worry? - Leaders Prosper Despite Questions About Their Organizations' Ethics and Performance

There were two examples in the recent news about how the leaders of health care organizations seem to prosper no matter what questions are raised about their organizations' ethics or performance.

WellPoint

It seemed that anger over a rate increase by a subsidiary of the huge insurance company/ managed care organization WellPoint was one reason for the revival of efforts in the US to enact some sort of health care reform legislation.  In our comment on this controversy, we noted that questions about the ethics of WellPoint's actions have appeared again and again.  Wellpoint...

• settled a RICO (racketeer influenced corrupt organization) law-suit in California over its alleged systematic attempts to withhold payments from physicians (see post here).
• subsidiary New York Empire Blue Cross and Blue Shield misplaced a computer disc containing confidential information on 75,000 policy-holders (see story here).
• California Anthem Blue Cross subsidiary cancelled individual insurance policies after their owners made large claims (a practices sometimes called rescission).  The company was ordered to pay a million dollar fine in early 2007 for this (see post here).  A state agency charged that some of these cancellations by another WellPoint subsidiary were improper (see post here).  WellPoint was alleged to have pushed physicians to look for patients' medical problems that would allow rescission (see post here).  It turned out that California never collected the 2007 fine noted above, allegedly because the state agency feared that WellPoint had become too powerful to take on (see post here). But in 2008, WellPoint agreed to pay more fines for its rescission practices (see post here).  In 2009, WellPoint executives were defiant about their continued intention to make rescission in hearings before the US congress (see post here).
• California Blue Cross subsidiary allegedly attempted to get physicians to sign contracts whose confidentiality provisions would have prevented them from consulting lawyers about the contract (see post here).
• formerly acclaimed CFO was fired for unclear reasons, and then allegations from numerous women of what now might be called Tiger Woods-like activities surfaced (see post here).
• announced that its investment portfolio was hardly immune from the losses prevalent in late 2008 (see post here).
• was sanctioned by the US government in early 2009 for erroneously denying coverage to senior patients who subscribed to its Medicare drug plans (see post here).
• settled charges that it had used a questionable data-base (builty by Ingenix, a subsidiary of ostensible WellPoint competitor UnitedHealth) to determine fees paid to physicians for out-of-network care (see post here). 
• violated state law more than 700 times over a three-year period by failing to pay medical claims on time and misrepresenting policy provisions to customers, according to the California health insurance commissioner (see post here).

But a few days ago, according to the Indianapolis Star:

Large stock awards helped boost total compensation to top executives at WellPoint by 51 percent to 75 percent last year over 2008.

The big jumps in take-home pay are detailed in the Indianapolis health insurer's annual proxy report to shareholders filed Friday.

Angela Braly, who is chair of the board, president and chief executive, saw her 2009 total compensation rise 51 percent, to $13.1 million. That compares with $8.67 million in 2008 and $14.8 million in 2007.

Braly's salary of $1.14 million barely budged from 2008, but she earned a $6.2 million stock award, almost triple the award she got in 2008.

Total compensation to other top executives:

Wayne DeVeydt, chief financial officer, $7.25 million, up 75 percent from 2008.

Ken Goulet, executive vice president, $4.43 million, up 62 percent.

Dijuana Lewis, executive vice president, $4.46 million, up 64.5 percent.

So whatever top WellPoint executives are paid for, it is not insuring that the company avoids ethical questions about its conduct, or controls health care costs or mdoerates premiums, for that matter. 

Boston Scientific, and Zimmer Holdings

We just commented on the generous compensation given the new and former CEOs of Boston Scientific, despite a series of ethical questions about that company's conduct, culminating in a guilty plea by the company to charges that it concealed information about important and potentially dangerous defects in its products.

A few days ago, I found a reminder, buried in an article in the Minneapolis Star-Tribune about a dispute between Boston Scientific and St Jude Medical, that current Boston Scientific CEO Ray Elliott has a track record of collecting generous compensation despite ethical questions about the companies he has lead.

Elliott is certainly familiar with the potential ethical minefield surrounding the relationships between sales reps and doctors. He was CEO at orthopedic devicemaker Zimmer Holdings Inc., which paid (along with four other companies) $311 million in 2007 to settle a Department of Justice investigation into the consulting fees paid to doctors.

As we discussed back in 2007, Zimmer Holdings Inc was one of four medical device companies which submitted to deferred prosecution agreements in response to charges that the companies implemented criminal conspiracies to violate federal anti-kickback laws. We posted several times about one aspect of this settlement, the mandate that the companies make public the payments (often huge) to orthopedic surgeons, academic institutions, and medical associations. (See posts here, here, here, here, here.) At the time, I did not think to look into what happened to the leadership of these companies thereafter.

According to the 2008 proxy statement by Zimmer Holdings, Ray Elliott conveniently retired in 2007, just before the deferred prosecution agreement was announced. Since he had been President of Zimmer since 1997 and CEO since 2001, according to the 2007 proxy statement, he appeared to have been in the top leadership of the corporation during the time the actions were performed that resulted in the deferred prosecution agreement. Nonetheless, again according to the 2008 statement, for the part of 2007 during which he served as CEO, his total compensation was $7,987,158. For 2006, his total compensation was $11,998,121. In 2007, the present value of his two pension plans were $269,764 and $5,302,050. In 2007, he owned 1,235,859 shares of stock (now worth $72,952,757 at the current price of $59.03 /share), and had the right to acquire 1,169,987 more within 60 days.

And of course, as we posted earlier, Boston Scientific paid him over $30 million for working part of 2009.

So Mr Elliott prospered mightily from his leadership of ethically challenged Zimmer Holdings, and was then further rewarded by ethically challenged Boston Scientific.

Summary

We have commented again and again that while numerous health care organizations have been charged with unethical, and sometimes illegal behavior, the people who oversaw, directed, or implemented the behavior almost never have had to suffer any negative consequences.  Now we see that while some large health care organizations have been subject to penalties for unethical and illegal behavior, the leaders of these organizations have been compensated so well as to make them rich, rich beyond the dreams of most people.  So the problem is not merely that captaining an organization onto the ethical rocks costs one nothing, but that it can make one very rich.

Clearly we see examples of both profoundly perverse incentives and a complete lack of accountability and responsibility affecting the leadership of major health care organizations.  Is it any wonder that these organizations continue to act unethically, and that the costs of the goods and services they provide rise continuously?

If we truly want health care that is accessible, of high quality, at a fair price, and more importantly, if we want health care that is honest and focused on patients, we need to provide health care leaders with clear, rational incentives in these directions, and make them fully accountable for their actions, and the courses of their organizations under their leadership.

New Investigations of Boston Scientific, but New CEO Made $33.5 Million for Half a Year's Work

It appears that device-maker Boston Scientific has a new set of troubles.  The Boston Globe just reported:

Stepped-up government scrutiny of Boston Scientific Corp. stems from heightened concern over medical safety and disappointment that the company made new missteps after resolving previous problems with the Food and Drug Administration, analysts said yesterday.

The Natick medical-device maker, which has been working to settle patent suits and federal investigations dating back years, recently was notified of fresh investigations begun by the Department of Justice and the Securities Exchange Commission into problems that forced it to recall implantable heart defibrillators this month.

Boston Scientific said March 15 that it had halted shipments and recalled unsold units of seven brands of cardioverter and cardiac resynchronization therapy defibrillators. The products represented roughly 15 percent of the company’s $8.2 billion in 2009 sales.

On March 15, the company belatedly filed a notice informing the FDA of the production changes.

Larry Biegelsen, a senior analyst for Wells Fargo Securities, estimated Boston Scientific could lose $5 million in revenue every business day until defibrillator sales resume.

The Boston Globe article noted that:

Boston Scientific’s latest woes are reminiscent of an earlier round of friction with the FDA when defibrillator problems came to light after the company bought Guidant. The agency issued a 'warning letter' in 2006, citing multiple manufacturing violations and limiting Boston Scientific’s ability to get new devices approved until it fixed the problems. The restrictions were gradually loosened over the next two years, as the company strengthened its compliance, and the letter was lifted in 2008.

That summary actually soft-pedaled Boston Scientific's previous woes.

We started posting about the company's travails in 2005, starting with allegations that Guidant, which is now a Boston Scientific subsidiary, hid information about defects in the implantable cardiac defibrillators (ICDs) the company manufactured. As we noted in early 2005 here, Guidant executives allegedly knew that ICDs made from 2000-2002 were at risk for short-circuiting and failing, thus making them unable to deliver potentially life saving electrical shocks meant to prevent cardiac arrests, but the company only revealed the problem in 2005. By failing to notify physicians and the public, Guidant executives let expensive and profitable, but potentially useless devices to continue to be implanted, potentially increasing the risk of sudden death for the patients who received them. Then here we noted reports that Guidant continued to ship failure-prone devices even after it had designed and started to manufacture new ICDs that were supposed to be less likely to fail. By June, 2005 we posted that Guidant had recalled thousands of ICDs, including models that were previously not identified as likely to fail. Later that year, the case rated an article by Robert Steinbrook in the New England Journal of Medicine. Towards the end of 2005, we noted that Eliot Spitzer had sued Guidant for fraud.  At the end of the year, more information appeared, suggesting that Guidant knew the ICDs were flawed, but continued to sell them. Still more appeared early in 2006. Then the business media became interested in the bidding war between Johnson and Johnson and Boston Scientific for Guidant, provoking a bit more interest in the tale of the suppression of data about the flawed ICDs.

Then all was quiet until 2009, when Guidant, now a Boston Scientific subsidiary, plead guilty to two criminal misdemeanor charges that it failed to properly notify the FDA about problems with its ICDs (see post here). Later, the Guidant subsidiary of Boston Scientific settled charges that it gave doctors kickbacks as part of a "seeding study" to use its devices. At that time, it came to light that Boston Scientific had made another settlement, in 2007, of civil lawsuits alleging that the company hid problems with its products (see post here).

However, just as the latest questions about Boston Scientific were revealed, the Boston Globe also reported about how the company compensated its new CEO, who started in the middle of 2009:

Boston Scientific Inc. gave its new top executive an unforgettable welcome gift.

The Natick medical device maker said it paid chief executive J. Raymond Elliott, who replaced former CEO James Tobin last summer, $33.5 million in total compensation last year, making him one of region’s highest-paid corporate leaders.

Elliott’s pay package includes a salary of more than $598,000 for six months, a $1.5 million signing bonus, nearly $608,000 in other incentive awards, and $29.4 million in stock awards and options that will vest over the next few years. He also received other benefits, including a $12,500 executive allowance, nearly $198,000 for personal use of the corporate jet, and more than $1 million in relocation expenses.

Tobin, who retired last year after running the medical device company for about a decade, earned $13.7 million last year, roughly six times his pay level in 2007 and 2008.

And by the way, the compensation paid both these men did not exactly correlate with the company's financial, as opposed to ethical performance:

In February, the company agreed to pay $1.7 billion to settle patent infringement charges from rival Johnson & Johnson.

And for years, the company has struggled with anemic sales growth. Last year, the company reported it lost $1 billion, its fourth straight year in the red. Sales rose 2 percent to $8.2 billion.

The company’s stock rose 16 percent in 2009, reflecting the broader stock market recovery. But shares have slipped 20 percent this year.

You just cannot make this stuff up.

How could the company possible justify paying over $30 million for half a year's work by its CEO at a time when the company is facing multiple investigations, has had to settle civil cases and criminal charges, has had to stop production of one of its most important products due to its failure to meet regulatory requirments, and has lost money for four years? 

This illustrates how leaders of big health care organizations are able to make themselves extremely rich at the expense of share-holders, employees, patients, and ultimately society, completely out of proportion to any claims they can make about their or their companies' performance.  This indicates the collective lack of accountability of many health care leaders, and the perverse incentives that now drive health care. 

But is it any wonder that health care costs continue to rise uncontrollably? Once again, I submit that true health care reform needs to make health care leaders accountable, and subject to clear ethical standards, and to eliminate the sorts of perverse incentives that are transforming them (and other corporate CEOs) into a new aristocracy.  Without such measures, we in the US may have near universal health care insurance, but soon no one will be able to afford access to any sort of quality health care.