Health Science

Rising Generic Drug Prices

Health care costs in the US continue their seemingly inexorable rise.  Even the parts of health care that used to seem reasonably priced now are affected.  As Ed Silverman discussed on PharmaLot

prices for many generic drugs have been climbing, prompting concerns that a low-cost staple of the U.S. health care system might soon strain budgets.

Generic drugs, like practically every other part of US health care, have become big business.  As a Forbes article pointed out, the industry is becoming more consolidated, and more likely to suffer from manufacturing and regulatory issues.  However, there may be other reasons for increasing generic drug costs.

Case: Mylan Purchased Properties Developed by its Own Board Vice Chair

A recent Wall Street Journal scoop on the big generic pharmaceutical company Mylan suggested that maybe such companies are now suffering from the same leadership and governance ills we have been finding throughout US - and indeed global - health care.  Furthermore, to understand the impacts of such health care dysfunction, one must consider the incentives that underlie them, that is, who benefits?

The story concentrated on some dodgy deals involving the company and firms linked to the Vice Chairman of its board of directors.  The first part of the story was:

Generic-drug maker Mylan NV moved into new headquarters in December 2013 after buying vacant land in an office park near Pittsburgh and erecting a five-story building for about 700 employees.

The company hasn’t publicly disclosed that the office park’s main developer is Rodney Piatt, Mylan’s vice chairman, lead independent director and compensation-committee chief. The new headquarters was a big boost for the mixed-use real-estate development, called Southpointe II, where all the land has been sold and some of the last buildings are now rising.

Securities regulators require public companies to tell shareholders about any significant transactions with directors, executives or other 'related persons.' Members of boardroom compensation committees have special duties under securities and tax laws to avoid dealings that compromise their independence.

Mylan, now fighting a three-way takeover battle in the pharmaceutical industry, says there was no need to disclose Mr. Piatt’s connection to the $60 million real-estate project because he and the company avoided any direct dealings with each other.

The day before Mylan announced plans to build the new headquarters, a company managed and partly owned by Mr. Piatt sold a 7-acre site for $1 to an entity owned by a business partner in Southpointe II, according to property records reviewed by The Wall Street Journal. The partner’s firm sold the same land to Mylan for $2.9 million later the same day.

Also,

Real-estate records show a similar transaction in May. Mylan paid $9.2 million to buy an adjacent 11 acres from Mr. Miller, whose firm previously bought the land for $10 from a company partly owned by Mr. Piatt.

'Mr. Piatt was not a party to either transaction' involving Mylan and 'had no direct or indirect material interest in the transactions,' says a Mylan spokeswoman.

She adds that Mr. Piatt didn’t make a profit on either sale to Mylan because Mr. Miller separately arranged to buy out Mr. Piatt at cost and then sold the land directly to Mylan. Mr. Piatt didn’t return calls seeking comment.

Note however that

Securities rules require disclosure of any transaction of more than $120,000 where a related person will have a direct or indirect material interest, regardless of whether the person makes a profit.

In the case of compensation-committee members, related-party transactions can jeopardize the independence required of them under tax and securities rules. That can threaten the tax-favored status of some executive-pay programs and require executives to disgorge some of their gains on stock sales.

Some securities-law and corporate-governance experts say Mylan should have been more transparent about the real-estate transactions or handled them differently.

'The optics are terrible,' says Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware and a director at HealthSouth Corp. and Bob Evans Farms Inc. 'Pittsburgh is a big town with no shortage of real estate. Either they could have gone somewhere else, or [Mr. Piatt] could have relinquished the directorship and eliminated the conflict.'

Just to emphasize the questions about Mr Piatt's independence,

The new headquarters is named the Robert J. Coury Global Center, after Mylan’s executive chairman. Mr. Coury, 54, was chief executive from 2002 to 2012.

A few months after the project’s approval by local officials, Mr. Piatt signed a pension amendment that increased the value of Mr. Coury’s promised benefits by 40%. His overall pension of $48.8 million is 11th-largest among executives at U.S. publicly traded companies, according to Standard & Poor’s ExecuComp.

Further muddying the waters,

During construction, Mylan hired project-management firm RIZ Consulting & Management Inc. to oversee the general contractor and architect. RIZ has the same business address and phone number as Mr. Piatt’s real-estate company, and he is listed as the contact person for RIZ in the local chamber of commerce’s membership directory.

RIZ’s president also is a top executive at Mr. Piatt’s company, and some employees of Mr. Piatt’s company worked for RIZ on the project, according to state records, construction documents and the minutes of permit meetings. RIZ’s president didn’t return calls seeking comment.

'They set it up that way because [Mr. Piatt] sits on the board of Mylan,' says Jeff Yates, a project manager with PJ Dick Inc., the general contractor for the Mylan headquarters project. 'It was kind of a conflict of interest, [so] RIZ was a separate company set up to be the owner’s rep.'

We often discuss how health care is tangled in a vast web of conflicts of interest.  The kinds of apparent conflicts of interest in play in this case are somewhat different from those we frequently discuss, but still seem part of this web.

In the last few days, other Pittsburgh newspapers have jumped into the fray, and found their own experts to question these deals.  Per the Post-Gazette,

'It doesn’t pass the smell test'” said Mel Fugate, a management professor at Southern Methodist University.  Mr. Fugate said that while the SEC places legal requirements on which transactions must be disclosed, the legal obligations are 'the lowest hurdle of them all.'

'This smells bad … even if they can prove legally there are no conflicts' he said.

Again, as noted above the law in certain instances may define conflicts of interest more narrowly than ethical definitions.  For example, the Institute of Medicine defined conflicts of interest in medicine: occurring "when an individual or institution has a secondary interest that creates a risk of undue influence on decisions or actions affecting a primary interest."

The Tribune weighed in,

'The whole thing stinks,' said Douglas Branson, a University of Pittsburgh law professor and an expert in corporate governance. 

Board members'have to serve the best interest of the corporation,' he said. 'You can't be both a seller and buyer — that's the classic definition of conflict of interest.

So here we see serious allegations of conflicts of interest affecting the Vice Chair of the Mylan board, and perhaps affecting another board member and former CEO.  These conflicts suggest that company operations could have been manipulated for these individuals' benefits.

Other Questions about Mylan's Leadership and Governance

Yet these are not the only examples of questions about Mylans' leadership and governance, questions which suggest that managers and board members may have been putting personal gain ahead of the larger interests of the corporation, its shareholders, and the patients who take its drugs


A Pittsburgh Business Journal article noted the "allegations of impropriety" raised by the current case, but also hinted at larger problems with the leadership and governance of Mylan.


Current CEO's Invalid MBA

Per the Pittsburgh Business Journal

Mylan (Nasdaq: MYL) has had ethics questions in the past. An MBA awarded to CEO Heather Bresch was withdrawn in 2008 following an investigation that found she didn’t complete the necessary course credits.

However, that finding did not apparently affect her ongoing career trajectory at Mylan

Former CEO's Use of Company Jet to Help Son's Rock Music Career

The Pittsburgh Business Journal also stated,

And in 2012, the Wall Street Journal found that [former CEO] Coury transported his son to rock concerts on the corporate jet, which was allowed as part of his employee benefits package.

That WSJ article emphasized,

 Nina Devlin, a spokeswoman for Pittsburgh-based Mylan, said Mr. Coury's employment contracts have allowed outside personal activities, 'including those related to his son Tino's career.' She said Mr. Coury isn't required to use the corporate jets but his employment contracts for the past decade have allowed personal use by him and his family.

Thus these contracts apparently allowed valuable Mylan resources to be expended in support of the former CEO's son's career, even though Tino did not apparently have any direct role in the company. Note that these revelations also apparently did not affect Mr Coury's career trajectory with the company, nor did those below.

Transactions Between Former CEO's Brothers and Mylan

That same WSJ article also found,

 This wasn't the only business relationship between the elder Mr. Coury and his brothers. Coury Investment Advisors, a company in which two of his brothers, Gregg and Paul, are principals, has served as a broker for Mylan's employee-benefit plans. Various insurers paid them $597,000 in the past three years for Mylan-related business, according to U.S. Labor Department filings.

That appeared to be another conflict of interest, benefiting different members of the former CEO's family.

However, that is still not the whole story.  A quick look through our magic files, and Google, revealed some other pieces.

Mylan Settled Allegations of Inflated Pricing

In 2010, we briefly posted about a settlement by Mylan of charges it falsely inflated prices for several drugs.
As is usual in such settlements, none of the people who authorized, directed or implemented the actions leading to this settlement apparently suffered any negative consequences, including the top managers on whose watch they occurred. 

Mylan Fired Executive Allegedly for Filing Whistleblower Lawsuit Against Another Company

In June, 2014, the Pittsburgh Tribune reported,

 When Mylan Inc. learned that its vice president of marketing had filed a whistleblower lawsuit against his previous employer, it fired him, the man alleged in a federal lawsuit filed Tuesday.

Note that the lawsuit was against Cephalon, not Mylan.  Rocking the boat, or blowing the whistle apparently are not rewarded at Mylan.

Current CEO Named US Patriot of the Year, then Moved Mylan to Netherlands

In 2014, some wondered how Heather Bresch, still the Mylan CEO, could have claimed to be ultra-patriotic while she was planning to move her company out of the US.  In 2011, Esquire listed Ms Bresch in an article on "Americans of the Year: Patriots." They were apparently particularly impressed that she had called for more inspections on foreign drug companies whose products are imported into the US. However, in 2014, per Ron Fournier in the National Journal.

This story is about a gilded class of people and corporations enriched by the new American economy while the rest of its citizens pay the tab. The protagonists could be any number of institutional elites, but this column happens to be about a Democratic senator from West Virginia, Joe Manchin, and his daughter, Heather Bresch, the chief executive of Mylan, a giant maker of generic drugs based outside Pittsburgh.

Her company's profits come largely from Medicaid and Medicare, which means her nest is feathered by U.S. taxpayers. On Monday, Bresch announced that Mylan will renounce its United States citizenship and instead become incorporated in the Netherlands – leaving this country, in part, to pay less in taxes.

This is the sort of story that makes blood boil in populists – voters from the Elizabeth Warren wing of the Democratic Party to libertarians who follow Rand Paul and including tea party conservatives. These disillusioned souls, growing in numbers, hate hypocrites who condemn the U.S. political system while gaming it.

Later, Ms Bresch's father, Senator Manchin, said what his daughter did should be illegal, again per another Ron Fournier article in the National Journal, whose title says it all:

Senator Manchin: What My Daugher Did Should be Illegal

Nonetheless, late in 2014, Bloomberg reported that not only would Mylan go ahead with the inversion, but it would pay the excess taxes personally incurred by its own executives due the transaction.  Such taxes were meant as a negative incentive to discourage such maneuvers.  Even so, top managers seemed to be able to pay themselves to avoid the effect of these incentives, and of course any resulting personal financial losses.


Summary

 The latest story about Mylan seemed to show a leading board member financially benefiting from transactions between the company over which he was supposed to exercise stewardship and his own company.  Other stories showed Mylan executives seeming to gain outsized benefits for themselves or their family members from Mylan beyond conventional salaries and corporate benefits packages. Of course, since Mylan is not just any company, but a very large generic drug company, putting top hired managers and boards of directors first may mean putting patients second.  The cost of these managers' and boards' interests may be at the expense of patients, and the public at large.

Thus perverse incentives enable mission-hostile management and ultimately health care dysfunction.

So once again, when considering how US, and global health care has become so dysfunctional, it makes sense to think about who is benefiting from the current dysfunction.  It very often is organizational insiders, particularly top hired managers, and sometimes those who are supposed to keep an eye on them. 

 Thus, like hired managers in the larger economy, health care managers have become "value extractors."  The opportunity to extract value has become a major driver of managerial decision making.  And this decision making is probably the major reason our health care system is so expensive and inaccessible, and why it provides such mediocre care for so much money. 

One wonders how long the people who actually do the work in health care will suffer the value extraction to continue?
As we have said far too many times - without much impact so far, unfortunately - true health care reform would put in place leadership that understands the health care context, upholds health care professionals' values, and puts patients' and the public's health ahead of extraneous, particularly short-term financial concerns. We need health care governance that holds health care leaders accountable, and ensures their transparency, integrity and honesty.

But this sort of reform would challenge the interests of managers who are getting very rich off the current system.

As Robert Monks said in a 2014 interview,

People with power are very reluctant to give it up. While all of us recognize the problem, those with the power to change it like things the way they are.

So I am afraid the US may end up going far down this final common pathway before enough people manifest enough strength to make real changes.

The theme of non-profit hospital CEO as Scrooge seems to be persisting in the media even beyond the holiday season.  (Our last post on this theme was in December, 2014).  The previous cases we discussed (also here) involved  marked contrasts between how well top hired managers of non-profit hospitals were doing, and how their institutions were doing.

Turning Around the Hospital, but Turning Away Employees

The background to this story comes from an article in the Cape Cod (MA) Times from January, 2014.  Cape Cod Healthcare, a regional non-profit hospital system, hired Dr Richard Saluzzo as CEO to turn around the system's troubled finances.

Cape Cod Healthcare had 'a pretty significant economic turnaround' under Salluzzo's stewardship, as well as accolades for quality of care, [board chairman Thomas] Wroe said.

'We were really in trouble. He was the architect and foundation of turning that around,' Wroe said.

In this case, the turn around seemed to be strictly financial,

During his tenure Cape Cod Healthcare's bond rating improved from one grade above junk status to BBB with a favorable outlook.

However, the turn around also involved turning away employees,

The financial turnaround came in part from cost-cutting measures such as layoffs for about 200 employees and improved billing.

More details about these layoffs were in a Cape Cod Times article from 2008,

A hospital chaplain and several psychiatric nurses are among the cuts emerging from Cape Cod Healthcare's announcement last month that it is eliminating 169 positions.

In particular,

the hospital's largest union is expected to begin the process of 'bumping' later this week, which allows employees with more years of service to move into jobs of junior colleagues.

Most of the layoffs announced last month are at Cape Cod Hospital.

Union jobs scheduled for elimination are going through a process of negotiation with management.

Seventy-six positions held by members of the 1199SEIU United Healthcare Workers East are slated for elimination.

Also still in negotiation is the fate of seven members of the Massachusetts Nurses Association, several of whom are employees of the psychiatric center located across the parking lot from Cape Cod Hospital in Hyannis.

Some of the nurses work part time, said Marilyn Rouette, president of the Cape Cod Hospital chapter of the association.

But the psychiatric services help 'a very vulnerable population,' she said.

So the hospital apparently did improve its financial performance during the reign of Dr Saluzzo, but at the expense of quite a few employees, including health professionals serving vulnerable patients.

CEO Compensation as the Gift that Keeps on Giving

CEO Dr Saluzzo earned pretty good pay during his last full year, as reported by the Cape Cod Times in 2014,

In fiscal 2010 — his last full year of employment at Cape Cod Healthcare — Salluzzo earned under $1 million, garnering $835,609 in salary and $23,967 in other compensation. He also received a benefit plan worth $78,618.

He did much better than did the previous CEO,

Salluzzo's most recent salary stands in striking contrast to that of his predecessor, retired Cape Cod Healthcare CEO Stephen Abbott, whose salary came to $621,225 in fiscal 2008, his last full year on the job. That year he also had a benefit plan worth $111,544.

However, CEO Dr Saluzzo's compensation did not stop when he left.  The 2014 article in the Cape Cod Times included,

Even as Dr. Richard F. Salluzzo abruptly left his CEO position at Cape Cod Healthcare more than three years ago, he was due to receive more than $2 million in compensation.

Reports filed with the state attorney general's office for fiscal 2012 and 2011 show that Salluzzo remained Cape Cod Healthcare's highest-paid employee those years, despite the fact that he left just two months into fiscal 2011.

Salluzzo earned $1,309,308 for fiscal 2011 and $1,095,342 for fiscal 2012, according to forms filed with the attorney general's nonprofit/public charities division. Cape Cod Healthcare's fiscal year starts Oct. 1.

This week, the January 5, 2015 Cape Cod (MA) Times updated the figures,

Three years after he abruptly left Cape Cod Healthcare, former CEO Dr. Richard Salluzzo continued to be one of its highest-paid employees, according to new financial reports filed with the state attorney general’s office.

Since departing the nonprofit organization in November 2010, Salluzzo has taken in more than $3 million in compensation, including $857,953 for the most recent fiscal year on file, 2013.

The compensation made Salluzzo the fourth-highest-paid employee at Cape Cod Healthcare for that period, which started Oct. 1, 2012, according to forms recently filed with the attorney general’s nonprofit/public charities division. The payout is less than what Salluzzo earned in fiscal years 2011 and 2012, which came to $1,309,308 and $1,095,342.

The Board Continues its Defense of the Seemingly Endless CEO Compensation

According to the 2015 Cape Cod Times article, the new board chairman continued the defense of the continuing payment of a CEO who departed over three years ago,

This was a commitment made by the board years ago,' said William Zammer, chairman of the Cape Cod Healthcare Board of Trustees. 'The system was hemorrhaging money, and we were in a terrible position.'

'Salluzzo came onboard and did the job' of shifting the health care system from the red to the black,' Zammer said.

Never Mind the Questions Raised about the CEO Since 2008

This defense, admittedly not as strident as some other defenses by hospital board members of CEO compensation that we have discussed, was maintained despite some pretty significant questions about former CEO Dr Saluzzo since he was hired back in 2008.

Dr Saluzzo's Leadership of Wellmont Health System

This concern goes all the way back to 2009, as reported again by the Cape Cod Times,

Amid the good news, however, comes word from the Wellmont Health System in Kingsport, Tenn., that profits under Salluzzo were significantly less than first reported. A recent audit by a new firm found the system overstated its net earnings for fiscal years 2006 and 2007 by nearly $20 million and lost $4.6 million in 2008. The financial restatement came as a shock to Salluzzo, who said audits during his tenure always came back clean.

'This is a disagreement between auditors,' he said. 'I know my team and I did nothing wrong.'

Wellmont officials, who have not returned phone calls, said in a prepared statement that the audit turned up no evidence of criminal acts. The press release referred to errors in recording expenses, receivables and assets and said the system was imposing a new set of controls to reconcile accounts and strengthen internal auditing.

At that time, the board of Cape Cod Healthcare just seemed relieved that the issue was not criminal,

'There's no indication of fraud, manipulation of funds or personal gain,' [board chairman Thomas Wroe] ... said. 'They changed auditors. Any time you do that, you have a different translation of financial results. We have strong confidence in Dr. Salluzzo. He's been doing a great job for us.'

Saying that there is no indication that a person is a criminal seems like rather faint praise.  Never mind that it was still on CEO Dr Saluzzo's watch that these results, which now appear less than stellar, were produced, and that the belief, not apparently wrong, that CEO Dr Saluzzo produced stellar results at Wellmont was a reason to hire him as CEO of Cape Cod Healthcare.  Never mind that it was on CEO Dr Saluzzo's watch that the Wellmont hospital systems accounting was full of errors, yet it was Dr Saluzzo's financial leadership at Wellmont that apparently endeared him to the Cape Cod board.

Dr Saluzzo Sanctioned by the Massachusetts State Medical Board

In 2011, after Dr Saluzzo left his position as CEO, the Falmouth (MA) Enterprise reported,

Dr. Richard F. Salluzzo, former CEO of Cape Cod Healthcare, was disciplined by the state Board of Registration in Medicine this week for using drugs prescribed to others for his own use and prescribing drugs to family members without keeping proper records.

In particular,

Among the allegations in the board’s investigation of Dr. Salluzzo are that in 2008, before he started at Cape Cod Healthcare, he wrote four prescriptions for Valium for an employee working under him and then asked the employee to fill the prescriptions and give him the drugs. In 2009, while holding the top job at Cape Cod Healthcare, he wrote prescriptions for Zoloft for a friend and filled the prescriptions for his own use.

According to the board’s allegations, he also wrote prescriptions for controlled substances for his wife, his two adult children and his father but did not keep medical records for the family members.

In disciplining Dr. Salluzzo for those actions, the board cites the American Medical Association’s Code of Medical Ethics that 'physicians should not treat themselves or family members as professional objectivity may be compromised and issues of patient autonomy and informed consent may arise.'

In a consent order, Dr. Salluzzo agreed to the ruling and punishment, signing the document on November 1.

At that time, the Cape Cod Healthcare board of trustees responded to the disciplinary measures taken for unprofessional actions by the system's former CEO thus,

Cape Cod Healthcare’s board of directors, in a press release, stated, 'We became aware of a complaint and followed our established policies to ensure that the licensing board was involved in this matter on a timely basis. We then cooperated fully with the Board of Medicine’s investigation.'

The board notes that the Board of Medicine discipline concerns Dr. Salluzzo’s private practice and not his management performance.

'No complaint was ever reported or filed by any patients or physicians here regarding the quality of the clinical care provided by Dr. Salluzzo during his tenure on the medical staff of both CCHC hospitals,' according to the statement.

The board reiterated its statement last year about Dr. Salluzzo’s tenure at the hospital. 'He achieved the goals set for him as witnessed by our financial turnaround and improved relationships with our physicians, then decided to pursue other career challenges and professional interests.'

By the way, the January, 2014, Cape Cod Times article also noted,

On the basis of the Massachusetts disciplinary actions, Salluzzo also was fined and reprimanded in 2012 by medical boards in New York, Tennessee and Pennsylvania — all states where he has practiced medicine in the past.

I would guess that this means that actions uncovered by the Massachusetts board of medicine included some that took place in these other states.  

The real issue raised was not whether Dr Salluzzo's professional actions harmed patients, but whether a physician so sanctioned for unprofessional conduct deserved continuing payments, amounting to millions of dollars, for his previous employment as CEO of  Cape Cod Healthcare. 

The usual justification for extremely high compensation of hired health care managers is their brilliance. Recall that in 2014, well after CEO Dr Saluzzo departed from Cape Cod Healthcare, then chairman of the board of trustees Thomas Wroe gave him accolades for "quality of care."  It seems that one could question the quality of care produced by the leadership of a physician who wrote used subterfuges to obtain controlled substances for himself and his family.  Such questions did not occur to the former chair of the system's board of trustees even by 2014.

Summary

Note that the 2014 Cape Cod Times article quoted W. Michael Hoffman, executive director of the Center for Business Ethics at Bentley University, who called CEO Dr Saluzzo's cumulative compensation "outrageously lucrative."  The 2015 Cape Cod Times article quoted David Schildmeier, spokesman for the Massachusetts Nurses Association, who called it "obscene," and furthermore,

We're paying this failure of a CEO millions of dollars.

Nevertheless, heaven forfend that a hospital board of trustees would try to withhold pay for a CEO, even pay provided years after that CEO's departure, that might violate a previously written contract, even new information discovered might now provide reasons to challenge that contract.

So here is an amazing example in which a former hospital system CEO continues to be rewarded with millions of dollars after he actually left his employment as CEO.  These rewards started even though the financial turnaround he supposedly engineered required layoffs of health care professionals serving vulnerable patients  The hospital system board of trustees continued to authorize, and failed to question these payments even after subsequent revelations that the CEO's initial hiring was apparently based on a false impression of the financial performance of his previous hospital system generated by accounting problems within that system, and that the CEO had behaved unprofessionally in obtaining prescriptions of controlled substances for his family and for himself.

As we have said before, in US health care, the top managers/ administrators/ bureaucrats/ executives - whatever they should be called - continue to prosper ever more mightily as the people who actually take care of patients seem to work harder and harder for less and less. This is the health care version of the rising income inequality that the US public is starting to notice.

 Thus, like hired managers in the larger economy, non-profit hospital managers have become "value extractors."  The opportunity to extract value has become a major driver of managerial decision making.  And this decision making is probably the major reason our health care system is so expensive and inaccessible, and why it provides such mediocre care for so much money. 

One wonders how long the people who actually do the work in health care will suffer the value extraction to continue?

So to repeat, true health care reform would put in place leadership that understands the health care context, upholds health care professionals' values, and puts patients' and the public's health ahead of extraneous, particularly short-term financial concerns. We need health care governance that holds health care leaders accountable, and ensures their transparency, integrity and honesty.

But this sort of reform would challenge the interests of managers who are getting very rich off the current system.  So I am afraid the US may end up going far down this final common pathway before enough people manifest enough strength to make real changes.

Less than two weeks ago, we discussed a series of cases in which there was a marked contrast between how well top hired managers of non-profit hospitals were doing, and how their institutions were doing. 

Now another vivid example of this problem as appeared, affecting Erlanger Health System,  a non-profit hospital system in Tennessee that has recently seen hard times.

Freezing Paid Time Off

In March, 2014, as reported by the (Chattanooga, TN) Time Free Press,

Erlanger Health System's latest strategy to staunch financial losses has hit its most personal note yet, as hospital executives have decided to freeze the paid time off accruals for 4,000 employees from now until July.

Erlanger employees used the words 'defeated,' 'distressed' and 'betrayed' when describing staff reactions to the cuts, announced Friday.

The sudden decision shows just how high stakes are becoming at the Chattanooga public hospital. Erlanger is $3.8 million in the red this fiscal year and is also feeling the weight of roughly $14 million in state, federal and insurance cuts this year, hospital executives say.

At that time, hospital managers emphasized the fairness of the freeze because it would be applied across the board,

 No one -- including executive staff and doctors-- will be exempt from the freeze, which will span nine pay periods and is expected to save the hospital $5.4 million, said hospital Chief Administrative Officer Gregg Gentry.

Furthermore,

 Of all potential cuts discussed -- including layoffs -- the executive staff said the decision to temporarily freeze paid time off would have the most impact on the budget while having the 'least impact' on employees.

The result means 'everyone has to sacrifice' to make those goals, [CEO Kevin] Spiegel said.

The freeze may have so badly affected employee morale because it came on top of other changes imposed on employees,

 Erlanger has already made significant changes to employees' benefits this year -- phasing out its traditional pension plan in favor of 401(k)-like accounts; changing how paid leave is structured and approved; and increasing what retirees pay toward their health insurance.

However, there was hope that perhaps the freeze would not last long, since hospital managers had located some government money that might be obtained to relieve the deficit.

More Money, So the First Thing to Do is Give Bonuses to Top Hired Managers

By December, 2014, Erlanger finances had at least temporarily improved, partially because of access to the government money.  So, as again reported by the Times Free Press, the first thing the hospital system board did was to give bonuses to the managers who had imposed all those cuts on other employees.

At the end of a year that started with freezing employees' vacation time and warnings of financial crisis, Erlanger Health System will award $1.7 million in bonuses to its top management for financial performance.

Erlanger trustees voted Thursday to pay the incentives, which were determined by a series of benchmarks set last year. The public hospital's financial turnaround -- driven largely by a $19 million infusion of federal money -- will enable the payout averaging $17,100 to 99 managers.

Erlanger CEO Kevin Spiegel will collect $234,669 in bonus pay, bringing his total compensation this year to $914,669. Trustees also voted to give Spiegel a 10 percent raise next year, upping his base pay to $748,000, and approved a 2 percent nonbudgeted pay raise for hospital employees.

Sometimes, you just cannot make this stuff up. The CEO gets a 10% increase in base pay, and almost a quarter-million dollar bonus, while regular employees may get a 2% increase after enduring vacation time freezes, and various reductions in benefits.

Furthermore, while money was saved by supposedly across the board cuts, reducing the benefits of hard working employees, including health professionals who took direct care of patients, and revenues were increased by some relatively easily found money from the federal government, the hospital system board seemed to attribute the sudden success only to the top hired managers.

 'Management has performed exceedingly well,' said board Chairman Donnie Hutcherson, [a certified public accountant, and partner in an accounting firm] who added that the compensation is comparable to that of other hospitals such as Erlanger.  'This is well deserved. They have put in long, long hours.'

He explicitly did not seem to consider whether other Erlanger employees, especially doctors, nurses, and other health professionals also were putting in long hours, and working diligently under difficult circumstances.

 One Erlanger nurse, who asked not to be named for fear of losing her job, said the management incentives 'have come at the expense of their employees and the sacrifices they have made.'

'[Employees] have had vacation time taken away and are paying more for benefits. They are routinely overworked and understaffed,' the nurse said Friday. 'The morale among staff and doctors is the lowest I have ever witnessed. If that constitutes a bonus, obviously my belief system of what I think is morally and ethically right and wrong is not shared by the management or board members at Erlanger.'

Thus this was a strikingly bizarre use of one of the talking points that are often used to justify high and ever increasing compensation for top hired managers.  Managers are often hyped as "brilliant," and "hard working," without any explicit comparison to any other employees, especially to health care professionals who often go through much more rigorous training, and may work far longer hours than managers, administrators, bureaucrats, or executives.  (Look here)


Previous Disconnects Between Executive Compensation and Hospital Finances

In fact, discrepancies between how hired executives are treated and how the hospital system is faring financially are old hat for the Erlanger Health System.  In 2012, we noted how the board voted to give a previous CEO a golden parachute soon after the system first began running a deficit, and after unpaid work days were imposed on other employee.  After further financial deterioration, the board voted to put the severance package on hold.  However, this 2013 Times Free-Press article suggestsd that CEO ultimately received it, paid out over 15 months.  Furthermore, as we wrote in 2011, the system board did something similar in 2009, giving the CEO bonuses despite financial losses and a bond default.

This history did not seem to inform the board's current decision making, or perhaps it did inform the board that they could get away with such decisions?

Once Again, the Board Temporarily Backs Off Under Public Pressure

The Times Free-Press reported today, December 12, 2014, that once again the board has retreated,at least for a while, 

Facing criticism and questions from state lawmakers after voting to award executives $1.7 million in bonuses, Erlanger Health System officials said Thursday night they will put the payments on hold and review their actions.

Trustees for the public hospital voted Dec. 4 to approve bonuses for 99 managers, including more than $234,000 for CEO Kevin Spiegel.

The Hamilton County legislative delegation -- which appointed three trustees to the 11-member board -- harshly criticized the move, saying the hospital had not proven it could afford such bonuses after ending the last three years in the red and relying on a federal funding pool to end this year with a profit.

Whether or not the bonuses will be cancelled, reduced, or merely delayed, however, still is unclear.

 Summary

In US health care, the top managers/ administrators/ bureaucrats/ executives - whatever they should be called - continue to prosper ever more mightily as the people who actually take care of patients seem to work harder and harder for less and less. This is the health care version of the rising income inequality that the US public is starting to notice.  It seems all the more unfair in health care, since the income inequality is clearly between managers/ administrators/ bureaucrats/ executives who are mostly generic, that is, not specifically trained or experienced in health care or biomedical science, and the doctors, nurses, therapists, and technicians who actually take care of patients.  (For example, the CEO of Erlanger Health Systems, Mr Kevin Spiegel, has an MBA in Health Care Administration from Adelphi, and no obvious training or experience in actual patient care, nor biomedical science.)

As we have noted before, most recently here, the favored treatment of the managers/ etc ... is often justified by other managers on the boards of trustees who are supposed to exercise stewardship over health care organizations, and by the public relations flacks, marketers and lawyers employed by the self-same managers.  The justifications usually consist of repetitions of the same stale talking points, as if in a vacuum.  Note above that the Erlanger board member justified the bonuses by extolling the managers' performance and long hours, totally ignoring how many other hospital system employes worked hard and well to keep the system above water.

Thus, like hired managers in the larger economy, non-profit hospital managers have become "value extractors."  The opportunity to extract value has become a major driver of managerial decision making.  And this decision making is probably the major reason our health care system is so expensive and inaccessible, and why it provides such mediocre care for so much money. 


One wonders how long the people who actually do the work in health care will suffer the value extraction to continue?

So to repeat, true health care reform would put in place leadership that understands the health care context, upholds health care professionals' values, and puts patients' and the public's health ahead of extraneous, particularly short-term financial concerns. We need health care governance that holds health care leaders accountable, and ensures their transparency, integrity and honesty.

But this sort of reform would challenge the interests of managers who are getting very rich off the current system.  So I am afraid the US may end up going far down this final common pathway before enough people manifest enough strength to make real changes.

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

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

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

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

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

Financialization of Pharmaceutical and Biotechnology Companies

George W Merck famously said,
 

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

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

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


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

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

Specifically,

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

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

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

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

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

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

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

Generic Management Deluded by Business School Dogma

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

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


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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

Furthermore,

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

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

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

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

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

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

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

'Public health is politics,' Troisi said.

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

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

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

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

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

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

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

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

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

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

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

Nurses at hospitals across the country are asking similar questions.

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

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

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

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

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

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

Just last month the RUC made it back into the headlines.  Then we posted  Politico made another attempt to shed some light on this obscure committee and its outsize effect on health care. Now the watchdog organization Public Citizen has stepped into the breach, publishing a report on the RUC (Research Based Relative Value Scale Update Committee), with an accompanying press release and op-ed. 

Introduction - Why the RUC is Important

To explain why this issue is important, I can simply repeat what I wrote before. 

In 2007, readers of the Annals of Internal Medicine could read part of the solution to a great medical mystery.(1)  For years, health care costs in the US had been levitating faster than inflation, without producing any noticeable positive effect on patients.  Many possible reasons were proposed, but as the problem continued to worsen, none were proven.

The article in the Annals, however, proposed one conceptually simple answer.  The prices of most physicians' services, at least most of those that involved procedures or operations for Medicare patients, were high because the US government set them that way. Although the notion that prices were high because they were fixed to be so high was simple, how the fixing was done, and how the fixing affected the rest of the health system was complex, mind numbingly complex.

Perhaps because of the complexity of its implementation, the simplicity of the concept has not seemingly reached the consciousness of most American health care professionals or policy makers, despite the publication of several scholarly articles on the subject, efforts by humble bloggers such as yours truly, a major journalistic expose in the Wall Street Journal in 2010,  another major expose in Washington Monthly in 2013, congressional hearings in 2013, and yet another major expose in Politico in 2014.  The lack of much public discussion of this issue despite its importance and the above attempts to start discussion seemed to be a prime example of what we have called the anechoic effect, that important causes of health care dysfunction whose discussion would discomfit those who are currently personally profiting from the current system rarely produce many public echoes.  (For a review of what is known to date about how the offputtingly named Resource Based Relative Value Scale Update Committee (RUC) works, and previous attempts to makes it central role in fixing what US physicians are paid public, see the Appendix.)

Once Again...  the Public Citizen Report

The latest report draws on the earlier exposes and journal articles, and repeats again all but one of the major points in the Washington Monthly 2013 article.  Here are the points with quotes from the new report.

The RUC is Well Hidden

After describing the RUC as "secretive" in its introduction, the report reviewed the specifics:

most of its proceedings occur behind closed doors and without public scrutiny. Minutes from each of the RUC’s three annual meetings are not made publicly available. Additionally, when the RUC votes each spring to assign work RVU values to CPT codes, the voting results are not released to the public.

Also,

One critical piece of information that is not disclosed to anybody (including RUC members) is any indication of how each member of the RUC voted.

The RUC Fixes Prices

The RUC has enormous power in setting health care prices,...

The Government Enables the RUC to Fix Prices

The key data point in the formula that is used to set Medicare payment rates is largely determined by a secretive committee that is managed and funded by the American Medical Association....

Also,

CMS is not required to accept the RUC’s recommendations. In fact, the RUC is insistent that its role in the process is only to exercise its right to petition the government. However, studies have demonstrated that CMS accepts RUC recommendations at overwhelmingly high rates.

The Government Fixed Prices are Endorsed by the Private Sector

The RUC’s influence over physician payments extends well beyond Medicare payments because private insurers also use the Medicare payment framework as a baseline for determining their payments. Private insurance companies often set their payments based on the underlying Medicare fee schedule.

The Price Fixing Drives Up Costs and the Use of Services

The RUC has been accused of overstating many of the factors used to determine a physician payment.

Also,

When the RUC has recommended adjusting the values that determine physician payments, it has been more than five times as likely to increase pay for a procedure as decrease it.

These Incentives Cripple Primary Care

To the extent that the RUC’s members are biased towards their own specialties, this results in the overvaluing of specialty procedures at the expense of primary care. Because there are significantly more specialty procedures than primary care procedures, the overvaluation of specialty and procedural services has caused U.S. specialists’ pay to rise much more rapidly than primary care physicians since the formation of the RUC.

Higher pay to specialists creates greater incentives for medical students to practice specialty or procedural medicine, resulting in a shortage of primary care physicians.

These Incentives Benefit Big Corporations, not just Medical Specialists

This was the only issue not directly addressed in the 2014 Politico article or in the new Public Citizen report.  (But see our 2013 post.)

Anechoic So Far

So in some sense the Public Citizen report on the RUC sang the same old song.  However, as the report itself noted, previous attempts to inspire action about the RUC have generated no echoes.  Thus, maybe it should be no surprise that so far there has been no press coverage of the Public Citizen report (at least as far as I could tell by using my usual search techniques as of this morning). 

Of course, as we have discussed ad infinitum, that which discomfits those who are making so much money from our current health care system often manages to create few echoes, that is, what we have dubbed the anechoic effect.

This is all the more interesting because there are aspects of the RUC that could outrage both left- and right-wingers.  First of all, the RUC is a major component in a system of government price fixing.  Enabled by the RUC, CMS fixes the prices of medical care.  Many on the right, but particularly those of the more libertarian or free market fundamentalist persuasion say they hate government price fixing.

Second of all, the RUC exemplifies regulatory capture.  The report quoted

 Thomas Scully, an administrator of the Centers for Medicare and Medicaid Services under President George W. Bush, also has been highly critical of the RUC, and particularly the power the AMA has over the process. 'The idea that $100 billion in federal spending is based on fixed prices that go through an industry trade association in a process that is not open to the public is pretty wild,' Scully said in 2013.

Again, many on the right, and also, probably many on the left worry about regulatory capture.

Third, the RUC represents a particular species of regulatory capture, crony capitalism.  This was not emphasized in the report, but we have written before about how many RUC members have personal financial ties to health care corporations, and how these constitute conflicts of interest (look here).  The Washington Monthly noted that RUC members are sponsored by medical societies that in turn have institutional conflicts of interest involving big health care corporations, and that the way the RUC sets prices could benefit such health care corporations (look here.)  Both left- and right-wingers say they loathe crony capitalism, although the left emphasizes the undue influence of big business, and the right emphasizes the bad actions of government resulting from it.

Yet very few on the right or left seem to have noticed, much less have become outraged by the RUC

The new Public Citizen report suggested

The most important policy change is for CMS to stop relying on the AMA to maintain the existing system for determining the value of Medicare payments to physicians.

Maybe this time someone will listen.  As I have written too often, I hope the latest attempt by Public Citizen to make the RUC less anechoic will succeed in increasing awareness of the RUC and its essential role in making the US health care system increasingly unworkable.  Of course, such awareness may disturb the many people who are making so much money within the current system.  But if we do nothing about the RUC, and about the ever expanding bubble of health care costs, that bubble will surely burst, and the results for patients' and the public's health will be devastating.



APPENDIX - Background on the RUC

 We have frequently posted, first here in 2007, and more recently here,  here, here, and here, about the little-known group that controls how the US Medicare system pays physicians, the RBRVS Update Committee, or RUC.

Since 1991, Medicare has set physicians' payments using the Resource Based Relative Value System (RBRVS), ostensibly based on a rational formula to tie physicians' pay to the time and effort they expend, and the resources they consume on particular patient care activities. Although the RBRVS was meant to level the payment playing field for cognitive services, including primary care vs procedures, over time it has had the opposite effect, as explained by Bodenheimer et al in a 1997 article in the Annals of Internal Medicine.(1) A system that pays a lot for procedures, but much less for diagnosing illnesses, forecasting prognoses, deciding on treatment, and understanding patients' values and preferences when procedures and devices are not involved, is likely to be very expensive, but not necessarily very good for patients.
 
As we wrote before, to update the system, the Center for Medicare and Medicaid Services (CMS) relies almost exclusively on the advice of the RBRVS Update Committee. The RUC is a private committee of the AMA, touted as an "expert panel" that takes advantage of the organization's First Amendment rights to petition the government. Membership on the RUC is allotted to represent specialty societies, so that the vast majority of the members represent specialties that do procedures and focus on expensive, high-technology tests and treatments.
 
However, the identities of RUC members were opaque for a long time, and the proceedings of the group are secret.  As Goodson(2) noted, RUC "meetings are closed to outside observers except by invitation of the chair." Furthermore, he stated, "proceedings are proprietary and therefore not publicly available for review."
 
In fact, the fog surrounding the operations of the RUC seems to have affected many who write about it. We have posted (here, here, here, and here) about how previous publications about problems with incentives provided to physicians seemed to have avoided even mentioning the RUC. Up until 2010, after the US recent attempt at health care reform, the RUC seemed to remain the great unmentionable. Even the leading US medical journal seemed reluctant to even print its name.
 
That changed in October, 2010.  A combined effort by the Wall Street Journal, the Center for Public Integrity, and Kaiser Health News yielded two major articles about the RUC, here in the WSJ (also with two more spin-off articles), and here from the Center for Public Integrity (also reprinted by Kaiser Health News.) The articles covered the main points about the RUC: its de facto control over how physicians are paid, its "secretive" nature (quoting the WSJ article), how it appears to favor procedures over cognitive physician services, etc.
 
In 2011, after the "Replace the RUC" movement generated some more interest about this secretive group, and its complicated but obscure role in the health care system, the current RUC membership was finally revealed.  It was relatively easy for me to determine that many of the members had conflicts of interest (beyond their specialty or sub-specialty identity and their role in medical societies that might have institutional conflicts of interest, and leaders with conflicts of interest).  
 
Then that year a lawsuit was filed by a number of primary care physicians that contended that the RUC was functioning illegally as a de facto US government advisory panel.  It appeared that things might change.  However, it was not to be.  A judge dismissed the lawsuit in 2012, based on his contention that the law that set up the RBRVS system prevented any challenges through the legal system to the mechanism used to set payment rates.  The ruling did not address the legality of the relationship between the RUC and the federal government.  The eery quiet then resumed, only punctuated briefly in early 2013, when a Senate committee held hearings with no obvious effect.      

References
1. Bodenheimer T, Berenson RA, Rudolf P. The primary care-specialty income gap: why it matters. Ann Intern Med 2007; 146: 301-306. (Link here.)
2. Goodson JD. Unintended consequences of Resource-Based Relative Value Scale reimbursement. JAMA 2007; 298(19):2308-2310. (Link here.)

Introduction

We just discussed how a major story in Politico has once again drawn attention to the opaque RUC (Resource Based Relative Value System Update Committee) and its important role in determining what physicians are paid for different kinds of services, and hence the incentives that have helped make the US health care system so procedurally oriented.  (See the end of our last post for a summary of the complex issues that swirl around the RUC.)

The Politico article covered most of the bases, but notably omitted how the RUC may be tied to various large health care organizations, especially for-profit, and how the incentives it creates may benefit them. When the RUC membership first became public in 2011 due to efforts by Wall Street Journal reporters, I used internet searches to find that nearly half of the RUC members had conflicts of interest (look here).  Most of them were part-time paid consulting relationships, paid speaking engagements, and memberships on advisory boards involving drug, device, biotechnology and occasionally health insurance companies, or personal stock holdings in such companies.

In preparing my latest post, I found that to its credit, the AMA now makes the RUC membership more accessible (look here, free registration required.)  So I decided to check whether the current RUC roster still seems so conflicted.

As I did in 2011, I ran internet searches on all new RUC members since 2011, and updated searches on the continuing members.  Results are below.  Information new since 2011 is highlighted thus.  Note that I believe all the listed relationships are or were actual, but cannot rule out errors, especially given some RUC members have common names.  Any corrections are welcome.


The RUC Members and Their Financial Relationships

- Barbara S Levy, MD

Chair, RVS Update Committee
Federal Way, WA 2000

Consultant/Advisory Boards: Conceptus; AMS; Covidien; Halt Medical; Gynesonics; Idoman Medical (hysteroscopic surgery and sterilization, endometrial ablation, electrosurgery, vaginal hysterectomy) per UptoDate


-Margie Andreae MD
American Academy of Pediatrics
Ann Arbor, MI

Chief Medical Officer of Integrated Revenue Cycle and Billing Compliance, University of Michigan Health System, per University of Michigan Health System

- Michael D. Bishop, MD
American College of Emergency Physicians (ACEP)
Bloomington, IN 2003

- James Blankenship, MD
American College of Cardiology (ACC)
Danville, PA 2000

Lecture fees from Sanofi-Aventis per New England Journal of Medicine
Financial relationships with  The Medicines Company, Abbott Vascular, Conor Med Systems, Portola Pharmaceuticals, Schering Plough, AGA Medical, Astra Zeneca, Abiomed, Bristol Myers Squibb, Tryton Medical, Kai Pharmaceutical, Novartis (Grants or Research Support) per Society for Cardiovascular Angiography and Interventions Disclosure Summary


- Robert Dale Blasier, MD
American Academy of Orthopaedic Surgeons (AAOS)
Little Rock, AK 2008

-Albert Bothe Jr MD
CPT Editorial Board
Danville PA

Executive Vice President and Chief Medical Officer, Geisinger Health Systems, per Geisinger

- Ronald Burd, MD
American Psychiatric Association (APA)
Fargo, ND 2006

-C Scott Collins MD
American Academy of Dermatology
Rochester, MN

- Thomas P Cooper MD
American Urological Association
Everett, WA

General Partner, Aperture Venture Partners LLC, (health care focused venture capital firm) , per Aperture
Member, Board of Directors, Kindred Healthcare, per Kindred
Member, Board of Directors, Hanger Inc (orthotic and prosthetic care), per Hanger
Member, Board of Directors, IPC/ the Hospitalist Company, per IPC


-Anthony Hamm DC
Health Care Professional Advisory Committee
Goldsboro, NC

- David F. Hitzeman, DO
American Osteopathic Association (AOA)
Tulsa, OK 1996


- Charles F. Koopmann, Jr., MD
American Academy of Otolaryngology-Head and Neck Surgery (AAO-HNS)
Ann Arbor, MI 1996

- Robert Kossmann, MD
Renal Physicians Association (RPA)
Santa Fe, NM 2009

Member of Advanced Renal Technologies Advisory Board, Network 15 Medical Advisory Board, Baxter Home Dialysis Advisory Board, Fresenius Medical Advisory Board per Renal Physicians Association

- Walter Larimore, MD
American Academy of Family Physicians (AAFP)
Colorado Springs, CO 2009

-Alan E Lazaroff MD
American Geriatrics Society
Denver, CO

- J. Leonard Lichtenfeld, MD
American College of Physicians (ACP)
Atlanta, GA 1994

Member, Physician Advisory Board, Aetna per Aetna 
Deputy Chief Medical Officer, American Cancer Society, per ACS

- Scott Manaker, MD, PhD
Practice Expense Subcommittee
Philadelphia, PA 2010

Consultant to Pfizer and Johnson and Johnson. Owns stock in Neose Technologies, Pfizer, Johnson & Johnson, and Rohm and Haas per Chest

-William J Mangold Jr MD
American Medical Association
Tuscon, AZ

Vice President, Board Developer Inc (health care management consulting firm), per Board Developer
Senior Advisor, ADVI (health care management consulting firm), per ADVI
Member, Board of Directors, Sante (post-acute health care company), per Sante

-Geraldine B McGinty MD
American College of Radiology,
New York, NY

- Gregory Przybylski, MD
American Association of Neurological Surgeons (AANS)
Edison, NJ 2001

Stock Ownership: United Healthcare (300 shares); Scientific Advisory Board: United Health Group (B, Spine Advisory Board) per NASS meeting

- Marc Raphaelson, MD
American Academy of Neurology (AAN)
Leesburg, VA 2009

personal compensation for activities with Jazz Pharmaceuticals and Medtronics as a speakers bureau member or consultant per AAN

- Sandra Reed, MD
American College of Obstetricians and Gynecologists (ACOG)
Thomasville, GA 2009


GlaxoSmithKline Consulting, $1750 in 2009, $1500 in 2010 per ProPublica Dollars for Docs search through here

-  David H Regan MD
American Society of Clinical Oncology
Portland, OH

Payment from Cephalon in 2009 for $2200, per ProPublica search 


-Chad A Rubin MD
American College of Surgery
Columbia, SC

-Joseph R Schlecht
Pimrary Care Seat
Jenks, OK 

- Peter Smith, MD
Society of Thoracic Surgeons (STS)
Durham, NC 2006

Eli Lilly, Consulting, $1500 in 2009, $1990 in 2010 per Pro Publica Dollars for Docs search through here
Advisor or consultant to Bayer per Medscape

-Samuel D Smith MD
American Pediatric Surgical Association
Little Rock, AK

-Stanley Stead MD
American Society of Anesthesiologist
Encino, CA

-  J Allan Tucker MD
College of American Pathologists
Mobile, AL

- James Waldorf, MD
American Society of Plastic Surgeons (ASPS)
Jacksonville, FL 2008

- George Williams, MD
American Academy of Ophthalmology (AAO)
Royal Oak, MI 2009

Advisory Team, RetroSense Therapeutics
Shareholder and consultant for ThromboGenics Ltd. and holds intellectual property on the use of plasmin per Review of Opthamology
Alcon Laboratories, consultant, lecturer; Allergan, consultant, lecturer; Macusight, consultant, equity owner; Neurotech, consultant; Nu-Vue Technologies, equity owner, patent/ royalties; OMIC- Ophthalmic Mutual Insurance Company, employee; Optimedica, consultant, equity owner; Thrombogenics, consultant, equity owner per AAO meeting

Pfizer, “Professional Advising,” $5534 in 2009 per Pro Publica Dollars for Docs search through here
Member, Medical and Scientific Committee, Pixium Vision Inc, per Pixium 
Member, Board of Directors, Macusight Inc, per BusinessWeek.  


Summary 

The membership of the RUC continues to have a considerable number of apparent financial conflicts of interest.  By my count, in 2014, nearly half, 15/31 members had such conflicts.

Again, most of the conflicts were financial ties such as part-time paid consulting relationships, paid speaking engagements, and memberships on advisory boards involving drug, device, biotechnology and occasionally health insurance companies, or personal stock holdings in such companies.  A number of members who had such ties known in 2011 have several more such ties in 2014. 

In 2014, new kinds of conflicts of interest that appear even more intense have appeared.  Several members are now known to also be members of the boards of directors of for-profit health care corporations, including biotechnology, device, health care provider, and health care management services companies. 

We have been writing about the severe conflicts of interest presented by service on the boards of  health care corporationa.  In 2006 we first discussed a newly discovered species of conflict of interest in health care, in which leaders of medical or health care organizations were simultaneously serving on boards of directors of health care corporations.
 
We posited these conflicts would be particularly important because being on the board of directors entails not just a financial incentive.  It ostensibly requires board members to "demonstrate unyielding loyalty to the company's shareholders" [Per Monks RAG, Minow N. Corporate Governance, 3rd edition. Malden, MA: Blackwell Publishing, 2004. P.200.]  Of course, after the global financial collapse of 2008 made us sadder and a little wiser, we realized that many board members actually seem to have unyielding loyalty to their cronies among top management.  However, in any case, the stated or actual interests of a member of the board of a health care corporation, like a pharmaceutical company or medical device company, could be very different and at odds with the mission of an academic medical institution or a non-profit ostensibly dedicated to improving health care quality, like in this case, the RUC of the American Medical Association.

Also, one new RUC member is apparently a top executive of a health care management services company, and another new RUC member is apparently a general partner of a health care venture capital firm. Again, such leadership roles create responsibilities that could be very much at odds with a leadership role in a very influential committee run by a physicians' society.

Finally, two new members are top executives of large, although admittedly non-profit hospital systems.  One member is now known to be a full-time executive of a large, non-profit disease specific patient advocacy organization.  While hospital systems' interests may overlap those of physicians, modern  hospital systems are often run by generic managers who put revenues ahead of all else.  Furthermore, in pursuit of revenues, hospital system leaders may be very interested in increasing utilization of the most lucrative, usually high-technology and procedural services, and thus in structuring physicians' incentives accordingly.  While disease-specific patient advocacy goups' interests may also overlap those of doctors, they may tend to be more interested in their diseases than all others.

By the way, note that AMA and RUC leaders often defend the RUC as purely physician run organization, e.g., the testimony of the RUC leader, Dr Barbara Levy, at a Senate hearing, per MedPage Today in 2011, (see this post),

The RUC is an independent group of physicians from many specialties, including primary care, who use their expertise on caring for Medicare patients to provide input to CMS [the Centers for Medicare and Medicaid Services],' RUC chair Barbara Levy, MD, said in a statement. 

But now it is clear that the RUC includes corporate executives and board members, and top hospital system executives.  These people may have MDs, but their loyalties appear divided.

We have questioned the tremendously influential role the RUC plays in setting the incentives that drive the US health care system.  Now it appears that the RUC membership remains conflicted.  Almost half work part-time for drug, device, biotechnology, and health insurance companies.  Several are in the top leadership and/or governance of various health care corporations and large non-profit hospital systems.  Thus it seems that the incentives that drive are health care system are under the influence of people who may put corporate or organizational revenue ahead of patients' and the public's health.

As we wrote before, the prevalence of conflicts of interest among RUC members highlight the need for a more accountable, transparent and honest system to manage how the government pays physicians, and a need for more transparency and accountability in the relationship among the government, health care insurance, and physicians.

As a first step, I submit that all RUC members who are executives or board members of for-profit health care corporations or large hospital systems step down from the RUC, or resign these positions.