The Pittsburgh Experiment - II - Another Echo of the Fall of AHERF

We recently started a series of posts about the battle for domination of health care in western Pennsylvania.  The contenders are the UPMC hospital system, the dominant hospital system in the region, and Highmark, the dominant health insurer in the region.  While these two health care behemoths fight, patients, health care professionals, and the public seem to be caught in the crossfire.

There is something of history repeating itself in this battle.

The biggest bone of contention in it is Highmark's attempt to purchase the struggling West Penn Allegheny hospital system.  UPMC leadership seemed to feel that this would put the insurer in direct competition with it, even though UPMC already provides a health insurance product, the UPMC Health Plan.

West Penn Allegheny, in turn, is struggling because it is a remnant of a previous attempt by a single organization to dominate the health care system in this area.  As we wrote in 2011,  West Penn Allegheny was formed from some components of what used to the be the Allegheny Health Education and Research Foundation, AHERF.   AHERF was a large integrated health care system formed out of multiple mergers.  AHERF went bankrupt in 1998, leading to massive layoffs, hospital closures, and the near dissolution of a medical school (which ended up taken over by Drexel University).

As we noted in 2008, although the AHERF bankruptcy appears to be the largest failure of a not-for-profit health care corporation in US history, its story has produced remarkably few echoes for doctors, other health care professionals, health care researchers, and health policy makers. I often use the fall of AHERF as major example in talks, at least the few talks I am allowed to give on such unpleasant subjects. Rarely have more than a few people in the audience heard of AHERF prior to my discussion of it. I only could locate one article in a medical or health care journal that discussed the case in detail, albeit incompletely since it was written before Abdelhak's guilty plea [Burns LR, Cacciamani J, Clement J, Aquino W. The fall of the house of AHERF: the Allegheny bankruptcy. Health Aff (Millwood) 2000; 19: 7-41.] I doubt the case is used for teaching in most medical or public health schools. (There is a new book out about the case, Merger Games, by Judith Swazey, available here as  a set of PDF files from Project Muse for those with the proper password, but it has not yet had much of an impact, and I confess I have not yet read it.)  The lack of discussion of such a significant case is a prime example of the anechoic effect.

Therefore, let me summarize some of important points about AHERF not found above (see also this narrative, starting on page 5):

• AHERF, one of the largest health care systems of its day, was built by the poster-boy for health care imperial CEOs, Sherif Abdelhak.
• Abdelhak, who started as food services purchasing manager at Allegeheny General Hospital, was repeatedly hailed as a "visionary" (in the March, 1997, ACP Observer) a "genius," and the like. His plans to create a huge integrated health care system were part of the wave of the future. Abdelhak was even invited to give the prestigious John D Cooper lecture at the annual meeting of the American Association of Medical Colleges (AAMC), which was published in Academic Medicine [Abdelhak SS. How one academic health center is successfully facing the future. Acad Med 1996; 71: 329-336.] He proclaimed that "we will need to create new forms of organization that are more flexible, more adaptive, and more agile than ever before." And he announced that "my aim as chief executive has been to unleash the creativity and productive potential of every individual and to provide an environment that encourages teamwork"
• While Abdelhak was making these grandiose promises, he paid himself and his associates very well. For example, he received $1.2 million in the mid-1990s, more than three times the average then for a hospital system CEO. He lived in a hospital supplied mansion worth almost $900,000 in 1989. Five of AHERF's top executives were in the top 10 best paid hospital executives in Philadelphia.
• Although Abdelhak talked of teamwork, he warned the combined faculty of the new Allegheny University of the Health Sciences (AUHS): "Don’t cross me or you will live to regret it."
• As AHERF was hemorrhaging money, Abdelhak continued to pay himself and his cronies lavishly.
• After the AHERF bankruptcy, which was at the time the second largest bankruptcy recorded in the US, Abdelhak was charged with numerous felonies involving receiving charitable assets. In a plea bargain, he pleaded no contest to misusing charitable funds, a misdemeanor, and was sentenced to more than 11 months in county prison.

The story of AHERF is not merely that of an unlucky bankruptcy. It shows what can go wrong when health care adopts business practices such as jumping the latest management band-wagons and genuflecting before imperial CEOs.  It also shows what happens when a single health care organization, and the person who leads it, becomes too powerful.

If either UPMC or Highmark definitively wins their current battle, the winner will become at least as locally dominant as AHERF.  As we shall see in the posts to come in this series, the leadership of both organizations has already demonstrated a certain arrogance.  Yet since 2008 we have not progressed to the point of controlling the tendency of a laissez faire health care system to approach monopoly, nor the monopolist's tendency to put his self-interest ahead of all else. 

If nothing else, maybe the messiness of the fight between UPMC and Highmark will remind more people of AHERF, hence the need not to let our health care leadership and governance problems remain anechoic, hence the need for true health care reform that would constrain health care leaders to put patients' and the public's health before their narrow self-interest. 

The Pittsburgh Experiment - I - Caught in the Crossfire

In our increasingly dysfunctional health care system, patients, health care professionals and the public are often caught in the crossfire between big health care organizations.  Such organizations are often led by people who do not seem to put the interests of patients and the public, and the values of professionals first.  (Note that we have been writing about this since at least 2003, when the concept appeared in my article: Poses RM. A cautionary tale: the dysfunction of the American health care system. Eur J Int Med 2003; 14: 123-130. Link here.)

Last week, Anna Wilde Matthews and John W Miller wrote in the Wall Street Journal about an amazing example of such a crossfire that pitted the two dominant health care organizations in Western Pennsylvania against each other.  The case turns out to touch on many of the most dysfunctional aspects of US health care.  So rather than try to cram it into an overly long blog post, I plan to periodically discuss it over the next few weeks, starting now with an overview of the grappling titans.

The Basic Conflict

Per the Wall Street Journal article,

In Pittsburgh, the acrimonious battle between Highmark, the region's most powerful health insurer, and UPMC, the dominant health-care provider, is drawing national attention as a test case on the impact of consolidation in the health-care industry.

At the heart of the dispute is Highmark's effort to acquire a financially troubled local hospital group, West Penn Allegheny Health System, as the centerpiece of what it says will be a lower-cost and more efficient health-care operation. UPMC, which has its own insurance arm as well as 19 area hospitals and 3,240 doctors, says it doesn't want to bolster a company it now considers a direct rival. It has vowed not to sign a new contract to treat patients covered by Highmark, which would mean those patients generally would pay high out-of-network rates to use UPMC hospitals and doctors.

As we will see, the dispute is between a dominant hospital system that is trying to muscle into the insurance business, and a dominant insurer that is trying to muscle into the hospital business. If either were to succeed, it would become the dominant health care organization in the Pittsburgh area.

A Personal Fight Amongst Two CEOs

However, the fight soon seemed to be more among the CEOs of the two organizations. Per the WSJ,

In Pittsburgh, the battle has become unusually bitter, spearheaded by the two companies' chief executives, UPMC's Jeffrey A. Romoff, 66, and Highmark's Kenneth Melani, 58. Mr. Romoff, who has built UPMC into a $9 billion juggernaut and put its initials on the tallest skyscraper in the city, calls Highmark a 'monopoly.' Dr. Melani uses the same term in warnings about UPMC's power and referred to Mr. Romoff in a local newspaper as 'trying to rape the commercial marketplace to build his empire.'  (A spokesman for Mr. Romoff said the comment 'lacked both substance and dignity.')

An article from December, 2011 in the Pittsburgh Tribune-Review had illustrated other aspects of the bitterness about and between the CEOs.

UPMC CEO Jeffrey Romoff's satiric, fake Twitter profile lists his favorite games as Monopoly and Risk.

In recent tweets, the anonymous author wrote under his name, 'New York State, here we come!' and said he wants to take Highmark CEO Dr. Kenneth Melani 'outside to settle things -- but it would be unfair competition if (we) could BOTH use our fists.'

The month-old Fake Jeffrey Romoff persona, whose author declined to be interviewed but said it's 'no laughing matter,' depicts the head of Western Pennsylvania's dominant health care system as a greedy tyrant with an angry avatar. It counts fewer than 40 followers, but its existence points to a public relations failure for UPMC in its fight with Highmark Inc., media experts say.

'Nobody feels sorry for Romoff,' said Andrea Fitting, president of Downtown marketing firm Fitting Group. 'If you ask anyone on the street, they'll say Romoff is a monster. There's no person who's trustworthy and sympathetic who they've enlisted as a spokesman.'

Romoff could not be reached for comment.

UPMC spokesman Paul Wood said he is not concerned about the profile's effect on the hospital network's image.

'Not something that has virtually no followers,' he said.

There's no fake Twitter handle lampooning Melani, but experts say the state's largest insurer is not doing a great job of managing its public image either.

As found in the WSJ article,

'There's no white hat here,' says Don White, a Republican who chairs the state Senate committee overseeing insurance. 'They're both concerned about their self-preservation and domination.'

Neither CEO seems satisfied that his organization has become dominant in its field, and both seem to resent the success of the other organization in another field. Let us briefly review the backgrounds of both systems.

UPMC as Dominant Hospital System

The WSJ article started to probe the complexity of the situation:

The struggle in Pittsburgh has roots that go back decades. UPMC, led since 1992 by Bronx native Mr. Romoff, has grown on his watch to $9 billion in annual revenue from $797 million when he took over. Today, UPMC has around 58% inpatient market share in Allegheny County and a brand buoyed by its identification with nationally known research and treatment centers like Hillman Cancer Center, where Ms. Wyckoff is being treated. The nonprofit system, with around $406 million in operating income in its most recent fiscal year ended June 30, is also Pennsylvania's biggest private employer.

UPMC's initials dominate the Pittsburgh skyline from the top of the U.S. Steel Tower, the city's tallest building. The nonprofit leases a private jet that is used to fly executives and doctors to its facilities in Ireland and Italy. Mr. Romoff has become one of the city's most prominent business leaders. Poking fun at a local nickname for his boss, a staffer once presented Mr. Romoff with a Darth Vader action figure. In 2009, UPMC published a glossy history of its own expansion titled 'Beyond the Bounds.'

Highmark as Dominant Insurer

On the other hand,

As UPMC grew, its main hospital rival, West Penn Allegheny, withered. The five-hospital group emerged from the ashes of a Pennsylvania hospital system that filed for bankruptcy in 1998 after piling on too much debt and acquiring money-losing assets. It struggled for years.

By 2011, West Penn Allegheny was in the red, with heavy debt and pension obligations. To cut costs, it shut down much of its Western Pennsylvania Hospital. At one point, filmmakers took over its empty intensive-care unit to film a scene for a coming Tom Cruise movie.

In June, Highmark's Dr. Melani unveiled his plan to acquire West Penn Allegheny for a combination of loans and grants valued at as much as $475 million. Like UPMC, nonprofit Highmark was a dominant presence in its market, formed from the merger of a Blue Cross and a Blue Shield plan in 1996. By 2011, it had market share of around 60% in Allegheny County, with annual revenue of $14.8 billion, and it was sitting on reserves of about $4.1 billion.

Still, it was a bold and risky stroke for Dr. Melani, a blunt-spoken internal-medicine physician who himself trained at West Penn.

Marketing Rather than Substance

The two sides launched a marketing and public relations battle which did not seem to have much to do with quality of, access to, and cost of health care. As the WSJ article noted,

The spat quickly got nasty. Highmark highlighted UPMC's rate request in ads, and hired a Washington lobbying firm to pull together a coalition of churches, patient groups and others that would press for a deal. UPMC's own ad campaign urged patients to 'Keep your doctor. Check your plan.' Highmark sued, arguing the ads were misleading. UPMC bought Google ads that called up its site when a user searched for 'Highmark.'

The Pittsburgh Tribune-Review article included,

Public relations experts agree that Highmark faces a daunting challenge: People might see UPMC -- and by extension, Romoff -- as a bully, but they don't want to lose access to the system's 19 hospitals and 3,000 doctors in Western Pennsylvania.

UPMC's 'Keep Your Doc' ad campaign, produced by South Side agency GatesmanMarmion+Dave, is successful because it furthers the organization's business objectives, said Dale Leibach, an associate with Prism Public Affairs in Washington. This year, for the first time, UPMC gave four national insurers full access to its facilities and doctors, an arrangement previously granted only to Highmark.

'I would give points to UPMC for consistency and transparency, in promising more competition and then delivering on that promise by giving people in Pittsburgh and in the region many more options in terms of insurance providers,' said Leibach, who reviewed news accounts about the dispute.

David Kosick Sr., senior associate at KMA Public Relations in Canonsburg, takes the opposite stance, saying Highmark receives greater sympathy from a public that views UPMC as an insensitive corporate titan. Mullen Advertising in the Strip District produces Highmark's 'Accepted. Everywhere' ad campaign for TV, radio, publications, billboards and the Internet.

'Highmark's winning the PR battle,' Kosick said, citing threats by state lawmakers to intervene and public criticism directed at UPMC, including Allegheny County Council's refusal last month to issue $335 million in bonds for UPMC because of public opposition.

Wood said the health system recognizes its reputation 'may have taken a bit of a short-term hit locally,' but 'UPMC is focused on the longer term.'

'We've used our PR and marketing to fundamentally change the health care market in Western Pennsylvania,' Wood said.

Gene Grabowski, senior vice president of Washington-based public relations firm Levick Strategic Communications, said that strategy could backfire.

Also,

In addition to online social media, the public relations campaigns have ramped up on television and in other advertising.

UPMC placed its TV ads on major networks and cable and estimates they will reach the average Pittsburgh viewer four times a week, Wood said. He declined to say how much UPMC is spending on the ad campaign or what it budgets for advertising, but he said the budget has not changed since last year.

The ads, Fitting said, target 'what people are really worried about.'

Highmark stepped up its campaign in response to UPMC's, Weinstein said. He would not say how much Highmark pays Mullen Advertising or what it budgets for advertising.

'UPMC launched an aggressive, multifaceted misinformation campaign targeted at employers and consumers who subscribe to Highmark's health plans,' Weinstein said.

Caught in the Crossfire

Meanwhile, of course, patients and doctors are trying to avoid being stomped by the wrestling titans. The Wall Street Journal article opened with this theme,

Trish Wyckoff is struggling with stage-four breast cancer, but now the 53-year-old Pittsburgh resident has another worry: a possible divorce between the hospital system that is treating her, the University of Pittsburgh Medical Center, and Highmark Inc., the health insurer that pays for her care. If the two companies can't agree, she fears she won't be able to keep seeing the doctors who she believes are keeping her alive.


'We are absolutely stuck in the middle,' she says. This is a really scary time.'

Here is another anecdote,

With local newspapers chronicling each tit-for-tat, Pittsburgh residents like Dan Glasser say they have been acutely aware of the battle. Mr. Glasser, a 46-year-old lawyer, says he is alarmed and annoyed at the potential split between his insurer and UPMC. If forced to choose a side, he says, he would switch health plans to ensure access to UPMC. He has been seeing the same doctor there since he graduated from law school. 'That's almost my whole adult life,' he says.

Doctors are equally unhappy.

For his part, Kenneth Gold, Mr. Glasser's primary care physician, says he has been telling worried patients that 'all of us are pawns in this fight,' which he hopes gets resolved. If Highmark and UPMC do break up, 'it is going to be mass chaos,' he says.

Even employers are unhappy,

Employers, for their part, say they feel trapped in the middle, worried about health-care costs and also under pressure from employees to lock in access to UPMC. Cheryl Melinchak, director of benefits at Pittsburgh-based Westinghouse Electric Co., says the firm is likely to offer a new health plan this fall, in addition to Highmark and a high-deductible Aetna version, to ensure workers can use UPMC.

The standoff is 'frustrating,' she says. 'We need competition on both sides,' insurers and health providers.

Summary

So here we have the brave new world of the US health care system, a system that some people in other countries seem to think is worthy of emulation. Increasing concentration of power has lead to health care dominated by ever larger organizations lead by ever more egocentric executives. Organizations that are dominant in one area seek to dominate other areas. Caught in the crossfire are patients, doctors, employers, and the public. While more money goes to advertising, public relations, and lawyers, nothing about the fight seems to be about improving care or making it more accessible.

Further considering how this particular fight came to be will reveal various interlocking facets of health care dysfunction. If we can start to address them, we may be able to accomplish real health care reform.  Clearly we need health care organizations to concentrate on health care, not on increasing their power and domination.  We need them using most of their resources for health care, not on marketing, public relations, legal services, administrative support, and executive compensation. 

Stay tuned to Health Care Renewal as we continue this series.

"It's All Been Done Before," If We Only Could Remember What it Was - the AHERF Example

A big Wall Street Journal article by Anna Wilde Mathews featured the latest wave of mergers affecting large health care organizations.

Large, Vertically Integrated Health Care Systems (Redux)

Call it the united state of health care.

Amid enormous pressure to cut costs, improve care and prepare for changes tied to the federal health-care overhaul, major players in the industry are staking out new ground, often blurring the lines between businesses that have traditionally been separate.

Hospitals are bulking up into huge systems, merging with one another and building extensive new doctor work forces. They are exploring insurance-like setups, including direct approaches to employers that cut out the health-plan middleman.

On the other side, insurers are buying health-care providers, or seeking to work with them on new cooperative deals and payment models that share the risks of health coverage. And employers are starting to take a far more active role in their workers' care.

This ongoing consolidation is being discussed as inevitable.

'We're seeing a marketplace reacting to an economic imperative,' says Michael O. Leavitt, a former U.S. Secretary of Health and Human Services who is now chairman of a health-information company. 'The new delivery models are far more integrated.'

The ongoing consolidation is also being proclaimed as leading to a brave new world of health care. For example,

Jim Taylor, the chief executive of the University of Louisville Hospital, says his institution's future depends on an ambitious statewide merger with two other hospital systems. Now, he has to persuade others that he's right.

These mergers often are meant to lead to the creation of large, vertically integrated health systems which may include hospitals, physicians and other health professionals (sometimes as hired help), and an insurance function.

It's All Been Done Before

"Large, vertically-integrated health care systems," of course, were all the rage in the 1990s.  In fact, the WSJ also published a companion article by Anna Wilde Mathews that suggested "it has all been done before," it did not necessarily work then, and therefore, it may not work now.

One example used in the latter article :

Perhaps the most dramatic flameout was the Allegheny Health, Education, and Research Foundation. Starting in the mid-1980s, it was built from a Pittsburgh hospital into a statewide system through hospital and doctor-practice acquisitions. In 1998, AHERF, as it was called, became the U.S.'s largest health-care nonprofit bankruptcy. Its debts became unsustainable after it piled on too many money-losing assets, failed to manage the new primary-care physicians successfully, and lost money on capitated business, according to an account published in Health Affairs in 2000.

The hospitals' moves in the 1990s 'did not improve quality, they did not reduce costs. In fact they increased everyone's spending,' partly because some hospitals eventually used their bulked-up leverage to push for higher rates, says Lawton Robert Burns, a Wharton School professor and the AHERF history's lead author. 'Nobody's showed me we're going to do it a whole lot better this time....To expect that with one piece of legislation, everyone's going to sit around the campfire and sing kumbaya, forget about it.'

However, the Mathews article showed that even people who ought to have been familiar with this case seemed to think that this time things would be different. For example, it included this quote from the CEO of Humana which had problems with the integrated model in the 1990s:

'It's not like we don't understand what we are getting back into here,' said Michael B. McCallister, Humana's CEO, at an investor conference. 'But things have changed.'

Maybe so, but maybe if the enthusiasts of the resurrected vertically integrated health system model realized how badly things went in the past they would not be so optimistic.

A More Complete Version of the AHERF Story

In fact, Professor Burns' take on the AHERF bankruptcy above did not seem to reflect all that went on then. A somewhat more pointed summary of that massive failure had appeared in 2008. Then, Moody's Investor Service issued a report on the 10 year anniversary of the fall of the house of AHERF. Per an article again by Steve Twedt in the Pittsburgh Post-Gazette, who also wrote a significant series in the same newspaper summarizing the collapse of AHERF,

From the distance of 10 years, the historic bankruptcy of Allegheny General Hospital's then-parent organization still offers valuable lessons for today's health-care industry, says a new report by Moody's Investor Service.

'AHERF left such a stain, such an indelible mark on hospital management teams, they realized that if one of the big systems can fail, no one is immune,' said Lisa Goldstein, leader of the Moody's health-care team that produced the report.

On July 21, 1998, Allegheny Health and Education Research Foundation (AHERF) defaulted, resulting in what is still the largest bankruptcy ever among the 560 Moody's-rated not-for-profit health-care entities. At the time, AHERF had $2 billion in revenue and $555 million in outstanding debt, according to the Moody's report.

Analyst Lisa Martin, who wrote the report, says industrywide forces converged with 'the organization's own management and governance failures' to cause the foundation's failure.

The external forces included Medicare reimbursement cuts -- still an issue a decade later -- and highly competitive markets in both Pittsburgh and Philadelphia.

But, she added, 'we believe its ultimate downfall was driven more by decisions of the organization itself -- weak governance, poorly executed strategies, lack of refined leadership, and absence of methodical execution.'

Even that version seems too polite.

Although the AHERF bankruptcy appears to be the largest failure of a not-for-profit health care corporation in US history, its story has produced remarkably few echoes for doctors, other health care professionals, health care researchers, and health policy makers. I often use the fall of AHERF as major example in talks, at least the few talks I am allowed to give on such unpleasant subjects. Rarely have more than a few people in the audience heard of AHERF prior to my discussion of it. The only scholarly article I could locate on the topic that discussed the case in any detail, albeit incompletely since it was written before Abdelhak's guilty plea, was written by Professor Burns, who was quoted above, and colleagues [Burns LR, Cacciamani J, Clement J, Aquino W. The fall of the house of AHERF: the Allegheny bankruptcy. Health Aff (Millwood) 2000; 19: 7-41.] I doubt the case is used for teaching in most medical or public health schools. The lack of discussion of such a significant case is a prime example of the anechoic effect.

Therefore, let me repeat my 2008 summary of some of important points about AHERF not found above (see also this more detailed narrative, starting on page 5):

• AHERF, one of the largest health care systems of its day, was built by the poster-boy for health care  CEOs at the time, Sherif Abdelhak.
• Abdelhak, who started as food services purchasing manager at Allegeheny General Hospital, was repeatedly hailed as a "visionary" (in the March, 1997, ACP Observer) a "genius," and the like. His plans to create a huge integrated health care system were part of the wave of the future. Abdelhak was even invited to give the prestigious John D Cooper lecture at the annual meeting of the American Association of Medical Colleges (AAMC), which was published in Academic Medicine [Abdelhak SS. How one academic health center is successfully facing the future. Acad Med 1996; 71: 329-336.] He proclaimed then that "we will need to create new forms of organization that are more flexible, more adaptive, and more agile than ever before." And he announced that "my aim as chief executive has been to unleash the creativity and productive potential of every individual and to provide an environment that encourages teamwork"
• While Abdelhak was making these grandiose promises, he paid himself and his associates very well. For example, he received $1.2 million in the mid-1990s, more than three times the average then for a hospital system CEO. He lived in a hospital supplied mansion worth almost $900,000 in 1989. Five of AHERF's top executives were in the top 10 best paid hospital executives in Philadelphia.
• Although Abdelhak talked of teamwork, he warned the combined faculty of the new Allegheny University of the Health Sciences (AUHS): "Don’t cross me or you will live to regret it."
• As AHERF was hemorrhaging money, Abdelhak continued to pay himself and his cronies lavishly.
• After the AHERF bankruptcy, which was at the time the second largest bankruptcy recorded in the US, Abdelhak was charged with numerous felonies involving receiving charitable assets. In a plea bargain, he pleaded no contest to misusing charitable funds, a misdemeanor, and was sentenced to more than 11 months in county prison.

The Moral of the Story

The story of AHERF was not merely that of an unlucky bankruptcy. It shows what can go wrong when health care adopts business practices such as jumping on the latest management band-wagons and genuflecting before imperial CEOs.

Yet since the fall of AHERF, we are still hearing breathless stories about the latest wonderful plans to save health care (think about, for example, electronic medical records, pay for performance schemes, etc), and the the need to genuflect to brilliant CEOs who may turn out to be not so brilliant (think about, for example, Dr William McGuire, the former CEO of UnitedHealth, and his back-dated stock options).

We health care professionals need to stop falling for this hype and spin. Saving health care will take clear thinking and hard work by a lot of people. The "visionaries," if we let them, are likely to depart with a huge cache of money, leaving us and health care worse off. If it is just "not done" to talk about cases such as that of AHERF, and other examples of "recent unpleasantness," how will be learn not to fall for the propaganda?

Of course, it is those who benefit from the propaganda who do not want us catching on to their game.

If physicians, health professionals, health care researchers, and health policy makers do not learn the lessons of the fall of AHERF, they will be doomed to see its repetitions.

With apologies to the Bare Naked Ladies - do not forget "it's all been done (before)"

(only live version I could find, actual song starts at about 3:00)

Blood Money at the Border - The Red Cross and a Local Blood Bank Fight Over Donors

Writing in our local Providence Journal, Felice Freyer reported on a story that becomes less bewildering when viewed in the context of how nominally not-for-profit health care organizations are now run. 

The Border Dispute

It seems that two such non-profits are having a border dispute:

Two local charities are fighting for your blood.

The Rhode Island Blood Center, long the sole blood-collection agency in the state, is objecting to incursions by the American Red Cross of Eastern Massachusetts, which recently started holding blood drives here.

A war of words has resulted, with the blood center accusing the Red Cross of a 'campaign of misinformation,' and the Red Cross calling the blood center 'hypocritical.' The Hospital Association of Rhode Island entered the fray with a letter to blood donors urging loyalty to the Rhode Island center.

The dispute might seem inconsequential to the typical blood donor, who is just trying to do a good deed and may not care or notice who collects the blood.

But the Rhode Island Blood Center argues that it matters a great deal. The competition, blood center officials say, is threatening a carefully calibrated system that ensures a steady, predictable supply of blood. The hospitals in Rhode Island all rely on the blood center for 100 percent of their blood supply.

The Red Cross says it just wants to give Rhode Islanders another way to support its mission. 'We are a humanitarian organization, a symbol of trust,' said spokeswoman Donna M. Morrissey.

The Red Cross’ Rhode Island chapter does not collect blood. A chapter based in Dedham, Mass., started collecting blood here last fall. Since then, the Red Cross has collected 138 units of blood in Rhode Island — a drop in the bucket compared with the 90,000 units of whole blood that the Rhode Island Blood Center collects each year.

High-Toned Missions

On its surface, the whole thing is bewildering. Here are two non-profit organizations ostensibly dedicated to providing worthwhile health services for people in need.

The American Red Cross' mission is to:

provide relief to victims of disaster and help people prevent, prepare for, and respond to emergencies.

The Rhode Island Blood Center's mission is:

to provide a safe, adequate and cost-effective blood supply for the patients and the hospitals we serve.

Why can't we all just get along? Why should these organizations be fighting, especially over what amounts to market share? Wouldn't they be able to better support their missions by cooperating? 

Where Does the Money Go?

I cannot give a definitive answer to those questions. However, there are some clues.

Let us look at the latest available (2008) US Internal Revenue Service form 990 from the Rhode Island Blood Center, and the latest available (2009) form 990 from the American National Red Cross, the parent of the eastern Massachusetts chapter.

The ProJo article stated that the RI Blood Center collected some 90,000 units of blood last year. The most recent form 990 for that organization revealed that the RIBC had $33,043,096 in program service revenue from sale of blood or blood components for its 2008 tax year. Assuming that its blood collections were the same then as the ProJo reported, that means it got $367 in revenue per unit of blood it supplied. Note further that program service revenue accounted for about 88% of its total $37,478,357 revenue in 2008, revenue sufficient to create a $558,169 surplus

So the sale of blood is lucrative. That may come as a big surprise to blood donors, who are unpaid, (and do not even get a tax-deduction for a charitable donation in the US).

Now of course it may not be cheap to collect, test, store and distribute blood, that is, the core functions of the RIBC. But note further that in 2008, it was also lucrative to be an executive for RIBC. That year, Lawrence F Smith, the CEO, got $430,650 in total compensation; Scott J Asadorian, the COO, got $331,736, and Carolyn T Young, the CMO, got $273,052. Six other managers got more than $100,000. That seems to be very good pay for managers of a relatively small, regional non-profit whose revenues depend on voluntary donations of bodily fluids.

There are parallels with the American Red Cross, parent organization of the local Massachusetts chapter. It got a whopping $2,219,161,636 in program service revenue from "biomedical products & services" in 2009, which was about two-thirds of its total revenue of $3,587,775,430, and which generated a $233,597,985 surplus.

Being an executive of the American Red Cross was much more lucrative. In 2009, then CEO Gail McGovern received over a million in total compensation, $1,032,022 to be exact. Its President for Biomedical Services got $850,489. Its Executive VP for Biomedical Services got $596,309. Twelve other executives got more than $250,000. Of those, ten got more than $350,000.

Summary

This is all too reminiscent of a dispute we noted briefly here, which involved threatened litigation by the large Susan G Komen For the Cure foundation against other charities that dared to use the word "cure" in their own campaigns to fight cancer.

The current example does seem a bit more tawdry because the organizations in question depend for their revenue and to support their executives' posh pay on voluntary donations, not just of money, but of blood.  (And it is not the first example we have found that raises questions about non-profit blood banks, look here.)

We have gone on at great length about how health care organizations have been infected by the prevailing "greed is good" culture of US (and world) businesses. Some of the worst examples have come from for-profit companies, but nominally non-profit companies (NGOs, outside of the US) have become part of the epidemic. Instead of cooperating to do good works, some have taking to fighting over market share. We have shown numerous examples in which the leaders of health care non-profits got incentives unrelated to the degree they uphold their institutions' high-toned missions, (here is a recent example) and seem happy to do what it takes to keep their compensation high.

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

What Is to Be Done?

Based on our ever enlarging file of cases on compensation of the top hired managers of non-profit health care organizations, let me make some concrete suggestions, based on my humble opinion.

A step forward would be to make the finances and compensation arrangements of health care non-profit organizations at least as transparent as those of large public for-profit organizations. So my big idea is:

Non-profit health care organizations above a reasonable threshold size should provide prompt, public, annual reports analogous and very similar to the reports required by the US Securities and Exchange Commission of public, for-profit companies.

These reports should include, at a minimum, a summary of financial and operational status, an audited financial report, an explanation and accounting for any for-profit subsidiaries and any interlocking non-profit organizations, the compensation given to the CEO and some minimum number of the top-paid officers and employees, a detailed explanation and rationale for the pay of these individuals, and a listing of other affiliations and all conflicts of interest affecting them.

If the need to supply such information causes non-profit health care organizations' hired executives and boards of trustees some cognitive dissonance, that would be a good thing.

The Restless Shade of AHERF and the Return of Merger Mania: Highmark Tries to Buy Another Insurance Company, a Hospital System, a Medical School, and Physicians' Practices

Starting in the 1990s, as US health care became more commercialized, a wave of mergers lead to super-sized hospital systems, insurance companies, and pharmaceutical companies.  Not all those mergers, especially involving hospitals, prospered.  Although the mergers were justified as drivers of increased efficiency, health care has become decreasingly accessible, increasingly expensive, and of no better quality.  However, now a whole new wave of mergers seems to be upon us. 

The Proposed Highmark Blue Cross/ West Penn Allegheny Health System Merger

The latest example to get national attention is the proposed combination of already large non-profit health insurer Highmark Inc, a Blue Cross Blue Shield plan, and non-profit hospital system Allegheny Health System.  The national attention was in a Wall Street Journal article by Anna Wilde Matthews, which described the proposed transaction:

Pittsburgh insurer Highmark Inc. struck a deal to acquire the second-largest hospital chain in its region, an ambitious, controversial step that would further blur the lines between those who pay for medical care and those who provide it.

Under the tentative plan, nonprofit Highmark will pump as much as $475 million into the five-hospital West Penn Allegheny Health System, which has been operating in the red for the past five years.

If state and federal regulators sign off on the plan, Highmark officials say the deal will allow them to move away from traditional fee models that reward providers for providing unnecessary procedures and services.

Instead they would pay salaries to doctors, offering them incentives to achieve quality and efficiency goals. The integrated model would also rely on primary-care doctors to coordinate patients' care and focus on preventive efforts.

Highmark officials said the deal is the best way to keep West Penn in business. 'It brings our expertise as an insurance company into the provider system,' said Kenneth R. Melani, Highmark's chief executive.

This deal is unusual because it would unite a health care insurance company/ managed care organization with a hospital system.

The Context: An Already Concentrated Health Care Environment

The deal appears in the context of and may be in response to an already concentrated health care environment.  Per the WSJ:

The newly combined Highmark-West Penn will face off against the University of Pittsburgh Medical Center, which is officially known by its acronym, UPMC. The prestigious $8 billion,19-hospital network employs 2,881 doctors and has about 56% of the inpatient market share in Allegheny County. It also owns a health plan with about 1.6 million members.

UPMC's current contract with Highmark runs out next June. Paul Wood, the hospital system's vice president for public relations, said the network won't sign a new one after the acquisition. 'In effect, Highmark expects UPMC to subsidize our competitor,' he said.

UPMC has had its issues, too, as discussed in posts here. 

The deal is also more extraordinary because it was accompanied by several other proposed deals that would create quite a sprawling health care entity.

The Extended Scope of the Merger

First, and as noted in the WSJ article, the proposed deal would involve physicians' practices:

Highmark may also buy or invest in other providers, including doctor practices, Dr. Melani said.

However not noted in the WSJ article, or in a contemporaneous Pittsburgh Post-Gazette article, was that since 2010 there has also been a proposal on the table for Highmark to merge with a non-profit Blue Cross Blue plan in neighboring Delaware. The latest discussion of this deal can be found on DelawareOnline, and was just noted in a Philadephia Inquirer commentary.

In Delaware, a bill that would remove a major obstacle to Highmark's proposed affiliation with Blue Cross Blue Shield of Delaware sailed through the legislature, passing the Senate unanimously Tuesday and the House, 34-5, Wednesday.

That is not all. It seems that while pursuing the merger with Highmark, West Penn Allegheny Health was also pursuing an arrangement with Temple University to set up a branch of its medical school in Western Pennsylvania. As noted by the Pittsburgh Tribune Review:

West Penn Allegheny Health System leaders expressed optimism on Friday about their partnership prospects with Highmark Inc. as they announced plans with Temple University to establish a four-year medical school campus in the North Side.

So it appears that lined up against the UPMC behemoth could be another behemoth combining a large Pennsylvania insurance company, a Delaware insurance company, a good-sized hospital system, physicians' practices, and a branch of a medical school.  So we see a new effort to divide the health care supposed "market" among a few large, vertically-integrated health care systems.

The Eerie Shadow of AHERF

Maybe all these simultaneous deals, which would apparently create a conglomerate of Highmark Blue Cross, Delaware Blue Cross Blue Shield, West Penn Allegheny Health System, Temple University Medical School, and possibly a large group of doctors' practices, were all being discussed separately because of how they could be seen as a strange shadow of the spectacularly failed Allegheny Health Education and Research Foundation (AHERF) of the late 1990s.

As discussed here, AHERF was a large integrated health care system formed out of multiple mergers.  AHERF which went bankrupt in 1998, leading to massive layoffs, hospital closures, and the near dissolution of a medical school (which ended up taken over by Drexel University). The former AHREF CEO, whose high compensation (for the time) was accompanied by an autocratic management style, ended up in the local jail on a plea bargain. Note that West Penn Allegheny Health System was formed from some of the pieces of the failed AHERF, and seems to have never fully recovered from its previous troubles.

Despite the fact that the AHERF bankruptcy was the second largest US bankruptcy up to its time, this vivid case was notably anechoic. The lack of echoes it originally produced made it prototypical of the anechoic effect.

The link to AHERF was briefly noted in the Post-Gazette article:

'They are well-capitalized, and we're not,' said David L. McClenahan, WPAHS board chairman, speaking of Highmark. 'That's putting it mildly.' In the decade since the collapse of the Allegheny Health Education and Research Foundation, whose bankruptcy eventually bore the West Penn Allegheny Health System, WPAHS has been persistently starved for capital, he said.

So far, however, the ominous implications of that previous debacle have not been publicly discussed.

How Some Executives Would Gain

Perhaps the executives rushing to make a deal are being distracted by the potential for personal gain. The DelawareOnline article noted that current executives of Delaware Blue Cross Blue Shield may be able to pull the ripcords of their golden parachutes if its proposed merger with Highmark goes through:

Seven executives at Blue Cross Blue Shield of Delaware, for example, are due a combined $6 million in severance pay -- equal to about three years of salary -- if they lose their jobs.

Details of Blue Cross severance payout packages have attracted attention recently because top executives at Delaware's largest health insurer are busy pressing for a merger with Pittsburgh-based insurer Highmark Inc., which could mean the elimination of some top positions.

Highmark has pledged that Blue Cross President and CEO Tim Constantine will keep his job after the merger's closing, if the deal is approved by state regulators. But Constantine, who has an annual salary of $420,000, would be due a $1.6 million payment if he were to lose his job.

Six other top executives, who earn between $245,000 and $330,000 annually, have potential payouts equal to about $4.3 million. Highmark has not discussed the fate of those officers, who range in position from the company's general counsel to its chief medical and financial officers.

That article further noted:

Some observers worry that the prospect of large severance payments could cloud the judgments of executives working to close the deal.

Considering the size of the Blue Cross payouts in relation to annual salaries, the payout promises deserve attention, said Ethan Rome, executive director of Health Care for America Now, a Washington consumer advocacy group. Severance agreements are typically in place to provide a cushion between jobs, he said. 'Three years is a long time,' Rome said. 'Three years is not a severance. It's a substantial payout.'

One wonders which other executives involved in these potential deals may also have prospects for either larger compensation or golden parachutes. This could include executives in particular current executives of West Penn Allegheny.  One also wonders whether the creation of this new conglomerate will produce rationales for big raises for the current executives of all the organizations involved who get to work for the new merged entity.  Perhaps someone should ask them.

Further Implications

Of course the various mergers were touted as productive of new efficiencies, as attempts to obtain increased market power usually are. As reported by the Post-Gazette:

While the short-term goal of this partnership is to preserve a 'fragile' Pittsburgh hospital system, the long term goal, said Highmark CEO and President Kenneth Melani, is the creation of a new model of health care, one that is outcomes based, with an integrated delivery and financing system.

;Health care services are becoming less affordable,' he said. 'It's important to have choice. It's important to have a second system.'

And, as we discussed here, the former CEO of AHERF pledged "new forms of organization that are more flexible, more adaptive, and more agile than ever before." But common sense and history suggests that increasing market domination will be good mainly for the market dominators, not their customers, or in this case, their patients, clients and students.

As Dr Westby Fisher asserted about how the new conglomerate will likely own physicians' practices:

So doctors lose more professional independence and autonomy and have even more chance that clinical decisions will be compromised by bureaucratic dictates. Yet ask patients who they want steering the boat when they get sick: their doctor.

It continues to be clear who the winners and losers are as health care reform unfolds. But when doctors lose autonomy, patients lose autonomy.

It’s that simple.

To argue that the only way to control the health care dollar is to bloat the bureaucratic levels of our system is a fool’s game. However, bureaucrats promote bureaucrats – it’s always been this way. Until doctors and the public speak up, there’s simply nothing to stop this train.

So I wonder if this complex merger will get more scrutiny than the many mergers that have preceded it in the last 30 years. Someone who is more likely to get answers than I am should be asking:
- What evidence is there that this merger will lead to any benefits to individual patients or to the public health?
- How will any efficiencies achieved benefit anyone other than the organizations' current and future managers?
- What sorts of management layers will the complexity of the multiple mergers proposed necessitate between current Highmark executives and current management of its new acquisitions?
- If the current problem is existing market concentration, why will these mergers be a better solution than a direct approach to that concentration?
- How will the current leaders of all the organizations involve personally benefit from this merger?

Meanwhile, increasing concentration of power in health care continues to benefit the leaders of the enlarging health care organizations, while reducing the choice of individual patients and the autonomy of health care professionals.

How Large Health Care Organizations Set the "Rules of the Game" to Dominate Health Care

The notion that health care is increasingly "dominated by large, bureaucratic organizations which do not honor ... [its] core values"(1) just made it into a main-stream, large circulation US medical journal.  A brand new commentary in the American Journal of Medicine(2) by Supri and Malone declared:

To explain why we have the most expensive health care system in the world and yet one of the lowest performing, we need to take a perspective that focuses on the US institution of medicine as a whole. We expose the hidden rules by which this institution operates and discuss how its powerful organizations shape, control and perpetuate this ailing system.

The article then described the main types of large, powerful health care organizations:

The US institution of medicine is not a single, comprehensive and cohesive system of health care. Instead, it is comprised of a myriad of large and powerful organizations, including insurance companies, Health Maintenance Organizations (HMOs), corporate for-profit hospital chains, and pharmaceutical companies. This institutional structure is large and vast, and has over the years become ever more labyrinthine.

Note that there are even more kinds of large and powerful health care organizations, including non-profit hospitals and hospital systems, employers acting as payers for health care, government agencies, device and biotechnology companies, health care information technology companies, public relations firms, medical education and communication companies, contract research organizations, professional societies, patient advocacy groups, accrediting bodies, health care charities, etc, etc, etc.  But the point is that the large organizations, not the patients, the physicians, nor the public dominate.

Supri and Malone suggested that each kind of organization sets the "rules of the game," that is, the priorities important to the organization, which are very different from the core values that many of us believe ought to guide health care:

Not only is the institutional structure large, it is dynamic, and actively creates, shapes, and maintains the institution of medicine. It does this through what we call setting the “rules of the game”; that is, by imposing the terms by which the system operates.

For example,

Insurance companies have set the rule 'restrict choice and coverage.' They enact this through their elaborate system of copayments and deductibles, exclusion clauses and loopholes, each designed to deter patients from claiming the health care they need, and to override physicians' medical judgment.

Similarly, it cited the rules for managed care, "manage care," that is, "restrict utilization of health care" regardless of patients' needs; the pharmaceutical industry, "charges as much as we want, because insurance will pay;" and "corporate hospital chains ... test as much as we want, because insurance will pay." Thus it made the point that US health care now is driven by the priorities of large organizations whose interests at best may disregard and at worst may conflict with providing the best possible care for individual patients.

Further, the resulting complexity is to the benefit of the large organizations:

As each organization has created its own 'rules of the game,' the institution of medicine has grown into a complex entity that few really understand. This very complexity actually works to the advantage of the organizations that comprise the system, creating an operating environment that allows them to siphon off billions of dollars. It is one of the main reasons why the cost of health care has spiraled out of control.

This is very important, and suggests that the system will just become more bureaucratic, complex and opaque until it finally collapses.

Finally, it raised the point that the organizations collude to promote their priorities at the expense of patients' and the public's health:

Although each organization sets their 'own rules of the game,' they are also strongly and deeply interlinked, and cooperate and collaborate to protect the system of health care that they have devised, so that it remains intact and continues to serve their own interests.

Although  Supri and Malone did not differentiate the leadership of large organizations from the organizations themselves, we have pointed out that the top leaders of various kinds of organizations seem to think alike, becoming a sort of de facto executives' guild, with a "superclass" of oligarchs at its pinnacle.  The guild may be enabled by these leaders' often huge compensation and other benefits and corporate arrangements that keep them shielded from the vicissitudes of daily life that patients, health care professionals, and lower level organizational employees must face.  Furthermore, the leadership of these organizations is often interlinked, for example, by leaders of one organization serving on boards of directors or trustees of others.

It is so nice for us at Health Care Renewal to have some company. It is a very important blow to the anechoic effect for these sorts of views to appear in a mainstream medical journal.

When I interviewed a motley group of physicians and health care professionals in the early part of the 21st century, many expressed concerns about how medicine had been taken over by large organizations which did not honor its values. The article published in 2003(1) in Europe which tried to summarize their concerns probably could not have been published at that time in the US, but its publication remote from its main topic only made it more anechoic. It may be that an article published in a respected American journal will generate some more echoes. Here is hoping that Health Care Renewal can help create some such echoes. 

Obviously, those who lead large organizations in health care will not be happy about that, so it is possible this article's appearance in a main-stream journal may incite some pushback, perhaps generated by the public relations machines of the large health care organizations (see this post about how Wendell Potter's excellent Deadly Spin documented how large organizations use propaganda and disinformation to undermine viewpoints that threaten their domination.)

In conclusion, I strongly support Supri and Malone's final sentiments:

The sum of the 'rules of the game' devised by these organizations has resulted in a fragmented, haphazard and broken system of health care. Reform is long overdue, and demands root and branch transformation of the 'rules of the game' governing the US institution of medicine. This requires us to understand these rules, who is setting them, and how these rules are being used to exploit the system of medicine. Only then can we begin to heal our ailing health care system.

Well said!

But now almost 8 years since the publication of "A Cautionary Tale," we still have a long way to go.

References


1.  Poses RM. A cautionary tale: the dysfunction of American health care.  Eur J Inte Med 2003; 14: 123-130.  Link here.
2.  Supri S, Malone K. On the critical list: the US institution of medicine. Am J Med 2011; 124: 192-193.  Link here. 

The Rise of the Corporate Physician - the End of the (Health Care) World As We Know It?

In discussing how concentration and abuse of power threatens health care professionals' values and professionalism, we have discussed how ostensibly academic institutions value faculty more for their earning power than their academic abilities.  We have discussed how financial relationships between physicians and drug, biotechnology, device and other companies risk abuse of entrusted power.  But up to now, I have been comforted by the hope that physicians in small independent practices who do not have such conflicts of interest are trying to uphold their professional values, even as they were buffeted by the perverse incentives imposed by managed care organizations/ health insurance companies and government insurance (e.g., US Medicare whose payments are controlled by the RUC).

However, a recent article in SmartMoney suggests that the end of the independent physician is nigh:

Remember the solo family doctor? In places like Springfield, it has become increasingly likely that she's collecting a paycheck from a large regional hospital—and practicing medicine according to the hospital's strict playbook. The experience in Springfield is just a needle prick compared with what's going on nationwide. At least one in six doctors—more than 150,000 nationwide—now works as an employee of a hospital system. And with about half of recent medical school graduates deciding to work for hospitals and many established doctors looking to unload their practices amid the tough economic climate, what was a trickle of change has turned into a torrent. Jim Pizzo, a Chicago-area hospital consultant, says the blistering pace of these mergers is leading some colleagues to joke that there are two types of physicians today: 'Those employed by hospitals and those about to be.'

So we are seeing physicians who practiced solo or in physician-lead, physician-run group practices becoming employees of large health care organizations. And here on Health Care Renewal, we know how most large health care organizations are run.

This appears to be an unintended consequence of our recent US health care "reform" law:

But hospital executives also believe that buying doctors' practices could yield a big payday, thanks to a different provision in the health care law. The law will encourage doctors and hospitals to share some payments when treating each patient; as collaborative teams, they could earn bonuses for holding down costs and meeting quality markers. 'The real question for everyone is how that pie—that money—is going to get split up,' Goertz says; hospitals think they'll have the upper hand if they employ the doctors that they're sharing their banana crème with. And that's touched off a flurry of mergers everywhere—from Seattle to Roanoke, Va.

The name of these supposedly collaborative organizations, which are turning out to simply be hospital systems which have purchased physicians' practices and now employ physicians, is "accountable care organizations," which now appears ironic at least.

The article detailed some of the adverse effects to be expected when accountable care organizations become hospital systems with employed physicians providing patient care.

Increased Costs with Decreased Care

Ruth Taylor, a 44-year-old woman in Bozeman, Mont., started seeing Robert Hathaway as her doctor during college, and she stuck with him through everything from routine blood tests to a kidney transplant. Taylor, a professional nurse with warm blue eyes, describes Hathaway as a 'classic small-town doctor' who knew all his patients by name and socialized with them at local basketball games; he was accessible and thorough—even catching a health problem of hers that other doctors had missed. But after Hathaway sold his practice to the local hospital, Taylor says, things began to sour. She was more likely to be assigned to see the physician assistant rather than Hathaway himself. And when she went in for a comprehensive physical (also run by the assistant) in late 2008, she was charged $360, more than double what she'd paid for a workup in previous years.

Imposition of Dysfunctional Health Care Information Technology

On this blog, Dr Scot Silverstein frequently posts about how poorly designed and implemented commercial health care information technology may have harms that outweigh any benefits, and how these systems are rarely objectively evaluated. Employed physicians are likely to be required by their new executive overlords to use commercial health care IT that benefits the managers and their strategies, but may not benefit patient care:

Last spring Hospital Sisters tried to shift all of its Springfield medical offices to electronic medical records simultaneously. But there wasn't enough tech support to deal with all the problems physicians ran into on day one, and wait times spiked at the system's walk-in locations. Nenaber, a soft-spoken 64-year-old with wire-rim glasses, sounds acquiescent about the situation. 'We're getting the hang of these things,' he says slowly, sitting at his desk overlooking a gas station and a strip-mall parking lot. But his practice is still waiting for its electronic payoff

Increasing Prices by Providing Care in the Hospital

Now that the acquisition spree is in full swing, some experts worry that price increases could become the dominant narrative for patients. When hospitals run medical practices, federal law allows them to add substantial 'facility fees' to patients' bills to cover overhead expenses. The new bosses also often rip equipment like X-ray machines and MRIs out of the physician's office, preferring to have patients get those tests from radiologists at the hospital. That, too, can cost patients. A consumer with a high-deductible Aetna plan, for instance, would pay up to $1,400 for an MRI of her back at the University Medical Center at Princeton, N.J., according to data that the insurer makes available to its members. The same scan would cost about a third as much at nearby Radiology Affiliates of New Jersey, a nonhospital facility. Based on a review of insurance databases and state regulatory records, that's a fairly typical price gap

Increasing Prices by Market Domination

Price increases also have the potential to bleed outward—affecting not only the patients of the absorbed doctor, but also the cost of health care citywide. That's because when hospitals sit down at the bargaining table with insurers, they're almost always able to negotiate higher payment rates for their big groups of doctors than a lone physician with little bargaining power

Despite the usual spin provided by the would-be monopolists:

Fast-growing hospital systems, including Hospital Sisters and Bozeman Deaconess, say that their growth will eventually make care more efficient and bring costs back down, since they'll be able to cut back on unnecessary care and duplicate tests

I am sure that the 19th century robber barons made the same pitch about increasing efficiency. Of course, the efficiency mainly benefits the insider managers.

By the way, of course, the hospital systems own public relations machines and lobbyists are now busy attacking any restrictions on such concentrations of power, while the hospital managers figure out how to game the system to increase their market domination before the regulators notice:

As more patients face such disruptions, regulators are taking notice. In October, the Federal Trade Commission and the Department of Health and Human Services met with doctors, insurers and other health officials to discuss the referral and pricing problems that could arise from 'accountable-care organizations'— those new groups of hospitals and doctors that will share financial incentives. The Federal Trade Commission will offer guidelines on what's permissible by midyear. But hospitals are already lobbying for accountable-care groups to be exempt from antitrust and antifraud rules, even as they scoop up more and more medical practices. Under current regulations, officials in Washington must green-light all mergers involving companies valued at more than $63 million. But by buying up tiny medical practices one at a time, critics say, hospitals stay below the threshold and avoid getting much attention. And by the time regulators settle on more-formal legal guidelines, those mergers may be hard to undo, says Cory Capps, a Washington economist specializing in health care antitrust issues.

Excess and Unnecessary Utilization via "Leakage Control"

With big hospital systems now owning physician practices, and practicing physicians directly answering to executives, the push will be on to maximize use of the most lucrative services. Once the hospital systems have made employees out of the physicians, it is easy to pressure their own employed physicians to refer patients to the hospital units that can bill most lucratively:

By their own admission, most hospitals are eager to keep patient referrals under the same corporate umbrella, to save on costs and share medical records but also to boost revenue. The hospitals say they wouldn't force an internist, for example, to refer a patient with heart problems to their own cardiologists, but critics say there's certainly financial pressure. Under a little-noticed regulation that took effect in 2007, hospitals are allowed to pay doctors less if they don't do enough internal referrals.

Doctors in Bozeman and Springfield who granted interviews said they didn't feel pressure to be 'team players' with referrals. But some of those who've left large health systems tell a different story, including Mark Callenberger, an orthopedist in Merritt Island, Fla. Callenberger says that the hospital group where he used to work urged him to direct more patients to the MRI machine owned by the hospital. The doctor preferred a more advanced machine at a private practice that he says offered clearer pictures. But after he ignored the recommendations, Callenberger says, the hospital told his office manager to schedule patients at the hospital's MRI anyway, leaving him to perform surgery using 'crummy images.' (The hospital declined to comment on Callenberger's case but says its doctors can use whatever facilities they choose.) Patients may never know about these power struggles, because doctors aren't required to disclose how they choose specialists. And while patients who ask can always see a specialist outside the network, in practice few are likely to challenge their doctors' judgment, says Bruce A. Johnson, a Denver health care lawyer. 'Face it, when we're really sick,' says Johnson, 'if the doctor tells us to jump off a roof, we'll probably consider doing it.'

Note that we discussed (here and here) the example of a for-profit hospital system with a large number of physician employees pushed to choke off "leakage" of patient referrals outside the system.

Summary

The overarching problem is that employed physicians now must answer to managers and executives who may put financial goals, and their own enrichment, ahead of physicians' values, and specifically will choose increased revenue over providing the best possible care to individual patients:

. Executives here are also hoping to push the needle further—standardizing everything from how long patients wait on hold to the ease of parking at the doctor's office (valets, luxury-restaurant style, are one solution under consideration).

Still, Mikell acknowledges, 'doctors don't want follow-the-directions, cookbook medicine.' And for many physicians, the idea of following new rules triggers a much larger unease at giving up their independence—a feeling of loss, both for the businesses they built and for their patients. Back in Bozeman, Blair Erb, the sole cardiologist in town, is a picture of resignation as he prepares to sign a contract with Deaconess. 'I feel defeated,' Erb says, looking around at the office furniture he and his wife, Liz, chose from a catalog years ago. The weathered ranchers and bundled-up women that come through his door mostly express disbelief when they hear that this frank-talking Tennessee native will sell his practice. His staffers say they're not looking forward to the questions the hospital's medical records system will soon prompt them to ask patients. (Do you wear a bike helmet regularly? Do you have a smoke detector?) 'We'll try to retain as much professional independence as possible,' Erb says, gazing at the hospital building, whose bulk he can see through his window. 'But the fact of the matter is, we'll have a new master.'

So I for one do not welcome our new executive overlords.

We have posted about numerous examples of health care organizational leaders who put their own enrichment ahead of the mission. Now even ostensibly non-profit hospital systems are increasingly competing against for-profit systems. We have seen, as noted above, an example of a for-profit system that seems to betting everything on a business strategy to reduce "leakage" of patient referrals.  We can expect that non-profit hospital systems will have to act more like for-profit systems, and the perverse financial incentives given the managers of all hospital systems will lead to pressure on physicians to forgo their responsibilities to provide the best care to individual patients in favor of actions that will bring in the most money in the shortest time.

We seem to be witnessing the rise of the corporate physician, the rise of a physician who must first answer to managers who never committed to putting patient care first, who may have no sympathy for physicians' core values, who may receive huge incentives to maximize short-term revenue no matter what. Such a rise of corporate physicians would be unprecedented in the US, and I believe in any developed country.

The rise of the corporate physician would require patients to put their trust in corporations, rather than individual doctors, in the era of the global financial collapse, in the new gilded age.

We may be seeing the end of health care world as we know it. The upcoming brave new world of health care may be worse that we can imagine.

What is to be done? - I rarely have ventured into specific policy suggestions, but I think that the consequences of the well-intended "accountable care organization" blunder may be so severe that I must so venture now. We must derail the movement towards "accountable care organizations." Any movement to make organizations more accountable cannot do so by making most professionals into employees answering to the sorts of ill-informed, incompetent, self-interested, conflicted or even corrupt leaders that we have been writing about for more than six years on Health Care Renewal.  We need to make it impossible for for-profit companies to employ physicians to take care of patients.  Maybe we need to think about making it impossible for for-profit companies to provide patient care at all, and for for-profit companies to sell health insurance.  Meanwhile, we need to ensure the accountability, integrity, transparency, and honesty of leaders of health care organizations.

If we do not reverse the current trends, anyone who wants good health care may have to look for it somewhere other than in the US.

More Hospitals Settle, But Not for Much

In late February, there have been several notable legal settlements made by more or less prominent hospitals, discussed in rough order of size.

United Regional Health Care System

Per the Cypress Times,

The Department of Justice announced today that it has reached a settlement with United Regional Health Care System of Wichita Falls, Texas, that prohibits it from entering into contracts that improperly inhibit commercial health insurers from contracting with United Regional’s competitors. The department said that United Regional unlawfully used these contracts to maintain its monopoly for hospital services in violation of Section 2 of the Sherman Act, causing consumers to pay higher prices for health care services.

Note that this appears to be the first settlement involving the Sherman Anti-Trust Act that included a hospital system, or any health care organization which we have discussed. As the Times article mentioned,

This is the first case brought by the department since 1999 that challenges a monopolist with engaging in traditional anticompetitive unilateral conduct.

Here is more detail about the alleged offenses:

According to the complaint, United Regional is by far the largest hospital in Wichita Falls. Its share of general acute-care inpatient hospital services is approximately 90 percent, and its share of outpatient surgical services is more than 65 percent. It is the region’s only provider of certain essential services such as cardiac surgery, obstetrics and high-level trauma care. In Wichita Falls, United Regional’s average per-day rate for inpatient hospital services sold to commercial health insurers is about 70 percent higher than its closest competitor for the services that are offered by both hospitals.

The department said that in order to maintain its monopoly in the provision of inpatient hospital and outpatient surgical services, United Regional systematically required most commercial health insurers to enter into contracts that effectively prohibited them from contracting with United Regional’s competitors. United Regional’s contracts required these insurers to pay significantly higher prices if they contracted with a nearby competing facility. Since United Regional is a must-have hospital for any insurer that wants to sell health insurance in the Wichita Falls area, and because the penalty for contracting with United Regional’s rivals was so significant, almost all insurers offering health insurance in Wichita Falls entered into exclusionary contracts with United Regional. As a result, competing hospitals and facilities could not obtain contracts with most insurers and were less able to compete, helping United Regional maintain its monopoly in the relevant markets and raising health-care costs to the detriment of consumers.

As far as I could tell, however, for this apparently severe offense there will be no actual penalty. The settlement only appears to provide for a promised change in future behavior by the hospital:

The proposed settlement, which if accepted by the court would be in effect for seven years, restores lost competition by prohibiting United Regional from using agreements with commercial health insurers that improperly inhibit insurers from contracting with United Regional’s competitors. In particular, United Regional is prohibited from conditioning the prices or discounts that it offers to commercial health insurers based on whether those insurers contract with other health-care providers and from inhibiting insurers from entering into agreements with United Regional’s rivals. United Regional is also prohibited from taking any retaliatory actions against an insurer that enters into an agreement with a rival provider.

So if a hospital engages in actions that restrain competition and results in a de facto monopoly, all the hospital leaders must fear is that at some point it may have to change its monopolistic behavior, according to this settlement.

Catholic Healthcare West

Per the San Jose Business Journal,

Catholic Healthcare West, parent company to local Mercy hospitals, has agreed to pay $9.1 million to settle allegations that seven of its hospitals submitted false Medicare claims, U.S. Attorney Benjamin Wagner announced late Friday.

Here is more detail about the alleged offenses:

The hospitals include Community Hospital of San Bernardino, St. Bernadine Medical Center in San Bernardino and St. Elizabeth Community Hospital in Red Bluff.

The settlement also included allegations that O’Conner Hospital in San Jose, Seton Medical Center in Daly City and St. Joseph’s Hospital and Medical Center in Phoenix submitted inflated costs for their home health agencies and were overpaid. The agreement also resolves allegations that St. Joseph’s overstated how much was owed in disproportionate share funding for indigent patients.

CHW no longer owns O’Conner Hospital or Seton Medical Center.

The settlement resolves allegations that St. John’s Regional Medical Center in Oxnard was overpaid for treating a high percentage of patients with end-stage kidney disease for several years, including two when it was not eligible.

Note that while the amount of the payment assessed appears substantial, it will be made a very long time after the alleged bad behavior occurred:

All of the problems occurred in the 1990s. Federal investigators began looking into the matter in 2001, but it took years to compile evidence and reach a settlement. All of the hospitals had set aside money in a reserve account should they have to pay funds back to the government.

So if a hospital submits false claims to the US government, hospital leaders need not fear paying anything back for more than 10 years, according to this settlement.

By the way, this was not the first such settlement that Catholic Healthcare West has had to make:

In 1998, a whistleblower at Woodland Healthcare disclosed instances of alleged fraud by two medical groups affiliated with local Mercy hospitals, Woodland Clinic Medical Group and Medical Clinic of Sacramento.

Following an extensive investigation, former U.S. Attorney John Vincent announced a $10.25 million settlement in May 2001. The allegations included false claims to inflate reimbursement from Medicare, Medi-Cal and military health insurance programs.

Massachusetts General Hospital (Partners Healthcare)

Per the Boston Globe,

Massachusetts General Hospital has agreed to pay the federal government $1 million to settle potential violations of patient privacy laws, which occurred when an employee commuting to work lost patient records on the T’s Red Line two years ago.

Here is more detail about the alleged offenses:

Health information for 192 patients in Mass General’s Infectious Disease Associates outpatient practice was lost in the incident, including that of patients with HIV/AIDS. The documents included a patient schedule containing names and patient medical record numbers, as well as billing forms containing the name, birth date, medical record number, health insurer and policy number, diagnosis, and name of providers for 66 of those patients.

Note that Massachusetts General Hospital is not independent, but part of Partners Healthcare, which reported net patient service revenue of $1.5 billion in the most recent quarter, again per the Boston Globe. So this settlement amounted to about 0.00167% of the system's patient revenue.

So if a hospital engages in actions that violate the trust patients have that their information will be kept confidential, all hospital leaders have to fear is that their institution will eventually have to pay something much less than round-up error of their revenue, according to this settlement.

Summary

Again, the volume of participants in the ongoing march of legal settlements is a reminder of how pervasive bad behavior is in the US health care system. Remember that these settlements are in some sense the tip of the iceberg. They only indicate behavior that inspired legal action which was in turn was publicized. It is likely that for each behavior that eventually leads to a settlement, there are many behaviors that go unreported, or that cause no reaction.

It is interesting that sorts of bad behavior that formerly caused no official reaction are now leading to settlements. As noted above, there had been no recent legal actions against concentration of power in health care up to the United Regional Health Care System settlement.

However, like many of the settlements we have previously noted, the latest crop seem to have little deterrent power. The United Regional Health Care System settlement seemingly involved no monetary penalties whatsoever, only a promise of not to do it again. The Catholic Healthcare West settlement's monetary penalties were so delayed, occurring over 10 years after the actions in question, their deterrent power is highly questionable. The Massachusetts General Hospital (really the Partners Healthcare) monetary penalty was infinitesimal compared to the size of the institution's budget.

Furthermore, as in nearly every other case we have reported, no person who authorized, directed or implemented the actions in question had to pay any penalty, or suffer any negative consequence, or was even identified.

So while there seems to be some increased interest in addressing some kinds of bad behavior, like monopolistic practices, that heretofore generated no official reactions, regulatory authorities still seem loathe to even slap the wrists of the people whose aggregated actions are making our health care so expensive, so inaccessible, and probably of such mediocre quality.

Thus, in recent years, health care leaders, like leaders of financial service companies, seem to have impunity,  Up to now, they have been able to preside over all sorts of bad behaviors that help support their exorbitant remuneration without fearing any personal penalties.  As Charles Ferguson, the director of Inside Job, said when accepting his Academy Award last night, per MarketWatch,

Forgive me, I must start by pointing out that three years after a horrific financial crisis caused by fraud, not a single financial executive has gone to jail — and that’s wrong

After a slow-motion health care train wreck over the last 30 years, hardly any health care executives have even had to pay a fine, much less go to jail.

So I repeat, and repeat, and repeat: we will not deter unethical behavior by health care organizations until the people who authorize, direct or implement bad behavior fear some meaningfully negative consequences. Real health care reform needs to make health care leaders accountable, and especially accountable for the bad behavior that helped make them rich.