"Person No. 7," Also Known as the 83rd Richest Man in the World

This one nearly snuck by. 

A Settlement and Some Indictments

In May, 2009, we posted that international Swiss-based medical device manufacturer Synthes settled charges that it was paying surgeons who conducted clinical trials for the company with company stock, and in June, 2009, we posted that Synthes was indicted based on allegations that it had subjected patients to an experimental use of its Norian XR bone cement product on the spinal cord, a use not approved by the US Food and Drug Administration, and that its executives had lied to the FDA about these actions.  It was noteworthy that the indictment named but did not charge the then CEO of the company as "Person No. 7" who allegedly decided not to conduct clinical trials of Norian XR, but rather to have surgeons use it in a case series that was not identified as clinical research.  The company CEO at that time was a Mr Hansjorg Wyss, who is still chairman of the Synthes board, owner of 40% of Synthes stock, and the richest man in the Philadelphia area, worth $5.7 billion according to Forbes magazine, making him the 83rd richest man in the world in 2009, according to Forbes magazine.

Four Guilty Pleas

Here is what first escaped my attention.  In July, 2009, the Philadelphia Inquirer reported:

Two senior executives of a West Chester-based manufacturer of medical devices pleaded guilty yesterday in connection with illegal clinical trials of a bone cement on about 200 patients, three of whom died.

The company, Synthes USA Inc., did not tell the patients that they were participating in what amounted to human experimentation, according to a 97-count indictment filed June 16 by the U.S. Attorney's Office in Philadelphia.

Michael D. Huggins, 51, of West Chester, was president and chief operating officer of Synthes' spine division from late 1994 to January 2008.

John J. Walsh, 46, of Coatesville, has served as director of regulatory and clinical affairs in the same division since August 2003.

Before U.S. District Judge Laurence F. Stengel, each pleaded guilty to a single misdemeanor count of introducing adulterated medical devices into interstate commerce. They face $100,000 fines and a year in prison when they are sentenced Oct. 22.

Then, in August, 2009, Bloomberg reported:

Synthes Inc. official Richard Bohner pleaded guilty in Philadelphia to charges tied to illegal clinical trials of a bone cement that led to three deaths.

Bohner, Synthes’ vice president of operations, is the last of four executives to plead guilty to shipping misbranded Norian XR across state lines. He faces as long as one year in prison plus a $100,000 fine, according to documents made public today in federal court in Philadelphia.

Bohner and the other executives, Michael Huggins, John Walsh and Thomas Higgins, promoted the drug through the use of test markets aimed at persuading surgeons to publish the results of their surgeries, according to court documents.

Huggins and Walsh, who pleaded guilty July 20, will be sentenced on Oct. 22.

So that is four individual guilty pleas so far in this case. The pleas received only scant attention in the local media, and hence slipped by the technology I was using to scan the media at the time.

The Richest Man in Philadelphia

I got caught up when on 6 December, 2009, the Philadelphia Inquirer published a summary article focused on the "Person No. 7":

Wyss also is chairman of Synthes in West Chester, which faces 52 felony counts stemming from allegations that it illegally experimented on patients, three of whom died.

Synthes is fighting the charges, and a trial could be held next year. Four of its executives already have pleaded guilty to misdemeanor counts in the case and face sentencing hearings in January.

Federal prosecutors in Philadelphia did not name or charge Wyss, but their June indictment describes a "Person No. 7," who was a major shareholder and chief executive officer of the company when the alleged illegal conduct occurred, from 2001 through 2004. A Synthes representative confirmed that Wyss was CEO then.

In 2001, the U.S. attorney's indictment says, Person No. 7 decided the company should not pursue the costly and time-consuming clinical trials that the U.S. Food and Drug Administration demanded for the company's bone-cement product, Norian.

Instead, according to the indictment, Person No. 7 directed the company to 'get a few sites to perform 60 to 80 procedures and help them publish their clinical results' to help popularize Norian for a use not approved by the FDA.

The procedures involved injecting Norian into the spines of patients who had vertebral compression fractures, which are typically caused by osteoporosis. FDA officials had previously approved Norian for other uses, but they demanded trials for that type of surgery, fearing that the cement could perform differently in the spine.

Even after tests in pigs showed that Norian could leak from the spine and cause life-threatening blood clots, Synthes continued with surgeries on human patients, who were never told that the procedure was experimental.

Three of those patients died, but prosecutors do not know whether Norian played any role in their deaths, because the company and doctors did not immediately report all the fatalities to the FDA. The patients have not been identified.

Through a Synthes representative, Wyss initially agreed to be interviewed for this article, but later declined.

The Inquirer article seemed to try to balance the allegations about Wyss with his wealth and philanthropy:

Wyss grew up in Bern, Switzerland. His father sold mechanical calculators and liked to discuss world events, according to Harvard's Web site. Wyss trained as an engineer in Switzerland and soon began setting up Chrysler manufacturing plants worldwide. In 1965, he earned a master's degree at Harvard's business school.

'I didn't speak in class for the first five weeks,' he told a Harvard Web publication at the time of his gift. 'My classmates were all the crème de la crème, with button-down shirts I had never seen before.'

He worked for several large companies, but sold airplanes on the side. One of his buyers was a Swiss surgeon who founded Synthes. That connection eventually led Wyss to become president of the company's U.S. business in 1977.

Over time, he became a large shareholder and chief executive. He retired from that post in 2007, but he remains chairman.

Forbes Magazine in March estimated Wyss was worth $5.7 billion. His fortune has helped him pursue whatever he wants, including the rehabilitation of the Crooked Tree Golf Course in Tucson, Ariz., and the purchase of the 900-acre Halter Ranch & Vineyard in Paso Robles, Calif. The winery emphasizes organic growing methods and sells many wines, including one named Synthesis.

Wyss has given away large chunks of his fortune, mostly to organizations dedicated to his primary passions: science and the environment.

His $125 million donation to Harvard funded the Wyss Institute for Biologically Inspired Engineering....

Wyss also established two private foundations. The Wyss Foundation is dedicated to preserving land in the American West. Wyss went hiking there as a student and fell in love, according to Forbes.

The Wyss Foundation gave away about $13 million and had about $250 million in assets in 2007, according to tax filings.

Wyss also donates heavily from his personal funds. BusinessWeek estimated his total giving from all sources at $277 million from 2004 through 2008.

However, some of Wyss' philanthropy seems more designed to benefit his company:

Wyss' other foundation, the Hansjörg Wyss Foundation, had about $172 million in assets and gave away $4.9 million in 2007. It focuses mostly on education and training of surgeons, according to the AO Foundation, a Swiss research group with ties to Synthes and Wyss.

By funding research and training, Synthes has forged tight relationships with surgeons. The U.S. Attorney's Office alleges that the company paid for trips to educational seminars in San Diego and Charlotte, N.C., where surgeons learned to use Norian in the spine.

Marketing Over Research

This emphasis on education that actually seems to partake of company marketing is also displayed by Synthes itself.  Per the company's 2008 Annual Report, the company runs a "residency program,"

The Synthes Resident Program was originally released in the United States in 2007 by Synthes Trauma. It was first developed to train orthopaedic trauma surgical residents and consists of both online training modules and locally offered workshops.

In 2008, the Synthes Resident Program was expanded to a selection of European countries with modifications for the needs of specific areas and markets. Furthermore it is now also being offered by Synthes Spine and Synthes CM.

This program has achieved remarkable popularity, or should we say "market penetrance?"

The Synthes Resident Program has been well accepted in the U.S., with more than 90% of all U.S. orthopedic residents having utilized the program.

The company also offers an "Enhanced Surgeon Education Program," and support's the AO Foundation's educational activities.

On the other hand, the financial summary provided in the report suggests that research is not what the company emphasizes.  Its 2008 operating expenses included $943.3 million in sales and promotion, $349.4 million in general and administrative, and only $169.9 million in research and development, only 11.6% of total operating expenses.

And if you like the report's verbiage about education, you will also appreciate its full page section on "Integrity," which includes the header:

Corporate Citizenship. Acting with Integrity. Acting ethically and respectfully is a cornerstone of our business. At Synthes we are committed to responding to the challenges in our business by operating in accordance with the highest levels of professional and ethical standards in our industry. Simply put, we must always act with integrity.

It also boasts:

Our commitment to abide by the rules and regulations applies throughout Synthes, to all countries and to all employees, and to all our business partners.

Acting ethically is highly important for Synthes. Our actions create our
reputation. Our good reputation is an integral part of our Synthes brand,
and an essential element of our continued success.

And finally asserts:

Our effort to operate with the utmost integrity begins with the commitment of our Board of Directors and senior managers. [italics added for emphasis]  Our managers are role models for our employees, and lead our efforts to build and to promote a culture that encourages positive ethical conduct and that demonstrates commitment to compliance with the law.

Those four now admitted guilty top executives certainly were excellent role models. Even better was "Person No. 7," the current board chairman and former CEO.

Summary

So here we have all the elements: guilty pleas by top executives in connection with a human experiment whose nature was concealed from patients; allegations about but no charges against a fabulously wealthy company leader; a company that promotes what appears to be marketing in the guise of education; a tremendously profitable company which spends most of its money on marketing, not research; a company that boasts of its integrity and how its leaders are "role models," even as some have pleaded guilty to crimes; and despite the worldwide reach of the company and its products, no national coverage of any of this, the anechoic effect redux.

We have, not only in the US, but in other developed countries (for example, Switzerland, in which Synthes is based), and globally, health care based on marketing and hype, on deception and conflicts of interest, and on making a few privileged insiders fabulously wealthy.  Here is the essence of our health care dysfunction, and the inflating health care bubble.  When would be health care reformer stop arguing about insurance coverage, perhapds they can then pay some attention to these major reasons why health care is so expensive, inaccessible, and often does so little good for patients. 

PS - Earlier this year, we commented on the make-up of the Board of Trustees of the prestigious Hospital for Special Surgery in New York, which seemed split mainly among leaders of finance, including such troubled corporations that contributed to the global financial meltdown as Bank of America, AIG, Citigroup, and Wachovia, and orthopedic surgeons with ties to device makers.  One of the latter was Dr David Helfet, who listed his memberships on advisory boards for OHK Medical Devices Inc, Healthpoint Capital, and Orthobond Corp.  Just to add to the whiffs of lack of full disclosure surrounding this case, Dr Helfet still does not disclose on the hospital web-site that he is on the Board of Directors of Synthes.

Note (added 14 December, 2009) - Per comment below, the Vice President of Corporate Compliance and Internal Audit at the Hospital for Special Surgery claimed that an administrative error, not failure of disclosure by Dr Helfet, lead to the omission of the information about his membership on the Synthes board from the Hospital's web-site.

More Air Into the Health Care Bubble: the $30,000 a Month Cancer Drug

Over four years ago, we posted about the stratospheric prices of new drugs that seemed disproportionate to manufacturing and development costs on one hand, and the value of the drugs for patients on the other.  For example, back then we noted that thalidomide, a very old drug that notoriously was found to cause birth defects when it was given to preganant women, but that then showed promise as an anti-cancer drug, was being marketed in the US for $29 per capsule (approximately $25,000 a year), while a generic form sold in Brazil for $0.07 per capsule.

That was then, and this is now.  This week, the New York Times reported on a $30,000+  per month cancer drug. 

A newly approved chemotherapy drug will cost about $30,000 a month, a sign that the prices of cancer medicines are continuing to rise despite growing concern about health care costs.

The price of the new drug, called Folotyn, is at least triple that of other drugs that critics have said are too expensive for the benefits they offer to patients. The colon cancer drug Erbitux, for instance, costs $10,000 a month and the drug Avastin about $8,800 when used to treat lung cancer.

So what could be the rationale for this breathtaking price?

Drug Effectiveness

Could it be that the drug is extremely effective? Not according to the NY Times:

Folotyn has not yet shown an effect on longevity. In the clinical trial that led to approval of the drug, 27 percent of the 109 patients experienced a reduction in tumor size. The reductions lasted a median of 9.4 months.

But considering all the patients in the trial, only 12 percent had a reduction in tumor size that lasted for more than 14 weeks. The trial did not compare Folotyn to another drug or a placebo

A PubMed search revealed no sign that this trial had been publsiehd, and no publications reporting any controlled trials of this drug.

So at best, this drug at best may temporarily shrink tumors, although that assertion is based on evidence that has not yet been published or subject to peer-review. It does not seem that the tremendous price of the drug could be justified by tremendous benefits to patients.

Research, Development and Manufacturing

So, perhaps the drug was very difficult and expensive to create, manufacture and develop?  That does not seem to be the case, either.

Folotyn's generic name is pralatrexate. As the name suggests, it is a chemical compound very similar to the much older anti-cancer drug methotrexate. [See O'Connor OA. Pralatrexate: an emerging new agent with activity in T-cell lymphoma. Curr Opin Oncol 2006; 18: 591-597.]  It was first developed not by Allos Therapeutics, but by Memorial Sloan-Kettering Cancer Center, Southern Research Institute, and Stanford Research Institute.  The Allos Therapeutics 2008 annual report noted that the company's total research and development expenses for the drug from 1992 through 2008 were $26.8 million (so much for the urban myth that the average drug costs $1 billion to develop.)  Based on the estimate that the drug would cost roughly $30,000/ month from the NY Times, the company could recover all the development costs of this drug after 893 patient-months of use.

Allos Therapeutics does not actually make pralotrexate, but outsources its production, according to the company's .  The firm's total yearly manufacturing costs (for several experimental drugs as well as pralotrexate) in 2008 were $6.7 million.

So it does not seem that the tremendous price of the drug could be attributed to the costs of discovering, developing, or manufacturing it.

So where would the money go?

General and Administrative Costs, Executive and Board Compensation

Allos Therapeutics seems to spend a disproportionate amount of money on marketing, general and administrative costs.  According to the 2008 report, "marketing, general and administrative expenses include costs for pre-marketing activities, corporate development, executive administration, corporate offices and related infrastructure."  In 2008, these expenses were $23 million, in one year, almost as much as the company spent over 16 years to research and develop Folotyn.

Allos Therapeutics has enriched its corporate insiders.  According to the company's 2009 proxy statement, in 2008, CEO Paul L Berns received $2,091,600 in total compensation; Chief Commercial Officer James V Caruso received $1,259,700; and Chief Medical Officer Pablo J Cagnoni received $1,408,700.  The total compensation of the five highest paid executives of the company in 2008, $5,945,500, was over 10% of the entire company's budget, $53,639,000. 

Mr Berns, who has only been with the company since 2006, owned 994,606 shares or equivalent (at a price of $6.62 per share on 4 December, 2009, worth $6,584,292).  Mr Caruso owned 272,072 shares or equivalent,and Dr Cagnoni owned 386,245.   Although two board members, Stewart Hen and Jonathan S Leff seemed to be serving by virtue of their positions with Warburg Pincus & Co, whose Private Equity VIII LP owns over 29% of Allos Therapeutics stock, Mr Hen and Mr Leff received $120,700 and $119,400 to sit on the board.

These amounts should be considered in light of the fact that the company is comparatively tiny.  Its 2008 report disclosed that it only has 81 full-time employees, of whom fully 31 "are involved in marketing, corporate development, finance, administration, and operations."  The company has never made money.  Its 2008 report noted losses of over $20 million a year in the past five years, and a total loss of over $289 million.

So one wonders if the real reason pralatrexate was priced so high was to justify the millions that top company leaders have reaped from a company that lost money over the 16 years?

Summary

The NY Times reported that people outside of Allos were not pleased with the price of Folotyn:

Dr. Lee N. Newcomer, senior vice president for oncology at the big insurer UnitedHealthcare, called the price of Folotyn 'unconscionable.' He said that Folotyn alone would cost as much as UnitedHealthcare now typically spends in total to treat a lymphoma patient from diagnosis until death. That median expenditure now, he said, is $87,000 for a little over a year of treatments.

But Dr. Newcomer said insurers would be obligated to pay for Folotyn because there were no alternatives.

Furthermore,

'This drug is not a home run,' Dr. Brad S. Kahl, a lymphoma specialist at the University of Wisconsin, said during a meeting of an advisory committee to the F.D.A. on Sept. 2. 'It’s not even a double. It’s a single.'

Saying that even a single was helpful, Dr. Kahl was part of a majority on the panel that recommended approval of the drug, 10 to 4.

But after recently learning what Allos planned to charge for Folotyn, Dr. Kahl said he was 'disappointed' by the 'excessive' price.

'It dampens my enthusiasm for using that drug,' he said. 'It creates these huge ethical quandaries about trying a drug that has a modest benefit for the average patient at enormous expense.'

So the health care bubble continues to inflate.  I suggest that the case of the ridiculous pricing of Folotyn shows how this bubble is in part generated by "compensation madness," not only "insiders hijacking established institutions for their personal benefit," but also insiders able to become rich at the expense of even tiny, money-losing corporations.   But the bubble is also generated by the amazing acquiescence of those who pay bills at all levels, form the individuals who ultimately fund health care through salary dollars not earned, health insurance premiums, co-pays and the like, and tax payments, through the health care insurers and government agencies who did not balk at paying $25,000 a year for thalidomide in 2005, and seemingly will not balk at paying $30,000+ a year for pralatrexate in 2009.

If we really want to provide accessible health care of good quality and a reasonable cost, we will need to develop mechanisms to pay more reasonable amounts for health care goods and services.  This will require some courage facing down the corporate and organizational insiders who have made themselves very rich from the current craziness. 

NOTE (21 December, 2009) - See also comments on the Postscript blog.

Troubled £12bn NHS IT System to be Scaled Back: UK MP's Come to Their Senses on Health IT. Will the U.S. Follow?

The UK National Programme for Health IT in the NHS, by the findings of the House of Commons Public Account audit committee, has been a £12bn debacle. Started as a starry-eyed utopian fantasy about experimental computerized clinical tools by former Prime Minister Tony Blair, nearly every possible mistake outlined at my ten year old website on HIT failure has been made, and made in abundance, the coup de grâce being dependence on an American health IT company.

It seems people's ability to detect rigor and seriousness in industrialists has become seriously impaired, the recent spectacular Ponzi schemes fallen for by quite prominent people and foundations being one example. Now the UK is at the point where hospitals are "unable to share documents" relating to problematic EHR's as their contract with that vendor includes a confidentiality clause. (Not that such clauses are limited to one company.

The health IT industry has generally profited from a sweetheart relationship of stunning proportions with healthcare regulatory agencies (it is entirely unregulated); with government (in the U.S., hundreds of billions of dollars are being thrown their way on similar starry-eyed dreams about reduced costs and improved quality per the economic "stimulus" bill); and with healthcare organizations (who accept HIT marketing puffery hook, line and sinker, do not perform due diligence properly for such critical clinical tools, who manage IT and informatics talent poorly, and who willingly sign defects nondisclosure and hold harmless clauses that violate the fiduciary responsibilities of their governance bodies as in my JAMA letter here and longer essay here).

At least for the £12bn down the drain, the U.K. is coming to their senses:

Troubled £12bn NHS IT system to be scaled back
BBC News
6 December 2009

The government is to scale back its £12bn NHS IT system in what the Tories are calling a "massive U-turn".

Chancellor Alistair Darling said he would be delaying parts of the scheme in Wednesday's pre-Budget Report as it was "not essential to the front line".

The move may save hundreds of millions but Mr Darling admitted it was only a fraction of total spending cuts needed.

The Tories and Lib Dems have been calling for the IT system, which has been hit by costly delays, to be axed.

... “It has held back the development of IT at a local level, cost billions and is running years behind schedule” - Norman Lamb, MP Liberal Democrats.

... [Chancellor Darling] said the full picture of cuts would not emerge until "the first half of next year at some point" - a reference to the comprehensive spending review, which the government has delayed until after an election.

The comprehensive spending review should be interesting, to say the least. I humbly suggest the NHS look at the contracting practices of the vendors, especially the gag clauses, the multiply-layered subcontracting deals with dyscompetent consulting companies common in IT, and conflicts of interest of local and national program leaders with IT and consulting suppliers.

I also suggest the reviewers borrow from the U.S. Senate Committee on Finance letter here from Senator Grassley to HIT vendors and consultants.

'Procurement disaster'

Treasury officials have stressed that only part of the NHS IT programme is facing the axe, and the whole project will not be scrapped.

But the Conservatives said Mr Darling's words represented a "massive U-turn".

Shadow Health Secretary Andrew Lansley said it was "another government IT procurement disaster".

"After seven years Labour have finally acknowledged what we've said for years, that the procurement for NHS IT was costing billions and not delivering," he said.

Why did it take years to acknowledge the obvious? The driving force behind blindness to IT failure goes way beyond wishful thinking. Lack of knowledge by the leadership of the complexities of "doing health IT right" and the ease of getting it wrong are a factor, especially when employing management talent in top positions inappropriate to the job such as these:

Two senior management appointments for NHS National Programme for IT announced
12 August 2008

The Department of Health has announced the two long-awaited senior management appointments for the National Programme for IT ... The Department announced in February that it was recruiting the two positions as part of a revised governance structure for handling informatics in the Department of Health.

Christine Connelly will be the first Chief Information Officer for Health and will focus on developing and delivering the Department's overall information strategy and integrating leadership across the NHS and associated bodies including NHS Connecting for Health and the NHS Information Centre for Health and Social Care.Christine Connelly was previously Chief Information Officer at Cadbury Schweppes with direct control of all IT operations and projects. She also spent over 20 years at BP where her roles included Chief of Staff for Gas, Power and Renewables, and Head of IT for both the upstream and downstream business.

Martin Bellamy will be the Director of Programme and System Delivery. He will lead NHS Connecting for Health and focus on enhancing partnerships with and within the NHS. Martin Bellamy has worked for the Department for Work and Pensions since 2003. His main role has been as CIO of the Pension Service.

"Informatics leadership" in healthcare with these backgrounds? Where's Winston Churchill when you need him?

Large sums of money in one's pocket also creates the most rabid enthusiasm in face of the obvious.

The electronic patient record system, which is thought to have cost about £12bn so far, was commissioned in 2002 by then prime minister Tony Blair, and was meant to be completed by 2010.

This sounds eerily familiar to the U.S., which set an equally unrealistic ten year timeline for a major social re-engineering project -- entirely dependent on experimental IT -- of immense proportions.

Mr Lansley told BBC One's Politics Show the Tories would scrap the "enormous centralised IT system" and instead give hospitals "the opportunity to buy IT systems" that could transfer images, patient records and prescriptions electronically.

A focus on easy wins - providing local hospitals leeway to buy or build systems to transfer images, basic records useful to clinicians in the real world (as opposed to every data point in the known universe possible about a patient) and prescriptions, with incremental refinement and slow spread as IT and human capabilities warrant, should have been the focus at the start, not an idealistic project to create a centralized national Medi-net.

It comes as the Conservatives called for a moratorium on all government computer projects, ahead of the publication of the government's five-year IT strategy later this week. They say Labour has spent £100bn on IT since 1997 and contracts worth another £70bn are due to be renewed or commissioned in the next two years.

That's a lot of money. What's the ROI, exactly?

The Liberal Democrats said the NHS programme had been "flawed from the start".

The party's health spokesman, Norman Lamb, said: "It has held back the development of IT at a local level, cost billions and is running years behind schedule."

That is subtantiated by the above linked House of Commons report.

But Dr Grant Ingrams, from the British Medical Association, said the system currently scheduled to come into effect would result in the NHS saving money.

"It's an essential tool for clinicians, for doctors and other staff to be able to treat patients," he said.

"The NHS pays out a third of a billion pounds a year on mistakes; a lot of that could be put right if the IT was in place."

That type of statement about medical mistakes is at the crux of the idealists' and zealots' dream. Unfortunately, they do not ask these simple minded questions:

• Are those mistakes due to informational issues, e.g., lack of immediate availability of patient information, or due to other personal, local and/or systemic factors?

• What percentage of the mistakes meet the criterion of being amenable to "prevention by IT"?

• Could computerized systems create new mistakes of their own?

• Where is the robust evidence that supports such a statement about error prevention?

• Has such evidence been rigorously reconciled with an accumulating evidence base to the contrary?
  

The answers to these simple questions are not hard to obtain to anyone who cares to look, and who will take off their global warming "Hide the Decline" blinders (warning: YouTube link to a most apropos satire and mockery).

Lacking the miracle of our own government officials sprouting new brain cells in cortical centers responsible for critical thinking and ethics, I regrettably predict the U.S. will be at this same point in approximately three to five years.

-- SS

"Compensation Madness" - "Insiders Hijacking Established Institutions for their Personal Benefit"

As we learn more about the causes of the global financial melt-down, aka great recession, the lessons appear more applicable to health care.  My latest example comes from last week's Wall Street Journal.  There appeared an article by a Professor from the Faculty of Management of McGill University (Montreal, Canada) on executive compensation that has important lessons for health care (Mintzberg H. No more executive bonuses. Wall Street Journal, Nov 30, 2009.  Link here.)

Prof Mintzberg's first major premise was that current executive compensation at major corporations resembles a rigged casino:

Although these executives like to think of themselves as leaders, when it comes to their pay practices, many of them haven't been demonstrating leadership at all. Instead they've been acting like gamblers—except that the games they play are hopelessly rigged in their favor.

First, they play with other people's money—the stockholders', not to mention the livelihoods of their employees and the sustainability of their institutions.

Second, they collect not when they win so much as when it appears that they are winning—because their company's stock price has gone up and their bonuses have kicked in.

Third, they also collect when they lose—it's called a 'golden parachute.'

Fourth, some even collect just for drawing cards—for example, receiving a special bonus when they have signed a merger, before anyone can know if it will work out. Most mergers don't.

And fifth, on top of all this, there are chief executives who collect merely for not leaving the table. This little trick is called a 'retention bonus' —being paid for staying in the game!

Prof Mintzberg points out that while there is no some recognition that the compensation system needs to be fixed, most proposals would simply tinker with the notion of pay for performance. However, Prof Mintzberg believes that such tinkering is hopeless, because the whole system is based on false assumptions. These are

"• A company's health is represented by its financial measures alone—even better, by just the price of its stock."

However,

Companies are a lot more complicated than that. Their health is significantly represented by what accountants call goodwill, which in its basic sense means a company's intrinsic value beyond its tangible assets: the quality of its brands, its overall reputation in the marketplace, the depth of its culture, the commitment of its people, and so on.

So the elements of true performance are multiple, and extremely hard to measure.

The consequences of making simple financial measures the only metric of performance are severe:

This flawed assumption, though, does far more damage than simply distorting CEO compensation. All too often, financial measures are a convenient substitute used by disconnected executives who don't know what else to do—including how to manage more deeply.

Or worse, such measures encourage abuse from impatient CEOs, who can have a field day cashing in that goodwill by cutting back on maintenance and customer service, 'downsizing' experienced employees while others are left to 'burn out,' trashing valued brands, and so on. Quickly the measured costs are reduced while slowly the institution deteriorates.

"• Performance measures, whether short or long term, represent the true strength of the company."

Prof Mintzer suggested that this has lead to an attempt to subsitute long-term rather than short-term financial measures. However, no one knows how long "long-term" should be.

" • The CEO, with a few other senior executives, is primarily responsible for the company's performance."

This one is especially pernicious

What if the CEO was lucky enough to have been in the right place at the right time? When it comes to a company's current performance, history matters, culture matters, markets matter, even weather can matter. How many chief executives have succeeded simply by maneuvering themselves into favorable situations and then hanging on while taking credit for all the success? In something as complex as the contemporary large corporation, how can success over three or even 10 years possibly be attributed to a single individual? Where is teamwork and all that talk about people being 'our most important asset?'

More important, should any company even try to attribute success to one person? A robust enterprise is not a collection of 'human resources'; it's a community of human beings. All kinds of people are responsible for its performance. Focusing on a few—indeed, only one, who may have parachuted into the most senior post from the outside—just discourages everyone else in the company. Sometimes, there is the impression that a forceful chief executive has turned around a troubled company. But how sure can we be that such a turnaround will be long-lasting? After all, so many of these supposed corporate resurrections eventually go sour.

So Prof Mintzberg observed, "if you do pay bonuses, you get the wrong person in ... [the CEO] chair."

Thus,

Executive bonuses provide the perfect tool to screen candidates for the CEO job. Anyone who insists on them should be dismissed out of hand, because he or she has demonstrated an absence of the leadership attitude required for a sustainable enterprise.

In summation, "All this compensation madness is not about markets or talents or incentives, but rather about insiders hijacking established institutions for their personal benefit."

I submit that Prof Mintzberg's essay is as applicable to health care organizations, not only public for-profit health care corporations, but also many of the not-for-profit organizations that have sought to become more businesslike, as it is to any large corporations.

We have discussed numerous examples of ill-informed, self-interested, conflicted and corrupt leaders of health care organizations, most of whom became rich despite, or perhaps because of these attributes.

We have seen examples of many of what Prof Mintzberg lists as examples of outcomes of the bonus culture:
- Short-term results twisted and hyped to enhance the reputation of a "visionary" CEO.  (For example, see the cautionary tale of the Allegheny Health Education and Research Foundation.  See posts here and here.)
- Leaders who focus only on short-term financial results, rather than the multi-faceted health care mission (For example, see how one academic health care leader revealed that institutions are only in it for the money.)
- Cutting back on quality to cut costs and maximize short-term financial results.  (For example, see the consequences of the out-sourced heparin, or failure to do adequate maintenance on over-worked production facilities.)

I would underline one particular point. The perverse incentives generated by the current bonus culture in business have lead to practices antithetical to the long-term prosperity of corporations, including cutting the quality and quantity of the product to cut costs, and firing or over-working employees, including the most experienced and sophisticated ones (outside of the leaders' inner circles). This would be bad for any kind of organization, but in health care can lead to distress, disease, disability, and death.

I again submit that to truly reform health care, we need to reform the current business culture of health care.  One primary element of that reformation is refocusing leadership on the health care mission.  For not-for-profit health care organizations, the mission must take precedence over making more money.  On the other hand, for-profit health care corporations that put short-term revenues (and bonuses paid to top leaders) before the quality of their products and hence their long-term reputations may find themselves, like some US automobile companies, without markets, without profits, and bankrupt.