Why Weren't Existing Laws About Hospital CEO Compensation Enforced in Washington State?

Public radio station KUOW reported on the generous compensation given hospital CEOs in Washington:

KUOW has learned that 15 hospital executives in Washington made $1 million or more in 2009. That elite group includes 14 nonprofit executives and one head of a government hospital. CEOs at Multicare, Providence, Virginia Mason and Valley Medical each made more than $2 million.

Those numbers can be found in the hospitals' latest tax filings and other public records. The pattern was more lopsided in the two prior years. Nobody working at a public hospital cracked the top 10 list of the state's highest hospital paychecks in 2007 or 2008.

But then the story takes an interesting twist:

Most of Washington's largest hospitals are nonprofit organizations. The state gives the nonprofits a break on their business taxes to help reduce the cost of health care.

The hospitals have to jump through some hoops to qualify for the reduced taxes. For one thing, state law limits how much the hospitals can pay their executives. Their pay has to be comparable to what public servants in Washington make in similar jobs — or else no break on their B&O taxes.

Somehow everyone seems to have forgotten about this part of the law:

The limit on executive pay has been on the law books for 30 years.

Gowrylow: 'Frankly, I don't think it's something that's been on our radar since the mid–80s.'

Mike Gowrylow is a spokesman for the Washington Department of Revenue. He says the recent million–dollar incomes were news to the department.

Gowrylow: 'But it's certainly something that I think we need to take a look at again and examine whether these nonprofits are paying their executives excessively or not.'

Gowrylow says the agency only audits 2 or 3 percent of tax returns. It mostly relies on businesses to comply voluntarily with the state's tax laws.

Gowrylow: 'We can't be everywhere. If we become aware of a nonprofit or any other business that's underreporting their taxes, we investigate those complaints, and if tax is due, we will assess it.'

He says the agency can recover back taxes for the past four years, along with penalties and interest.

Although the article cited an unsuccessful legal action to enforce the law in a particular case in 1986, why the state government seemed to forget about it after that is unclear, and maybe deserving of further investigation.
Right  now, hospital management seems to be trying to avoid the issue, or is arguing about the meaning of "comparable,"

Several present day hospital officials declined to be interviewed on tape. They told KUOW they believe they are in compliance with the state law. But they generally provided little detail to back up that claim.

Providence and Group Health representatives both said their organizations are so large and complex that there may not be any comparable public service jobs in Washington.

Swedish spokeswoman Melissa Tizon told me that CEO Rodney Hochman's pay was generally comparable to what the highest paid public hospital executives made, at Valley and Evergreen hospitals.

On the other hand,

Harborview is the state's largest hospital. Eileen Whalen is its head and an employee of the University of Washington. She makes about $470,000.

[State Senator Karen] Keiser: 'That's really not comparable to the million dollar and more salaries of other hospital directors in our state. We are paying attention here in Olympia to that.'

Other executives at UW Medicine did make more than Whalen. Still, none of them, not even the president of UW, made as much as any of the 15 highest paid executives at nonprofit hospitals in 2009.

I searched high and low to find any public officials making as much as the top nonprofit CEOs.

The only one I found who consistently did so was the UW football coach. But it might be hard to argue that Steve Sarkisian's job is comparable to running a hospital system.

We have discussed numerous cases of executives of not-for-profit hospitals and hospital systems receiving lavish compensation and benefits that seem out of proportion to any reasonable measure of their performance or of their positions' difficulties.  (Remember that advocates of corpulent executive compensation love to cite the size of the company and the number of employees, but the CEO really has only to manage the next tier of executives, rarely numbering more than a dozen.)

As we have said before, far too often the leaders of not-for-profit health care institutions seem more interested in padding their own bottom lines than upholding the institutions' missions. They often seem entirely unaware of their duty to put those missions ahead of their own self-interest. Like the financial services sector in the era of "greed is good," health care too often seems run by "insiders hijacking established institutions for their personal benefit." True health care reform would encourage leadership of health care who understand health care and care about its mission, rather than those who see a quick way to make a small fortune.

However, the twist in this story is that it appears the lavish compensation of hospital executives in this particular state may have violated state law, or at least the tax breaks these hospitals got may have violated the law, given their leaders excessive compensation, and that the law in question is over 30 years old.  However, the law seems to have been forgotten or ignored for nearly all that time, for reasons that are unclear. 

This seems reminiscent of how the Responsible Corporate Officers' Doctrine seems to have been forgotten and ignored.  this post from June, 2010).  However, in the last 30+ years, this notion has been ignored and abandoned by US government regulators at least in so far as it applies to health care organizations, particularly drug, biotechnology and device companies.

The big question is why have such laws and legal practices, which have not been repealed or refuted, instead been ignored and forgotten?  Surely this cries out for investigation.

Of course, It seems that somehow in the brave new world of laissez faire, anything goes capitalism foisted on health care over the last 30 plus years, old practices and customs that limited the power and enrichment of top leaders may have seemed increasingly prudish, and those advocating them may have seemed to be old fuddy duddies to those bent on personal gain.  But unhipness and scorn of prudishness are not reasons to ignore an existing law. 

So it is not that there are no legal tools to prevent abuses by leaders of health care organizations.  Instead, there has been increasing forgetfulness of the existence of such tools, and perhaps a growing effeteness of enforcement that has lead to a reluctance to even try to use them.  So we can start truly reforming health care by simply enforcing the laws that are already there. 
  

Passport to ... Fraud? - AmeriHealth Mercy Settles

Back in November, 2010, we discussed the relatively opulent pay and perks given to and conflicts of interest affecting leaders of Passport Health Plan, a non-profit, state (Kentucky) supported Medicaid managed care organization/ health insurer.  This seemed to be another case of health care organizational insiders putting their personal gain ahead of their mission, which was particularly unseemly because their mission was serving the poor. 

Now Passport Health is in the news again, and not in a favorable way, as per the Louisville (Kentucky) Courier-Journal:

Passport Health Plan’s main contractor has agreed to pay more than $2 million in damages to the Kentucky Medicaid program to settle a fraud investigation, Attorney General Jack Conway announced Wednesday.

The settlement with AmeriHealth Mercy Plan is the result of a nine-month investigation by the Attorney General's Medicaid Fraud Unit into alleged falsification of records by the company that entitled it to more than $677,000 in bonus money for good performance.

Conway said the investigation centered on an allegation from a whistleblower that AmeriHealth falsely reported data to the state Medicaid Services Department on the number of Medicaid recipients who received cervical cancer screenings in 2009. The false numbers allowed AmeriHealth to receive the bonus money under the terms of its contract.

We have discussed a variety of cases of leaders of health care organizations getting compensation or benefits that seemed disproportionate in their organizations' context. The usual justification seems to be that it takes such rewards to attract the excellent leaders needed by health care organization.

Here is another example of leaders who not only seemed to get excessive compensation and benefits, but whose performance seemed far from excellent.

Moreover, it suggests that compensation and benefits may actually have an inverse correlation to performance. Organizations whose stewards seem unrealistic about the talents of their hired managers, and dependent on material rewards to retain such managers may lack good stewardship. Leaders who find themselves rewarded beyond any reasonable evaluation of their work may learn the lesson that they cannot ask for too much. Meanwhile, the excess of their rewards may inspire increasing greed rather than increasing devotion to the mission, while the pay and perks increasingly place them in a bubble that insulates from the concerns of the common people who their organizations are supposed to serve.

As we have said before, far too often the leaders of not-for-profit health care institutions seem more interested in padding their own bottom lines than upholding the institutions' missions. They often seem entirely unaware of their duty to put those missions ahead of their own self-interest. Like the financial services sector in the era of "greed is good," health care too often seems run by "insiders hijacking established institutions for their personal benefit." True health care reform would encourage leadership of health care who understand health care and care about its mission, rather than those who see a quick way to make a small fortune.

PS - Also note that this is also another example of the sort of legal settlements of misbehavior by health care organizations that seems to have little deterrent effect, mainly because no individual who authorized, directed or implemented the bad behavior suffers any negative consequences.  See our discussion in these previous posts.  True health care reform would also hold leaders accountable for their organizations' misdeeds.

After Publicity About Losses from Corruption, Now Will Any Health Charities Start Anti-Corruption Initiatives?

Over the last few weeks a series of stories appeared about how corruption siphons off money from worthy global health initiatives. 

Corruption Depletes Global Fund to Fight AIDS, Tuberculosis and Malaria

The story that first got attention was from AP:

A $21.7 billion development fund backed by celebrities and hailed as an alternative to the bureaucracy of the United Nations sees as much as two-thirds of some grants eaten up by corruption, The Associated Press has learned.

Much of the money is accounted for with forged documents or improper bookkeeping, indicating it was pocketed, investigators for the Global Fund to Fight AIDS, Tuberculosis and Malaria say. Donated prescription drugs wind up being sold on the black market.

The fund's newly reinforced inspector general's office, which uncovered the corruption, can't give an overall accounting because it has examined only a tiny fraction of the $10 billion that the fund has spent since its creation in 2002. But the levels of corruption in the grants they have audited so far are astonishing.

A full 67 percent of money spent on an anti-AIDS program in Mauritania was misspent, the investigators told the fund's board of directors. So did 36 percent of the money spent on a program in Mali to fight tuberculosis and malaria, and 30 percent of grants to Djibouti.

In Zambia, where $3.5 million in spending was undocumented and one accountant pilfered $104,130, the fund decided the nation's health ministry simply couldn't manage the grants and put the United Nations in charge of them. The fund is trying to recover $7 million in 'unsupported and ineligible costs' from the ministry.

The fund is pulling or suspending grants from nations where corruption is found, and demanding recipients return millions of dollars of misspent money.

'The messenger is being shot to some extent,' fund spokesman Jon Liden said. 'We would contend that we do not have any corruption problems that are significantly different in scale or nature to any other international financing institution.'

To date, the United States, the European Union and other major donors have pledged $21.7 to the fund, the dominant financier of efforts to fight the three diseases. The fund has been a darling of the power set that will hold the World Economic Forum in the Swiss mountain village of Davos this week.

It was on the sidelines of Davos that rock star Bono launched a new global brand, (Product) Red, which donates a large share of profits to the Global Fund. Other prominent backers include former U.N. secretary-general Kofi Annan, French first lady Carla Bruni-Sarkozy and Microsoft founder Bill Gates, whose Bill and Melinda Gates Foundation gives $150 million a year.

Corruption Depletes Health Alliance International

At about the same time, the Seattle Times reported fraud losses at another global health project:

Health Alliance International (HAI), which was begun in 1987 by North American doctors and nurses to support the fledgling government in Mozambique, has played a leading role in HIV treatment.

Focused on strengthening health systems of impoverished and fragile nations, it was awarded the Doris Duke Charitable Foundation's Africa Health Initiative grant, a seven-year $10 million program to help government-run health facilities use data to improve services. The UW departments of Global Health and Industrial Engineering are partners in that project.

All but 7 percent of its funding came from the U.S. government, and more than 90 percent of its work was in Mozambique, according to HAI's 2009 annual report. Gloyd said the alliance increased the number of people receiving antiretroviral drugs from about a couple dozen in 2003 to more than 50,000 this year.

In late 2009, the alliance applied for what would have been its biggest grant ever — $100 million in funding from USAID over the next five years.

Early last year, its application was selected as the best technical proposal. But in the midst of the administrative review in June, a tipster reported problems in an organization employed by HAI.

One such program hired local community organizations in Mozambique for home-based nursing care and delivery of basic medical kits. The alliance did an internal audit and discovered irregularities.

'Their own accounting for those kits was quite inadequate, and that came back to bite us,' Gloyd said.

HAI shared the findings with USAID and put forth a plan to resolve the issues. But at the end of August, USAID rejected the group's grant application.

How Big Is Corruption?
There was actually considerable dispute about the significance of the fraud discovered at the Global Fund. On one hand, the losses were a very large proportion of the grants investigated. On the other hand, the total amounts were a very tiny proportion of the total of the fund's outlays. As summarized by William Savedoff in the Center for Global Development's Global Health Policy blog:

While readers might finish the AP article mistakenly thinking that $14 billion has been stolen (that is, two-thirds of $21.7 billion), it would also be a mistake to read the Global Fund press release and believe that only $34 million is gone.

What we’re missing is a way to assess how representative these cases may be. If the Global Fund’s detection system is 100% effective, then these cases are isolated and it is a tiny problem. If the detection system only picks up 50% of cases, then instead of a tiny problem, we’ve got a small one. But if the detection system only finds 5% of cases then—despite the mistaken deduction from the AP article—we really would have a massive billion-dollar corruption problem.

The Global Fund should be praised, not slammed, for its investigations and for its openness. But, it also needs to be challenged to find a way to estimate how representative these cases may be.

At any case, the Global Fund has promised "new anti-corruption measures," per the AP again.

A $21.7 billion global health fund and the U.N.'s main development arm launched new anti-corruption measures Friday in the wake of intense scrutiny from donors and stories by The Associated Press detailing fraud in their grants.

Chief among The Global Fund to Fight AIDS, Tuberculosis and Malaria's new measures are plans to create a high-profile panel of experts to examine the fund's ability to prevent and detect fraud in its grants.

'Programs supported by the fund have saved seven million lives and are turning back the three disease pandemics around the world,' said the fund's executive director, Dr. Michel Kazatchkine. He said the fund has 'zero tolerance' for fraud and corruption and was 'responding aggressively when instances of fraud or misappropriation are detected.'

That is nice, but I submit these stories are a reminder of how anechoic health care corruption is, and how few and ad hoc are the few efforts made to fight it. Much of the coverage of the corruption affecting the Global Fund had a breathless quality as if the authors were shocked, shocked that there could be corruption in health care.

In fact, many people more distinguished than yours truly have been warning about health care corruption for years. In particular, in 2006, Transparency International's Global Corruption Report, asserted in its executive summary, " the scale of corruption is vast in both rich and poor countries."  It also noted how diverse is health care corruption:

In the health sphere corruption encompasses bribery of regulators and medical professionals, manipulation of information on drug trials, the diversion of medicines and supplies, corruption in procurement, and overbilling of insurance companies. It is not limited to abuse by public officials, because society frequently entrusts private actors in health care with important public roles. When hospital administrators, insurers, physicians or pharmaceutical company executives dishonestly enrich themselves, they are not formally abusing a public office, but they are abusing entrusted power and stealing precious resources needed to improve health.

It further stated how serious the consequences of corruption may be:

Corruption deprives people of access to health care and can lead to the wrong treatments being administered. Corruption in the pharmaceutical chain can prove deadly....


The poor are disproportionately affected by corruption in the health sector, as they are less able to afford small bribes for health services that are supposed to be free, or to pay for private alternatives where corruption has depleted public health services.


Corruption affects health policy and spending priorities.

On this blog, our limited resources make us focus mainly on the US, and sometimes other English-speaking countries. Yet we now have in our archives some amazing stories that document various forms of corruption, including numerous allegations of corporate misbehavior ending in legal settlements, outright fraud, and other crime. Also, as we have noted before, the US Institute of Medicine has defined conflicts of interest

Conflicts of interest are defined as circumstances that create a risk that professional judgments or actions regarding a primary interest will be unduly influenced by a secondary interest.

Given that Transparency International's definition of corruption is

abuse of entrusted power for private gain

One can easily argue that in health care, conflicts of interest defined as above create risks of abuse of power by health care professionals influenced by the private gains provided by their secondary interests. On Health Care Renewal, we have provided a massive set of examples of individual and institutional conflicts of interest. There is evidence that about two-thirds of medical academics(1) and academic leaders(2) have significant conflicts of interest. The huge prevalence of conflicts suggests the risk of major corruption.

Corruption and Conflicts of Interest as Anechoic

So what we all should be shocked, shocked about is how little has been done to fight health care corruption, whether in Mozambique or the US.

Note that the Gates Foundation is a major donor to the Global Fund. It has a number of disease or condition specific initiatives, and a global health policy and advocacy initiative. But it has no initiative to fight corruption and conflicts of interest, or, to put it in positive terms, to promote accountability, integrity, transparency, honesty and ethics.

The Doris Duke Charitable Foundation funds Health Alliance International.  It funds medical research, and has a specific focus on African health care research.  However, it also has no initiatives to fight corruption and conflicts of interest, or improve accountability, integrity, transparency, honesty and ethics in health care.

In fact, one could look in vain for any initiatives about or funding for anti-corruption, or pro-accountability, integrity, transparency, honesty and ethics by any major US charity with health care interests.

One can  find very few significant efforts to discuss, teach about, or research ways to fight corruption, or to promote accountability, integrity, transparency, honesty and ethics by academic health care institutions.  (See this post for how difficult it was to find academic institutions' initiatives to resist conflicts of interest.)  One can count the conferences, meetings, symposia, and courses on such topics on one's fingers. When I last looked, I could count only a single course on fighting corruption at any US medical or public health school ( at Boston University, by Prof Taryn Vian).

Given the scope of corruption, we should be shocked, shocked at how anechoic it is, and how our respected health care institutions, particularly academic institutions and health care charities have ignored the problem.

So will the Global Fund's losses to corruption inspire the Gates Foundation or any of its major donors to start an anti-corruption initiative? Or even have an anti-corruption symposium? So will the Health Alliance International's losses so inspire the Doris Duke Charitable Foundation?  Will these cases inspire any foundation, or academic health care organization to do anything to fight corruption and conflicts of interest, and to promote accountability, integrity, transparency, honesty and ethics in health care?

I am not holding my breath, but I live in hope.

Of course, one reason we started Health Care Renewal was to make these issues less anechoic. So hear we go again.

PS - If anyone in our vast audience does know about any additional anti-corruption or conflict of interest, or pro-accountability, integrity, transparency, honesty and ethics initiatives, courses, meetings relevant to health care, please let me know and I will do my best to disseminate the information.

References

1. Campbell EG, Gruen RL, Mountford J et al. A national survey of physician–industry relationships. N Engl J Med 2007; 356:1742-1750. (link here)

2. Campbell EG, Weissman JS, Ehringhaus S et al. Institutional academic-industry relationships. JAMA 2007; 298: 1779-1786. (link here)

The New Steward Health Care: Will Superbowl Ads and "Leakage Reduction" Keep the Ship Afloat, or Will a "Greater Fool" Be Left Trying to Bail it Out?

Some recent publications raise interesting questions about the leadership of a regional health care organization which now seems to have intentions of going national. 

A Superbowl Ad for Steward Health Care

The millions watching the Superbowl, maybe the biggest single US sports event, expect to be dazzled by the new, extremely expensive advertisements to be aired during the television coverage of the event.  The Boston Globe reported that the glitzy offerings by Volkswagen and Budweiser will have an odd companion, at least in the Boston area:

The local television audience for Super Bowl XLV on Sunday will get the usual array of high-impact commercials, from the suds of Budweiser to the sedans of Kia Motors. But amid all the elaborate productions, one quieter spot might stand out — an ad for Steward Health Care System, the Boston company formed to oversee the six Caritas Christi hospitals.

During the 30-second commercial, Massachusetts residents talk about the importance of quality health care, as the camera roams through Brighton and Dorchester — the homes of St. Elizabeth’s Medical Center and Carney Hospital.

There was no such marketing campaign for the hospitals before November, when they were bought by New York private equity firm Cerberus Capital Management. The ad will be broadcast only on WFXT-TV (Channel 25), not nationally.

Officials at Steward said they were looking to introduce the health care service company to customers who may have never heard of Steward. The campaign also further demonstrates a different marketing approach for the regional hospital network as it transitions to a for-profit health care player.

Why would a hospital system advertise during the Superbowl?

Brian Carty, chief executive marketing officer at Steward, said that’s the aim: make a debut during the Super Bowl to reach a large swath of local consumers.

'You can only launch a brand once, and we wanted to launch it in the biggest way we could,' said Carty.

It certainly is curious, particularly when the brand is only new in the most superficial sense. As noted above, Steward Health Care System is the new name given the former Caritas Christi, a regional Massachusetts health care system that was formerly non-profit and run by the Catholic Church, but was recently bought out by Cerberus Capital Management, a private equity company.

We discussed concerns about whether a private equity group would put its short-term financial gain ahead of the patient care mission if given the chance to run a hospital system in a series of posts in spring, 2010.

A CEO with a Short-Term Focus

Things get curiouser and curiouser. The Boston Globe also just published a lengthy report on former Caritas Christi, now Steward Health Care CEO Ralph De La Torre, which emphasized, perhaps unintentionally, his chronic focus on short-term gain.

[Friend and mentor Dr David] Torchiana has been fielding questions from lots of colleagues wondering what de la Torre might to next. 'My view of Ralph,' he tells them, 'is that he's aggressive and unpredictable.'

Forced Out His BIDMC Chief
Dr de la Torre trained as a cardiovascular thoracic surgeon who apparently was a very highly regarded surgeon. But then, the article described how Dr de la Torre forced out his clinical and academic leader at the Beth Israel Deaconess Medical Center:

He stayed at Boston Medical for only a year, jumping to Beth Israel Deaconess Medical Center for a better opportunity. Dr. Frank Sellke, Beth Israel’s relatively young interim chief of cardiothoracic surgery, saw great things in him.

But then,

After a couple of years, Sellke, who officially became chief in 2001, started hearing chatter that de la Torre was gunning for his job. He didn’t take it seriously. Traditionally, to be a chief at a Harvard-affiliated hospital like Beth Israel, you needed heavy research and teaching credentials, which de la Torre did not have. 'When I heard Ralph was trying to undo me, I thought it was joke,' Sellke says. 'It turns out the joke was on me.'

In 2004, de la Torre greatly expanded his reach when hospital officials named him chief of cardiac surgery, a section within the division of cardiothoracic surgery. Two years later, he gained freer reign over cardiac care after the hospital removed Sellke as chief of the division. Sellke – who stresses that he is happy now as a chief at Brown Medical School and remains one of the country’s best-funded cardiac researchers – says that although he respects de la Torre’s talents, he lost respect for him as a person. 'He has a take-no-prisoners approach. If he interrupts or destroys someone else’s career, that doesn’t bother him in the least.'

Developed CardioVascular Institute, then Left
After this little coup d'etat, Dr de la Torre hatched a plan to integrate cardiovascular care at the BIDMC, but then flew the coop after it did not work out as planned:

Instead, he hatched a plan to revolutionize cardiac care at Beth Israel. Traditionally, cardiac surgeons, vascular surgeons, and cardiologists operated in their own silos, even though they were all treating related cardiovascular diseases. De la Torre proposed the CardioVascular Institute, or CVI, as a way to break down those silos and centralize care by creating a 'hospital within a hospital.'

But,

The CVI officially opened in 2007, with de la Torre as president and CEO. He continued his work as a surgeon, maintaining the salary of more than $1.3 million that he had earned the previous year.

Pomposelli says de la Torre’s enormous talent, intellect, and drive helped the CVI succeed in many ways, notably in removing waste from hospital operations and in building strong networks of affiliated physicians. De la Torre wined and dined community cardiologists around the region, persuading them to become affiliates and refer patients to Beth Israel for care.

But Pomposelli concedes that the CVI fell short in other ways. The silos were harder to break down than they thought, especially since “we didn’t pay enough attention to academics and research.” Also the “enhanced revenues” to physicians turned out to be far less than promised, leading to resentment. Pomposelli, who remains the chief of vascular surgery at Beth Israel, stresses that the CVI still exists, but in a much less ambitious form. 'Ralph’s a builder. He loves the deal, loves creating new things,' Pomposelli says. 'I don’t think he loves managing things as much. Running the CVI turned out to be tedious and difficult.'

And de la Torre was out the door before this idea turned out to be less than what he touted:

In 2008, just a year after seeing his brainchild become a reality, de la Torre told Pomposelli he would be leaving to run the ailing Caritas hospital network.

Left Republican Party, Became Democrat

After assuming control of Caritas, Dr de la Torre seemed to abandon his previous political affilisations.

As recently as 2007, he was a registered Republican.

De la Torre (pronounced DEL-a-TOR-ree) says that, like many children of Cuban immigrants, he has long identified with the conservative Republican outlook on foreign policy, though he is a social liberal. Sometime after he moved to Newton, he switched his registration to independent. Regardless, he stresses that he was not politically active until recently, when he became motivated to fund Democratic candidates because of that party’s commitment to overhauling health care.

Then, the instant Democrat contributed substantially to the campaign of Massachusetts Attorney General Martha Coakley, who had to approve the take-over by Cerberus of Caritas:

she was the guest of honor at a ... fund-raiser held at the de la Torre home the previous fall when she was running for US Senate.

Some state Republicans complained that Coakley should not have been signing off on a deal being advanced by a major campaign donor, although they could produce no evidence that her office’s review was anything but thorough and deliberative.

And he hosted a better noticed fundraiser that that included a visit by President Obama,

Just before 5 p.m. on a Saturday in mid-October, a Cadillac limousine climbed the curvy driveway outside the Newton home belonging to Dr. Ralph de la Torre and his wife, Wing. Inside, the 75 guests were anxiously awaiting the main attraction while staying busy wondering how long the de la Torres’ adorable 2-year-old twin sons would be able to keep their neckties attached and their dress shoes on. Swell parties like this are not uncommon in the West Newton Hill neighborhood, which is dotted with multimillion-dollar houses like the de la Torres’ place. Still, this gathering stood out for two reasons. First, just about every person attending had paid $15,000 a pop to be there. Second, the guest of honor was none other than President Obama.

Abandoned Surgery and His Medical License

More strikingly Dr de la Torre also effectively abandoned the profession which had earlier brought him so much recognition:

After a decade of training to become a cardiac surgeon and endless effort to become one of the best in the business, de la Torre decided to walk away from surgery. He’d been in practice for only about nine years.

De la Torre says it’s impossible to be a great heart surgeon working only part time. He even took the drastic step of letting his medical license expire, his way of refusing to look back. 'Burn the boats on the beach, baby!' he says.

Saving Caritas: "Leakage Reduction"
So what set of boats would he burn to promote Steward Health Care? When he took over Caritas, he was able to improve its finances, but only up to a point,

The hospitals in the chain – flagship St. Elizabeth’s in Brighton, the Carney in Dorchester, Holy Family in Methuen, Good Samaritan in Brockton, St. Anne’s in Fall River, and Norwood Hospital – were all hurting. Worse, the system was weighed down by debt and underfunded pensions. De la Torre moved quickly to cut costs, improve efficiency, and negotiate increased reimbursement rates paid to Caritas hospitals by Blue Cross and other insurers. His actions helped turn around Caritas’s finances, going from a $20 million loss in 2008 to a $30 million operating income in 2009. But the debt, pension liabilities, and lack of access to capital combined to become an albatross on the chain. As of March 2009, Caritas had only 40 days’ cash on hand, according to Mark Rich, the CFO, who took to keeping extra-large bottles of Tums on his desk.

His solution was the private equity take-over:

In classic de la Torre style, the deal promised something for each of the stakeholders. The archdiocese, which administered the Caritas pension fund, would see support for the fund to the tune of $295 million as well as a continued commitment that the hospitals would follow Catholic doctrine and not perform abortions or sterilizations. The SEIU would get job preservation and a stronger beachhead in Boston from which to try to expand its organizing efforts into the city’s big-name hospitals. The communities would see their local hospitals stay alive, even getting spruced up rather than stripped for parts. And Cerberus would get a dynamic leader who could offer them both a laboratory for testing the post-health care-overhaul national market and a sort of cloak of righteousness, given the hospitals’ history of working with the poor.

But how would Cerberus make money on its investment? The explanation in the article raises more questions than it answers:

As he sees it, through investment in information technology and bricks-and-mortar hospitals, he will be able to offer a highly integrated 'accountable care organization' that gives patients quality care, close to home, thereby keeping costs down. The key is insisting that patients get all but the most complex care from their community hospital, rather than seeking treatment for pneumonia or a broken arm at a big shop like Mass. General.

Left unsaid, though, is who could effectively "insist" that patients get all their care within the system?

The notion that such insistence is the key also appeared in other reports on the Cerberus take-over of Caritas. For example, on October 14, 2010, the Boston Globe reported on Dr de la Torre's responses to the Massachusetts Public Health Council in a hearing on whether the take-over should be approved:

De la Torre said his aim was to stop the 'leakage' of patients from communities served by Caritas hospitals to academic medical centers in Boston.

'The business plan, the strategy, or whatever you want to call it, is all about keeping care locally,' he said. 'If we improve the facilities, improve the infrastructure, make it so that our very own patients want to stay in our hospitals, that’s the business plan.'

The same notion appeared in a post in local television station WPRI's news blog about the possible take-over by Steward of another local hospital

Private equity investors did not buy Caritas and turn it into a for-profit medical complex for the purpose of standing still. Caritas executives say they want to improve business by reducing 'leakage' — patients leaving its suburban medical settings to be treated in Boston teaching hospitals.

In fact, a little Google searching revealed that Caritas Christi Network Services had been pushing "leakage reduction" in its own newsletter in the Fall, 2009 issue:

Our job now is to focus performance on two critical success factors:
reducing leakage and improving quality.

So,

Leakage Reduction: Keep the Care in Caritas

Network-wide Referral Management

Our first initiative to help reduce leakage is to implement a network wide referral management
program.

Furthermore,

Region Specific Leakage Action Plans

Each of the Hospital and IPA presidents will collaborate to develop region specific action plans to reduce leakage. Together they will develop goals, identify reporting needs, and establish processes to achieve leakage targets. The participation and support of each physician IPA member will be important to the success of this initiative.

You and Your Patient

Your support in keeping the care you provide within the Caritas system and in participating in the care management initiatives is critical to the system’s success.

Note that Caritas Christi Network Services is apparently the subsidiary of Caritas Christi, now Steward Health Care, that employs physicians:

Caritas Christi Network Services (CCNS) is the second largest physician network in Massachusetts. Established in 2001, CCNS is responsible for the implementation and successful execution of managed care contracts, providing physicians with medical management services (referral and care management), quality improvement programs, data analysis, information systems and financial expertise.

But here is where it gets really tricky. It is one thing to aim to improve hospital services and accessibility in the hopes of attracting more patients. It is another thing to push physicians to refer patients to specific facilities for economic reasons, because physicians are supposed to make decisions for individual patients, including decisions about where to refer, based on the particular patient's needs and preferences.

So there are major questions about both the effectiveness and the ethics of "leakage reduction" based on applying leverage to physicians.

Summary: Will Someone End Up the "Greater Fool?"
Meanwhile, Paul Levy, the soon to be former CEO of BIDMC, who has not been afraid to say what he thinks on his blog, now called Not Running a Hospital, suggested that Cerberus, and by implication, Dr de la Torre, are not in this for the long haul. He first introduced the "greater fool" theory of business management,

It seems that there is no end to the number of people with cash who will be intoxicated by a good story line, even when there is little substance to back it up. All of these stories depend on the capital markets to bolster the price of investments, counting on the 'greater fool' theory: There is always someone who will take on a bad investment at just the wrong time, providing a good return to those who are lucky enough to escape before the crash.

Then he raised the concern:

Those seeking to regulate the behavior and financial decisions of for-profit hospitals will find that their post hoc authority will likely be insufficient to protect the public interest from a depletion of plant and equipment and from a plan that is mainly meant to burnish the pre-tax and pre-depreciation short-term earnings of the firm so that it is ready for the initial public offering or resale to another private equity firm.

So the question is whether Superbowl advertisements and "leakage reduction" management can really make the new Steward Health Care a lasting success? And if not, will Cerberus Capital Management hang around just long enough to buff the system up for the next buyer?

And if that happens, Levy noted:

Who gets hurt if these deals go bust when the next generation of owners takes over and discovers that creating the margin to generate the expected return is very hard in the hospital world? Well, that very last set of investors, the 'greater fools.' But, as we have seen in the examples above, the hurt goes much further. Hospitals, though, are in a special category. Investors may come and go, but the community depends on its local hospital to provide high quality service. It is the residents of the community who are left holding the bag if the hospital corporation reaches the conclusion that ownership is not financially viable.

As we said before,.... Deals that turn not-for-profit hospital systems into privately held for-profit systems ought to be scrutinized with extreme skepticism. Furthermore, once such deals are made, the results ought to be watched extremely closely to make sure they do not put private gain ahead of individuals' and the public's health. For-profit hospitals have generally not lived up to the promises they made to provide quality, accessible health care at a cheaper price.  It is yet to be seen whether private equity running for-profit hospital systems (and physicians networks) will do any better.