VCU President Rao's Previous Code of Silence

We recently posted about the code of silence imposed by Virginia Commonwealth University President Stephen Rao on his staff.  It turns out now that this was not his first exercise in imposing a code of silence. Before he was at Virginia Commonwealth University, Rao was President of Central Michigan University.  Central Michigan Life just reported:

While serving as CMU president, Rao required all office employees to sign a similar confidentiality agreement stating all names, places, dates or incidents that happened in his office were not to be shared with anyone or discussed outside the office.

'I understand that the information and all files, letters, projects, telephone calls and anything relating to the work performed in the President�s Office and in my capacity as an employee is highly confidential,' stated the agreement, which was obtained through a Freedom of Information Act request. 'I understand that it may not be discussed with anyone outside this office who does not have a need to know, which includes any other CMU employee, as well as my family members, friends, etc.'

The CMU confidentiality agreement extended past any employee�s tenure at CMU, stating that the contract must not be broken past the term of employment. If an employee were to break the confidentiality agreement past employment, possible consequences included personal liability and potential lawsuits.

Note that just as was the case in Virginia, this agreement placed employees at risk not only of losing their jobs, but of being sued were they to violate the agreement.

By the way, while Central Michigan University does not include a medical school and academic medical center, as does VCU, it does have, and therefore the previous agreement affected the operations of multiple health related programs (see here) including allied health, health administration, physical therapy, and psychology.

As we wrote previously, such a code of silence subverts the university's central mission, and directly opposes the transparency I believe is necessary for good governance in health care.  The discovery of this previous confidentiality agreement at CMU suggests that such agreements may not be rare in health care. 

We have long discussed the anechoic effect in health care, how certain topics and issues are just not to be discussed, especially those that might embarrass or oppose the personal interests of health care leaders.  We have postulated that the effect operates through fear of offending supervisors, colleagues, or those who provide one's pay.  It may be, however, that the anechoic effect has been codified through confidentiality clauses.  As noted above, such codification can mean whistle-blowers may risk lawsuits as well as job loss and ostracism.

If there are other codes of silence operative in health care, I hope that sunlight soon shines upon them. 

That sunlight may cause such codes to shrivel is suggested by President Rao's rescinding of the code at VCU soon after it was made public, as reported by the Richmond Times-Dispatch:

With the board of visitors meeting yesterday to evaluate his performance, Virginia Commonwealth University President Michael Rao rescinded the confidentiality agreements he required employees working in his office to sign.

Rao sent employees a letter Wednesday that said the confidentiality agreements were intended "to protect the privacy of my family, particularly my children, in my home."

'The confidentiality agreements have been the subject of recent scrutiny and criticism and, unfortunately, have been misinterpreted in terms of what I sought to be accomplished by these agreements,' he wrote. 'I sincerely regret any undue burden or ill will that these agreements may have caused. Therefore, I have decided to withdraw all such confidentiality agreements.'

Such codes ought to be perceived as unethical, and perhaps should be made illegal.  Meanwhile, though, the anechoic effect continues.

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A Confidentiality Clause or an Oath of Fealty?

The advancement of modern scientific medicine depends on the search for and dissemination of truth. Academic medicine, like the rest of academia, ought to be based on openness, transparency, and academic freedom. The 1940 American Association of University Professors (AAUP) Statement of Principles on Academic Freedom and Tenure opened with:

The common good depends upon the free search for truth and its free exposition.

Yet we have written about dark clouds of secrecy spreading over medicine and health care. The increasingly powerful leaders of health care increasingly use opacity and secrecy to keep what they are doing out of the public eye. We have frequently discussed the anechoic effect, how it is just not done to discuss certain topics, particularly those related to the adverse effects of bad (ill-informed, incompetent, self-interested, conflicted, or corrupt) leadership and bad (opaque, unaccountable, mission-hostile, unethical) governance of health care organizations.  People may feel it is unseemly to speak badly of renowned institutions such as hospitals and universities.  People with conflicts of interest may not be inclined to criticize those who pay them.  Now people employed by contemporary health care organizations may have to pledge theri silence to keep their jobs.

The latest story in this regard comes from Virginia Commonwealth University (VCU), which includes VCU Health Systems, and MCV Hospital and Physicians.  (Full disclosure: I was a VCU full-time faculty member from 1987-1994, and still am on the adjunct faculty.)  In 2008, the VCU President resigned after the university's secret research contract with a tobacco company, and the President's own position on the board of directors of another tobacco company were revealed (see blog post here and others here).

Michael Rao, the President since 2008, is now under outside review after it was revealed that he required his staff to sign a secrecy pledge.  The story appeared in the Richmond Times-Dispatch:

Virginia Commonwealth University President Michael Rao asks employees who work in his office to sign an unusual confidentiality agreement that bars them from talking about what they observe about him or his family.

The prohibition goes beyond the standard agreement that university employees sign acknowledging that they can't disclose personal or proprietary information.

The agreement, a copy of which was obtained by the Richmond Times-Dispatch, covers interactions at Rao's office and at his residence. It bars disclosure not just to the news media, family or friends, but also to colleagues, 'clergy and attorneys, or to any other person not otherwise identified.'

'I agree that any such disclosure in violation of this nondisclosure agreement could result in irreparable damage and harm to VCU, President Rao, and/or his family'" the agreement states. 'Any such violation or anticipated violation' would entitle Rao to seek 'injunctive relief' in Richmond or Henrico County circuit courts.

VCU spokeswoman Pam Lepley said she could not comment immediately yesterday.

Several current or former employees of the president's office confirmed that they had been asked to sign the agreement, including Kimberley Busch, Rao's former scheduler.

She described it as a 'what happens in the president's office stays in the president's office' agreement.

The newly uncovered confidentiality clause provoked strong criticism:

Raymond D. Cotton, a Washington attorney who specializes in higher-education governance, said such a confidentiality agreement is highly unusual and goes against the culture of openness and transparency in higher education.

'There is this concept of academic freedom that is broader than the First Amendment,' he said.

In fact, since Virginia Commonwealth University is a state-supported institution, the confidentiality clause may be unconstitutional, as reported by WTVR:

Kent Willis with the Virginia American Civil Liberties Union said the agreement doesn't pass constitutional muster.

'A public employee, no matter where they are in the government, has a right to speak out on matters of public concern,' Willis said. 'That's a U.S. Supreme Court case, it's guaranteed to every public employee by the First Amendment to the Constitution.'

Willis said there are numerous legal issues raised by the contract. But, he said, the bottom line problem with the contract 'is the attitude. This is a contract that says 'I'm not transparent. I don't want you to know what is going on. I'm running a closed shop.''

Times-Dispatch columnist Michael Paul Williams wrote:

VCU, we have a problem. This confidentiality agreement does not inspire confidence. The lack of transparency only gives the appearance that someone's hiding something.

He also further quoted Kent Willis:

Rao's contract 'fails to address this whistle-blower right and could create conflicts for employees, who are silenced by the employment contract,' yet have a constitutional right to speak out on some matters, Willis said.

And as Willis points out, even if a person's constitutional right trumps the contract, how many employees are willing to take that risk?

'Particularly disturbing is the prohibition against talking to an attorney,' he said. 'If an employee believes something illegal is going on at work, an attorney is precisely the person he or she should be talking with.'

We just posted about how a pharmaceutical company included a confidentiality clause in a consulting contract, suggesting the deliberate creation of a conflict of interest in order to prevent criticism of the company's products or practices. 

However, in several ways, the present example is more insidious.  First, it involves a university, whose mission is to discover and disseminate the truth.  Thus, as noted above, the confidentiality agreement subverts the university's core mission.  Second, it was required of full-time employees who wanted to keep  their jobs, making choose between secrecy and unemployment.  Third, it was particularly harsh, addressing incipient as well as actual disclosure, and including injunctive relief as well as the threat of  termination.  Fourth, it protected not just the organization and its products, but personally protected the organization's leader and his family.  It was not just a contract, but an oath of fealty, as if the CEO were nobility, or even royalty.

The good news is that this confidentiality agreement now sits in the glare of sunlight.  One does wonder, however, how many other such agreements are already in force so that the would be nobility who now run too much of health care to avoid any embarassing revelations about what their leadership really is about.

We are a long way from the transparency that true health care reform requires. 

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About to be Bought-Out Non-Profit Hospital System Tries to Hide Executives' Golden Parachutes

A report from FloridaToday (in Brevard County) about the sale of a not-for-profit Florida hospital system to a for-profit corporation raises some interesting questions. The background is that the non-profit Wuesthoff Health System was bought by for-profit Health Management Associates (HMA):

HMA, a for-profit hospital management company in Naples, bought the not-for-profit Wuesthoff Oct. 1 for $145 million. Wuesthoff lawyer William Kopit has said it was forced to sell because the hospital system lacked the capital to compete.

The question is about the conditions of the sale:

A foundation formed to manage the proceeds of the sale and continue providing indigent health care has refused to disclose the executive packages to the state, claiming it constitutes a trade-secret exemption under Florida law.

This was despite the state Attorney General's authority to oversee sales of charitable non-profit organizations to for-profit entities:

Under its statutory obligation to oversee charities registered in the state, the Attorney General's Office requested the executive pay information from Wuesthoff, Wiggins said. Wuesthoff's lawyers submitted 40 pages of heavily redacted material. Negotiations led to Wuesthoff agreeing to redact only the names and compensation details of the executives.

The materials submitted suggested a lot of executives getting golden parachutes, but not the amounts or conditions involved:

The unredacted portions show as many as eight former executives receiving three years of salary paid out over 12 months, a pay-to-stay retention bonus for continuing to work for the company during sale discussions, a senior executive retirement package and regular retirement pay and extended health benefits. Based on Wuesthoff's tax returns, those payouts will be in the millions.

So, legal action will ensue:

'Therefore we will look to the court for guidance and abide by any judicial ruling on the public record and trade secret issues,' said Ryan Wiggins, communications director for the attorney general.

The notion that how much a for-profit corporation will pay in golden parachutes to former executives of a not-for-profit hospital system is a "trade secret" just boggles the mind.  What could a competitor possibly gain from this information that could lead to specific action that would disadvantage Wuesthoff?

On the other hand, it might be that the size of these golden parachutes, if revealed, would lead to some raised eyebrows, or worse.  Consider first the contrast between payments made and to be made to fortunate executives and the performance of the health care system. 

Note that what is available on the public record (via the hospital system's latest available, that is, 2008 form 990 disclosures to the US Internal Revenue Service) suggests that in the past, Wuesthoff executives were already quite well-paid. On that form we found the following total compensation reported:
Emil Miller, President: $927,543 ($523,069. compensation; $342,130, benefits; $62,344, benefits)
Brian Bodi, Controller: $184,789
George Fayer, CFO: $439,580
Johnette Gindling, Senior Vice President: $236,975
Marchita Marino, Senior Vice President: $264,529

Nearly a million dollars was a lot of compensation for the CEO of a small, non-profit hospital system in 2007.  Although there is no easily publicly available information about executive compensation since 2007 (the year covered by the 2008 report noted above), these high rates of compensation were paid by a hospital system that now apparently has so little capital that it no longer can "compete" without being bought by a for-profit corporation.   Now the executives who could not amass a competitive amount of capital will amass quite a sizable amount of personal riches.

Consider second the contrast between the extraordinary assertion that these golden parachutes should remain secret, and the hospital system's stated interest in "transparency," or its stated devotion to "five core values that drive our hospital and its mission: integrity, courtesy, compassion, competence and stewardship." It seems that preventing embarrassment about executive enrichment may trump transparency and integrity.

Health care, probably infected by the finance industry that brought us the global financial collapse, aka "great recession," seems to have been overcome by "compensation madness."  A central value of many health care organizations seems to be enriching their top leaders/ managers/ executives, no matter what the financial condition of the organization, or the performance of the leaders in terms of fulfilling the organization's mission.  From these perverse incentives, the perverse incentives favoring short-term financial performance over patient care seem to have sprung.  As Prof Mintzberg wrote, "All this compensation madness is not about markets or talents or incentives, but rather about insiders hijacking established institutions for their personal benefit."

If we truly want health reform that addresses spiraling costs, declining access, and threatened quality of care, we need to give health care practitioners and leaders positive incentives for being caring, competent, well-informed, and honest, not for clever financial manipulation and short-term profits, or just for managing to show up for work.

ADDENDUM (2 December, 2010) - 4 days after the above post, Florida Today reported that details about the golden parachutes were released:

[Emil] Miller, who ran Wuesthoff for more than a decade, received $6.25 million total. Of that, $2.2 million was severance pay and $3.2 million was retirement pay. The balance was the cost of his employee benefits.

Former CFO George Fayer has the next highest exit pay at $973,000, which includes a $171,000 for staying through the sale and transition. Fayer is a consultant to the foundation, Gindling said.

Chantal LeConte, who ran the Rockledge hospital, received the third highest payout, $553,000. LeConte's package included about $138,000 for staying through the transition.

Given that the health system was merged out of existence because it supposedly no longer had enough capital to "compete," now we see why system leaders were so reluctant to reveal the amounts.

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What a Conflicted Web We Weave: More About Leaders of Financial Firms Influencing Policy in the Guise of Independent Academics

The issue of conflicted academic economists providing public policy recommendations just got bigger.  As discussed by Felix Salmon in his blog for Reuters, and by Nancy Folbre in the Economix blog for the New York Times,  a new study by Epstein and Carrick-Hagenbarth showed that some very prominent economists who frequently make pronouncements about financial policy often failed to disclose some major conflicts of interest. 

In summary, they identified "two groups of economists that were prominent in the field of financial economics and which had taken a public stance on financial regulation."  Some of these economists also had prominent advisory roles for government economic agencies, including the US Federal Reserve, the US Council of Economic Advisers, the Indian Finance Ministry, the Bank of Finland, the World Bank, and the International Monetary Fund. The authors did an extensive search for the economists' financial ties to financial corporations, which probably detected most relationships such as membership on the boards of directors of public companies, but may have missed consulting arrangements.  They found that 12 of 19 had such relationships, mostly positions on boards of directors or ownership interests.  They found that all but one of the economists with such relationships failed to identify these relationships in the majority of their academic papers and writings in the media.  The one economist who always disclosed his relationships in the media only wrote articles for the private financial firm for which he worked.

So major financial conflicts of interest were prevalent among "prominent economists who write op-eds for newspapers, they testify on public panels, they take positions as advisers for politicians and they are interviewed by the media. Academic economists often convey the impression that they occupy these positions as independent objective experts."  The authors concluded:

Academic economists serve as experts in the media, molding public opinion. They are also important players in government policy. If those that are creating the culture around financial regulation as well as influencing policy at the government level for financial reform also have a significant, if hidden, conflict of interest, our public is not likely to be well-served.

They also noted that economics as a profession does not even have a formal code of ethics, and in particular has never embraced any necessity for disclosing, managing, or restricting conflicts of interest.

We had previously discussed anecdotal but striking evidence that some of the most prominent economists who influenced public policy up to and after the great recession/ global financial crisis also had major but undisclosed financial ties to financial institutions. It now looks like conflicts of interest could be as prevalent among those who are influential in economics as they may be among those who are influential in medicine, health care, and health care policy.

This further corroborates the hypothesis that academic medical institutions are so comfortable with their faculty and leaders' conflicts of interest because they exist in a larger academic culture in which such conflicts are standard operating procedure.  Academic institutions may be particularly happy with economists' conflicts of interest because they involve such large amounts of money. Felix Salmon gave the example of  Paul Krugman who when he worked as an economist could command a $40-50,000 fee per speech, easily more than an order of magnitude more than the going rate for medical talks.  Furthermore, as we have noted before, (e.g., here, here, and here) many prominent academic institutions that incorporate medical schools and academic medical centers have boards of directors dominated by leaders of finance.  Now it appears that these leaders' economic interests may lead them to encourage conflicts of interest among their faculty and administration.

So not only do conflicts of interest appear to be a fundamental problem for medicine and health care, they may pose a fundamental problem for society as a whole.

Clearly, as Epstein and Carrick-Hagenbarth wrote, economists, like all professionals who can influence public policy, ought to have a code of ethics, and that code, at a minimum, ought to require full disclosure of all conflicts of interest.  Economists who write about policy in the media, write policy-relevant academic articles, and/or who advise non-profit organizations and government agencies should at a minimum reveal all such conflicts.  Similarly, of course, physicians and health policy/ care/ services researchers who write about or otherwise may influence health care policy should at a minimum reveal all such conflicts.

Meanwhile, extreme skepticism about policy advice by apparently independent academics and experts is warranted.  We risk sliding into the cynical position that all major policy is now being made by imperial CEOs and their cronies and paid agents. 

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RUC It Up - How the US Government Fixes Physicians' Payments Becomes Less Anechoic

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

Since 1991, Medicare as set physicians' payments using the Resource Based Relative Value System (RBRVS), ostensibly based on a rational formula to tie physicians' pay to the time and effort the expend, and the resources they consume on particular patient care activities.  Although the RBRVS was meant to level the payment playing field for cognitive services, including primary care, vs procedures, over time it has had the opposite effect, as explained by Bodenheimer et al in a 1997 article in the Annals of Internal Medicine.(1)  A system that pays a lot for procedures, but much less for diagnosing illnesses, forecasting prognoses, deciding on treatment, understanding patients' values and preferences, when procedures and devices are not involved, is likely to be very expensive, but not necessarily very good for patients. 

As we wrote before, to update the system, the Center for Medicare and Medicaid Services (CMS) relies almost exclusively on the advice of the RBRVS Update Committee. The RUC is a private committee of the AMA, touted as an "expert panel" that takes advantage of the organization's First Amendment rights to petition the government. Membership on the RUC is allotted to represent specialty societies, so that the vast majority of the members represent specialties that do procedures and focus on expensive, high-technology tests and treatments. However, the identities of RUC members are opaque, and the proceedings of the group are secret.


To expand on the penultimate point, the current page on the AMA web-site that describes the RUC only lists its members in terms of their specialties and organizational affiliation. Their names do not appear. A response to a previous post by me on the subject by the then Chair and Chair-Elect of the RUC suggested that the RUC membership is not quite secret. They stated that "a list of the individual members of the RUC is published in the AMA publication, Medicare RBRVS 2009: The Physicians Guide." This publication is available from the AMA here for a mere $71.95. However, the book is not on the web, or in my local or university library, and I have no other way to easily access it. Thus, the RUC membership as at best relatively opaque.

To expand on the ultimate point, as Goodson(2) noted, RUC "meetings are closed to outside observers except by invitation of the chair." Furthermore, he stated, "proceedings are proprietary and therefore not publicly available for review."

The fog surrounding the operations of the RUC seems to have affected many who write about. We have posted (here, here, here, and here) about how previous publications about problems with incentives provided to physicians seemed to have avoided even mentioning the RUC. Up until now in 2010, after the US recent attempt at health care reform, the RUC seems to remain the great unmentionable. Even the leading US medical journal seems reluctant to even print its name.

That has just changed.  A combined effort by the Wall Street Journal, the Center for Public Integrity, and Kaiser yielded two major articles about the RUC, here in the WSJ (also with two more spin-off articles), and here from the Center for Public Integrity (also reprinted by Kaiser Health News.)  The articles cover the main points about the RUC: its de facto control over how physicians are paid, its "secretive" nature (quoting the WSJ article), how it appears to favor procedures over cognitive physician services, etc.

So the RUC has suddenly become less anechoic.

However, despite the best efforts of some very good investigative reporters, there still are important unanswered questions, questions we have raised before:

• How did the government come to fix the payments physicians receive? Government price-fixing has not been popular in the US, yet this has caused no outcry.
• Why is the process by which they are fixed allowed to be so opaque and unaccountable? Why are there no public hearings on the updates, and why is there no input from practicing physicians or organizations other than those related to the RUC?
• How did the RUC become de facto in charge of this process?
• Why does the AMA keep the membership on the RUC so opaque, and give no input into the RUC process to its general membership?
• Why is the RUC membership so dominated by procedural specialists? Why were primary care physicians, who made up at least a sizable minority of physicians when the update process was started, not represented according to their numbers?
• Why has there been so little discussion of the RUC and its responsibility for an extremely expensive health care system dominated by high-technology, expensive, risky and invasive procedures?

Without discussing how the incentives for physicians became so unbalanced, do we really expect we can fix them?  If we do not fix them, do we really think we can "bend the cost curve?"  If we do not control our costs, do we really think that we will be able to make good health care accessible for all?  At least now I can say that the issue may really be in play for health care professionals, health care policy experts, and the public at large.
See also comments on other blogs: DBs Medical Rants, GoozNews, and Managed Care Matters.

ADDENDUM - Additionally, see comments on the Retired Doc's Thoughts blog, and the Running a Hospital blog.

References
1. Bodenheimer T, Berenson RA, Rudolf P. The primary care-specialty income gap: why it matters. Ann Intern Med 2007; 146: 301-306. (Link here.)

2. Goodson JD. Unintended consequences of Resource-Based Relative Value Scale reimbursement. JAMA 2007; 298(19):2308-2310. (Link here.)

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More on Hospital Market Dominance, Enabled by Secret Pricing

This week two more articles appeared describing how large hospital systems use market dominance to charge more.  Naturally, both were in news publications, not scholarly health services research journals.

San Francisco

Kaiser Health News (via the Contra Costa [CA] Times) discussed hospital market dominance in the San Francisco area.  The article documented how particular systems can command higher prices. Consider the example of John Muir Health vs San Ramon Medical Center:

Often, a hospital's dominance in an area helps determine how much it can charge, experts say. Consider John Muir Health, a two-hospital nonprofit system in the East Bay. With campuses in Concord and Walnut Creek, John Muir has the biggest footprint in the local hospital market, accounting for 54 percent of all the acute care inpatient stays in 2009, more than any other hospital group, according to state data.

The hospital with the weakest market penetration is San Ramon Medical Center, a Tenet-owned, for-profit hospital, with 10 percent of the acute care inpatients.

The least the insurer Aetna paid John Muir for an outpatient colonoscopy was $3,185, according to Aetna's website, which tracks two years of payments. Aetna paid $1,483 to San Ramon Regional Medical Center for the same service. The least Aetna paid John Muir for an uncomplicated birth was $7,722, while its lowest price for a birth at San Ramon was $5,278.

Yet on broad quality measures, John Muir's hospitals generally score no better than San Ramon's, according to the California Hospitals and Reporting Taskforce, a nonprofit that produces hospital report cards published at Calhospitalcompare.org.

San Ramon ranks equal to John Muir's Walnut Creek campus in most major measures, including mortality rates in the intensive care units, overall patient satisfaction and maternity care. John Muir's Concord campus ranks below San Ramon on several measures, including mortality rate and patient experience, though John Muir was rated better in avoiding complications for patients on ventilators.

Then there is Sutter Health:

[Stanford University associate vice president for Benefits Les] Schlaegel says so many employees like to see doctors at the Palo Alto Medical Foundation, a doctors' organization affiliated with Sutter with a clinic near the Stanford campus, that the university feels obliged to keep offering insurance networks that include Sutter.

'Sutter basically has a stranglehold on Northern California,' says Schlaegel. 'They are strategically situated, both for hospitals and medical groups. They know purchasers need them. When you are strategically located, you can say 'this is our price and you can pay it.''

Secret Pricing
The ability of dominant hospitals to charge higher prices is facilitated by secrecy in which hospital pricing is cloaked

The hospitals haven't made it easy for consumers to comparison shop. State law requires hospitals to reveal their charges for specific services. But those charges don't reflect the lower negotiated rates insurers actually pay - rates hospitals usually insist be kept secret. The California Hospital Association has opposed legislation to ban such 'gag clauses'; the most recent of these bills died in the state Assembly in August.

Hospitals have also resisted a four-year campaign by the Pacific Business Group on Health, an employer coalition, and CalPERS to create a 'hospital value initiative' that would allow hospital comparison based on cost and quality of care.

Summary

In many cases, hospitals are able to keep raising prices beyond inflation because their sizes or reputations give them clout in negotiating rates with insurers, researchers say. Yet high prices don't always equate with superior care.

Quality measures for some of the Bay Area's most prestigious hospitals, including Stanford and John Muir, show that in some instances, less expensive competitors perform as well or better in their basic responsibilities, such as avoiding infections and high death rates for patients in intensive care.

'Some hospitals are able to charge higher prices than the market normally would bear, even without providing higher quality,' says Dr. R. Adams Dudley, a professor of medicine and health policy at the University of California, San Francisco. 'That means they're getting those higher prices without really offering more to patients or the rest of society.'

New York City


Meanwhile, a long feature story in New York magazine about the demise of St Vincent's hospital (see our post here) also discussed the market power of its competitors as one factor in its decline:

The city�s largest and most powerful hospitals, which are crucial to an insurer�s customers, exert their leverage to secure deals that are believed to pay well above the average margin; smaller hospitals, which are often located in low-income neighborhoods, have little choice but to accept the dismal rates dictated by insurers if they want to remain in the insurers� plans. 'When the big players take their cut, there are only scraps left for everyone else,' says the CEO of an outer-borough hospital. �'United HealthCare couldn�t care less about having my hospital in their network. They tell me to take it or leave it.

Secret Prices

Like in California, market dominance is enabled by secret pricing:

the rates negotiated between hospitals and insurance providers are withheld from public scrutiny�even state health and insurance regulators are denied the information

Free Markets?

Secret prices determined by market power hardly sound like characteristics of a free market. Yet in New York, at least, they seem partially to be the result of the free market ideology of previous political leaders:

Then George Pataki took office in 1995, determined to allow hospitals to test their mettle in the free market by negotiating their own terms with insurers. It turned out to be an exercise in shock-therapy capitalism. Inexperienced at the bargaining table, hospitals engaged in intramural rivalry with each other, cutting unfavorable deals with insurers in order to hold on to patients in the short term. With their already thin margins pared down further by deregulation, many hospitals soon built up paralyzing debt loads. Even the largest and seemingly least vulnerable facilities decided that their best hope for survival was to get bigger. A flurry of mergers and buyouts ensued, and by the end of the nineties, the hospital system began to assume its current bewildering patchwork of partnerships and affiliations. Columbia Presbyterian and New York Hospital, both attached to elite medical schools, joined forces. NYU and Mount Sinai forged a deal (it later came undone). On the eastern edge of the city, North Shore hospitals merged with nearby Long Island Jewish, staking out an enormous swath of the hospital market on Long Island, Queens, and Staten Island. Beth Israel and St. Luke�s�Roosevelt, debt-ridden and left on the sidelines by the major academic hospitals, decided to try making a go of it together. It was unclear if bigger was actually better�for patients or the bottom line�but size seemed to offer hospitals a buffer against collapse.

By 2005, less than a decade into its dalliance with free enterprise, the city�s hospital system had taken on something of a post-Soviet tinge, with winners ruling the roost like oligarchs and losers reduced to a state of grim dependency. A pecking order emerged, with elite academic centers at the top, well-regarded independent hospitals like Lenox Hill in the middle, and community hospitals on the bottom.

Summary

We have previously written (for example, here and here) about how increasing market dominance by large, sometimes strategically located, and sometimes politically well-connected (e.g., see here) hospital systems run by conflicted leaders. This seems like another unintended consequence of the "free markets solve all problems" ideology, possibly fueled by conflicts of interest that has done so badly in our financial arena (see here). What some of these free market enthusiasts seem to forget, their forgetfulness perhaps fueled by payments received from the large corporations that have profited from this movement, are that true free markets are hard to maintain. This is particularly so in health care, in which knowledge is asymetric, outcomes are uncertain, and sick and anxious patients have trouble making cool, rational choices (as per Arrow, see this post.)

But if the free market enthusiasts really believe in free markets, why have they not been out campaigning to prevent the "unfree" characteristics, like secret pricing, of current health care markets?  Of course, ending secret pricing might compromise the ability of their financial sponsors to keep earning their millions

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How Oligopolists Rationalize Their Market Domination: the Examples of Sutter Health and the Carilion Clinic

Advocates of laissez faire commercialized health care often trumpet the advantages of competitive markets as a rationale for deregulation.  While there are theoretic, and possibly empiric reasons to think that competitive markets are the optimal way to distribute goods and services, we recently discussed aspects of health care that make it extremely hard for health care markets to be ideally competitive. 

Meanwhile, two news articles gave some case-based evidence about how current health care markets are hardly competitive.  

Sutter Health

A Bloomberg article focused on Sutter Health in northern and central California. Sutter Health commands a substantial part of a very large market:

Sutter Health Co., the nonprofit that owns Sutter Davis, has market power that commands prices 40 to 70 percent higher than its rivals per typical procedure -- and pacts with insurers that keep those prices secret.

Sutter can charge these prices because it has acquired more than a third of the market in the San Francisco-to-Sacramento region through more than 20 hospital takeovers in the last 30 years, according to executives of Aetna Inc., Health Net Inc. and Blue Shield of California, who asked not to be named because their agreements with Sutter ban disclosure of prices.

Also,

Operating as a nonprofit, it has $8.8 billion in revenues, 24 hospitals, 17 outpatient surgery clinics and a 3,500-doctor network, making it the largest health-care provider in an 11- county region -- from San Francisco Bay to the Sierra Nevada mountains -- where 10 million people live.

Sutter has 35 percent of the revenue and 36 percent of beds that compete for patients in the region, according to a state hospital database, including 100 percent of beds the state tracks in Placer and Amador counties east of Sacramento.

Sutter care seems to cost a lot more than care from other doctors and hospitals:

After Mark Logsdon tore a ligament in his knee skiing at Lake Tahoe in March, he returned home to suburban Sacramento and had an MRI scan at Sutter Davis Hospital.

Sutter�s price for the knee scan was $1,271, payable by Logsdon and his insurer. Exactly the same MRI at one of the local imaging centers owned by Radiological Associates of Sacramento would have cost $696 -- 45 percent less.

A few other examples of Sutter's prices compared to others;

'Instead of leveraging its system to be more cost- effective, we�ve seen Sutter leveraging its system for monopoly pricing,' said Peter V. Lee, who in June became director of health-care delivery system reform for the U.S. Department of Health and Human Services. Lee was interviewed while he worked at the Pacific Business Group on Health, a coalition that includes Chevron Corp., Walt Disney Co., General Electric Co., and Wells Fargo & Co.

In San Francisco, Aetna pays Sutter�s California Pacific Medical Center in a range with a midpoint of $4,700 for an abdominal CT scan, compared to $3,200 at St. Francis Memorial Hospital, owned by Catholic Health Care West. For colonoscopies, Aetna�s midpoint price is $3,200 at Sutter�s flagship CPMC and $2,800 at St. Francis Memorial.

In Palo Alto, Aetna pays Sutter $349 per visit for new patients to see Manju Deshpande, a family doctor in Sutter�s Palo Alto Medical Foundation clinic. Three miles away, Paul Ford�s Stanford Medical Group receives $222. If the patient needs an immunization, Aetna pays Palo Alto Medical $85, and Stanford Medical, $16. Deshpande removes wax from the ear for $175. Ford scoops it out for $104.

Down the road in Silicon Valley, when obstetrician Sarah Azad, a solo practitioner, delivers a baby for a patient covered by Aetna, the insurer pays her $2,052. When Nicole Wilcox of Sutter�s Palo Alto Medical Foundation does the same job, Aetna pays Sutter $5,890.

The doctors practice blocks apart in Mountain View, California. Performance isn�t an issue -- Azad has Aetna�s top rating for quality of care and trained Wilcox during residency.

The Sutter CEO, of course, denies there is a problem:

Sutter operates in a competitive market, Chief Executive Officer Patrick Fry, 53, said in an interview. 'I don�t see Sutter Health as having market power, given the choices that employers can make,' Fry said. 'The market has a lot of room to make a lot of decisions.'

The people who most praise competitive markets often seem to be those who have done the most to reduce the competitiveness of these markets.  The CEO also trotted out another old saw, that his organization has grown not to charge more, but to be more efficient.

While Sutter may have higher 'unit' prices than its competitors, Fry said, it is not the most costly for patients over the long run because its integration of hospitals and doctor groups allows it to provide more efficient care, cutting down on the number of procedures.

'Our mission isn�t to maximize profits,' Fry added. 'Our mission, to the extent we can, is to optimize services.' Insurers and patients have many alternatives to Sutter, according to Fry.

That is a tune would-be monopolists have been singing at least since the days of the "robber barons" and their monopolies such as Standard Oil.

Of course, he is likely to defend a system that makes so much money and pays him and his buddies in top management so much, (and, contrary to his statement above, seems to have maximized profits):

Sutter, with 48,000 employees, was among the most profitable hospital groups in the U.S. in 2009, with income of $697 million, up more than three-fold from 2008 due to large investment gains, on revenue that grew 6 percent to $8.8 billion.

Its 5.2 percent operating margin -- or operating income as a percentage of revenue -- was 73 percent higher than the median for all nonprofit hospital systems in 2009, according to Standard & Poor�s.

As of Dec. 31, Sutter had a $2.63 billion investment portfolio. Sutter paid Fry $2.8 million in 2008, according to its latest Internal Revenue Service filing. His top 14 lieutenants made between $830,000 and $1.8 million each.

The article on Sutter emphasized how the strategic use of secrecy has helped Sutter maintain its remunerative ways:

Sutter doesn�t allow its prices to be disclosed on insurers� websites because it believes the information is often misleading and doesn�t reflect the variables of each patient�s case, [Sutter spokesman William] Gleeson said.

Of course, keeping prices secret just makes the market even less like an ideally competitive one:

As Sutter�s confidentiality terms show, the actual prices that hospitals receive are often kept secret by insurers. Patients in need of hospital care, especially in emergencies, often can�t travel very far, restricting competition. And if they have health insurance, they have little incentive to price shop.

Finally, the article reminds us that the latest fad from health policy and health management circles (which seem increasingly to overlap), "accountable care organizations," may just be a pretext for even more market consolidation:

The federal Patient Protection and Affordable Care Act is looking for $500 billion in savings over the next decade to help pay for extending coverage to 32 million uninsured Americans. Yet it doesn�t address the problem of market concentration -- and may make it worse, said Robert Berenson, a physician and policy analyst at the Urban Institute in Washington D.C.

The 'unchecked' clout of hospital and physician groups in California is a 'cautionary tale for national health reform,' Berenson said in a February article in the journal Health Affairs. He warned that incentives in the new legislation to improve treatment by promoting doctor-hospital alliances -- called 'accountable care organizations' -- could backfire by strengthening providers� bargaining leverage.

Carilion Clinic
A Washington Post article discussed the example of Carilion Clinic in Virginia, whose increasing market power we had blogged about in 2008:

Railroads put this city on the map, but the king of the domain is now health care -- or rather, the Carilion Clinic.

Carilion owns the two hospitals in town and six others in the region, employs 550 doctors and has set off a bitter local debate: Is its dominance a new model for health care or a blatant attempt to corner the market?

The Carilion story emphasized again how the "accountable care organization" meme is being used to justify market consolidation, allowing health care oligopolies to appear politically correct:

Carilion says it represents an ideal envisioned by the nation's new health-care law: a network that increases efficiency by bringing more doctors and hospitals onto one team, integrating care from the doctor's office to the operating room. The name for such networks, which the new law strongly promotes with pilot programs, is accountable care organizations, or ACOs -- providers joining together to be 'accountable' for the total care of patients, with incentives from insurers to keep people healthy and costs down.

Note that this political correctness is also used to justify further consolidation of power by limiting outside referrals:

Independent doctors say Carilion is urging its employees to refer patients only to providers within the Carilion network, cloaking its expansion in the lingo of health-care reform.

Of course, the Carilion CEO also denies anything but the most altruistic intent, but he too is making a lot of money from the current system:

[Edward] Murphy, Carilion's chief executive who earned $2.3 million in 2008, acknowledges that providers holding excessive leverage over insurers is cause for concern but argues that ACOs can be a corrective.

Summary

We noted earlier this week that multiple kinds of uncertainty (e.g., about diagnosis, prognosis, and the effects of treatment), and information asymmetry make it theoretically difficult for the health care market to be truly competitive. Meanwhile, there is increasing evidence that the market is actually uncompetitive. Although there are many hospitals and health insurers across the US, in many areas there are very few insurers and very few hospitals or hospital systems from which to choose. We have previously blogged about how market dominant hospital systems seem to be able to charge more than any others.

In the 1960s, it became recognized that physicians' professionalism, hospitals' devotion to their missions, and sometimes even (gasp) government regulation might partially compensate for distortions in the health care market. However, as supposed free market advocates became more powerful, they pushed for the commercialization of medicine and hospitals, reducing professionalism and mission support, and the hollowing out government regulation. (However, why did the people who attacked medical societies' codes of ethics as monopolistic have no interest in attacking market domination by insurers or hospital systems?  Inquiring minds want to know.)

As we said last time, true health care reform would help physicians and other health care professionals uphold their traditional values, including, as the AMA once stated, "the practice of medicine should not be commercialized, nor treated as a commodity in trade." True health care reform would put health care "delivery" back in the hands of mission-focused, not-for-profit organizations, which put patients' health, safety and welfare first.

Meanwhile, these latest stories about market dominating hospital systems suggest some additional lessons.

Secrecy is the would-be monopolist's best friend. However, it is hard to think of very many kinds of information that hospitals really ought to be able to keep as proprietary secrets. As usual, sunshine is the best disinfectant.

There seems to be a strange and increasing alliance between politically- correct academic theorists and proponents of raw economic power. The theorists' notion of "accountable care organizations" seems to have become a great foil for would-be monopolists, yet the theorists have done nothing to show how their creation would really bring "power to the people." Meanwhile, maybe "ACO" should stand for "aggressive care oligopoly." Meanwhile, be extremely skeptical of the latest health care fad, especially when it is supported both by academics and CEOs.

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