The Financialized Medical Center - Executives of Non-Profit Wake Forest Baptist Medical Center Make an "Investor Call," but Have no Investors

We recently discussed the uncomfortable situation of Wake Forest Baptist Medical Center, the non-profit health system/ academic medical center of Wake Forest School of Medicine.  The organization suffered acute monetary losses after a problem plagued roll out of its new electronic health record.  Presiding over this mess were some extremely well paid executives who had been hailed as "visionaries" by their own public relations people. (Look here and here.)

An Even Bigger Financial Loss

The resourceful Richard Craver, writing in the Winston-Salem Journal, just documented that the financial losses due to this cybernetic chaos now seem even bigger,

The center said Monday in a report submitted to bond agencies that it had a $62.8 million operational loss and an overall loss of $3.2 million in the third quarter of fiscal year 2012-13, which ended March 31.

Stock investment gains of $54.6 million helped offset much of the operational revenue loss.

Still, the operational loss was $13.2 million higher than the $49.6 million it reported Dec. 31. At that time, the center reported $7.4 million in overall excess revenue because of investment gains.  

A Call to Non-Existent Investors
 
That, however, was not the big news.  Mr Craver further noted,

Wake Forest Baptist chief executive Dr. John McConnell and chief financial officer Edward Chadwick held an investors call on Monday to discuss the financial performance. It is the third such presentation of the fiscal year, according to the Municipal Securities Rulemaking Board’s www.emma.msrb.org website.

Mr Craver noted that there was something distinctly odd about this. 

The investor call represents a potential blurring of the lines between how not-for-profit hospitals and corporations operate, which also includes executive compensation as a hot-button topic.

Analysts said the call is comparable to an earnings warning that corporations provide when they try to soften the negative reaction from a poorer-than-projected financial performance.

Wake Forest Baptist did not comment when asked how long has it made investor calls and who receives notifications of the presentations. According to emma.org, the center did not have investor calls listed prior to the first quarter of the current fiscal year.

A search of Wake Forest Baptist’s public website did not find any references to investor calls or quarterly and annual financial reports. Spokesman Chad Campbell said the quarterly financial calls are in the public domain.

While US publicly traded for-profit companies usually do schedule quarterly conference calls with investors to inform them about recent developments, Wake Forest Baptist Medical Center is clearly not a publicly held for-profit company.  It is a non-profit organization.  Non-profit organizations do not have investors or shareholders,

For-profit corporations also may do periodic calls with bondholders.  Wake Forest Baptist Medical Center does have bondholders.  But the posted notice for the call discussed above clearly refers to an "investor call," not a bondholders call.  One can now listen to the call (+1 855 859 2056, conference ID 90279604), and when I did, I heard the call was introduced by the operator, and by the Wake Forest Baptist Medical Center CFO as an "investor call."  

A Financialized Mindset?

So what in the world is going on here?  So why would its CEO and CFO make a quarterly call to "investors?"  The idea is absurd on its face. 

Mr Craver was able to find one person to comment, who seemed to assume that the calls were truly "investor calls," not mislabeled calls to bondholders:

Ken Berger, president and chief executive of Charity Navigator, said a not-for-profit hospital holding an investors call 'is the antithesis of why a nonprofit exists.'

'Nonprofits are not supposed to be trying to maximize shareholder value, but maximize their benefit to the communities they serve,' Berger said. 'Transparency is great, whether corporation or nonprofit, for shedding light on financial performance.'

'In this instance, the investor call doesn’t represent full transparency, but only represents more morphing of a not-for-profit into a for-profit organization where only a select few investors are chosen to have access to pertinent current information.'

My guess is that Mr Berger got it right.  It may be that the top executives of Wake Forest Baptist Medical Center have the mindsets of executives of a big for-profit corporation in an era of financialization. 

In the New York Times Economix blog, Bruce Bartlett, an economist who has served in the administration of two Republican Presidents, Ronald Reagan and George HW Bush, and has worked for two Republican legislators, Jack Kemp and Ron Paul, cited financialization as the big largely anechoic reason for the global economic malaise.  He wrote,

 According to research by the economists Jon Bakija, Adam Cole and Bradley T. Heim, financialization is a principal driver of the rising share of income going to the ultrawealthy – the top 0.1 percent of the income distribution.

Research by the University of Michigan sociologist Greta R. Krippner supports this position. She notes that financialization exacerbates the well-known problem of corporate ownership and control: while corporate assets are owned by shareholders, they are controlled by managers who often extract an excessive share of corporate profits for themselves.

 As we have discussed, for a generation business schools have taught managers that there primary goal is to maximize shareholder value, which has been interpreted to mean short-term financial performance.  Large corporations now give top managers tremendous incentives to maximize such performance, such that top managers have become rich, often the richest members of society.  Many top managers of health care organizations now come from a business background, and health care managers, even of non-profit organizations, also get large incentives. 

Note also that the two executives on the "investor call" both had outsize compensation in 2011, the latest year for which the non-profit Wake Forest Baptist Medical Center has released the disclosure form (990 form) required by the US government.  The CEO, Dr McConnell, received over $2 million, while the CFO, Mr Chadwick, received just short of $1 million. (Look here.)  So it looks like they have a good reason to continue to operate a financialized organization so they can keep extracting sufficient revenue to make themselves rich.

Clearly, though, if we want our health care organizations to preserve and protect patients' and the public health, we need them to be lead by leaders who care much more about health care than about short-term revenue and making themselves rich.


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

Clouded "Visionary" Leadership - Wake Forest Baptist Medical Center's EPIC "Business Cycle Disruptions"

A typical excuse for the multi-million dollar compensation now enjoyed by many leaders of health care organizations is these leaders' supposed brilliance.

For example, in 2011 we noted  that the total compensation of Dr John McConnell, the CEO of Wake Forest Baptist Medical Center, a non-profit teaching hospital, rose from over $700,000 in 2008-2009 to over $1.6 million in 2009-2010.  Other top executives in the system made nearly one million a piece.  An official statement from the hospital system claimed that this level of compensation was needed to "retain skilled executives and visionary leaders for the medical center."  Furthermore, in 2012 we noted that in 2010-2011 Dr McConnell's compensation had grown to nearly $2.5 million, while other top executives received from over $900,000 to over $1.1 million. 

Recent events, however, suggest that the "visionaries" may need new glasses.

An EPIC Challenge

Last month, the Winston-Salem Journal reported that Wake Forest Baptist Medical Center is facing some unexpected fiscal challenges, especially from its new electronic health record (EHR):

Wake Forest Baptist Medical Center’s struggles to implement its Epic electronic records system contributed to additional costs and lost revenue during the first half of its fiscal year 2012-13.

The center provided the information in a second-quarter financial report submitted to bond agencies in which it also reported a $49.6 million operational loss and a gain of $7.4 million in overall excess revenue.

That is interesting.  There have been many criticisms of EHRs, particularly for how they may impede, rather than help health professionals, and more importantly for their risks of causing adverse effects affecting patients, in the absence of clear data from controlled clinical trials that they provide benefits that outweigh their potential harms to patients.  Some of these problems may stem from design and implementation that prioritizes benefits to managers and institutional finances over effects on patients and doctors.  As InformaticsMD noted, even the AMA now admits that

 As the healthcare industry moves to EHRs, the medical record has essentially been reduced to a tool for billing, compliance, and litigation that also has a sustained negative impact on doctors' productivity, according to Steven J. Stack, MD, chair of the American Medical Association’s board of trustees.

Yet in this case, a well known commercial EHR did not even help out the hospital system's finances.

Furthermore,

Wake Forest Baptist said it spent as of Dec. 31 about $13.3 million directly on the Epic electronic-record system, which went live in September.

And,

 The center also cited $8 million in 'other Epic-related implementation expense' that it listed among 'business-cycle disruptions (that) have had a greater-than-anticipated impact on volumes and productivity.' Also listed was $26.6 million in lost margin 'due to interim volume disruptions during initial go-live and post go-live optimization.'

Note that InformaticsMD frequently criticizes proponents of commercial health care information technology for glossing over potentially bad effects on patients and practice with management-speak (e.g., as "glitches," or "hiccups.").  Here is a great example of an attempt to gloss over bad effects on finance with management-speak.

Bond Downgrades and Furloughs, Wage Reductions, Hiring Freezes, Retirement Contribution Reductions, and Bonus Eliminations

As a consequence,

 On March 20, Moody’s Investors Service downgraded the center’s long-term debt rating below the lowest level of high-grade investment quality. The downgrade to A1 from Aa3 affects $597.2 million of rated debt outstanding.

The rationale was clear,

 Moody’s said the A1 rating 'reflects the unexpected decline in financial performance through the first half of fiscal 2013, largely due to the installation of a new information technology platform (Epic), encompassing 95 percent of all revenue components of the enterprise.'

You know when you see bond downgrade by rating agencies that  financial matters are really going badly.  

By May, 2013, month, the problems were evidently still not solved, and the hospital was forced to take more drastic measures.  As again reported by Richard Carver writing for the Winston-Salem Journal,

The workforce at Wake Forest Baptist Medical Center is paying a paycheck price to make up for the financial shortcomings to date of its Epic electronic records system.

The center said in a statement Thursday it has begun another round of cost-cutting measures that will last through at least June 30, the end of its 2012-13 fiscal year.


The measures include attempts at volunteer employee furloughs and hour-and-wage reductions, a hiring freeze, a reduction in employer retirement contributions, and elimination of executive incentive bonuses for 2013.

Management made clear that the cuts were in response to the Epic debacle,

Even though management said Thursday the center is making progress with fixing the Epic revenue issues, it acknowledged it 'will not meet projected financial targets for the current fiscal year.'

'Wake Forest Baptist has identified immediate multimillion-dollar savings with a series of short-term measures that impact personnel,' according to the statement.

To give credit where it is due, at least the cuts will apparently not affect line clinical employees:

 Those primarily affected by the volunteer furloughs and hour-and-wage reduction requests are nonclinical full-time employees, including administrative staff. They can volunteer to work as few as 30 hours a week with no loss of health or dental benefits for May and June. In the memo, management said employees can volunteer to continue the reduced-hour work week into fiscal year 2013-14.

However, it seems likely that they will affect many employees, including some proportion who likely had not responsibility for the problems with Epic.

When in Doubt, Lobby the Government

What the hospital system did not seem to be cutting was lobbying and public relations.  Perhaps this was a response to its unexpected inability to manage its own commercial health care information technology?  What bad management can lose, maybe government can supplant.  Once again Richard Carver had the story for the Journal:

Stung by a series of unusual setbacks at the General Assembly, the North Carolina hospital industry is launching a public relations campaign aimed, in part, at protecting revenues and staving off competition from lower cost surgery centers.

In a social media initiative targeted at lawmakers and their constituents, the N.C. Hospital Association says hospitals are 'fighting for their economic survival.' [It was not said whether they were fighting in part because they had already managed to shoot themselves in their economic feet - Ed]


The association and some of the state’s bigger hospitals also are hiring more GOP lobbyists to make inroads with the Republicans who control the state House, Senate and governor’s mansion.

The hospital association recently began promoting a new website — www.healthyhospitalsnc.org — that describes an array of financial threats.

Wake Forest Baptist is a big part of this initiative:

When asked about its lobbying efforts, Wake Forest Baptist spokeswoman Paula Faria said last week that the center’s Office of Government Relations monitors proposed legislation and regulations at both the federal and state levels.

'It informs North Carolina’s congressional delegation, members of the General Assembly and their staff about how proposed language could impact the day-to-day operations of the medical center.'

Maybe they should be first worrying about the impact of badly chosen, designed, or implemented commercial health care information technology on "day-to-day operations of the medical center" first.

 Summary

So the top executives of Wake Forest Baptist Medical Center have seen compensation rising at a rate greater than inflation and than the general public's income over the last few years.  In particular, the CEO has seen his compensation go up three and one-half times in three years!  The hospital system administration has justified this extraordinary increase by referring to supposedly "visionary" leadership.  Yet over this time frame these "visionaries" decided to implement an EHR whose first effects were to lose the hospital system a lot of money.  Based on previous anecdotes about the Epic system, it is quite possible it had other adverse effects.  For example, InformaticsMD discussed a case in which an EPIC system apparently lead to a large disruption in patient workflow and hence large increases in waits for acute care, and lead to errors that could have adversely affected patients.  So this underscores some important lessons:

So beware that "visionary" behind the curtain. As we have noted repeatedly, top health care managers can now easily make themselves rich.  They, their boards of directors (who may be their cronies), and their public relations flacks often justify their exorbitant compensation by their supposed brilliance, if not visionary status.  Such claims are rarely further explained, and mostly seem be be humbug, for want of a better term.  It seems that most top leaders of health care organizations have participated in the managers' coup d'etat, and become at least manager nobility, if not manager-kings  At least, the public should know that their compensation is what they can grab, and its justification is often nonsense. 

Note that contrary to a red herring argument often made, outrageous compensation is important not so much because of how much money it drains out of health care, although that can be large in the aggregate.  It is important because it reflects a system that is no longer accountable, and leaders who follow perverse incentives.

Such management compensation is almost never revisited to determine whether it turned out to be justified.  Instead, the public, watchdog organizations, health care professionals, and even politicians ought to demand accountability of health care management, good  justification for their compensation, and rationality for the incentives they are provided.  True health care reform would encourage well-informed, competent, mission-focused, honest, responsible, accountable and transparent management, leading organizations of manageable size.  But as long as things stay the same, expect the craziness to continue.