Sicko

The Sick Business of Health-Care Profiteering
Think Wall Street’s titans are the highest paid C.E.O.’s in the land? Think again. With median annual compensation of more than $12 million, medical moguls take the pay prize, even as the quality of care we receive falls to embarrassing lows. As the debate over health-care reform intensifies, the author catalogues the industry’s unbridled profiteering.
By Matt Kapp
WEB EXCLUSIVE September 24, 2009

It’s become a national pastime to bash Wall Street’s lavish pay packages, but as we enter the vortex of another health-care showdown, consider these overlooked facts: With median annual compensation of more than $12.4 million, C.E.O.’s at the big health-care companies make two-thirds more than their counterparts in finance and are the highest paid of any industry. The health-care industry’s total annual profit has grown to an estimated $200 billion, and it doled out nearly $170 million in campaign contributions in 2007 and 2008. It now spends more than any other industry lobbying the federal government—$3.5 billion over the past decade and a record $263 million in the first six months of this year. That’s six lobbyists and nearly half a million dollars for each member of Congress. It’s been a good year on K Street, too.

It should come as no surprise, then, that we spend 17 percent of our G.D.P. and more than $7,500 per American per year on health care. That’s 50% more than any other industrialized nation. Meanwhile, the quality of care we get in return has fallen to embarrassing lows. According to the World Health Organization, our health-care system ranks 37th in overall quality and fairness, placing us between Costa Rica and Slovenia. We rank 41st in infant-mortality rates, alongside Slovakia and Serbia, and dead last among 19 leading industrialized countries in preventable deaths. Nearly two-thirds of personal bankruptcies in the U.S. are caused by illness, yet more than three-quarters of those people actually had health insurance when they fell ill. In other words, we’re all getting ripped off.
Health-Insurance Companies

Gambling investors’ money on exotic securities in pursuit of outsize returns may be a dubious profit model, but what could be worse than the health-insurance industry’s core model: screwing sick people to boost margins. President Obama has taken aim at big health-insurance companies and their “record profits.” While it’s true they’ve managed to more than triple their profits over the last eight years, they’ve still only lifted their average margin to 3.4 percent, enough to place 87th out of 215 industries. But they shouldn’t be complaining about lackluster profits when they’re paying their C.E.O.’s and executives as extravagantly as they are. Dishing out this much scratch, it’s a wonder they’re making any profits at all: Aetna C.E.O. Ronald Williams has helped purge millions of members from the company’s rolls; his total annual compensation in 2008 was $24,300,112. Angela Braly, who has promised that WellPoint “will not sacrifice profitability,” also saw a raise, to $9,844,212. Cigna’s Edward Hanway saw his pay cut in half and still hauled in $12,236,740, but he was forced to manage a major P.R. crisis after the company initially refused to approve a liver transplant for a 17-year-old girl, which it said was “outside the scope of the plan’s coverage.” She died just hours after Cigna changed its mind and decided it would pay for a new liver after all. Despite a 75 percent pay drop in 2008, cutting him down to a humiliating $3,241,042, UnitedHealth Group’s Stephen Hemsley put on a brave face for Congress, assuring legislators: “Our mission at UnitedHealth Group is to help people live healthier lives.” UnitedHealth has been fined tens of millions of dollars for claims-processing violations (i.e., stiffing patients and doctors). Hemsley’s predecessor, William McGuire, resigned amid a stock-options backdating scandal in 2006. He still walked away with nearly half a billion dollars in stock options. Hemsley surrendered $190 million in options himself, but with $744,232,068 left over, he should be fine.

Even C.E.O.’s at “not-for-profit” insurance companies (like most state Blue Cross and Blue Shields) collect multi-million-dollar compensation packages, even as their companies pay little in the way of taxes. Blue Cross of Massachusetts’s C.E.O., Cleve Killingsworth, got a 26 percent raise in 2008, to $3.5 million, and Blue Cross of North Carolina’s C.E.O., Bob Greczyn, pulled down nearly $4 million after a 19 percent raise. Gail Boudreaux left Blue Cross of Illinois in December 2007 with $15.3 million. The not-for-profits can be just as freewheeling with expense accounts. In early September, a state audit found that Blue Cross of North Dakota used premiums to pay for a $238,000 sales managers’ retreat in the Cayman Islands and a $34,814 retirement party for an executive.

The bottom line for health-insurance companies is that things like new livers really eat into profits. But it’s not just the expensive life-and-death stuff they’re rejecting. While health-insurance premiums have more than doubled in the past decade, a recent study by the California Nurses Association found that the six biggest insurers in California denied an average of 21 percent of all claims in the first half of 2009, with PacifiCare denying an astonishing 39.6%. The nurses were able to conduct their study, the first of its kind, only because California requires insurance companies to provide detailed records of claims denials. (It’s the only state with such a mandate.)

On August 17, Representative Henry Waxman sent out a letter to 52 health-insurance companies asking for revenue and profit figures over the past five years, a list of employees making more than $500,000 a year, and an itemization of expenses for “all conferences, retreats, or other events held outside company facilities” since 2007. The deadline for responses was September 14. When the details are released, we can expect a collective gasp.
Hospital Operators

The companies that manage hospitals post annual average profit margins of 5 percent, slightly better than the insurers. Hospital Corporation of America, founded by former senator Bill Frist’s father and brother, saw revenues climb 23 percent, to $28 billion, in 2008 with a tidy (if comparatively tiny) profit of $673 million. The Nashville-based company is doing better in 2009, doubling second-quarter revenue over last year. Back in 2002, H.C.A. paid $1.7 billion in fines to settle charges of Medicare and Medicaid fraud, the biggest settlement for an individual corporation in U.S. history at the time. And now H.C.A., whose outgoing chairman, Jack Bovender, made $6.87 million in 2007 and reportedly rides around Nashville in a cherry-red Ferrari, is fighting a class-action lawsuit alleging that “systematic understaffing” at H.C.A. facilities endangered patients.

Tenet Healthcare’s rap sheet is equally impressive. In 1994 the company paid the government $362 million in fines and penalties after pleading guilty to paying bribes and kickbacks for patient referrals. In 1999, Tenet settled lawsuits with 680 former psychiatric patients who claimed the company held them in hospitals against their will. In 2006 it agreed to pay the government $900 million to settle charges it had overbilled Medicare by marking up its prices many times over actual costs. While it’s been a turbulent ride for Tenet’s shareholders lately, C.E.O. Trevor Fetter is still allowed 75 hours’ worth of personal use of the company jet each year and pulled down a cool $9.7 million in 2008.

HealthSouth’s Richard Scrushy used to throw garish fêtes on his 92-foot yacht, the Chez Soiree, and was worth an estimated $300 million at the peak of the party. He’s now serving an 82-month sentence for bribery, conspiracy, and mail fraud; in June, he was ordered to pay $2.87 billion in damages to shareholders. “I have no interest in having money,” Scrushy told the judge when pleading for leniency at his sentencing. “I’m just a pastor.” (Scrushy co-founded a ministry in 2006.) HealthSouth lawyers are still trying to seize the Chez Soiree, now dry-docked in Florida.
Laboratory Testing Companies

The $50 billion medical-lab-testing sector’s average profit margin is a healthy 8.2 percent, putting it just above restaurants and below oil and gas equipment and services. The mother of all lab-test companies, Quest Diagnostics, earned a 9.1 percent margin during the last year, just a hair behind Exxon Mobil. In April, Quest settled with the Justice Department for $302 million for misbranding one of its tests, the Nichols Advantage Chemiluminescence Intact Parathyroid Hormone Immunoassay. (With names like these, they could just as well charge you for their afternoon coffee and call it Post Meridien Genera Coffea Robusta on your bill.) Despite the fine, Quest’s revenues were up 3.5 percent in the second quarter of 2009, to $1.9 billion, and its C.E.O., Surya Mohapatra, pulled down $11,964,632 in compensation last year.

In March, California attorney general Jerry Brown announced a civil lawsuit against seven medical labs, including Quest and LabCorp, for allegedly overcharging the state’s Medi-Cal program by up to 600 percent for routine tests. “In the face of declining state revenues,” he said at a press conference, “these medical laboratories have been ripping off our medical program for our most vulnerable people.” The suit claims that Quest was charging Medi-Cal $8.59 for simple blood-count tests while billing other clients $1.43 for the same test, and that LabCorp was charging Medi-Cal five times what it was charging others for hepatitis C antibody screenings. A little more than a decade ago, LabCorp paid $173 million to settle fraud allegations arising from the Justice Department’s Operation labscam crackdown on fraudulent lab-company billing. LabCorp C.E.O. David King’s pay was $8.2 million in 2008. The company posted a $514 million profit, with a margin of 10.3 percent, just behind AT&T.

Giant settlements for lab-billing scams have been commonplace since the 1980s, but Congress has failed to implement any real anti-fraud protections for Medicare: a paltry $756 million is currently devoted to fraud prevention, less than one-fifth of one percent of Medicare’s annual budget. Given the unbridled pillaging going on, it’s little wonder Medicare is projected to become insolvent by 2017. The Government Accountability Office has estimated that 10 cents of every dollar spent on Medicare is lost to fraud, which means that $42 billion is expected to vanish this year. That’s $280 picked from the pocket of every wage-earning American.
Health-Care Real-Estate Investment Trusts

Where the health-care industry really stretches out the profit margins is in Real Estate Investment Trusts (reits). Essentially hospital and health-care-facility landlords, the folks with money in health-care reits are used to seeing double-digit returns. Last year they ranked second, behind only the beverage business, with a 24.6 percent average profit margin. Despite the real-estate doldrums, the bluntly branded Health Care reit, Inc., has recently been called a “hot stock” for basking in net margins of nearly 40 percent. So although C.E.O. George Chapman’s compensation was a meager $5.2 million in 2008, he’s bound to do better in 2009.

The biggest of the health-care reits, Health Care Property Investors, Inc., paid its C.E.O., James Flaherty, $6.54 million last year. The company points out on its Web site that “The healthcare industry is growing and is expected to represent 17.7% of U.S. Gross Domestic Product in 2010,” as if this is good news for everyone, and illustrates in a graph that this percentage is expected to top 20 percent by 2018. Trivia: At this pace, by the year 2300, 100% of our GDP will go to health care. The future indeed looks rosy for reits: aging baby-boomers will drive the growth of long-term-care facilities for years to come.
Big Pharma

With more than $300 billion in annual revenue and nearly $50 billion in profits, Big Pharma is the 800-pound gorilla in the room. The pharmaceutical industry’s share of G.D.P. has more than tripled since 1980, and its average profit margins are now better than 15 percent. The checks forked over to the men at the top of the big drug companies take the cake. Forest Labs’ C.E.O., Howard Solomon, has made an average of $33 million a year over the last six years. (He is 81 years old, so you can adjust for seniority.) Abbot Labs’ C.E.O., Miles White, reeled in $25.3 million last year, with profits up 35 percent, to $4.88 billion. Merck’s Richard Clark and Bristol-Myers Squibb’s James Cornelius each pulled down $17.2 million. Pfizer C.E.O. Jeff Kindler’s pay package was $13.1 million, and Wyeth’s C.E.O., Bernard Poussot, saw a 69 percent raise, to $21.3 million. The two companies merged and purged 19,500 workers (a marriage made possible by tarp money, to make matters worse), which landed Poussot a “change of control” bonus of $24 million. Unlike Tenet’s C.E.O., whose personal aircraft use is capped, Poussot is actually required by the board of directors “when feasible” to use Wyeth’s toys for personal travel, “for security and other reasons.” Somehow this is all news to New York City’s well-heeled mayor, Mike Bloomberg, who said on his radio show last month, “You know, last time I checked, pharmaceutical companies don’t make a lot of money, their executives don’t make a lot of money.”

Given the fact that pharmaceutical-industry innovations have increased the expectancy and quality of life for countless people, most Americans tend to give the drug companies wide moral latitude. And the drug companies have done everything they can to exploit the free pass in pursuit of profit, which occasionally lands them in hot water. In January, Eli Lilly was ordered to pay more than $1.4 billion as part of a civil settlement and plea agreement for their “off-label promotion” of the anti-psychotic drug Zyprexa. In early September, Pfizer paid a record settlement—$2.3 billion—for the unlawful marketing of the painkiller Bextra.

In stark contrast to all this greed, general physicians make about $148,000 on average a year, with heart and nuero surgeons topping the scale at around $550,000. (Who wouldn’t want his surgeon to be making good money?) But even your heart surgeon is making less than 5 percent of what the average health-care C.E.O. earns. No wonder doctors are cranky these days. Their salaries are flat, and they’ve been forced into indentured servitude by the insurance companies, whose reams of unnecessary paperwork clog their offices and cut into their time with patients. After years of double-digit increases, malpractice-insurance premiums have stabilized in many states in the last 12 months or so, but family physicians still pay an average of $12,500 annually. Premiums for specialists like neurosurgeons can run well over $100,000 a year in some states. Patients are cranky, too, having seen their premiums more than double in the last decade.

So why have the Democrats pushing health-care reform been reluctant to draw attention to the profound profiteering going on in the health-care biz? Why won’t they just spit it out: as long as our health-care system is a casino-haven for ambitious M.B.A.’s, Wall Street brokerages, middlemen, and bottom-feeders looking for easy money, it will remain broken for the rest of us. Pointing out how deeply we’re getting our pockets picked, and by whom, would surely rouse umbrage in the insured and uninsured alike.

Politicians deny that the money they get from health-care interests has in any way swayed their opinions on reform, but it sure seems to have flagged their resolve. In the first six months of this year, Senator Blanche Lincoln brought in $325,350 from health-care-industry interests. She recently came out against the public option, the biggest menace to insurance companies because, in theory, it could lure away potential costumers. Senate majority leader Harry Reid, who supports a public option but thinks it ought to be privately run, collected $382,400. Senator Max Baucus, head of the bipartisan “Gang of Six” health-care-reform committee, has brought in $1.5 million since he began holding healthcare hearings in 2007. In May, 13 doctors and nurses were arrested for showing up at Senate hearings to demand that Baucus allow single-payer advocates to be heard. Earlier this summer, the senator charged $2,500 a head to lobbyists and execs wanting his ear during the 10th annual Baucus golf and fly-fishing retreat in Big Sky, Montana, his home state. If your congressman isn’t busy cashing checks, or taking appointments with lobbyists, he’s probably busy getting shouted down at a town hall somewhere.

With the Democrats message dead on arrival, once again the reform-minded are proving to be no match for the cyclopean assault unleashed by the biggest industry in America. Health-care companies have mobilized at least 50,000 of their employees to write letters and attend town-hall meetings, on the premise that their industry faces a grave existential threat. The insurers’ leading lobby, America’s Health Insurance Plans (A.H.I.P.), prepared a “Town Hall Tips” memo, urging them to remain calm and not shout at members of Congress. A.H.I.P.’s president, Karen Ignagni, told The Wall Street Journal that town-hall meetings are an opportunity for industry employees “to strongly push back against charges that we have very high profits.” I wonder how many of them are on the lists of $500,000-a-year-plus employees due on Rep. Henry Waxman’s desk last week.

In his speech to Congress, President Obama sowed the seeds of compromise, delivering a watered-down, three-point plan for health-care reform: 1) compel insurance companies to treat their customers more fairly; 2) create an insurance “exchange” of affordable health plans for individuals and small businesses; and 3) require everyone to carry basic health insurance in the same way car insurance is mandatory.

By making health insurance compulsory for 46 million Americans, Obama’s plan could be a boon to hospitals and hospital-equipment-makers. “The expected spending could positively affect the top-line growth of many healthcare providers” was rating agency Moody’s assessment. Insurance companies also stand to do very well, particularly if a public option doesn’t come to pass. Even if it does, the president reassured the industry that in any event the Congressional Budget Office has estimated that fewer than 5 percent of Americans would sign up for it. The flood of government-compelled premiums could generate $1 trillion in revenue for health insurers over the next decade. Health-insurance stocks spiked the day after Obama’s speech, signaling approval of the direction the White House is steering the conversation. Over the past three months, Humana shares have gone up 26 percent, Aetna’s stock is up 21 percent, and UnitedHealth has gained 7 percent.

The administration’s plan could also mean a windfall for medical-supply companies, testing labs, and drugmakers. In July, the perennial Harry and Louise returned to the airwaves, but this time they’re bankrolled by Big Pharma and are advocating for reform. Why? Because “drug and insurance companies stand to benefit when tens of millions more Americans have coverage,” as President Obama said in June. The drug companies put a dollar figure on the potential benefit, offering to invest $80 billion in the president’s plan, in the form of Medicare discounts and other concessions over the next decade. Republican senator Olympia Snowe, a member of the Gang of Six and a key figure in the debate, thinks it’s a wise investment. “The savings offered here appear to be more than offset by new drug sales,” she told the Associated Press. In early August, as a worrisome proposal that would allow the government to negotiate drug prices was making the rounds in the House, Big Pharma flexed its muscles, demanding the White House explicitly acknowledge that drug companies wouldn’t be on the hook for anything beyond the agreed-upon $80 billion. The White House obeyed.

Despite the boorish antics of Joe Wilsons everywhere, the American people’s support for fundamental health-care reform remains steadfast. Depending on who’s doing the polling, between two-thirds and three-quarters of Americans support a public option and up to 75% want to see more regulation of insurance companies. With this kind of mandate, the fight is the Democrats’ to lose.

Matt Kapp is a Vanity Fair reporter-researcher.