There They Go Again - Pfizer CEO Compensation Triples, Ordinary Employees' Severance Cut

In mid-March, Pfizer, which used to proclaim itself to be the world's largest research-based pharmaceutical company, announced in a regulatory filing a huge increase in total compensation for its relatively new CEO.  Per the AP, via the Wall Street Journal:

Pfizer Inc. nearly tripled CEO Ian Read's compensation in 2011, his first full year as top executive of the world's largest drugmaker, which has been cutting costs and making other moves to compensate for generic competition hurting sales of top medicines.

Read, 58, received compensation worth a total of $18.12 million in 2011, up from $6.42 million in 2010, according to an Associated Press analysis of a regulatory filing Thursday by the maker of Viagra and cholesterol fighter Lipitor.

The total includes a salary of $1.7 million, up 42 percent, stock awards and option awards totaling about $12.5 million, a $3.5 million incentive award and about $319,000 in other compensation. The last category ranges from use of company aircraft and a car and driver to contributions to Read's retirement savings.

Contrast: Decreasing Research and Development Spending, Facilities, Employment

Mr Read seems to have been rewarded for decreasing the scope of research and cutting research spending:

Over the past year, Read has narrowed the focus of Pfizer's huge research operations to diseases with big sales potential or few existing treatment options, trimming the research budget significantly in the process.

Reuters noted that involved sweeping layoffs and the closure of multiple research facilities:

Pfizer said it had improved its performance during 2011 by reducing research spending by nearly $1 billion. That feat came, however, at the expense of thousands of Pfizer researchers, whose jobs are being eliminated along with numerous laboratories in an effort to ultimately slash Pfizer research spending by up to $2 billion a year.

Contrast: Long-Term Shareholder Value

Read traded research capacity, and presumably the long-term value of the company, for an immediate boost in the stock price,

Pfizer, under Read, has narrowed its focus to five main therapeutic areas and is considering either selling or spinning off its nutritional products and animal health units.

Proceeds from the transactions will likely be used to buy back company shares, Read has said, delighting investors and helping boost company shares almost 27 percent in the past twelve months.

On the other hand, a quick look at Google Finance reveals that while the stock price is higher than it has been since 2009, it is roughly half of what it was from the late 1990s until 2004.

On its web-site, the company still proclaims, however,

we at Pfizer are committed to applying science and our global resources to improve health and well-being at every stage of life.

Contrast: Treatment of Other Employees

Note that Mr Read is an employee of Pfizer, albeit its most highly paid employee by a huge margin.

Other employees are not being treated so well. The massive increase in CEO compensation should also be contrasted with the company's new severance policies, as explained in an article from last week in The (New London, CT) Day,

Pfizer Inc. personnel being laid off at the company's Groton laboratories after May 14 will receive less money than previous waves of departing workers have received.

Pfizer, at the tail end of a planned 1,100 layoffs locally, said in a memo released last week that in the future people leaving the company will receive eight weeks of severance in addition to two weeks for every year served with the company. The pharmaceutical giant had previously offered at least 12 weeks of severance to employees, and before acquiring Wyeth Pharmaceuticals in 2009 had handed out three weeks of pay for every year served.

Summary

While Pfizer recently has made an amazing series of ethical missteps (look here), a decreasing drug pipeline, lost half of its stock price since its peak, and decreased its ability to develop new products, it has quickly returned to its previous ways of making its top hired executives very rich. (No matter, by the way, that Mr Read ought to bear some responsibility for the company's previous problems, since as the AP pointed out, he "has spent his entire career at the New York-based drugmaker, became Pfizer's CEO in December 2010 after running its worldwide pharmaceutical business since 2006.")

This is just the latest of many, many examples of how top hired executives of health care organizations are not like you and me. Whatever is happening to their organization, whatever its faithfulness to its mission, its performance, its value, its treatment of employees in general, many CEOs just get to take more and more off the top. Given this perverse incentive structure, is there really any question why most health care organizations do not always seem to put patients' or the public's health, or health care professionals' values, or their employees' welfare, or even their owners' financial interests (when they are publicly held for-profit corporations) first?  Or why health care costs steadily increase while quality and access decrease?
Repeat after me - we will never solve the problem of health care dysfunction until we assure that the leaders of health care organizations are well-informed about the context of health care, uphold health care professionals' values, put patients' and the public's health first, are accountable and transparent, and receive reasonable incentives based on all the above.

The Pittsburgh Experiment - II - Another Echo of the Fall of AHERF

We recently started a series of posts about the battle for domination of health care in western Pennsylvania.  The contenders are the UPMC hospital system, the dominant hospital system in the region, and Highmark, the dominant health insurer in the region.  While these two health care behemoths fight, patients, health care professionals, and the public seem to be caught in the crossfire.

There is something of history repeating itself in this battle.

The biggest bone of contention in it is Highmark's attempt to purchase the struggling West Penn Allegheny hospital system.  UPMC leadership seemed to feel that this would put the insurer in direct competition with it, even though UPMC already provides a health insurance product, the UPMC Health Plan.

West Penn Allegheny, in turn, is struggling because it is a remnant of a previous attempt by a single organization to dominate the health care system in this area.  As we wrote in 2011,  West Penn Allegheny was formed from some components of what used to the be the Allegheny Health Education and Research Foundation, AHERF.   AHERF was a large integrated health care system formed out of multiple mergers.  AHERF went bankrupt in 1998, leading to massive layoffs, hospital closures, and the near dissolution of a medical school (which ended up taken over by Drexel University).

As we noted in 2008, although the AHERF bankruptcy appears to be the largest failure of a not-for-profit health care corporation in US history, its story has produced remarkably few echoes for doctors, other health care professionals, health care researchers, and health policy makers. I often use the fall of AHERF as major example in talks, at least the few talks I am allowed to give on such unpleasant subjects. Rarely have more than a few people in the audience heard of AHERF prior to my discussion of it. I only could locate one article in a medical or health care journal that discussed the case in detail, albeit incompletely since it was written before Abdelhak's guilty plea [Burns LR, Cacciamani J, Clement J, Aquino W. The fall of the house of AHERF: the Allegheny bankruptcy. Health Aff (Millwood) 2000; 19: 7-41.] I doubt the case is used for teaching in most medical or public health schools. (There is a new book out about the case, Merger Games, by Judith Swazey, available here as  a set of PDF files from Project Muse for those with the proper password, but it has not yet had much of an impact, and I confess I have not yet read it.)  The lack of discussion of such a significant case is a prime example of the anechoic effect.

Therefore, let me summarize some of important points about AHERF not found above (see also this narrative, starting on page 5):

• AHERF, one of the largest health care systems of its day, was built by the poster-boy for health care imperial CEOs, Sherif Abdelhak.
• Abdelhak, who started as food services purchasing manager at Allegeheny General Hospital, was repeatedly hailed as a "visionary" (in the March, 1997, ACP Observer) a "genius," and the like. His plans to create a huge integrated health care system were part of the wave of the future. Abdelhak was even invited to give the prestigious John D Cooper lecture at the annual meeting of the American Association of Medical Colleges (AAMC), which was published in Academic Medicine [Abdelhak SS. How one academic health center is successfully facing the future. Acad Med 1996; 71: 329-336.] He proclaimed that "we will need to create new forms of organization that are more flexible, more adaptive, and more agile than ever before." And he announced that "my aim as chief executive has been to unleash the creativity and productive potential of every individual and to provide an environment that encourages teamwork"
• While Abdelhak was making these grandiose promises, he paid himself and his associates very well. For example, he received $1.2 million in the mid-1990s, more than three times the average then for a hospital system CEO. He lived in a hospital supplied mansion worth almost $900,000 in 1989. Five of AHERF's top executives were in the top 10 best paid hospital executives in Philadelphia.
• Although Abdelhak talked of teamwork, he warned the combined faculty of the new Allegheny University of the Health Sciences (AUHS): "Don’t cross me or you will live to regret it."
• As AHERF was hemorrhaging money, Abdelhak continued to pay himself and his cronies lavishly.
• After the AHERF bankruptcy, which was at the time the second largest bankruptcy recorded in the US, Abdelhak was charged with numerous felonies involving receiving charitable assets. In a plea bargain, he pleaded no contest to misusing charitable funds, a misdemeanor, and was sentenced to more than 11 months in county prison.

The story of AHERF is not merely that of an unlucky bankruptcy. It shows what can go wrong when health care adopts business practices such as jumping the latest management band-wagons and genuflecting before imperial CEOs.  It also shows what happens when a single health care organization, and the person who leads it, becomes too powerful.

If either UPMC or Highmark definitively wins their current battle, the winner will become at least as locally dominant as AHERF.  As we shall see in the posts to come in this series, the leadership of both organizations has already demonstrated a certain arrogance.  Yet since 2008 we have not progressed to the point of controlling the tendency of a laissez faire health care system to approach monopoly, nor the monopolist's tendency to put his self-interest ahead of all else. 

If nothing else, maybe the messiness of the fight between UPMC and Highmark will remind more people of AHERF, hence the need not to let our health care leadership and governance problems remain anechoic, hence the need for true health care reform that would constrain health care leaders to put patients' and the public's health before their narrow self-interest.