Roots of Pay for Performance in Healthcare

Pay for performance is sold as the panacea, the balm for America's health care ills.  One root of the movement came in an "Open Letter in Health Affairs 2003":

We call on the administration and congressional leaders of both parties to act in a bipartisan spirit on health care quality and to join the campaign to rally our underperforming health care system by empowering Medicare to take the further necessary and decisive steps to make pay-for-performance a national strategy for better quality. We should settle for nothing less.

The first two signers were:

Donald M. Berwick
Institute for Healthcare Improvement, Boston, MA

Nancy-Ann DeParle (MedPAc)
J.P. Morgan Partners LLC, Washington, DC 

Dr. Berwick is the Interim Chief of the Centers for Medicare/Medicaid, while Ms. DeParle, a former CMS chief and private equity underwriter (PEU), served as President Obama's health czar, before her promotion to White House Deputy Chief of Staff.

Dr. Berwick called incentive pay a toxic daisy chain while at the Institute for Health Improvement.  Pay for performance kills intrinsic motivation, the internal desire to perform good work.  People focus on what it takes to get the prize.  That behavior is frequently unethical.  This leads us to another signee of the P4P letter:

Gail R. Wilensky (MedPAC)
Project HOPE, Bethesda,

Wilensky's 2003 ManorCare bio showed her on the board of Advanced Tissue Sciences, Inc.; Gentiva Health Services, Inc.; Quest Diagnostics Incorporated; Syncor International Corporation; and UnitedHealth Group.

UnitedHealth Group employed the most pure form of incentive compensation, executive stock options.  Wilensky sat on the Compliance and Government Affairs Committee of UnitedHealth's board.  SEC filings described the committee's responsibilities.

The Compliance and Government Affairs Committee is responsible for the development of guidelines and procedures for ethical and legal compliance; ensuring adequate guidance, reporting and investigation processes; monitoring compliance with Company guidelines and ethics policies; and monitoring and evaluating corporate governance.

Corporate governance set and implemented executive compensation, thus Wilensky's committee bore responsibility for ensuring stock option pay remain ethical and legal.  Wilensky, on the board since 1993, missed nearly a decade of stock option cheating by CEO William McGuire, MD.  Bloomberg reported:

McGuire is the most visible CEO to leave his job in the continuing probe into options-granting practices at U.S. companies.

At least 144 companies are conducting internal investigations or are subject to government probes on the matter. Executives at two companies, Brocade Communications Systems Inc. and Comverse Technology Inc., have been charged by federal authorities with securities fraud. At least 30 executives and directors have left their jobs, and hundreds of lawsuits have been filed.

A repricing of McGuire's options from 1994 through 2002 to the high closing price of each year, assuming he hasn't yet exercised any of the options, would deny him a profit of $155 million, according to a Bloomberg analysis. From 1994 through 2005, McGuire realized $333 million in option gains.

Wilensky may not have known about pay for performance's toxic effects in 2003, but she clearly knew in 2006. 

Other letter signers were the beneficiaries of clean executive stock option pay:

John W. Rowe

Aetna, Hartford, CT

Leonard D. Schaeffer

WellPoint Health Networks, Thousand Oaks, CA

Corporate influence permeates the letter:

William L. Roper
University of North Carolina, Chapel Hill, NC

Roper was on the board of Davita, Medco Health Solutions, Luminex Corporation and Quintiles Transnational Corp at the time.  Nancy-Ann DeParle, signer #2, served alongside Roper on the Davita board.  She also had board slots for  Guidant, Accredo Health, Cerner, Triad Hospitals, Medco, Boston Scientific and Specialty Labs.

Toxic corporate pay practices will not solve the ills of America's healthcare system. While it's interesting to know who set the stage for today's non-solutions and how they may profit, it's not the least bit comforting.

Update 11-14-11: Nancy Ann DeParle's board track record reveals a number of investigative settlements, with more potential fraud investigations on the way.  The quest for quality will be undermined by extrinsic motivation schemes.

Update 5-30-23:  HuffPo's "The Golden Age of White Collar Crime" stated:

32 percent of American managers said they were comfortable behaving unethically to meet financial targets.