Monday, July 20, 2009

Healthcare and Banking: What do they have in common?

The Banking system collapse due to the excesses of greed and deregulation is well known. But I believe there is a root cause, not readily discussed. The same is true for the abysmal failure of our healthcare system to control the costs of healthcare. I have worked in both systems and will share some insights and thought I have had about these issues.

The For-Profit model of business isn't right for any business and many have been ruined by moving from a Not-for-Profit system, to a For-Profit system of governance. I have consulted over the past 20 years to 7 prominent healthcare company CEO's and their executive teams, as well as to Freddie Mac and Banks. While Healthcare companies don't seem to have anything in common with Freddie Mac and this story, they do. You see, most senior executives were allured, and are still allured, by the idea of making more money than just a good salary for themselves. They wanted their companies to become For-Profit entities and wanted a share in the company's profit through the use of bonuses and, when possible, stock options/grants. What has happened is that many healthcare companies have merged and become Publicly traded companies, such as Anthem Insurance company and then, Wellpoint.

I remembered the time back in 1988 when I was facilItating an Executive retreat with the CEO, the President and senior team. It was just before the Savings and Loan crisis had raised its ugly head to give you a reference point. Initially the team had a low level of energy and I asked what would make them more excited as a team. I was reminded that they were a quasi government appointed and instituted organization. I asked them what that meant to them. They answered that their compensation was set with little room to truly make the kind of money other Executive teams would make in smaller sized financial institutions, and, for the level of responsibility they had versus the compensation they received, they just weren't that excited about things. I asked the group, "What would make you excited and really engaged?" They replied almost to the person, "If we were a Publicly traded company and had a chance at owning stock and truly merit based performance aligned with the level of responsibility and accountability they had." That comment was an eye opener for me. I then asked, "Why don't you become a Publicly traded company?" The reply was, "You don't understand, we are a quasi government organization and therefore they couldn't." I said to them, "That's not the reason you aren't a Publicly traded company. It's because YOU DON'T BELIEVE YOU CAN become a Publicly traded company! I then suggested consideration that they could in fact become a Publicly traded company and asked what would have to be done to start the process. This began the process where Freddie Mac began a Publicly traded company in 1989. The rest is now history.

During that same approximate timeframe, I had Blue Cross and Blue Shield (BCBS) of Kentucky as a client beginning in 1988. It was a Non Profit organization at that time. It went through a major successful turnaround from 1988-1993 with a new CEO (my client) leading the charge. In 1993, it became the first BCBS plan to merge with Anthem Insurance Co. This was the first cross-state merger of two strong Blue plans. In 2001, Anthem became a Publicly traded company. In 2004, Anthem and Wellpoint merge becoming Wellpoint, Inc. and in 2005 Wellpoint, Inc. acquires Lumenos (formerly, another client of mine). To see the other acquisitions of Wellpoint during those years, click on this Wikipedia link.
What these all have in common is the pursuit of profits in the healthcare industry.

I don't know what contribution For-Profit motivation contributed to the increase in healthcare costs. But I am sure it has been substantial. For example, the Anthem/Wellpoint merger reaped the Executive team a total of hundreds of millions of dollars in deferred compensation, salary and bonuses. The exact figure is difficult to determine. But it is enough to say that many people could have been insured for years, had the companies not had these compensation packages. In the words of a former CEO from the Healthcare system, "The biggest mistake I made was going form a Non-profit to a For-Profit company, as everything changed after that. If I could do it over again, I would not have done it!

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Anonymous Jerry Wechsler said...

In the first line of your new health-care post, the word "their" should be "there."

6:42 PM  
Blogger Charles Amico said...

Thanks Jerry. I took care of it. Hope you are well.

4:58 AM  
Anonymous Jerry Wechsler said...

Thanks. I'd be better if if my near 100k shares of our mutually appreciated greentech stock were closer to the level they "should" be at. I have a daughter spending a year studying in Paris, and the cashflow of a secretary. But I think we'll have to complete our share of the financing before the street will begin to believe anything is real. I guess they just see anything resembling positive cashflow as too far down the pike. Maybe my daughter (and yours?) will inherit the stock.

8:12 AM  

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