Vanderbilt Business

Category: Informed Opinion

Matter of Life and Death

Most people know Parkland Memorial Hospital in Dallas for its heroic efforts to help President John F. Kennedy after he was shot in November 1963.

Fifty years later, Parkland is once again drawing national attention, only this time, not for its service to the nation, but rather for its woeful record of violating basic patient safety procedures.

In August 2011, the hospital received a damning 600-page report issued by federal and state regulators detailing scene after painful scene of chaos and confusion. Emergency room patients were repeatedly placed in soiled bedding, children were discharged without proper medical screening, and unqualified medical residents were treating patients. In one instance, on-site regulators were forced to intervene to help lost patients seeking medical attention who were left wandering the halls.

Ranga Ramanujam

In short, there have been few—if any—instances of such a large, high-profile public hospital facing similar funding cuts for regularly placing patients in “immediate jeopardy” as a result of the facility’s systemic violation of basic safety practices.

But the truth is that even without the scathing reports issued by the Centers for Medicare & Medicaid Services, Parkland would have been in crisis. Like most public hospitals, Parkland is an anachronism that has been propped up by a too-important-to-fail mentality.

In an environment that includes a shrinking margin for medical errors, relentless pressure to cut costs, uncertainty over how to implement the Affordable Care Act, and acute physician and nursing shortages, the status quo is no longer good enough. Safety is more than a matter of operating for a long period without major adverse events—that’s just getting lucky. Instead, safety must be purposefully managed throughout every layer of an institution.

And doing that requires a fundamental shift in today’s health care organizations. Issues of quality and safety are intensely local and as such, they are not items that can be managed from a suite of executive offices.

Rather, the hospital of the 21st century demands that management build and maintain organizations designed to encourage what former Treasury Secretary and Alcoa chairman Paul O’Neill calls habitual excellence. Hospital leadership teams should seek to build an organizational infrastructure where employee engagement and continuous improvement are paramount. Improving care for patients can be brought about only by identifying and solving problems in the delivery of that care.

Hospital CEOs must start these transformations by expanding their traditional definitions of success. While financial outcomes and regulatory compliance remain crucial, management must also set audacious goals around employee engagement, communication and learning.

As many as 44,000 patients die each year in U.S. hospitals as a result of medical error.

Patient safety is more likely when clinical employees are treated with respect and dignity, when they’re given the necessary resources to carry out their work, when they are recognized for their contributions, and when they are afforded physical and psychological safety. When these critical preconditions are absent or go unmet and hospital employees are not meaningfully engaged in their work, patients face dangers that are all too real—as Parkland and the people it serves discovered.

While the idea of employee engagement may strike some as too squishy or touchy-feely, in the case of medical institutions nothing could be further from the truth. By some estimates, as many as 44,000 patients die each year in U.S. hospitals as a result of medical error—the equivalent of a 9/11-type attack happening each month. That means employee engagement literally becomes a matter of life and death in a clinical setting, a fact that every hospital CEO needs to fully comprehend.

CEOs must also recognize that change is not easy, especially in an entrenched culture like medicine where doctors typically go unchallenged by nurses and other staff members. Resistance and setbacks are almost guaranteed.

But with time and effort this will change. It starts at the top. Executives must be as attuned to quality and safety metrics as they are to profits and losses. This means undertaking things like frequent employee surveys and ensuring that senior leadership engages in regular walk-arounds. It may also require new team clinical structures that include physicians, nurses, pharmacists and dietitians who are jointly reviewing cases on a daily basis. There must also be mechanisms that enable and encourage employees to report medical errors and other safety issues.

Hospital leaders should have a mindset not of fixing problems but rather of redesigning structures and processes in a way that delivers care that is safer, more cost-effective and, most important, patient-focused.

The need to implement effective health care organizations has become as pressing as the need for medical breakthroughs. Safety is too important to be left to chance.

A version of this article originally appeared in the Dallas Morning News as part of a continuing series on safety problems at that city’s Parkland Memorial Hospital. Associate Professor of Management Rangaraj “Ranga” Ramanujam’s current research examines leadership, communication and learning processes in enhancing the quality and safety of health care.

June 17, 2013
A Prescription for Better Health Care

Washington may have enacted health care reform in March, but Larry Van Horn has a different idea for fixing the system.

A version of this article originally appeared in Modern Healthcare on Oct. 6, 2009.

I’m a balding, middle-aged, overweight American male. I have borderline hypertension and high cholesterol. I don’t like to exercise, and I enjoy eating foods with mayonnaise and cheese. I am Everyman. This is not an education problem. I know what I should do and generally how to do it—I just can’t make myself do it. I know the consequences of my short-run gluttonous behavior will negatively impact my long-run health, but like many people, knowing something is bad for me is insufficient to discipline my behavior. What’s worse, I am codependent on my health plan, and they are enabling my unhealthy behavior through the absolution of responsibility for my lifestyle choices.

I start each day with my morning “cocktail” of an ACE inhibitor, beta blocker and statin drug—all grossly subsidized by my health plan. I pay the same monthly premium as every other employee at my workplace with a family health plan. My wages have been reduced to fund the insurance premium behind the scenes, so I never know how much was taken from me. I know the only way to get my money back is to consume the services and drugs. I already paid for them.

It’s ironic that I rarely speed on my way to my favorite fast-food restaurant. The consequence of speeding is real and immediate. I would like to speed and given the opportunity—free of consequences—I’d light up my big-block V8 all the way to the drive-through. Let’s take it a step further. What if I purchased auto insurance the way I receive health insurance—priced independently of conduct, with a true premium cost hidden from view that covered all preventive maintenance?

I would drive like a bat out of hell. The insurance also would be so costly that I wouldn’t be able to afford it.

But unlike my auto insurance, my health insurance rates are not based on my underlying lifestyle choices, which are the primary determiner of how much health care I’m going to consume. We need to get to a world where I’m held individually accountable for the decisions that I make.

If my health insurance was like auto, home or life insurance—meaning it was individually underwritten, used for catastrophic use only, predicated on my behavioral decisions, and the prepaid consumption was instead funded out of my monthly wages after tax—would I be better off? There is little doubt that the marginal effect would be in the right direction.

Though treating health insurance like auto or life insurance would obviously be controversial, folks would change their behavior in a socially desirable way. Markets would form, prices would adjust, and demand for health services would change.

Larry Van Horn

Here’s another way to think of the value of basic health “maintenance” being included in a separate prepaid health plan. It would be as if you packed your auto insurance policy with additional insurance for oil changes, tire rotations and tune-ups. If those elements were part of your auto insurance policy, it would be much more expensive.

I want to do the right thing and make the right decisions to support a rational healthy lifestyle, but I need help. The current set of incentives and subsidies are stacked against me. I need my employer to hold me accountable financially for my slovenly behavior in ways that are currently prohibited by the Employee Retirement Income Security Act. I need the government to remove the preferential tax treatment of employer-provided health benefits that make it rational to consume too much health “insurance” and in forms that support poor conduct. I need my morning cocktail to be more expensive than salubrious lifestyle choices. I need to save more of my money to fund my health care consumption rather than looking for ways to spend other people’s money.

We seem comfortable with saving for and funding our retirement. Few count on Social Security to either be around or be the primary source of funding for retirement. We own it individually, yet Medicare is projected to be insolvent in 2017. The Centers for Medicare & Medicaid Services trustee report projects a long-run $37 trillion shortfall. I’m not saving for my post-retirement health care needs in large part because of the fact that I have never felt ownership and personal responsibility for the liability. This is the true health care crisis—a lack of individual ownership and a system that passes the buck.

If we all change our behavior by exercising, eating right and taking responsibility for our actions, we’re not going to solve the health care crisis. But it would be a clear step in the right direction. It is a step down the path toward a cultural change toward individual accountability, ownership and responsibility with respect to both our dollars and our decisions. It is a move away from spending other people’s money and shifting the burden to others.

Associate Professor of Management Larry Van Horn teaches within the Health Care MBA program at the Owen School.

May 3, 2010
Iceland Meltdown

In a matter of 10 days in October 2008, Iceland’s banking system completely collapsed, sending a shock wave through the small island country in the North Atlantic. Yet as fast as the collapse occurred, it should not have come as a surprise to anyone. Its origins were a long time in the making.

Once regarded as a model of economic success, Iceland suffered a complete banking collapse in October 2008.

There is no simple way to explain the Icelandic banking collapse, but a good starting point is the country’s long-standing support of free trade. Iceland’s economy has always been export-driven, and as such, the government there has promoted free international trade for quite some time. Iceland became a member of the European Free Trade Association (EFTA) in 1970 and a member of the European Economic Area (EEA) in 1994. The EEA allows EFTA countries, like Iceland, to participate in the European single market without joining the European Union.

One of Iceland’s obligations in becoming a member of the EEA was to relinquish state ownership of its banks—no small task as the state owned and controlled two-thirds of the banking sector. The timing of this bank privatization, however, was unfortunate. In the wake of 9/11 and the uncertain financial markets that followed, international banks were not about to invest in state-owned banks in little Iceland. Instead of turning to these international banks, as originally planned, the government decided to sell the stakes to Icelandic investors. In late 2002 and early 2003, controlling interests in two major commercial banks were sold to two groups of Icelandic investors.

In 2002 the size of the Icelandic banking system was less than Iceland’s GDP. By 2008, shortly before the collapse, it had grown to 12 times the country’s GDP.

These transactions would turn out to be a big mistake because the investors had no background in banking and finance. They were simply investors—and speculative ones at that. They soon turned the former state banks, which for some reason still enjoyed strong ratings from the major rating agencies, into their own private financing and co-investing vehicles.

The 9/11 tragedy would continue to impact the Icelandic banking sector even further. The Federal Reserve of the United States and other central banks had responded to the crisis and uncertainties by driving interest rates down to their lowest level in a century and printing money to stave off recession. The Fed was very successful—too successful, many would argue—as the easing policies following 9/11 paved the way for the housing bubble and subsequent liquidity crisis in capital markets that still haunts us.

The Icelandic banks, meanwhile, were rated as if they were still backed by the government, and cheap money was flowing all around. Big banks, like Deutsche Bank, Morgan Stanley and many others, were practically begging the Icelandic banks and their owners to borrow money. In 2002 the size of the Icelandic banking system was less than Iceland’s GDP. By 2008, shortly before the collapse, it had grown to 12 times the country’s GDP.

In the years leading up to 2008, Icelandic banks opened offices and branches abroad. London, Luxembourg, Geneva, New York, Stockholm, Helsinki, Copenhagen—in fact, the whole world—became their playground. The banks acquired banks in other countries and funded acquisitions for Icelandic and international companies, mainly on “High Street” in the United Kingdom (or “Main Street,” as it is known in the United States), but also in Scandinavia and elsewhere. Due to the ready availability of funds there was an equity price bubble in the making on High Street, and Icelandic investors often turned out to be the highest bidders. This scenario was fine as long as the bubble lasted, but once the bubble started leaking air, it turned out to be a curse.

Funding of the Icelandic banks was thin and highly dependent on wholesale. As a result, two of the banks introduced online deposit accounts in major markets (the U.K., the Netherlands, Germany and elsewhere) and were very successful in attracting depositors. Landsbanki operated its Icesave accounts in branches in the U.K. and the Netherlands, while Kaupthing Bank operated its Edge accounts in the U.K. through a subsidiary.

The distinction between branches and subsidiaries became very important in the aftermath of the banking collapse, as subsidiaries are regulated by the host country and thus covered by deposit insurance schemes in the host country. Branches, however, are regulated by the Icelandic Financial Supervisory Authority (FSA) and covered by the Icelandic deposit insurance scheme. The cost of the Icesave deposit insurance alone could end up bankrupting the Icelandic state, as cost per capita could reach $20,000.

Glitnir, the third bank, did not introduce deposit accounts internationally. This meant that Glitnir felt the liquidity squeeze in international capital markets much sooner than the others. Glitnir was facing a refinancing of almost $1 billion in mid-October 2008. After the collapse of Lehman Brothers on Sept. 15, 2008, confidence in financial markets evaporated. Banks stopped doing business with other banks as one could not be certain whether the counterparty would still be around the next day, let alone a month later.

At the end of September, Glitnir went to the Icelandic Central Bank and asked for a loan to cover the refinancing. The Central Bank—against the warning of the whole banking sector, economists and others—refused the loan and recommended instead that the Icelandic government put up the money in exchange for a 75 percent equity stake in Glitnir. The government went with the Central Bank’s recommendation.

There was a problem, however, with this approach. Each share of Glitnir stock, which on Friday, Sept. 26, had been trading at ISK 15.5, was valued at approximately ISK 2, thereby destroying any pricing built into the Icelandic stock market. This move put the pricing of other banks listed on the exchange in jeopardy. Also, to make matters worse, the owners of Glitnir had a billion-dollar loan from Landsbanki secured with their Glitnir stock.
The Glitnir nationalization was announced on Monday, Sept. 29. Immediately the rating agencies downgraded all Icelandic banks and Icelandic sovereign debt as well. In the early hours of Oct. 9, Kaupthing Bank became the last of the large Icelandic commercial banks to fall. The banking system officially had collapsed.

Trying to salvage what they could, the Icelandic government and parliament passed an emergency law, which gave the FSA unprecedented powers to take over and manage Icelandic financial institutions. The British government responded by invoking the anti-terrorism legislation from 2001 to freeze all assets of Landsbanki in the U.K.

The U.K. authorities also used their powers to bring down Singer & Friedlander, Kaupthing Bank’s subsidiary in the U.K., with brute force. This move guaranteed the fall of Kaupthing and was, in the eyes of many, a low blow by the British. On that very same day the British government announced a rescue package for U.K. banks—that is, all banks other than the one owned by an Icelandic bank.

The Icelandic Central Bank failed miserably in maintaining a responsible and stabilizing monetary policy. It brought interest rates up to 15.5 percent in a fight against imaginary inflation. This policy drove up the value of Iceland’s króna, the world’s smallest floating currency, and created an opportunity for carry trade, wherein investors borrowed in low interest rate currencies and invested in króna. This further drove up the value of the króna, resulting in a huge trade imbalance, which in the end caused the króna to collapse even before the banks.

When the monetary policy of the Central Bank is viewed in context, it is difficult not to put the brunt of the blame for the meltdown squarely in the lap of its directors. In fact, chances are anyone could have done better than they did. But, of course, the Central Bank was working under adverse conditions at the time, and it would be unfair to say that one group was more at fault than any other. In reality there was no single, simple reason for the collapse. It was the result of a confluence of unfortunate decisions and circumstances—ones that Icelanders hope will never be duplicated again.

November 6, 2009
On the Wrong Foot

Over the years I have counseled many students as they negotiated for new jobs. Often the key challenge for them is being really clear about their own goals and options, but in some cases the challenge is dealing with companies that are extremely aggressive, or just plain inconsiderate, in their negotiations. The classic aggressive tactic is the “exploding offer,” in which companies try to keep candidates from considering other job offers by saying that theirs is only good for a few weeks, or even a few days. At other times companies may leave a candidate hanging, without information about what is happening in the hiring process, or signal a lack of respect toward the candidate in any number of ways.

Having seen this process over the years, Professors Neta Moye, Meredith Ferguson and I began to wonder: Does it matter if companies create negative feelings on the part of job candidates during negotiations? Obviously the goal of an exploding offer is to get a candidate to agree to the company’s terms, and many candidates do sign on as a result of this tactic. In the end the company achieves its goal, regardless of potential negative feelings. While disrespectful behavior may make them less likely to join a company, candidates still sign on because it is a good job in terms of pay or responsibilities, or because there may not be any other good alternatives. If that is true, then why should it even matter how job candidates feel?

How a company treats an employee during the negotiation process has an impact months or even years later. That first impression is a very strong and enduring one.

Our answer to that question is that the relationship between employees and companies requires long-term commitments. An employee’s feelings toward a company build over time. Those feelings affect whether an employee is likely to keep an eye on other jobs or really commit to the company. The costs associated with turnover are high. They include direct recruiting costs, as well as the time and money it takes to get an employee fully up to speed. Indeed, it may not be until a new MBA’s second or third year that he or she is really productive for a company. A premature exit by a highly skilled employee can be costly.

Looking at the literature on “justice” in organizations, we know that people care not just about the financial results of personnel decisions, like pay and job assignments, but also about how those decisions are made. People want to be treated with respect, have procedures explained and feel that others recognize their individual needs. It is not just that people like proper treatment; it is also about whether the organization sees them as valued members of the community. An employee builds his or her first impressions about a company during the job negotiation. As a result, we predicted that the treatment of employees during job negotiations would affect their sense of negotiation “interactional justice,” which in turn would affect their interest in looking for jobs at other companies—even long after the initial hiring process was over.

It is important to manage the conversations and interactions with job candidates in a way that is respectful and considerate. This can be done at no cost to the company, and can potentially save lots of money down the road.

To test our predictions, we conducted two studies. In one we surveyed 68 MBA graduates about the hiring processes for their current jobs, which had happened on average a year or two earlier. We asked if they thought their companies used high-pressure negotiation tactics, if they felt unjustly treated, and if they were currently looking around for other jobs. When we did the analysis, we statistically controlled for the quality of the actual outcome (that is, how satisfied they were with the actual deal they got) and for their impressions of the overall HR practices at their companies. This was done to be really clear about the effects of the job negotiation process. Our results showed that those MBAs who felt that their initial job negotiations were unjust reported a higher desire to leave their companies. And, we know from prior research that this desire to leave a company (called “turnover intention”) does predict actual job exit.

In our second study we surveyed 52 MBAs just as they were leaving their MBA programs and right after they completed their job negotiations. We asked about pressure tactics during those job negotiations and how they felt they were treated. We then did a follow-up survey asking about turnover intentions six months later, with 31 of those MBAs responding. This study showed that high-pressure tactics did enhance feelings that the negotiation process was unjust, and it also confirmed what we found in our first study: that perceived unjust treatment experienced during job negotiations enhanced turnover intentions six months later. Thus, using two different research methods, we were able to show that how a company treats an employee during the negotiation process has an impact on turnover intentions months or even years later. That first impression is a very strong and enduring one.

What are the implications for companies? Most importantly, companies should pay attention not only to what they offer new recruits but also to how those offers are made. Note that these effects occurred controlling for actual outcomes (that is, the actual terms being offered to new hires). So, we are not suggesting that companies need to pay more or give higher benefits. Totally separate from what is actually offered, it is important to make the offer and manage the conversations and interactions with job candidates in a way that is respectful and considerate. This can be done at no cost to the company, and can potentially save lots of money down the road.

Does this matter even during hard economic times? Actually it may matter even more. Hard times are when people may take job offers simply because they have no other choice. They may be even more willing than usual to overlook bad behavior by a hiring company just to get that job. So while it may be easier to get the recruit, the feedback received from that person will be less clear. During hard times companies are more at risk of being overconfident, being sloppy in the negotiation process, and undermining the foundation of the relationship with that employee in the years to come.

April 21, 2009
Money Talks

The role of corporate lobbying in politics is a hotly debated topic these days. Perhaps nothing frames the difference in opinions better than the recent presidential campaigns of Hillary Clinton and Barack Obama. During the Democratic primaries, the two presented sharply contrasting views on lobbyists.

At the 2007 Yearly Kos convention in Chicago, Clinton said, “A lot of those lobbyists, whether you like it or not, represent real Americans. They actually do. They represent nurses. They represent social workers. They represent—yes, they represent corporations that employ a lot of people.”

Firms lobby not only to defend themselves from harmful policies but also to profit from tax advantages, regulation loopholes and government budget appropriations.

Obama, however, offered a different argument. “I disagree with the notion that lobbyists don’t have disproportionate influence,” he said. “Look, the insurance and the drug companies spent $1 billion in lobbying over the last 10 years. … They are not spending that just because they are contributing to the public interest. They have an agenda.”

Interestingly their views seem to correspond to the two academic theories of lobbying. On the one hand Gene Grossman, an Economist at Princeton University, and Elhanan Helpman, an Economist at Harvard University, emphasize the “information” role of lobbying. In their well-cited book Special Interest Politics, they consider lobbying as primarily a mechanism to transfer information and knowledge from certain interest groups to policymakers. Grossman and Helpman argue that this improves the efficiency of society, in a sense.

Nobel Laureate and University of Chicago Economist George Stigler, however, suggests industries are often able to acquire regulations that protect them rather than harm them. Their need for such regulations and the regulators’ willingness to provide them create the demand and supply of a “market for politics.” Firms contact politicians and government agencies through various channels and try to convince them of the necessity to pass “friendly” policies or deter “hostile” ones. In return for the favor granted by the regulators, firms compensate them with votes and resources such as political contributions.

The popular press seems to give more support to the latter view. The Washington Post recently quoted one top lobbyist as saying: “People in industry better have good lobbyists or they’re going to get rolled over.” Even companies that try to resist political involvement for various reasons usually end up joining the game. For example, Google was reluctant to lobby until it was under severe pressure for issues related to user privacy and operations in China. It then decided to hire high-profile Washington lobbyists and invest heavily in lobbying, as reported in The New York Times. Google’s story was hardly new; Microsoft went through the same process in 1996 when it was entangled in antitrust problems.

Firms lobby not only reactively to defend themselves from potentially harmful policies but also actively to profit from tax advantages, regulation loopholes and government budget appropriations. The benefits of lobbying are seemingly huge: The Washington Post reported a $100 return on $1 of investment in lobbying for corporations. Similarly BusinessWeek conservatively estimated that firms received an average of $28 in awarded federal earmark spending per dollar spent on lobbying. The benefits of these efforts can come through various channels. The defense industry lobbies for more government contracts; the hi-tech industry lobbies for issues related to patent; and of course, everybody lobbies for lower taxes.

To check whether these claims withstand statistical scrutiny, we compiled a database of corporate lobbying activities made possible by the Lobbying Disclosure Act of 1995. Prior to the Act there was no public data available on how much firms spent on federal lobbying, as lobbying organizations and professional lobbyists were not required to register or disclose their lobbying activities.

In brief, we found that spending on lobbying pays off handsomely. We looked at financial performance as reported in firms’ financial statements, as well as stock market returns. To gauge stock market performance, we constructed portfolios of companies based on their lobbying intensities (that is, by how much they lobby relative to their size). Based on these rankings, we discovered that firms in the top portfolio generated annual returns 8 percent higher than similar firms that do not lobby. Moreover, it was only these firms with the highest lobbying intensities that systematically outperformed their benchmarks. Thus, contrary to the impression gleaned from the financial press, not all lobbying yields huge rewards.

That said, the chance to tilt the odds in their favor probably explains why American corporations spend so much on lobbying. For example, in the 1997-1998 election cycle, corporations, their trade associations, and other business-related interest groups accounted for roughly 90 percent of the total lobbying spending, dominating that of any ideological or single-issue organizations. (See Figure 1 for the list of top lobbying spenders from 1998 to 2008, as reported by the Center for Responsive Politics.)

At the end of the day, the need for petitioning government and influencing public policy will never go away, and eliminating official channels of lobbying will only result in a secretive and corrupt system.

So was Hillary Clinton wrong in saying that lobbying represents the interests of everyday Americans? Not necessarily. Corporations lobby to inform policymakers of the impact of regulation and legislation; individuals are impacted in their roles as consumers, as employees and as shareholders. The presence of corporations in the list of top spenders on lobbying is just an example of a collective action problem. Only those groups or firms with the most to gain or lose have an incentive to participate.

One solution to this problem is to ensure a clean and transparent process. The Lobbying Disclosure Act of 1995 intends to at least partially serve that purpose. All lobbyists and organizations that lobby must register and file with the government, and report semi-annually how much they spend on lobbying, for what purpose, etc. At the end of the day, the need for petitioning government and influencing public policy will never go away, and eliminating official channels of lobbying will only result in a secretive and corrupt system. The principle of transparency is arguably one of the key advantages of the American political system and must be viewed as an important contributor to its current and future economic health. What is needed is more disclosure, not less lobbying.

Hui Chen is an Assistant Professor at the University of Colorado’s Leeds School of Business. David Parsley is a Professor of Management at the Owen School. Their paper “Corporate Lobbying and Financial Performance” was co-written with Ya-Wen Yang of the University of Miami.

November 10, 2008