State officials have demanded that Cardinal Innovations repay $3.8 million in “unlawful” severance pay to its ousted CEO and three executives by Friday – even though the four already have the money.
The demand came in a letter to Cardinal’s attorney from Mandy Cohen, secretary of the N.C. Department of Health and Human Services.
DHHS on Monday took the dramatic step of taking control of Cardinal, firing its board and barring ousted CEO Richard Topping from the premises. That same day, Topping walked away with a $1.7 million severance while three associates left with packages as high as $740,000.
The tension continued Tuesday as one former board member suggested the possibility of legal action against the state and another defended the large payouts.
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“If you set a contract up to keep somebody and all of a sudden you’re forced to let him go, there’s a price to pay,” said Bill Burgin of Salisbury, who chaired the Cardinal board’s compensation committee.
The takeover punctuates what has been a turbulent year for Charlotte-based Cardinal, the largest of the state’s seven managed care organizations.
Known as Local Management Entity/Managed Care Organizations, they contract with the N.C. Department of Health and Human Services to manage treatment networks for mental health, developmental disabilities and substance abuse. Cardinal offers services for people with disabilities, mental health needs and substance abuse in 20 counties including Mecklenburg.
In May, State Auditor Beth Wood ripped Cardinal for spending on CEO pay as well as on lavish Christmas parties and board retreats, charter flights for executives and “questionable” credit card purchases, including alcohol. Her report said all that threatened to “erode public trust.”
In October, a DHHS auditor released a 17-page report that criticized Cardinal’s severance packages for being offered for longer than similar entities and offering severance pay to 10 employees other than the CEO.
The board voted last week to oust Topping and pay his seven-figure severance. Since Topping and the three executives already received their packages, Cohen told Cardinal attorney Wallace Hollowell that the state should be repaid with administrative money, not dollars otherwise allocated to clinical services.
“I am deeply troubled by the unlawful excessive severance package you have authorized for your departing CEO,” Cohen wrote Monday, adding that the board paid “$3.8 million state, county and federal dollars that are supposed to provide mental health, developmental disability, and substance abuse services to residents of Cardinal’s 20 county coverage area.”
Lucy Drake, chair of the ousted board, said that the state takeover was unnecessary, adding “the Board has been working with DHHS to bring Cardinal to the type organization the state wants.”
The severance contracts were legal, binding contracts that the board honored, she said.
“Cardinal has always been proactive and hired the best team to guide them in decisions,” Drake said. She added the board is made up of volunteers who give up a weekend for $50 a meeting.
She said that the board pays market rates for its executives and is given a 15 percent administration budget to operate under. “It stayed under its budget and was able to have a hefty fund balance,” she said.
Burgin said Topping’s salary – $635,000 – was driven by the market. “Now they’re saying it was financially mismanaged,” he said. “No. It’s just what happens when you write a contract for someone you want to keep.”
Democrat George Dunlap, a Mecklenburg County Commissioner and former Cardinal board member, said another board member told him Tuesday that there was talk of suing the state. Dunlap said he wasn’t personally asked about a suit. “They were never interested in negotiation,” he said of the board. “It was ‘We’re right, we’re in charge, the state can’t do this.’ It’s really sad.”
Lawmakers say a priority is getting the severance money back. Department of Justice lawyers are working with DHHS.
“We can’t go through all that we’ve gone through and not try to recoup those funds,” said Sen. Tommy Tucker, a Union County Republican who helps oversee Cardinal.
Sen. Dan Bishop, a Charlotte Republican, said it would be “a great shame if it should require litigation to sort out.”
“But executives of organizations, whether they be in the private sector or the public, have fiduciary responsibilities to the organization,” he said, “and DHHS I’m sure will be examining whether those have been met.”
A ‘bigger issue’
Marvin Swartz, head of the Division of Social and Community Psychiatry at Duke Medical School, said there’s a bigger issue.
“I get that people are focused on greed and executive salary,” he said, “but to me there is a larger issue of contract and regulatory failure.”
According to Swartz, as the state moves to public-sector managed care, “DHHS has to assume new regulatory and contractual challenges. DHHS has to transition from simply paying Medicaid claims ... They need to clearly set parameters for administrative costs, executive salaries, and, most importantly, what proportion of the funds should be spent on patient care. Clearly this did not happen.”
He said this partly due to drastic cuts to DHHS staff and salaries in past recessions.
Longtime Winston-Salem mental health activist Mary Annecelli, a member of Cardinal’s Triad Consumer and Family Advisory Committee, accuses the company of “nickle and dime-ing” its community activists “while they were doing all this lavish stuff.”
“They weren’t interested in servicing their clients. They were only interested in their own greed and power,” she said. “That’s sociopathic. They have no conscience.”
She criticized Cardinal’s penchant for secrecy.
Annecelli says she recalls how the families of developmentally disabled clients of Cardinal who went to the agency headquarters for a scheduled meeting were not allowed to enter unless they signed a non-disclosure form. The group met in the parking lot instead.
“Their salaries were paid with taxpayer money. They had a responsibility to the community,” Annecelli said. “Nobody knew what was going on because you couldn’t get any information out of them.”