Carilion Clinic

Case History/Background

Nestled in the Commonwealth of Virginia between Salem and Vinton is the city of Roanoke, whose population was approximately 98,000 in 2010. The metropolitan area population was about 309,000. Bisected by the Roanoke River and circled by the Blue Ridge Mountain Parkway, Roanoke is the commercial and cultural hub of western Virginia and southern West Virginia.

The community that became Roanoke was established in 1852. Early economic development of Roanoke resulted from its importance as the junction point for the Shenandoah Valley Railroad and the Norfolk and Western Railway. These railroads were essential for transporting coal from western Virginia and West Virginia. Roanoke’s service area includes a regional report, shopping malls, a regional hub for United Parcel Service, and manufacturing plants for General Electric, Yokohama tires, and Dynax, a maker of friction-based automobile parts.

Carilion Clinic

Carilion Clinic employs almost 12% of Roanoke’s population. The clinic includes 9 freestanding hospitals, 7 urgent care centers, and 220 (and increasing) practice centers, and it employs over 650 physicians in more than 70 specialties. The clinic has 1,026 licensed beds, not including 60 neonatal intensive care unit beds. The clinic had 48,659 admissions in fiscal year 2014-15.

The clinic’s joint ventures and related companies include the following:

Carilion Clinic Physicians, LLC (real estate holding company)

Carilion Emergency Services, Inc.

Carilion Behavioral Health, Inc.

In March 2010, the same month and year the Affordable Care Act became law, the clinic was ordered by the Federal Trade Commission to divest itself of an outpatient surgical center and an imaging center. Both had been acquired as it sought to re-create “The Mayo Clinic” medical delivery model.

Led by Edward G. Murphy, M.D., from 1998 to 2011, Carilion Health System became Carilion Clinic, a vertically integrated health-care system. During Murphy’s tenure the system expanded to include graduate and undergraduate medical education programs, a school of medicine (through a partnership with Virginia Polytechnic Institute and State University Virginia Tech), and, perhaps most impressively, Carilion established an accountable care organization in partnership with Aetna insurance company.

Dr. Murphy’s total compensation was almost $2.3 million in 2007. Nancy Agee, the clinic’s chief operating officer at the time, earned the next highest salary of about $800,000. When Murphy resigned in 2011, Ms. Agee was promoted to president and CEO. In fiscal 2014, Carilion Clinic net revenue was $1.5 million. Agee’s salary was $1.9 million.

CONTROVERSY IN ROANOKE

Despite its philanthropic mission and positive effect on Roanoke, Carilion Clinic has not always enjoyed a good relationship with its community.

   In May 1988, the U.S. Justice Department’s Antitrust Division sought to prevent the merger of Roanoke’s two hospitals: Memorial Roanoke Hospital and Community Hospital of Roanoke Valley. The lawsuit sought to block the merger because of the monopoly it alleged would result. Less than one year after the suit was filed, the Fourth Circuit U.S. Court of Appeals found for defendants Memorial Roanoke Hospital and Community Hospital of Roanoke Valley.

   The merger between defendant hospitals would not constitute an unreasonable restraint of trade under the Sherman Act $1. The merger would strengthen the competition between the hospitals in the area because defendant hospitals could offer more competitive prices and services.

In the two appeals that followed, courts found for defendant hospitals, which then merged and were named Carilion Health System. The decision provided legal basis for what is now the Carilion Clinic.

IN A MARKET: WHAT CONSTITUTES A MONOPOLY?

A monopoly occurs when one or more persons or a company dominate an economic market. This market domination results in the potential to exploit or suppresses those in the market or those trying to enter it (supplier, provider, or consumer).

   During the 19th century, the U.S. government began prosecuting monopolies under the common law as “market interference offenses” to block suppliers from raising prices. At the time, companies sometimes sought to but all supplies of a certain material or product in an area, a practice known as “cornering the market”.

   In 1887, Congress passed the Interstate Commerce Act in response to railway companies’ monopolistic practices in small, local markets. This legislation protected small farmers who were being charged excessive rates to transport their products. Congress addressed monopolistic practices further by passing the Sherman Antitrust Act of 1890, which limited anticompetitive practices of businesses. The act blocked transfer of stock shares to trustees in exchange for a certificate entitling them to some of the earnings. The Sherman Act was the basis for the Clayton Antitrust Act of 1914, the Federal Trade Commission Act of 1914, and the Robinson-Patman Act of 1936, which replaced the Clayton Act.

   Antitrust or competition laws address three main issues:

Prohibit agreements or practices that restrict free trade and competition among business entities.

Ban abusive behavior by a firm dominating a marker, or anticompetitive practices that tend to lead to such a dominant position.

Supervise the mergers and acquisitions of large corporations, including some joint ventures.

The Herfindahl-Hirschman Index (HHI)helps implement these laws by providing a mathematical method to determine market “density”, or the concentration of the market. Antitrust laws and methods of calculating market density, such as HHI, are imperfect and can leave gaps that may be exploited.

   Since its establishment, the mission of the Federal Trade Commission has remained largely unchanged. Laws affecting private enterprise and government agencies have not. It is possible this mal juxtaposition underlies many of the difficulties in the healthcare industry.

VERTICAL INTEGRATION: THE MAYO CLINIC MODEL

The Mayo Clinic is the leading example of vertical integration in the delivery of healthcare in the United States. Founded in Rochester, Minnesota, in 1863, the Mayo Clinic began as the medical practice of William Worrall Mayo and his two sons, who were also physicians. It grew to include a comprehensive array of specialties. Mayo developed different levels of care across the health services continuum. The result was a vertically integrated health system. Mayo physicians are salaried at market levels, and they control the management structure.

   Mayo Clinic is headquartered in Rochester, Minnesota; it has satellite clinics elsewhere in the United States. In addition, Mayo and various medical centers worldwide have consulting and referral relationships. Mayo provides excellence and dedication in delivery of services with a constant, and self-admittedly stubborn, commitment to core values, which include that the needs of the patient come first, the integration of teamwork, efficiency, and mission over profit.

   Mayo has been long recognized for high performance, research and innovation. It has ranked at or near the top of “Honor Roll” hospitals through the history of U.S. News and World Report’s best-hospital rankings. In 2015 - 2016, Mayo clinic had more number one rankings than any U.S. hospital or system. Eight specialties ranked number one: diabetes and endocrinology, gastroenterology and gastrointestinal surgery, geriatrics, gynecology, nephrology, neurology and neurosurgery, pulmonology, and urology.

FORESHADOWING A MAYO CLINIC CLONE

Even before Murphy took the helm in 2001, Carilion Health System actions had stirred significant, but manageable, controversy in the community. Much of the controversy resulted from the antitrust case in 1988. After the court ruled that the merger did not violate federal law because it posted no threat of monopoly, the hospital continued its previous work in the community.

   After becoming CEO, Murphy began to vertically integrate the Carilion Health System. His formal plan was presented in fall 2006. Part of evolving to a Mayo-style organization included acquiring physician practices in the community; some were closed after acquisition.

WHO IS EDWARD G. MURPHY, M.D.?

Edward. G. Murphy earned his BS from the University of Albany, New York, and his medical degree (with honors) from Harvard University Medical School. Although he never practiced medicine. Murphy was a clinical professor at the University of Albany School of Public Health and an adjunct assistant professor at Rensselaer Polytechnic Institute School of Management. Before leaving New York state he was also a member of the New York State Hospital Review and Planning Council, and he served on its executive committee as the vice chair of the fiscal policy council.

   From 1989 to 1991, Murphy served as the vice president of clinical services at Leonard Hospital, a 143-bed facility north of Albany, New York. In 1991, he was promoted to president and CEO of Leonard Hospital until it merged with St. Mary Hospital fo form Seton Health system in 1994. Murphy became president and CEO of that new health system and stayed with Seton until 1998, when he relocated to Roanoke to head Carilion Health System.

   During his tenure at Carilion Clinic, Murphy managed the growth of that two-hospital health system into a vertically integrated model of healthcare delivery anchored by a 500-physician specialty group practice that included nine not-for-profit hospitals, undergraduate medical programs, an array of tertiary referral services, and a multistate laboratory service. In 2007, Murphy announced plans for the Virginia Tech Carilion School of Medicine, which opened in 2010. In 2010, Murphy was paid $2.27 million ($1.37 million in salary and $900,000 in benefits).

Murphy’s other roles in the Roanoke community included memberships on the boards of Healthcare Professionals Insurance Company and Trust; Luna Innovations, Inc; and Hometown Bank. He is past chair of the Art Museum of Western Virginia. He also served in an influential position with the council on Virginia’s Future, which works to frame the growth and progress of the state, including businesses, people, and the health of the population.

   Murphy left Carilion to become chairman of Sound Physicians, a national provider of Intensivist and hospitalist services. In 2012, he became the operating officer of Radius Ventures, a venture capital firm that invests in health-related companies.

VERTICAL INTEGRATION: BECOMING A “CLINIC”

Murphy was always clear about his plans for Carilion Health System. In an August 2006 interview, “Right now...our core business is hospital services. In the new model, the core business will be physician services; the hospital will become ancillary. In a 2007 interview for Health Leaders Magazine, Murphy explained, “I’ve been enamored of this model of healthcare delivery for a long time.”

   In Fall 2006, Murphy, his staff, and the leadership board of Carilion Health System announced their plan to create a new model for Carilion management characterized by teamwork and salaried physicians and other caregivers focused on patients across the spectrum of care. Murphy explained:

   The essence of the clinic model is that hospitals stop becoming independent businesses and start becoming ancillary services to the physician practice….If hospitals eventually want to provide better and more cost-effective healthcare, it’s a necessary shift.

The transformation was planned for seven years with an 18-month phase -in of its new name, Carilion clinic. Plans for Carilion Clinic included a 50-50 partnership with Virginia Tech University in Blacksburg, Virginia, to establish a private, not-for-profit clinical research institute and a new medical school. Further, from 2007 to 2012 Carilion clinic would add four or five fellowships for physicians to support its mission.

Ground was broken for the much-anticipated university in early 2008. On July 20, 2009, the Virginia State Council for Higher Education approved the Virginia Tech Carilion School of Medicine as a postsecondary institution. It’s first class matriculated in fall 2010.

THE WALL STREET JOURNAL EXPOSE

Usually, an organization is pleased if the Wall street Journal publishes an article about it. That is, of course, unless the story ignites a firestorm that leads to separate citizen and physician coalitions working against the organization and raises the specter of a word from Carilion Clinic’s prehistory: monopoly.

“Nonprofit Hospitals Flex Pricing Power. In Roanoke, Va., Carilion’s Fees Exceed Those of Competitors: The $4,727 Colonoscopy” was published on the front page of the Wall Street Journal August 28, 2008. The author, John Carreyrou, explored Carilion’s history, including the 1989 antitrust case, its expanding”market clout,” and the strides toward its goal of vertical integration. The article suggested that some of the means used were questionable.

   Carreyrou asserted that skyrocketing healthcare costs in Roanoke were partially caused by, or possibly even led by, Carilion Clinic.

   In a press release, Carilion Clinic denied monopolistic practices or exploitative pricing and claimed it faced robust competition from Lewis-Gale Medical Center located in nearby Salem, Virginia. Carilion Clinic defended its pricing practices by noting it must cross-subsidize emergency departments and care for the uninsured.

   Unsettling to some, however, was Carilion’s practice of suing patients for unpaid medical bills. After Carilion obtains a court judgement, a lien is placed against the patient’s home. A lien on real property puts a “cloud” on the title, which prevents the owner from conveying the property with a clear title until the lien has been satisfied. Responding in the Wall street Journal, Murphy stated,

   Carilion only sues patients and places liens on their homes if it believes they have the ability to pay … If you’re asking me if it’s right in a right-and-wrong sense, it’s not...But Carilion cannot be blamed for the country’s “broken” healthcare system.

Murphy asserted that Carilion efforts to protect its financial interests meet legal requirements, but may be morally flawed. This position appears inconsistent with Carilion’s mission that ‘Patient Care Comes First.”

WHERE WERE THE LOCAL MEDIA?

As reported by Carreyrou, Carilion Clinic complained several times to editors of the Roanoke Times regarding reporter Jeff Sturgeon’s coverage of the system. Shortly after the complaints, and mainly in response to a May 2008 article by Sturgeon, Carilion greatly reduced advertising in the Roanoke Times. About the same time, Sturgeon, the paper’s longtime health issues writer, was reassigned.

Even after Sturgeon’s reassignment, Carilion continued to be frontpage news in the Roanoke Times. Reporter Sarah Bruyn Jones covered community reaction to the Wall Street Journal article and the impetus it gave to local coalitions. Her articles included the following: “Carilion Critics Draw Hundreds to Meeting” (September 2008); “Fed Agency Looks into Carilion Purchase” (September 2008); “Carilion Footprint Expands in Deal” (August 2008); and “Carilion to Buy Cardiology Practice” (August 2008). Jone’s reporting put Carilion practices at the forefront for Roanoke’s citizens, but, as noted by Carreyrou, Carilion growth seemed unstoppable.

THE BACKLASH

The August 2008 Wall Street Journal article resulted in a community uproar and fueled physician's’ efforts to air their concerns about Carilion, including its anti competitive actions and unfair pricing, and their desire to have open referrals for patients from outside Carilion’s health network. Citizen and physician coalitions met in hotel conference rooms and community centers to discuss the “unfair practices and behaviors” ifof Carilion Clinic. One, the citizens Coalition for Responsible Healthcare, sponsored a petition that read as follows:

   To Dr. Murphy and the Carilion Health System Board of Directors:

   Please reconsider your Carilion Clinic plans. I want to keep my right to choose my doctor, even if he or she is an independent physician. Please rethink spending $100 million of my community’s money on a Clinic model that could ruin our hospitals! Monopolies are never good for healthcare.

The Coalition’s website offered copies of the Wall Street Journal article, video recordings of their meetings, information about a new forum program, and membership form for those who wished to join their efforts.

   The citizen coalitions stated they intended to focus on the negative impact of Carilion’s transformation to a physician-led clinic that they asserted will increase costs and drive out many local physicians. Murphy’s plan was to bring into Carilion as many physicians as possible; all of whom will be salaried. The concerns of citizen coalitions stemmed from the scope of the effort, which resulted in closure or sale of many physician practices. Unaffiliated physicians asserted they could not compete. Further, Carilion’s system of internal referrals, added to the purchase of existing practices, gave many specialists no choice but to leave, or stay and fight.

   Despite the controversy, Carilion has shown no signs of slowing: it has stayed the course outlined in Fall 2006.

CARILION’S RESPONSE

On August 28, 2008, less than 24 hours after publication of Carreyrou’s Wall Street Journal article, Carilion responded. Statements published in newspapers and posted on Carilion’s website, as well as press releases, stated the allegations and conclusions drawn from them were misleading and misinformed.

   In response, Carilion directed readers’ attention to the Virginia Hospital and Health care Association PricePoint Website. It showed that Carilion’s prices are comparable to surrounding hospitals and are generally lower than its closest competitor, Lewis-Gale Medical center in neighboring Salem, Virginia. To support their position on pricing,Carilion stated “Medical care in hospitals is more expensive … having staff and technology at the ready has its costs. Also mentioned was Carilion’s Lifeguard helicopter, which is subsidized service. Carilion provided $42 million in charity care in 2007 and an additional $25 million in free care (bad debt written off), thus illustrating its dedication and support of its service area. Carilion supports research and education substantial resource commitments that add major costs to the organization and provide subsidize services tiot the community.

   In explaining the policy to sue patients, Carilion stated that efforts are made to qualify patients for public programs, as needed. Further, Carilion said only “a small fraction of the nearly 2 million” patient billings each year go to court.

   Court filings are a final resort, and we try to be flexible. If the judgement includes a lien on an individual’s property, we do not foreclose on the lien. The lien is satisfied if and when the property is sold.

In response to concerns about its internal referral practice, Carilion stated that referrals are sent from physician to physician in the system with the intention of sending patients to better, more-qualified physicians who have earned the referral. The “earn, not force” mentality contributes to the goal of well-coordinated care and service, which is the first choice of patients.

Carilion’s press release closed by describing a wasteful and poorly organized U.S. healthcare system that is hoped to improve with the vertically integrated clinic model of providing care. The hope is that comprehensive, high quality, and cost-effective care will put the patient first. The reader of the press release is reminded that what happened at Mayo could be replicated at Carilion.

CURRENT SITUATION IN ROANOKE

As noted, Carilion Clinic has a medical school partnership, an expanding physician practice with a robust specialty list, and its own accountable care organization, which continues to show progress and increased membership.

Three decades after the hospital merger controversy began in Roanoke, Virginia, the economic and healthcare environments have changed, the population is increasing, and healthcare costs are rising. When the antitrust case was brought in 1988, Roanoke had among the lowest health insurance premiums in Virginia; now, they are among the highest.

Discussion questions to be answered

1) Identify the problems Carilion Clinic faces as it seeks to become a comprehensive, vertically integrated healthcare provider.

2) Briefly explain the summary of the case

3) Identify the most important factors/facts of the Case study

4) Explain the critical issues that is the most important health administration problem/issue to be solved and if applicable, identified secondary problems.

5) Identify the recommended solution of the case. At least three realistic alternative solutions.

6) Identify the relevant concepts and tools for example, methods, techniques, principles,theories, and or models.

Article summary

A Community-Based Family Intervention Program to Improve Obesity in Hispanic Families 16 WMJ • DECEMBER 2012 programs. Publicity was primarily in the form of posters, announcements, and word of mouth. Families with schoolage children were encouraged to enroll. Families with children younger than school age were offered on-site childcare. The 8-week program included a 40-minute classroom component followed by a 40-minute physical activity session that concluded with a healthy family dinner to promote good eating habits. The classroom program was based upon the 3 crucial components used in the We Can! curriculum and became program objectives. Program objectives helped families: (1) improve food choices; (2) increase physical activity; and (3) reduce screen time. Screen time is the amount of time a person spends in front of a television, computer, or video game screen. Because many of the household decisions regarding television viewing, food preparation, and recreational activities are made by adults, the program was designed to present parallel messages to both the adults and children. The overall goal of the program was to encourage additional communication between parents and their children, leading to cooperative decisionmaking involving nutrition and physical activities for all family members. The educational component was divided into 2 groups, one consisting of adults and the other of school-age children. Adult educational programming was presented in Spanish by a bilingual health educator and a bilingual registered nurse. All written materials were made available in Spanish and English, with literacy level considerations. Children’s classes were presented in English. Bilingual staff included a registered nurse and exercise instructor from the HCHRC and a health educator from the Waukesha Public Health Division. Although the adults and children attended separate nutrition lessons, both discussed the importance of making healthy food choices and being active. A variety of activities and games were incorporated into the curriculum to strengthen the understanding of the lesson objectives (Table 1). All family members participated in the same exercise/physical activity session. The sessions were taught by the bilingual health promoter, a certified, bilingual exercise instructor. Physical activities proved to be a very popular component for all family members and strengthened the concept of being active together and enjoying physical activity. Participants had different levels of mobility and the exercises were selected with that in mind. The exercise sessions had 3 distinct dimensions: warm-up, exercise, and cool down. Physical activity included aerobic/cardiovascular (endurance), anaerobic (speed/strength), flexibility, and coordination exercises. The physical exercise equipment consisted of fun and inexpensive materials that many families already have at home, such as balls, jump ropes, hula hoops, lies in order to diminish health disparities such as those seen between the Hispanics and non-Hispanic whites in the areas of obesity. This article describes the study and specific individual and community outcomes. METHODS Where there are many lifestyle programs for children, few involve the full family unit and take the Hispanic culture into consideration. For example, the Fit Kids Program11 was structured with primarily the English-speaking child in mind and had a program fee. Given the high percentage of low-income Hispanic families in Waukesha, any program fee or language barrier could economically or socially exclude participation. The We Can! curriculum promotes awareness of healthy food choices and discusses the importance of physical activity with a particular focus on energy balance and family.10,12 It is available online at no cost, and the first 2 weeks of materials were already translated into Spanish. The curriculum is endorsed by the National Heart, Lung, and Blood Institute10,12 and strives to further the Healthiest Wisconsin 2020 focus areas and objectives regarding nutrition, healthy foods, and physical activity.13 It also addresses important overarching goals of Healthy People 2020 to reduce obesity and disparities.6,7 The Waukesha County Public Health Division collaborated with the Hispanic Community Health Resource Center to facilitate the We Can! curriculum in a series of nutrition and exercise classes. After translating the remaining curriculum into Spanish and including other culturally appropriate supplemental handouts, a family exercise component was added to each class. Community partnerships were sought to host activities, promote participation, and provide support for sustainability. Partners included White Rock Public Elementary School, La Casa de Esperanza (community center) and the local YMCA. Participants were recruited through convenience sampling using community outreach methods at local churches, medical clinics, schools, self-service laundries, and community Table 1. Nutrition Session Themes Week 1 Program Overview Week 2 Energy Balance Week 3 Body Mass Index and Portion Control Week 4 Energy In* and Reading Nutrition Labels *Energy In is the amount of calories consumed through dietary intake. Week 5 Energy In and Healthy Substitutions Week 6 Energy Out* and the Importance of Physical Activity in Energy Balance *Energy Out is the amount of calories burned through physical activities and normal daily functions. Week 7 Decreasing Screen Time Week 8 Program wrap-up with post-test, evaluation and program surveys VOLUME 111 • NO. 6 17 with the intent of measuring behaviors about healthy choices in nutrition and activity. Children also were asked true and false knowledge questions in a group setting, which included knowledge about nutrition labels, portions, physical activity, and general health. No biometric blood testing was done with children. Child participants were measured for height, weight, and body mass index (BMI) percentile pre-program and postprogram. RESULTS The program served 47 families: 57 adults and 54 children. The average age for adults was 32 years. Of the adults, 89% were women and 11% men. One 16-year-old participant was given a choice to participate in the adult or the children’s educational component. He chose to attend the adult class; however, a decision was made not to participate in biometric testing. The survey included assessment of families’ habits related to food choices, sweetened beverage consumption, physical activity, and screen time. Adult health risk assessments (HRAs) were performed approximately 1 week prior to the start of each program and 1 week following. HRA assessments included biometrics: total cholesterol, LDL cholesterol, HDL cholesterol, triglycerides, fasting glucose, height, weight, BMI percentile, waist circumference and blood pressure. The HCHRC hosted all screenings and offered a post-screening healthy breakfast. The biometric testing in the adults’ post-program intervention showed some improvements in reducing cardiac and diabetes risk factors (Table 2). This included improvements in systolic and diastolic blood pressure, glucose, weight, BMI, and waist circumference. Blood pressure data collection averaged a 3.5 mm Hg decrease systolically (P=.0132) and decreased 2.36 mm Hg diastolically (P=.0357). Blood glucose decreased by 3.08 points (P= .0253) comparing pre-program and postprogram collections. Weight decreased by 2.03 pounds overballoons, spoons and eggs, and foam pool toys. The participants were able to take home elastic bands to continue exercises taught. A family dinner encouraged participants to implement some of the strategies and decision-making skills covered in each week’s lesson. Demonstration and participation in snack and meal preparation encouraged participants to use healthy ingredients and substitutions. The participants practiced portion control and had many opportunities to experience new healthy foods. A closing ceremony anchored the last class, at which each participant’s accomplishments were recognized with a certificate of completion. Program incentives were awarded upon successful program completion and included YMCA memberships at a discounted rate. As an incentive for children, $50 was given toward the purchase of a bicycle to further promote physical activity. The program educators secured and fitted bicycle helmets for each child participant. Participants were encouraged to suggest any changes or to share any thoughts. Participants who completed the program were encouraged to register for other exercise classes and community health programs available at the HCHRC. For this study, data was collected before and at the conclusion of the 8-week program. Progress toward program objectives was measured through knowledge testing, lifestyle surveys, and biometric testing. Pre- and post-program lifestyle surveys, and knowledge and biometric testing for adults were facilitated. Testing and surveys were available in Spanish and English. In addition, adult test questions and response choices were read aloud at both pre- and post-assessments to ensure understanding. Children were given pre- and post-program survey questions that reflected the lifestyle behaviors of children participants. These were administered by a public health educator, Table 2. Biometric Results for Adults Program Year Unit of Measure Sample Size Pre-program Ave Post-program Ave Change P-valuea Systolic BP 2006-2010 mm Hg 50 108.34 104.84 decrease 3.5 0.0132a Diastolic BP 2006-2010 mm Hg 50 67.84 65.48 decrease 2.36 0.0357a Cholesterol 2006-2010 mg/dL 52 174.96 170.79 decrease 4.17 0.3616a HDL 2006-2010 mg/dL 52 44.94 46.52 increase 1.58 0.2663a LDL 2006-2010 mg/dL 48 104.71 97.44 decrease 7.27 0.1157a Triglycerides 2006-2010 mg/dL 50 145.92 154.36 increase 8.44 0.4678a Glucose 2006-2010 mg/dL 52 96.62 93.54 decrease 3.08 0.0253a Waist 2006-2010 in. 52 37.33 36.79 decrease 0.54 0.0345a Weight 2006-2009 lbs 37 156.97 154.95 decrease 2.03 0.0024a BMI 2006-2009 37 27.97 27.62 decrease 0.35 0.0103a Knowledge Test 2006-2010 % correct 57 38% 88% Increase of 50 0.0001b percentage points aStatistical significance tested using paired t test bStatistical significance tested using unpaired t test 18 WMJ • DECEMBER 2012 lack of motivation as a barrier to physical activity. For the third program objective, decreased screen time, lifestyle surveys for adults in 2008 showed that prior to program participation, 100% of participants reported watching more than 2 hours of television per day. Postprogram, that number dropped to 47%. In 2009, participants viewing more than 2 hours of television per day dropped by 34% by the program completion. Reportedly, in 2010, the number of participants watching more than 2 hours of television dropped by 65% at the end of the program. The children’s scores yielded similar findings. An overall goal of the study was to increase communication between parents and their children to facilitate cooperative decision-making involving nutrition and physical activities. Anecdotal evidence obtained through parent’s comments suggests that increased family communication of nutrition and physical activities had occurred. (Table 3) The HCHRC created a monthly support exercise group post program in response to participants’ comments. It reinforced nutrition and exercise concepts previously learned in the program and encouraged families to continue exercising together. Program participants led this exercise support group, which evolved into a monthly “Family Exercise Night” that is held during the winter months. In addition, a total of 16 walking sessions are offered as a counterpart during the summer months. Participants of all ages continue to walk together and numbers have surpassed 100 walkers. Other programmatic outcomes included a culturally appropriate We Can! curriculum translated into Spanish and available for use as well as pre-screening and post-screening HRA forms, Release of Information for HRA’s form, Release of Liability form, and a Photo Consent form, all translated into Spanish. COMMUNITY OUTCOMES The We Can! program served not only to improve the knowledge and individual behaviors of the participants, but it also facilitated a variety of systems changes in the community due to its collaborative nature. For example, the local YMCA provided gym memberships at a discounted rate, which were awarded all (P= .0024) and BMI decreased by 0.35 (P= .0103). Waist circumference decreases over the 4-year period averaged .54 inches (P=.0345). Each of the core evaluation measurements was linked to one of the program objectives in order to measure the program’s effectiveness. The first objective to improve food choices was measured through didactic testing of both adults and children. Comparisons of pre-program to post-program knowledge testing for adults revealed an average of a 50 percentage point increase over the span of the program. In 2008, there was a 50% decrease in soda consumption among adults. In 2009 and 2010, there was a 20% decrease of soda consumption among adults post program (Figure 1). For children, pre-program nutrition knowledge scores for children averaged 20%, while post-program knowledge scores averaged 80%. There was a 33% decrease in soda consumption among children in year 2008. In 2009 and 2010, there was a 40% decrease in soda consumption among children. The second program objective was to increase physical activity. In an analysis of pre-program and post-program data, there was an average 60% drop in adult participants reporting Figure 1. Knowledge Testing Results for Adults by Program Year. 0 10 20 30 40 50 60 70 80 90 100 A verage Test Percentage Program Year Pre-program Post-Program Table 3. Participant Comments Participant 1 “I loved the program because it gave me the opportunity to be with my children. Also I learned that exercising as a family is fun.” Participant 2 “I am very pleased that there are programs like this because, aside from learning about good nutrition and health, we spent time as a family discussing what we want to do in the future.” Participant 3 “It seemed to be a great program, very complete for health. I loved that there are people concerned about the health of others. Thank you with all my heart. It also served to unite our family on what we should eat and how to exercise as a family.” VOLUME 111 • NO. 6 19 ability. A community approach was necessary to change both individual eating and exercise habits as well as to diminish environmental barriers to achieve a healthy and active lifestyle. Time for community conversations, strategic partnerships and grant writing became the first steps in developing community programs that address health disparities of minority populations. Collaboration between key community organizations and health institutions was essential in improving health in a social ecological approach. A strong collaboration between leadership at the Waukesha Public Health Division and management at Waukesha Memorial Hospital provided the framework to explore new ways to improve Hispanic health in Waukesha County. With hospital restructuring, health care reform, and state budget reductions, finding future funding for multiple year prevention programming may be challenging. The intent of this initiative was to provide a communitybased program to diminish the incidence of overweight and obesity in Hispanic families by promoting awareness of healthy food choices and the importance of physical activity in a culturally acceptable fashion with a particular focus on energy balance. Using the We Can! curriculum and intervening at an individual, family, and community level, program goals were achievable. The ability to replicate the program year after year has resulted in additional programmatic and system changes. Changes occurred in community systems, which positively affected the built environment with increased availability of and improved access to safe places for family physical activity. The results of this program evaluation are encouraging. This program has had a meaningful impact on the participating community members and the community at large. Funding/Support: This project was funded by a State of Wisconsin MCH Title V Services Block Grant from the Maternal and Child Health Bureau, Health Resource and Services Administration, US Department of Health and Human Services. Financial Disclosures: None declared. REFERENCES 1. CDC. Differences in prevalence of obesity among black, white, and Hispanic adults – United States, 2006-2008. MMWR Morb Mortal Wkly Rep. 2009; 58(27):740-7444. 2. The Surgeon General’s Call to Action to Prevent and Decrease Overweight and Obesity. Rockville, MD: Office of the Surgeon General (US); 2001. http://www. surgeongeneral.gov/topics/obesity/calltoaction/CalltoAction.pdf. Accessed August 31, 2012. 3. Nestle M, Jacobson MF. Halting the obesity epidemic: a public health policy approach. Public Health Rep. 115(1):12-24. 4. Wisconsin Department of Health Services, Division of Public Health. Obesity, nutrition, and physical activity in Wisconsin. Executive summary. http://dhs.wisconsin. gov/health/physicalactivity/pdf_files/executivesummary.pdf. Accessed August 31, 2012. upon successful program completion. This encouraged families to maintain an active lifestyle post-program. Bilingual program staff interpreted and oriented one family to the gym equipment and activities at the YMCA. That family in turn oriented and interpreted for the remaining participants. Through this, the YMCA was made aware of the need for bilingual signage and staff. They have since hired 3 bilingual individuals to improve access for Spanish speakers. Meals were served by a local Hispanic café, which agreed to create some dishes especially for the program. The meals were so popular with program participants that the café added a healthy-options section to its menu, featuring many of the program entrées. System changes occurred in the built environment (community structures). After a report to the Waukesha Collaborative Hispanic Network, a community stakeholder group comprising 23 organizations, a call was made to city leaders to ask for improvements to a neighborhood intersection. The 5-way intersection was perceived by local residents as unsafe and created a barrier to a local park. Pedestrian-friendly lights were installed with audible cues. A partnership with a local elementary school and a wellknown water systems company resulted in the promotion and increased consumption of drinking water in schools. The Waukesha Public Health Department staff assisted the School District of Waukesha in their development of a school wellness policy. The HCHRC staff worked with County Parks and Recreation Department to assist with Spanish translation of their children’s program brochure. DISCUSSION The adapted We Can! curriculum, when combined with a physical activity and meal preparation component, showed some evidence in decreasing cardiac and diabetes risk factors in Hispanic families. Some biometric improvements were achieved, such as lowering BMI. Surveys pre- and post-program showed increased knowledge relating to energy balance and nutrition and revealed positive attitude changes regarding healthy behaviors. Limitations included the lack of a control group with which to compare the program’s effects, and the inability to control variables such as other sources of education from media or reading nutrition education materials that may have affected learning. There were no follow-up biometric measures planned beyond those of post-program. Collecting biometric measures at 6 months and 12 months post-program could yield additional evidence of long-term clinical impact. The community was involved in every step of the program, including program development, system changes and sustain-

team 7 provide a  3-4 paragraph answer for the following questions

1-What are 4 key things you learned about the topic from reading their paper?

2-How does the topic relate to you and your current or past job?

3-Critique the paper in terms of the organization and quality.

In today’s technological age, employers have a plethora of options on how and where to find employees. Companies often choose between two different sources to find candidates: internal or external sources. The Internal sources that organizations use to acquire new hires include locations for walk-ins, career programs, website job listings, employee referral, internships, and pay for new hire services by career search websites. External sources can vary from job postings or job posting sites, to local recruiters, and career fairs. Often, the internal sources are the most effective method that employers have when it comes to finding employees.

Internal sources have three significant methods to successfully convert applicants to interviews. The first one is Website job listings. On the job listing the human resource department directly handles with every applicant, which is quickly evaluated, responds with acknowledgement for every application. The second one is career programs, it immediately has new hires for-go a training program that could be paid by the employer or educational grants or out of pocket. This career program would allow the new hires to be ready for joining the company. The last method is walk-in and career fairs. This means that new hires would be recruited in specific locations to directly apply with human resources.

Websites like Indeed and Monster have great career builder tools for online applicants which is one of the reasons why external sources have become successful in finding candidates for employer. Some companies want more options to recruit new hires rather than official websites, walk-in, career programs, career fairs, and employee referrals so they usually have external sites like monster and indeed.com promote paid advertisements for positions. This is why external individual companies that have been paid to have certain positions advertised are considered an internal source. These types of sources end up giving the highest percent of interviews and hires. Human resource departments have been recruiting employees today in a much more specific way. They have utilize their incentives as tools to target quality employees in to staying with the company or recruit talent. These tools and incentives were not always available in the past, so some companies have been creative in utilizing these tools to widen their candidate pools and hire the individual that meets the qualifications of their ideal employee.

The way employers hire candidates is broken down to straight forward metrics from SilkRoad technology, a global provider of social talent management solutions that has been partnered up with over 700 of its customers to uncover which recruitment methods yield the most interviews and hires. SilkRoad collected data from OpenHire, an applicant tracking system, that measures the 222,308 job postings, 9.3 million applicants to the 147,440 interviews, ending up to the 94,155 hires, into a rate. These measurable rates would help optimize recruitment, advertising budgets, and new sources of hire. External online recruitment marketing sources hires are about half of all interviews and search engines, considered an external source, produced over 90% of interviews. Companies in today's industry are utilizing the internet and other mobile technologies for new hires which can lead to a quicker turnaround in finding quality employees.

Companies lean towards using online methods of hiring since more than half of the interviews are created by online applications. The external online recruitment market is a resource that companies can pay to have an internal process made to acquire new hires specific to their needs. Examples of these external recruitment markets are Monster, hcareers.com, and indeed.com. These companies supply several tools as online applications to successfully find new hires. I personally believe utilizing internal sources is the better choice because you are able to create a physical presence while meeting the HR department. Local recruiters like CERS and Octagon Technologies have added physical tools within communities to collect new hires. Career fairs also have a social dynamic as a physical location for getting local talent.
            Once a company knows what employee they are looking for and what sources they are utilizing to find them, they must research what benefits they will offer to entice the employee and create loyalty to the company. Companies normally implement standard employee benefits that include covering 50% of a universal Health insurance plan and providing 2-weeks paid vacation after the first year of joining the company. Then for more innovative employee incentive ideas for talent, companies tend to use 20% discounts and stay bonuses, also known as retention bonuses due to the fact that they attempt to reward the employee for staying with the company for different increments of time. Other employee incentives that companies use to promote an attractive program are referral bonuses after a new hire has past the a certain time mark with the company, onboarding or hiring bonuses where students can work to get loans and tax incentives to attract young talent, and remote work options which gives hires an advantage of today’s technologies allowing them to work at home. The option I believe is most popular with employees would be cash bonuses and company profit sharing.

Once companies find the employees they must also focus on retaining them. It cannot be underestimated how paramount it is to ensure that employees remain at the company they work for. There are many key factors on how to ensure employee retention is secured and why that is so. The cost effectiveness of employee retention is what is most important for human resource departments when discussing the post hiring stage of the company. This also plays in line with the immersion period for when employees begin their job at the company. Orientation and company culture is what is key.
            It is not cost effective at all when a company loses employees and has high turnover rate. Turnover is extremely expensive and this factor is what many human resource departments fear during the hiring process. Finding the qualified applicant is just as important as ensuring the applicant will stay with the company. Replacing an employee can cost up to 50-60% of the annual salary of a position. In addition to the cost of turnover, there are also unfilled position cost. With an unfilled position at a company productivity is down and soft costs and be exponentially increased.
            With new employment it must be noted that the anticipated results of a new employee are not immediate. Companies with too high of expectation during the orientation period may put too much pressure on an employee. It is better to take time and allow the new employee to immerse themselves into the company culture and truly understand how to do their job. This is otherwise known as the ‘learning period.’ Company culture is also something to be taken into consideration in regard to employee retention.
            Employee retention can easily be secured through a positive company culture. Cultures vary from one company to another however, hostile cultures that make employees feel uncomfortable and unwelcome will experience higher turnovers. Sexual harassment should be taken very seriously, and company culture should reflect that. As a new employee, one would want to feel welcome and feel part of a culture where they can be comfortable. There is enough stress getting used to a new job, if the company culture is accommodating then employee will want to stay. By implementing the company culture, team building, and employee engagement and ensuring that companies are invested in their employee’s workplace happiness, employees will invest in the company they work for and the company can decrease their turnover rates.

It is incredibly important when working for a company for all employees to have a positive mindset, which will result in a supportive environment. An enthusiastic surrounding will result in higher productivity, as well as an increase in the company’s success. When a person feels supported and accepted due to the cheerful surrounding at their job, that individual will want to see the business flourish by working harder, rather than an employee who feels discouraged about their negative work environment. Countless adults are at work more than they are at home, so why not make it worthwhile? There are five main tips that will improve a positive work environment: make a strong effort to connect with teammates, show appreciation and positivity towards peers, have open ears and listen to other people’s ideas, have trust in the coworkers around, and lastly to be spontaneous.

The first pointer of a constructive work environment is to make a strong connection with teammates. When someone goes out of their way to interact with their peers, it shows a sense of consideration that they care for the business they represent, and that ends up radiating motivation to individuals in all sorts of ways. This is because unless that person is a one-man team, it is critical to work with the people around to make the company thrive and be successful. Also, anyone can send a message in an email, but that lacks getting to know that coworker face-to-face and will end in short messages and not-so connecting responses.

Another suggestion would be to show appreciation towards coworkers as much as possible when they accomplish a task for the business. This may seem like stating the obvious, but it is surprising how often a company is insufficient in awarding a workmate when they do a superior job. From my experience, one of the top complaints told by employees is that they feel like they do not matter to the company, and how all their hard work is not being appreciated enough. Without them, the company would not be where they are today, and to show gratitude managers can do a quick “great job” or a 5-minute appraisal out of the day. This will even make that coworker work harder than they already were because they feel invested in the work that they are doing. A business owner or manager will only gain by giving something as simple as a “thank you.”

To develop a positive work locality, it is significant to have open ears as well as an open mind when listening to other people’s ideas. It does not matter if it is the CEO or the janitor, everyone has their own personal ideas and first-hand experiences with the company. This goes along with trusting team members, which will also create a positive work environment. Nothing is more valuable than trust, whether it is work-related or something personal. Without trust, it is like a train with no tracks- the train will go nowhere. When delegating with peers, it is important for managers to try to let go of wanting to take control of everything, and allow them to help with the tasks needed to be complete. Trust is a very powerful word that can take years to build, yet seconds to break. If someone is incapable of trust, that individual will not be able to work well with others, and therefore will crumble in the business, which will negatively impact the workplace.

The last part of tips that will improve a positive work environment is being spontaneous. Employment does not always have to be so serious; it is okay to have some enjoyment at work. An average American works at least 45 hours a week, which ends up being a little less than 1/3 of the week; why not make the most of it by connecting well with the team and collaborate together to reach the same goal. When teams work nicely together, whether it is during downtime in the office or coming up with a last minute work party for the Super bowl, the outcome is incredible and will not only make anyone feel better about themselves, but create a pleasant work environment.

After discussing why having a positive work environment is so predominant when uncovering different ways of how to maintain a successful business, it is an appropriate transition into the next topic that will help properly acquire and retain employees: the importance of team building. Forbes described team building as having a bad rap, but it is actually one of the most important investments a manager or CEO can make for the company. Not only will team bonding increase collaboration, but it will also ease confrontation in the workplace. Team building has also been known to initiate trust, and engage the employees into wanting to work harder. This is fantastic for the company’s culture, which will plant a seed into impressive fortune.

A way of engaging in team building is to not make the employees feel like it is a typical day in the office. When taking time out of the day to generate team bonding, it is vital to spend time and get to know each other, as well as voice experiences that will aid in working towards a specific goal. This will result in a positive fellowship with one another, yet in a more organic way. Believe it or not, happiness and learning go hand in hand. Testing out different activities with the staff can generate a cheerful mood among employees, which will conveniently help the business itself.

When companies look to make their employees feel valued they must first look at how they approach employee engagement and how their employees are reacting to it. Do employees feel disengaged or feel included in their organization? To find this out companies are utilizing new resources to uncover the current state of their employee engagement. In 5 Tips for Measuring Employee Engagement, Saige Driver goes over 5 ways a company can approach seeing where their employee engagement at. The first step is to define what employee engagement actually means to the organization. Each individual member of a company may have a different idea of what employee engagement means to them and how they feel employee engagement should be approached, so by defining what employee engagement means to the organization as a whole it will better portray what their initiatives and plans are trying to achieve.

The number one way to measure engagement and how employees feel is through individual, anonymous surveys. With changes in technology companies are now able to utilize apps that send out frequent surveys regarding events that have happened throughout the year and get immediate answers about how employees feel this contributes to their engagement. Driver suggest sending “super-short surveys – one or two questions maximum. This makes it easier for managers to collect survey data regularly and drive timely action”, and “protecting employees by making the surveys anonymous encourages critically transparent feedback even if the feedback is negative” (Driver, 2017). By having these surveys, companies get data that they can utilize to formulate action plans for engagement that actually work. The most important part of these surveys to focus on is ensuring that they are asking the right questions. The article suggests using qualitative and quantitative questions to get well rounded feedback from employees. Questions should ask, What do we do to make you feel valued at work? and also ask, Why does this make you feel valued?

Another way to measure employee engagement that also makes employees feel valued is by having individual, informal, and candid conversations with employees. Surveys are a great way to get data for a plan, but when speaking directly with the source of the surveys, managers are able to acquire more details about answers given. Driver also discusses how exit interviews are a great way to find out why an employee is leaving and what changes should be made to ensure more employees do not leave, but that conducting interviews with employees that choose to stay and grow with the company may be even more insightful because they will discuss why they are staying and this will show a company what part of their employee engagement plan is actually working. Personally, I work for a company that has defined employee engagement and has presented workshops on what it is, but does nothing to actually promote employee engagement into the company. Many employees rely on myself as a manager to make them feel valued which in turns exhausts the management team because we do not have anyone above us do the same.

There should be a balance of engagement all down the line of a company from the top to the bottom, each tier being motivated and made to feel valued. The way I make my employees feel valued is by being there for them and not shying away from my responsibilities to them. If they have a table the is angry I will do my best to turn their experience around not for the guest, but to ensure that they guest does not take their anger out on my employee. The other way I attempt to make employees feel engaged is by thanking them. When I see them doing something good, or something that goes above and beyond I recognize them with a free crew meal, tickets for a drawing, or just a simple thank you. I also like to write encouraging messages and quotes on the mirrors at work so employees are reminded daily and throughout the day that I appreciate them.

The final step to ensuring companies find the best way to make employees feel engaged is by ensuring that surveys or individual conversations are conducted frequently throughout the year. My suggestion would be to have surveys sent out right after engagement events happen to see how employees are feeling about the event, and employee conversations should be planned in advance so they have time to have questions to ask managers and have solutions for issues they may be facing every day. Making employees feel valued does not always take an large amount of money to accomplish, but it will take time to find the right balance that works for the employees currently working in the company and for future employees. Not every idea will work for everyone, but by having an action plan in place, companies are more likely to find a good mix to ensure that their employees are staying loyal and are contributing to the success of the company for years to come.

Throughout the paper we described different methods of finding, acquiring, and retaining employees. It started with the research that went into these effective methods and covered the advantages that new hires can take advantage of in order to qualify for certain or additional incentives, standard incentives that most full-time companies should use. These included dynamic incentives that some companies offer and cash incentives that directly create a positive impact. We focused on why retaining employees is just as important as finding the right candidate for a company, and team building was discussed which we learned is a more recent trend for companies to focus on to ensure that they have employees that work together to make the company successful. We also looked into making work more “fun” or “enjoyable” since the average employee spends majority of their week at work. We explored employee engagement, what it means, and how companies can implement it into their human resources plan. All of these topics are crucial in finding a workforce that contributes directly and continuously to the success of the organization's mission. It is not without its difficulty to find the best mix of what works for a company and its employees, but once a company finds that balance they are guaranteed a happy workforce that will lead to their company’s success

Carilion Clinic

Case History/Background

Nestled in the Commonwealth of Virginia between Salem and Vinton is the city of Roanoke, whose population was approximately 98,000 in 2010. The metropolitan area population was about 309,000. Bisected by the Roanoke River and circled by the Blue Ridge Mountain Parkway, Roanoke is the commercial and cultural hub of western Virginia and southern West Virginia.

The community that became Roanoke was established in 1852. Early economic development of Roanoke resulted from its importance as the junction point for the Shenandoah Valley Railroad and the Norfolk and Western Railway. These railroads were essential for transporting coal from western Virginia and West Virginia. Roanoke’s service area includes a regional report, shopping malls, a regional hub for United Parcel Service, and manufacturing plants for General Electric, Yokohama tires, and Dynax, a maker of friction-based automobile parts.

Carilion Clinic

Carilion Clinic employs almost 12% of Roanoke’s population. The clinic includes 9 freestanding hospitals, 7 urgent care centers, and 220 (and increasing) practice centers, and it employs over 650 physicians in more than 70 specialties. The clinic has 1,026 licensed beds, not including 60 neonatal intensive care unit beds. The clinic had 48,659 admissions in fiscal year 2014-15.

The clinic’s joint ventures and related companies include the following:

Carilion Clinic Physicians, LLC (real estate holding company)

Carilion Emergency Services, Inc.

Carilion Behavioral Health, Inc.

In March 2010, the same month and year the Affordable Care Act became law, the clinic was ordered by the Federal Trade Commission to divest itself of an outpatient surgical center and an imaging center. Both had been acquired as it sought to re-create “The Mayo Clinic” medical delivery model.

Led by Edward G. Murphy, M.D., from 1998 to 2011, Carilion Health System became Carilion Clinic, a vertically integrated health-care system. During Murphy’s tenure the system expanded to include graduate and undergraduate medical education programs, a school of medicine (through a partnership with Virginia Polytechnic Institute and State University Virginia Tech), and, perhaps most impressively, Carilion established an accountable care organization in partnership with Aetna insurance company.

Dr. Murphy’s total compensation was almost $2.3 million in 2007. Nancy Agee, the clinic’s chief operating officer at the time, earned the next highest salary of about $800,000. When Murphy resigned in 2011, Ms. Agee was promoted to president and CEO. In fiscal 2014, Carilion Clinic net revenue was $1.5 million. Agee’s salary was $1.9 million.

CONTROVERSY IN ROANOKE

Despite its philanthropic mission and positive effect on Roanoke, Carilion Clinic has not always enjoyed a good relationship with its community.

   In May 1988, the U.S. Justice Department’s Antitrust Division sought to prevent the merger of Roanoke’s two hospitals: Memorial Roanoke Hospital and Community Hospital of Roanoke Valley. The lawsuit sought to block the merger because of the monopoly it alleged would result. Less than one year after the suit was filed, the Fourth Circuit U.S. Court of Appeals found for defendants Memorial Roanoke Hospital and Community Hospital of Roanoke Valley.

   The merger between defendant hospitals would not constitute an unreasonable restraint of trade under the Sherman Act $1. The merger would strengthen the competition between the hospitals in the area because defendant hospitals could offer more competitive prices and services.

In the two appeals that followed, courts found for defendant hospitals, which then merged and were named Carilion Health System. The decision provided legal basis for what is now the Carilion Clinic.

IN A MARKET: WHAT CONSTITUTES A MONOPOLY?

A monopoly occurs when one or more persons or a company dominate an economic market. This market domination results in the potential to exploit or suppresses those in the market or those trying to enter it (supplier, provider, or consumer).

   During the 19th century, the U.S. government began prosecuting monopolies under the common law as “market interference offenses” to block suppliers from raising prices. At the time, companies sometimes sought to but all supplies of a certain material or product in an area, a practice known as “cornering the market”.

   In 1887, Congress passed the Interstate Commerce Act in response to railway companies’ monopolistic practices in small, local markets. This legislation protected small farmers who were being charged excessive rates to transport their products. Congress addressed monopolistic practices further by passing the Sherman Antitrust Act of 1890, which limited anticompetitive practices of businesses. The act blocked transfer of stock shares to trustees in exchange for a certificate entitling them to some of the earnings. The Sherman Act was the basis for the Clayton Antitrust Act of 1914, the Federal Trade Commission Act of 1914, and the Robinson-Patman Act of 1936, which replaced the Clayton Act.

   Antitrust or competition laws address three main issues:

Prohibit agreements or practices that restrict free trade and competition among business entities.

Ban abusive behavior by a firm dominating a marker, or anticompetitive practices that tend to lead to such a dominant position.

Supervise the mergers and acquisitions of large corporations, including some joint ventures.

The Herfindahl-Hirschman Index (HHI)helps implement these laws by providing a mathematical method to determine market “density”, or the concentration of the market. Antitrust laws and methods of calculating market density, such as HHI, are imperfect and can leave gaps that may be exploited.

   Since its establishment, the mission of the Federal Trade Commission has remained largely unchanged. Laws affecting private enterprise and government agencies have not. It is possible this mal juxtaposition underlies many of the difficulties in the healthcare industry.

VERTICAL INTEGRATION: THE MAYO CLINIC MODEL

The Mayo Clinic is the leading example of vertical integration in the delivery of healthcare in the United States. Founded in Rochester, Minnesota, in 1863, the Mayo Clinic began as the medical practice of William Worrall Mayo and his two sons, who were also physicians. It grew to include a comprehensive array of specialties. Mayo developed different levels of care across the health services continuum. The result was a vertically integrated health system. Mayo physicians are salaried at market levels, and they control the management structure.

   Mayo Clinic is headquartered in Rochester, Minnesota; it has satellite clinics elsewhere in the United States. In addition, Mayo and various medical centers worldwide have consulting and referral relationships. Mayo provides excellence and dedication in delivery of services with a constant, and self-admittedly stubborn, commitment to core values, which include that the needs of the patient come first, the integration of teamwork, efficiency, and mission over profit.

   Mayo has been long recognized for high performance, research and innovation. It has ranked at or near the top of “Honor Roll” hospitals through the history of U.S. News and World Report’s best-hospital rankings. In 2015 - 2016, Mayo clinic had more number one rankings than any U.S. hospital or system. Eight specialties ranked number one: diabetes and endocrinology, gastroenterology and gastrointestinal surgery, geriatrics, gynecology, nephrology, neurology and neurosurgery, pulmonology, and urology.

FORESHADOWING A MAYO CLINIC CLONE

Even before Murphy took the helm in 2001, Carilion Health System actions had stirred significant, but manageable, controversy in the community. Much of the controversy resulted from the antitrust case in 1988. After the court ruled that the merger did not violate federal law because it posted no threat of monopoly, the hospital continued its previous work in the community.

   After becoming CEO, Murphy began to vertically integrate the Carilion Health System. His formal plan was presented in fall 2006. Part of evolving to a Mayo-style organization included acquiring physician practices in the community; some were closed after acquisition.

WHO IS EDWARD G. MURPHY, M.D.?

Edward. G. Murphy earned his BS from the University of Albany, New York, and his medical degree (with honors) from Harvard University Medical School. Although he never practiced medicine. Murphy was a clinical professor at the University of Albany School of Public Health and an adjunct assistant professor at Rensselaer Polytechnic Institute School of Management. Before leaving New York state he was also a member of the New York State Hospital Review and Planning Council, and he served on its executive committee as the vice chair of the fiscal policy council.

   From 1989 to 1991, Murphy served as the vice president of clinical services at Leonard Hospital, a 143-bed facility north of Albany, New York. In 1991, he was promoted to president and CEO of Leonard Hospital until it merged with St. Mary Hospital fo form Seton Health system in 1994. Murphy became president and CEO of that new health system and stayed with Seton until 1998, when he relocated to Roanoke to head Carilion Health System.

   During his tenure at Carilion Clinic, Murphy managed the growth of that two-hospital health system into a vertically integrated model of healthcare delivery anchored by a 500-physician specialty group practice that included nine not-for-profit hospitals, undergraduate medical programs, an array of tertiary referral services, and a multistate laboratory service. In 2007, Murphy announced plans for the Virginia Tech Carilion School of Medicine, which opened in 2010. In 2010, Murphy was paid $2.27 million ($1.37 million in salary and $900,000 in benefits).

Murphy’s other roles in the Roanoke community included memberships on the boards of Healthcare Professionals Insurance Company and Trust; Luna Innovations, Inc; and Hometown Bank. He is past chair of the Art Museum of Western Virginia. He also served in an influential position with the council on Virginia’s Future, which works to frame the growth and progress of the state, including businesses, people, and the health of the population.

   Murphy left Carilion to become chairman of Sound Physicians, a national provider of Intensivist and hospitalist services. In 2012, he became the operating officer of Radius Ventures, a venture capital firm that invests in health-related companies.

VERTICAL INTEGRATION: BECOMING A “CLINIC”

Murphy was always clear about his plans for Carilion Health System. In an August 2006 interview, “Right now...our core business is hospital services. In the new model, the core business will be physician services; the hospital will become ancillary. In a 2007 interview for Health Leaders Magazine, Murphy explained, “I’ve been enamored of this model of healthcare delivery for a long time.”

   In Fall 2006, Murphy, his staff, and the leadership board of Carilion Health System announced their plan to create a new model for Carilion management characterized by teamwork and salaried physicians and other caregivers focused on patients across the spectrum of care. Murphy explained:

   The essence of the clinic model is that hospitals stop becoming independent businesses and start becoming ancillary services to the physician practice….If hospitals eventually want to provide better and more cost-effective healthcare, it’s a necessary shift.

The transformation was planned for seven years with an 18-month phase -in of its new name, Carilion clinic. Plans for Carilion Clinic included a 50-50 partnership with Virginia Tech University in Blacksburg, Virginia, to establish a private, not-for-profit clinical research institute and a new medical school. Further, from 2007 to 2012 Carilion clinic would add four or five fellowships for physicians to support its mission.

Ground was broken for the much-anticipated university in early 2008. On July 20, 2009, the Virginia State Council for Higher Education approved the Virginia Tech Carilion School of Medicine as a postsecondary institution. It’s first class matriculated in fall 2010.

THE WALL STREET JOURNAL EXPOSE

Usually, an organization is pleased if the Wall street Journal publishes an article about it. That is, of course, unless the story ignites a firestorm that leads to separate citizen and physician coalitions working against the organization and raises the specter of a word from Carilion Clinic’s prehistory: monopoly.

“Nonprofit Hospitals Flex Pricing Power. In Roanoke, Va., Carilion’s Fees Exceed Those of Competitors: The $4,727 Colonoscopy” was published on the front page of the Wall Street Journal August 28, 2008. The author, John Carreyrou, explored Carilion’s history, including the 1989 antitrust case, its expanding”market clout,” and the strides toward its goal of vertical integration. The article suggested that some of the means used were questionable.

   Carreyrou asserted that skyrocketing healthcare costs in Roanoke were partially caused by, or possibly even led by, Carilion Clinic.

   In a press release, Carilion Clinic denied monopolistic practices or exploitative pricing and claimed it faced robust competition from Lewis-Gale Medical Center located in nearby Salem, Virginia. Carilion Clinic defended its pricing practices by noting it must cross-subsidize emergency departments and care for the uninsured.

   Unsettling to some, however, was Carilion’s practice of suing patients for unpaid medical bills. After Carilion obtains a court judgement, a lien is placed against the patient’s home. A lien on real property puts a “cloud” on the title, which prevents the owner from conveying the property with a clear title until the lien has been satisfied. Responding in the Wall street Journal, Murphy stated,

   Carilion only sues patients and places liens on their homes if it believes they have the ability to pay … If you’re asking me if it’s right in a right-and-wrong sense, it’s not...But Carilion cannot be blamed for the country’s “broken” healthcare system.

Murphy asserted that Carilion efforts to protect its financial interests meet legal requirements, but may be morally flawed. This position appears inconsistent with Carilion’s mission that ‘Patient Care Comes First.”

WHERE WERE THE LOCAL MEDIA?

As reported by Carreyrou, Carilion Clinic complained several times to editors of the Roanoke Times regarding reporter Jeff Sturgeon’s coverage of the system. Shortly after the complaints, and mainly in response to a May 2008 article by Sturgeon, Carilion greatly reduced advertising in the Roanoke Times. About the same time, Sturgeon, the paper’s longtime health issues writer, was reassigned.

Even after Sturgeon’s reassignment, Carilion continued to be frontpage news in the Roanoke Times. Reporter Sarah Bruyn Jones covered community reaction to the Wall Street Journal article and the impetus it gave to local coalitions. Her articles included the following: “Carilion Critics Draw Hundreds to Meeting” (September 2008); “Fed Agency Looks into Carilion Purchase” (September 2008); “Carilion Footprint Expands in Deal” (August 2008); and “Carilion to Buy Cardiology Practice” (August 2008). Jone’s reporting put Carilion practices at the forefront for Roanoke’s citizens, but, as noted by Carreyrou, Carilion growth seemed unstoppable.

THE BACKLASH

The August 2008 Wall Street Journal article resulted in a community uproar and fueled physician's’ efforts to air their concerns about Carilion, including its anti competitive actions and unfair pricing, and their desire to have open referrals for patients from outside Carilion’s health network. Citizen and physician coalitions met in hotel conference rooms and community centers to discuss the “unfair practices and behaviors” ifof Carilion Clinic. One, the citizens Coalition for Responsible Healthcare, sponsored a petition that read as follows:

   To Dr. Murphy and the Carilion Health System Board of Directors:

   Please reconsider your Carilion Clinic plans. I want to keep my right to choose my doctor, even if he or she is an independent physician. Please rethink spending $100 million of my community’s money on a Clinic model that could ruin our hospitals! Monopolies are never good for healthcare.

The Coalition’s website offered copies of the Wall Street Journal article, video recordings of their meetings, information about a new forum program, and membership form for those who wished to join their efforts.

   The citizen coalitions stated they intended to focus on the negative impact of Carilion’s transformation to a physician-led clinic that they asserted will increase costs and drive out many local physicians. Murphy’s plan was to bring into Carilion as many physicians as possible; all of whom will be salaried. The concerns of citizen coalitions stemmed from the scope of the effort, which resulted in closure or sale of many physician practices. Unaffiliated physicians asserted they could not compete. Further, Carilion’s system of internal referrals, added to the purchase of existing practices, gave many specialists no choice but to leave, or stay and fight.

   Despite the controversy, Carilion has shown no signs of slowing: it has stayed the course outlined in Fall 2006.

CARILION’S RESPONSE

On August 28, 2008, less than 24 hours after publication of Carreyrou’s Wall Street Journal article, Carilion responded. Statements published in newspapers and posted on Carilion’s website, as well as press releases, stated the allegations and conclusions drawn from them were misleading and misinformed.

   In response, Carilion directed readers’ attention to the Virginia Hospital and Health care Association PricePoint Website. It showed that Carilion’s prices are comparable to surrounding hospitals and are generally lower than its closest competitor, Lewis-Gale Medical center in neighboring Salem, Virginia. To support their position on pricing,Carilion stated “Medical care in hospitals is more expensive … having staff and technology at the ready has its costs. Also mentioned was Carilion’s Lifeguard helicopter, which is subsidized service. Carilion provided $42 million in charity care in 2007 and an additional $25 million in free care (bad debt written off), thus illustrating its dedication and support of its service area. Carilion supports research and education substantial resource commitments that add major costs to the organization and provide subsidize services tiot the community.

   In explaining the policy to sue patients, Carilion stated that efforts are made to qualify patients for public programs, as needed. Further, Carilion said only “a small fraction of the nearly 2 million” patient billings each year go to court.

   Court filings are a final resort, and we try to be flexible. If the judgement includes a lien on an individual’s property, we do not foreclose on the lien. The lien is satisfied if and when the property is sold.

In response to concerns about its internal referral practice, Carilion stated that referrals are sent from physician to physician in the system with the intention of sending patients to better, more-qualified physicians who have earned the referral. The “earn, not force” mentality contributes to the goal of well-coordinated care and service, which is the first choice of patients.

Carilion’s press release closed by describing a wasteful and poorly organized U.S. healthcare system that is hoped to improve with the vertically integrated clinic model of providing care. The hope is that comprehensive, high quality, and cost-effective care will put the patient first. The reader of the press release is reminded that what happened at Mayo could be replicated at Carilion.

CURRENT SITUATION IN ROANOKE

As noted, Carilion Clinic has a medical school partnership, an expanding physician practice with a robust specialty list, and its own accountable care organization, which continues to show progress and increased membership.

Three decades after the hospital merger controversy began in Roanoke, Virginia, the economic and healthcare environments have changed, the population is increasing, and healthcare costs are rising. When the antitrust case was brought in 1988, Roanoke had among the lowest health insurance premiums in Virginia; now, they are among the highest.

Discussion questions to be answered

1) Identify the problems Carilion Clinic faces as it seeks to become a comprehensive, vertically integrated healthcare provider.

2) Briefly explain the summary of the case

3) Identify the most important factors/facts of the Case study

4) Explain the critical issues that is the most important health administration problem/issue to be solved and if applicable, identified secondary problems.

5) Identify the recommended solution of the case. At least three realistic alternative solutions.

6) Identify the relevant concepts and tools for example, methods, techniques, principles,theories, and or models.

Write a one-page article summarizing what you've read. Use Times New Roman 12 font, 1.5 spacing, with no spacing between paragraphs and 1 inch margins. IT STARTS WITH a single cell. The first cell splits to become two and the two become four and so on. After just forty-seven doublings, you have ten thousand trillion (10,000,000,000,000,000) cells in your body and are ready to spring forth as a human being.1 And every one of those cells knows exactly what to do to preserve and nurture you from the moment of conception to your last breath. You have no secrets from your cells. They know far more about you than you do. Each one carries a copy of the complete genetic code—the instruction manual for your body—so it knows not only how to do its job but every other job in the body. Never in your life will you have to remind a cell to keep an eye on its adenosine triphosphate levels or to find a place for the extra squirt of folic acid that’s just unexpectedly turned up. It will do that for you, and millions more things besides. Every cell in nature is a thing of wonder. Even the simplest are far beyond the limits of human ingenuity. To build the most basic yeast cell, for example, you would have to miniaturize about the same number of components as are found in a Boeing 777 jetliner and fit them into a sphere just five microns across; then somehow you would have to persuade that sphere to reproduce. But yeast cells are as nothing compared with human cells, which are not just more varied and complicated, but vastly more fascinating because of their complex interactions. Your cells are a country of ten thousand trillion citizens, each devoted in some intensively specific way to your overall well-being. There isn’t a thing they don’t do for you. They let you feel pleasure and form thoughts. They enable you to stand and stretch and caper. When you eat, they extract the nutrients, distribute the energy, and carry off the wastes—all those things you learned about in junior high school biology—but they also remember to make you hungry in the first place and reward you with a feeling of well-being afterward so that you won’t forget to eat again. They keep your hair growing, your ears waxed, your brain quietly purring. They manage every corner of your being. They will jump to your defense the instant you are threatened. They will unhesitatingly die for you—billions of them do so daily. And not once in all your years have you thanked even one of them. So let us take a moment now to regard them with the wonder and appreciation they deserve. We understand a little of how cells do the things they do—how they lay down fat or manufacture insulin or engage in many of the other acts necessary to maintain a complicated entity like yourself—but only a little. You have at least 200,000 different types of protein 1 Actually, quite a lot of cells are lost in the process of development, so the number you emerge with is really just a guess. Depending on which source you consult the number can vary by several orders of magnitude. The figure of ten thousand trillion (or quadrillion) is from Margulis and Sagan, 1986. laboring away inside you, and so far we understand what no more than about 2 percent of them do. (Others put the figure at more like 50 percent; it depends, apparently, on what you mean by “understand.”) Surprises at the cellular level turn up all the time. In nature, nitric oxide is a formidable toxin and a common component of air pollution. So scientists were naturally a little surprised when, in the mid-1980s, they found it being produced in a curiously devoted manner in human cells. Its purpose was at first a mystery, but then scientists began to find it all over the place—controlling the flow of blood and the energy levels of cells, attacking cancers and other pathogens, regulating the sense of smell, even assisting in penile erections. It also explained why nitroglycerine, the well-known explosive, soothes the heart pain known as angina. (It is converted into nitric oxide in the bloodstream, relaxing the muscle linings of vessels, allowing blood to flow more freely.) In barely the space of a decade this one gassy substance went from extraneous toxin to ubiquitous elixir. You possess “some few hundred” different types of cell, according to the Belgian biochemist Christian de Duve, and they vary enormously in size and shape, from nerve cells whose filaments can stretch to several feet to tiny, disc-shaped red blood cells to the rod- shaped photocells that help to give us vision. They also come in a sumptuously wide range of sizes—nowhere more strikingly than at the moment of conception, when a single beating sperm confronts an egg eighty-five thousand times bigger than it (which rather puts the notion of male conquest into perspective). On average, however, a human cell is about twenty microns wide—that is about two hundredths of a millimeter—which is too small to be seen but roomy enough to hold thousands of complicated structures like mitochondria, and millions upon millions of molecules. In the most literal way, cells also vary in liveliness. Your skin cells are all dead. It’s a somewhat galling notion to reflect that every inch of your surface is deceased. If you are an average-sized adult you are lugging around about five pounds of dead skin, of which several billion tiny fragments are sloughed off each day. Run a finger along a dusty shelf and you are drawing a pattern very largely in old skin. Most living cells seldom last more than a month or so, but there are some notable exceptions. Liver cells can survive for years, though the components within them may be renewed every few days. Brain cells last as long as you do. You are issued a hundred billion or so at birth, and that is all you are ever going to get. It has been estimated that you lose five hundred of them an hour, so if you have any serious thinking to do there really isn’t a moment to waste. The good news is that the individual components of your brain cells are constantly renewed so that, as with the liver cells, no part of them is actually likely to be more than about a month old. Indeed, it has been suggested that there isn’t a single bit of any of us—not so much as a stray molecule—that was part of us nine years ago. It may not feel like it, but at the cellular level we are all youngsters. The first person to describe a cell was Robert Hooke, whom we last encountered squabbling with Isaac Newton over credit for the invention of the inverse square law. Hooke achieved many things in his sixty-eight years—he was both an accomplished theoretician and a dab hand at making ingenious and useful instruments—but nothing he did brought him greater admiration than his popular book Microphagia: or Some Physiological Descriptions of Miniature Bodies Made by Magnifying Glasses, produced in 1665. It revealed to an enchanted public a universe of the very small that was far more diverse, crowded, and finely structured than anyone had ever come close to imagining. Among the microscopic features first identified by Hooke were little chambers in plants that he called “cells” because they reminded him of monks’ cells. Hooke calculated that a one-inch square of cork would contain 1,259,712,000 of these tiny chambers—the first appearance of such a very large number anywhere in science. Microscopes by this time had been around for a generation or so, but what set Hooke’s apart were their technical supremacy. They achieved magnifications of thirty times, making them the last word in seventeenth-century optical technology. So it came as something of a shock when just a decade later Hooke and the other members of London’s Royal Society began to receive drawings and reports from an unlettered linen draper in Holland employing magnifications of up to 275 times. The draper’s name was Antoni van Leeuwenhoek. Though he had little formal education and no background in science, he was a perceptive and dedicated observer and a technical genius. To this day it is not known how he got such magnificent magnifications from simple handheld devices, which were little more than modest wooden dowels with a tiny bubble of glass embedded in them, far more like magnifying glasses than what most of us think of as microscopes, but really not much like either. Leeuwenhoek made a new instrument for every experiment he performed and was extremely secretive about his techniques, though he did sometimes offer tips to the British on how they might improve their resolutions.2 Over a period of fifty years—beginning, remarkably enough, when he was already past forty—he made almost two hundred reports to the Royal Society, all written in Low Dutch, the only tongue of which he was master. Leeuwenhoek offered no interpretations, but simply the facts of what he had found, accompanied by exquisite drawings. He sent reports on almost everything that could be usefully examined—bread mold, a bee’s stinger, blood cells, teeth, hair, his own saliva, excrement, and semen (these last with fretful apologies for their unsavory nature)—nearly all of which had never been seen microscopically before. After he reported finding “animalcules” in a sample of pepper water in 1676, the members of the Royal Society spent a year with the best devices English technology could produce searching for the “little animals” before finally getting the magnification right. What Leeuwenhoek had found were protozoa. He calculated that there were 8,280,000 of these tiny beings in a single drop of water—more than the number of people in Holland. The world teemed with life in ways and numbers that no one had previously suspected. Inspired by Leeuwenhoek’s fantastic findings, others began to peer into microscopes with such keenness that they sometimes found things that weren’t in fact there. One respected Dutch observer, Nicolaus Hartsoecker, was convinced he saw “tiny preformed men” in sperm cells. He called the little beings “homunculi” and for some time many people believed that all humans—indeed, all creatures—were simply vastly inflated versions of tiny but complete precursor beings. Leeuwenhoek himself occasionally got carried away with his enthusiasms. In one of his least successful experiments he tried to study the explosive properties of gunpowder by observing a small blast at close range; he nearly blinded himself in the process. 2 Leeuwenhoek was close friends with another Delft notable, the artist Jan Vermeer. In the mid-1660s, Vermeer, who previously had been a competent but not outstanding artist, suddenly developed the mastery of light and perspective for which he has been celebrated ever since. Though it has never been proved, it has long been suspected that he used a camera obscura, a device for projecting images onto a flat surface through a lens. No such device was listed among Vermeer's personal effects after his death, but it happens that the executor of Vermeer's estate was none other than Antoni van Leeuwenhoek, the most secretive lens-maker of his day. In 1683 Leeuwenhoek discovered bacteria, but that was about as far as progress could get for the next century and a half because of the limitations of microscope technology. Not until 1831 would anyone first see the nucleus of a cell—it was found by the Scottish botanist Robert Brown, that frequent but always shadowy visitor to the history of science. Brown, who lived from 1773 to 1858, called it nucleus from the Latin nucula, meaning little nut or kernel. Not until 1839, however, did anyone realize that all living matter is cellular. It was Theodor Schwann, a German, who had this insight, and it was not only comparatively late, as scientific insights go, but not widely embraced at first. It wasn’t until the 1860s, and some landmark work by Louis Pasteur in France, that it was shown conclusively that life cannot arise spontaneously but must come from preexisting cells. The belief became known as the “cell theory,” and it is the basis of all modern biology. The cell has been compared to many things, from “a complex chemical refinery” (by the physicist James Trefil) to “a vast, teeming metropolis” (the biochemist Guy Brown). A cell is both of those things and neither. It is like a refinery in that it is devoted to chemical activity on a grand scale, and like a metropolis in that it is crowded and busy and filled with interactions that seem confused and random but clearly have some system to them. But it is a much more nightmarish place than any city or factory that you have ever seen. To begin with there is no up or down inside the cell (gravity doesn’t meaningfully apply at the cellular scale), and not an atom’s width of space is unused. There is activity every where and a ceaseless thrum of electrical energy. You may not feel terribly electrical, but you are. The food we eat and the oxygen we breathe are combined in the cells into electricity. The reason we don’t give each other massive shocks or scorch the sofa when we sit is that it is all happening on a tiny scale: a mere 0.1 volts traveling distances measured in nanometers. However, scale that up and it would translate as a jolt of twenty million volts per meter, about the same as the charge carried by the main body of a thunderstorm. Whatever their size or shape, nearly all your cells are built to fundamentally the same plan: they have an outer casing or membrane, a nucleus wherein resides the necessary genetic information to keep you going, and a busy space between the two called the cytoplasm. The membrane is not, as most of us imagine it, a durable, rubbery casing, something that you would need a sharp pin to prick. Rather, it is made up of a type of fatty material known as a lipid, which has the approximate consistency “of a light grade of machine oil,” to quote Sherwin B. Nuland. If that seems surprisingly insubstantial, bear in mind that at the microscopic level things behave differently. To anything on a molecular scale water becomes a kind of heavy-duty gel, and a lipid is like iron. If you could visit a cell, you wouldn’t like it. Blown up to a scale at which atoms were about the size of peas, a cell itself would be a sphere roughly half a mile across, and supported by a complex framework of girders called the cytoskeleton. Within it, millions upon millions of objects—some the size of basketballs, others the size of cars—would whiz about like bullets. There wouldn’t be a place you could stand without being pummeled and ripped thousands of times every second from every direction. Even for its full-time occupants the inside of a cell is a hazardous place. Each strand of DNA is on average attacked or damaged once every 8.4 seconds—ten thousand times in a day—by chemicals and other agents that whack into or carelessly slice through it, and each of these wounds must be swiftly stitched up if the cell is not to perish. The proteins are especially lively, spinning, pulsating, and flying into each other up to a billion times a second. Enzymes, themselves a type of protein, dash everywhere, performing up to a thousand tasks a second. Like greatly speeded up worker ants, they busily build and rebuild molecules, hauling a piece off this one, adding a piece to that one. Some monitor passing proteins and mark with a chemical those that are irreparably damaged or flawed. Once so selected, the doomed proteins proceed to a structure called a proteasome, where they are stripped down and their components used to build new proteins. Some types of protein exist for less than half an hour; others survive for weeks. But all lead existences that are inconceivably frenzied. As de Duve notes, “The molecular world must necessarily remain entirely beyond the powers of our imagination owing to the incredible speed with which things happen in it.” But slow things down, to a speed at which the interactions can be observed, and things don’t seem quite so unnerving. You can see that a cell is just millions of objects—lysosomes, endosomes, ribosomes, ligands, peroxisomes, proteins of every size and shape—bumping into millions of other objects and performing mundane tasks: extracting energy from nutrients, assembling structures, getting rid of waste, warding off intruders, sending and receiving messages, making repairs. Typically a cell will contain some 20,000 different types of protein, and of these about 2,000 types will each be represented by at least 50,000 molecules. “This means,” says Nuland, “that even if we count only those molecules present in amounts of more than 50,000 each, the total is still a very minimum of 100 million protein molecules in each cell. Such a staggering figure gives some idea of the swarming immensity of biochemical activity within us.” It is all an immensely demanding process. Your heart must pump 75 gallons of blood an hour, 1,800 gallons every day, 657,000 gallons in a year—that’s enough to fill four Olympic- sized swimming pools—to keep all those cells freshly oxygenated. (And that’s at rest. During exercise the rate can increase as much as sixfold.) The oxygen is taken up by the mitochondria. These are the cells’ power stations, and there are about a thousand of them in a typical cell, though the number varies considerably depending on what a cell does and how much energy it requires. You may recall from an earlier chapter that the mitochondria are thought to have originated as captive bacteria and that they now live essentially as lodgers in our cells, preserving their own genetic instructions, dividing to their own timetable, speaking their own language. You may also recall that we are at the mercy of their goodwill. Here’s why. Virtually all the food and oxygen you take into your body are delivered, after processing, to the mitochondria, where they are converted into a molecule called adenosine triphosphate, or ATP. You may not have heard of ATP, but it is what keeps you going. ATP molecules are essentially little battery packs that move through the cell providing energy for all the cell’s processes, and you get through a lot of it. At any given moment, a typical cell in your body will have about one billion ATP molecules in it, and in two minutes every one of them will have been drained dry and another billion will have taken their place. Every day you produce and use up a volume of ATP equivalent to about half your body weight. Feel the warmth of your skin. That’s your ATP at work. When cells are no longer needed, they die with what can only be called great dignity. They take down all the struts and buttresses that hold them together and quietly devour their component parts. The process is known as apoptosis or programmed cell death. Every day billions of your cells die for your benefit and billions of others clean up the mess. Cells can also die violently—for instance, when infected—but mostly they die because they are told to. Indeed, if not told to live—if not given some kind of active instruction from another cell— cells automatically kill themselves. Cells need a lot of reassurance. When, as occasionally happens, a cell fails to expire in the prescribed manner, but rather begins to divide and proliferate wildly, we call the result cancer. Cancer cells are really just confused cells. Cells make this mistake fairly regularly, but the body has elaborate mechanisms for dealing with it. It is only very rarely that the process spirals out of control. On average, humans suffer one fatal malignancy for each 100 million billion cell divisions. Cancer is bad luck in every possible sense of the term. The wonder of cells is not that things occasionally go wrong, but that they manage everything so smoothly for decades at a stretch. They do so by constantly sending and monitoring streams of messages—a cacophony of messages—from all around the body: instructions, queries, corrections, requests for assistance, updates, notices to divide or expire. Most of these signals arrive by means of couriers called hormones, chemical entities such as insulin, adrenaline, estrogen, and testosterone that convey information from remote outposts like the thyroid and endocrine glands. Still other messages arrive by telegraph from the brain or from regional centers in a process called paracrine signaling. Finally, cells communicate directly with their neighbors to make sure their actions are coordinated. What is perhaps most remarkable is that it is all just random frantic action, a sequence of endless encounters directed by nothing more than elemental rules of attraction and repulsion. There is clearly no thinking presence behind any of the actions of the cells. It all just happens, smoothly and repeatedly and so reliably that seldom are we even conscious of it, yet somehow all this produces not just order within the cell but a perfect harmony right across the organism. In ways that we have barely begun to understand, trillions upon trillions of reflexive chemical reactions add up to a mobile, thinking, decision-making you—or, come to that, a rather less reflective but still incredibly organized dung beetle. Every living thing, never forget, is a wonder of atomic engineering. Indeed, some organisms that we think of as primitive enjoy a level of cellular organization that makes our own look carelessly pedestrian. Disassemble the cells of a sponge (by passing them through a sieve, for instance), then dump them into a solution, and they will find their way back together and build themselves into a sponge again. You can do this to them over and over, and they will doggedly reassemble because, like you and me and every other living thing, they have one overwhelming impulse: to continue to be. And that’s because of a curious, determined, barely understood molecule that is itself not alive and for the most part doesn’t do anything at all. We call it DNA, and to begin to understand its supreme importance to science and to us we need to go back 160 years or so to Victorian England and to the moment when the naturalist Charles Darwin had what has been called “the single best idea that anyone has ever had”—and then, for reasons that take a little explaining, locked it away in a drawer for the next fifteen years.

Dynamic Medical Solutions

Case Questions

After reading the Dynamic Medical Solutions Case answer the questions below. Type your answers to the questions below in a Word document and send in through the designated drop box. Please be sure to fully answer each question. Most questions (with the exception of questions number three and five) will require at least one paragraph (three to five sentences) to answer.

Why are government regulators sensitive to the amount of claims submitted to the government insurance programs in comparison to retail prices?

Why could/would government programs reimbursement amounts exceed the retail sales prices for products?

Consider the information provided for the two products (Nutrition Supplement and Nondurable Gloves) as shown in Table 3. In accordance with the Office of the Inspector General (OIG) for “substantially in excess” are the government programs reimbursement rates for each product presently “substantially in excess” of the “usual charges?”

HINT: To determine your answer use the threshold of 120% of proposed by the OIG from page two of the case narrative and assume that DMS is charging the maximum permitted selling price to the government as shown in Table 3 on page three.

Please provide details of the details of your calculations in your submission.Use the format shown below and fill in the numbers.

	Retail Price Paid by Cash & Carry Customers	Multiplied by 120%	Maximum Amount) Price charged to Government Customers
Nutrition Supplement
Nondurable Gloves

Based on your answer above - Assume at least one of the products violates OIG’s suggestion for “substantially in excess and consider the following scenarios.

DMS reacted by changing the price charged to cash and carry customers. Assume that the government programs reimbursement rate was no more than 20% higher than the newly calculated amount. What effect would this decision be likely to have on the future business of cash and carry customers?

DMS reacted to the dilemma by requesting reimbursement amounts below the maximum allowable reimbursement rates in order to be within 20% of the prices charged to cash and carry customers. What effect would this decision potentially have on the company’s profit margins?

OIG proposed that “good cause” for substantially in excess charges could be established in a number of ways, including, for example, “evidence of increased costs associated with serving Medicare or Medicaid beneficiaries.” Using the information from the time study conducted by DMS that is presented in Table 5 along with the department operating expenses from table 2, determine how customer service, billing, and compliance costs could be allocated by customer type.

Operating Expenses by Dept.	and Cost	Allocations by Customer
	Total Costs	Government Programs	Cash & Carry
Customer Service

Do you think the DMS should track costs for the shipping and receiving departments and try to establish “good cause” for charging Medicare and Medicaid beneficiaries substantially more than cash and carry customers for the same products?

What thoughts do you have concerning how DMS should address the company’s weaknesses in preparation for the upcoming audit?

COMPANY INTRODUCTION AND CASE BACKGROUND
Dynamic Medical Solutions (DMS) is a small company that sells (as a retailer of products manufactured by others) durable and nondurable medical products to customers in seven states across the United States. Some of the popular durable products sold by the company are hospital beds, diabetic footwear, and mobility equipment (i.e., wheelchairs, scooters, etc.). A large portion of the company’s business involves the sale of durable and nondurable medical supplies including nutrition supplements, gloves, and personal care products used in patient care. All of the products carried by DMS are over-the-counter items and thus do not require a physician’s prescription.1 Like most companies in the medical products supply industry, DMS serves a multitude of customers, including those with (1) no insurance (i.e., cash and carry), (2) Medicare and Medicaid benefits (i.e., government programs),2 and (3) private insurance. Accordingly, DMS has a billing department internally for customers with such benefits and insurance. Many customers, including those enrolled in government programs and those who pay for products out of pocket (i.e., cash and carry) are elderly and/or reside in assisted-living facilities. The company employs sales representatives who visit these facilities and interact with the customers and their caregivers on a regular basis and establish the ordering process for the customers via phone or fax. Customers also are able to purchase goods at one of the company’s five retail stores via the company’s website or through the phone/fax process with a sales representative.
In regard to cash and carry customers, DMS strives to offer competitive prices as the company is directly competing with large national retail stores that offer many types of medical products and operate on small profit margins. Serving cash and carry customers is fairly straightforward, involving no other considerations beyond the typical sales initiation (i.e., visits from a sales representative), point-of-sale sales, and warehouse shipping or customer pick-up processes.
On the other hand, serving government programs customers is more restrictive and requires an extensive number of internal processes and procedures. The prices charged to these customers (i.e., the reimbursement amount) are set by the program entity (i.e., Medicaid or Medicare). Most importantly, the process of selling goods involves additional mandated (by law) considerations beyond the normal cash-and-carry process, including the written verification of medical necessity from the customer’s physician, the processing of insurance claims, and the substantiation of product delivery. For many of the nondurable medical supplies, such as nutrition supplements and gloves, the process is even more cumbersome as these products are supplied to customers on a monthly basis. Accordingly, proof of medical necessity for these products also has to be updated on a recurring basis. This involves
IMA EDUCATIONAL CASE JOURNAL VOL. 7, NO. 2, ART. 3, JUNE 2014
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ISSN 1940-204X
Dynamic Medical Solutions:
Expanding the Application of Cost Management Principles to Channel and Customer Profitability Analysis
Casey J. McNellis, Ph.D., CPA
University of Montana
Ronald F. Premuroso, Ph.D., CPA, CFE
University of Montana
additional interaction by the company with primary care physicians and Medicare/Medicaid representatives, as well as increased processing of paperwork.
Sales to customers using private insurance comprise an immaterial amount of the company’s revenues. Most private insurance companies cover only a minor amount of the charges for the products offered by DMS, often after a government program has been billed first and has paid for the majority of the charge billed by DMS.
Table 1 provides a breakdown of DMS’s sales for the most recent financial year, along with other relevant financial information (excluding an immaterial amount for private insurance-related sales).
Table 1: DMS Sales by Customer Type and Other Financial Information
Sales
% of Total Sales
Government Programs Sales
$3,000,000
75.0%
Cash and Carry Sales
$1,000,000
25.0%
Total Net Sales
$4,000,000
100.0%
Cost of Sales
($1,300,000)
32.5%
Gross Profit
$2,700,000
67.5%
Operating Expenses
($2,200,000)
55.0%
Operating Income
$ 500,000
12.5%
The company’s operations are divided into five departments: Customer Service, Shipping, Billing, Compliance, and Administration. Table 2 includes a breakdown of the operating expenses by department along with a brief description of the general functions carried out by each department for the most recent financial year.
Table 2: Department Operating Expenses and Descriptions
Department
Operating Expenses
Description of Functions
Customer Service
$660,000
Process sales orders; support customer base
Shipping
$870,000
Prepare orders for shipment; track shipments to delivery
Billing
$120,000
Submit insurance claims; monitor customer eligibility for government programs
Compliance
$120,000
Monitor company policies regarding government programs
Administration
$430,000
Perform bookkeeping, payroll, and marketing functions; heat, light, and power; insurance expenses; execute strategic plan
Total Operating Expenses
$2,200,000
REGULATORY ENVIRONMENT
As Table 1 depicts, DMS’s primary source of sales are from customers who are eligible for assistance from government-related healthcare programs. As such, the company’s success is largely based on understanding government regulations, policies, and procedures governing Medicare and Medicaid programs, including reimbursements.
Because of past alleged abuses of these government insurance programs by healthcare providers, Federal and state authorities have enacted several regulations under the Social Security Act for providers like DMS involved with submitting reimbursement claims under government programs. For example, the Department of Health and Human Services (HHS) has the power to revoke a company’s privileges to serve Medicare and Medicaid customers if the company has been involved in criminal activity, patient abuse, and/or healthcare fraud. Additionally, the Act also allows HHS to prohibit a company from engaging in business activities with Medicare and/or Medicaid if the company submits product reimbursement claims for government programs customers significantly higher than amounts charged to cash and carry customers. Specifically, Section 1128(b) of the Act states that HHS:
“…may exclude…from participation in any Federal health care program…any individual or entity that the Secretary determines…has submitted or caused to be submitted bills or requests for payment (where such bills or requests are based on charges or cost) under Title XVIII or a State health care program containing charges (or, in applicable cases, requests for payment of costs) for items or services furnished substantially in excess of such individual’s or entity’s usual charges (or, in applicable cases, substantially in excess of such individual’s or entity’s costs) for such items or services, unless the Secretary finds there is good cause for such bills or requests containing such charges or costs.” (Emphasis added.)
The language of this regulation was further interpreted in a proposal by the Office of the Inspector General (OIG) in June 2007.3 The phrase “usual charges” was suggested to include “charges billed directly to cash paying patients” (i.e., cash and carry customers). The term “substantially in excess” was defined by the OIG proposal as charges exceeding “120 percent of an individual’s or entity’s usual charges.” Finally, the OIG proposed that “good cause” for “substantially in excess” charges could be established in a number of ways, including, for example, evidence of “increased costs associated with serving Medicare or Medicaid beneficiaries.”
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DMS’S DILEMMA
DMS sends a member of the management team to a government programs seminar, where firms are provided information and guidelines regarding Federal regulations governing Medicare and Medicaid reimbursements. The team member is amazed by the number of regulations governing these programs, including the one mentioned earlier. Because the team member is not familiar with the methods that ensure DMS is in compliance with these regulations, he holds a meeting with the rest of the management team to discuss the regulations. The management team agrees it is necessary to hire a healthcare consultant to review DMS’s policies, procedures, and billing practices for products sold to customers under government programs.
After examining DMS’s operations in some detail, the healthcare consultant hired by DMS informed management of a grim, unexpected finding: DMS’s product pricing appeared to be in violation of Federal regulations governing Medicare and Medicaid reimbursements. The aforementioned regulation was the issue referenced by the healthcare consultant in determining DMS was potentially in violation of the Federal Act. The consultant examined all of the company’s products and determined many of them had Medicaid reimbursement rates “substantially in excess” of prices charged to cash and carry customers. According to the consultant, DMS would likely have to change its pricing structure and/or potentially eliminate the sale of certain products sold by the company to remedy the violation. Accordingly, the company was advised to employ one of the following courses of action: either raise cash and carry prices for products not complying with the 120% proposed “rule,” or eliminate sales of the two selected products to cash and carry customers. Discouraged by the findings and faced with uncertainty and potentially disastrous consequences, the DMS management team members contemplated their next moves.
DMS’S INITIAL CONCERNS AND RESPONSE
Given the substantial portion of DMS’s sales from customers eligible for government program reimbursements, the issue of product pricing is therefore critical to the company. Prices offered to cash and carry customers must be competitive, yet they must be within a certain percentage of government program reimbursement claims in order for DMS to comply with government regulations. As such, pricing decisions have the potential to not only adversely impact DMS’s market share of cash and carry customers but also may put the company’s ability to sell and receive reimbursement for these products under the respective government programs in jeopardy.
Unhappy with these two alternatives suggested by the consultant, company officials began compiling product pricing and costing data, as well as observing and documenting key operational aspects of the business to determine the extent of the problem revealed by the consultant and to develop potential alternative courses of action.
SELECTED PRODUCT PRICING DATA
The first two products examined by management were the nutrition supplement and nondurable gloves, two products eligible for reimbursement under government insurance programs. Table 3 includes selected information for these two products in the latest financial year.
IMA EDUCATIONAL CASE JOURNAL VOL. 7, NO. 2, ART. 3, JUNE 2014
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Table 3: Information for Selected Products Offered by DMS
Nutrition Supplement (1 can)
Nondurable Gloves (1 box)
Retail sales price (paid by cash and carry customers)
$1.54
$6.95
Maximum permitted selling price to government*
$2.20
$8.82
Product cost
$0.66
$2.65
Product sales as a % of cash and carry sales
3%
4%
Quantity of product sold to cash and carry customers
19,480 cans
5,755 boxes
Product sales as a % of government programs sales
6%
6%
Quantity of product sold to government programs customers
81,800 cans
20,408 boxes
*This maximum permitted selling price to the government applies to all companies in general under specific regulations pertaining to these products issued by the government.
BUSINESS OBSERVATIONS
Management was inclined to believe disproportionate shares of company resources were being devoted to serving government program customers, especially in the case of nutrition and nondurable products (i.e., gloves), which involved additional processing costs in order to comply with regulations. But they had no formal evidence to support this belief and thus needed to obtain relevant information about the efforts being exerted to serve the two different customer types: cash and carry and government programs. As a first step, the officials observed employees from each department to obtain an understanding of the sales and order fulfillment processes, separately, for the cash and carry and government program customers. Information about these processes from new sales origination all of the way through billing are detailed in Table 4.
As part of these observations, company employees from selected departments were asked to keep track of the amount of time they spent on the different types of customer orders and related activities for a one-month period. Because of increased work demands at the time the study was performed, similar time data was not immediately obtained from employees working in the Shipping or Administration departments. The results are presented in Table 5.4
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Table 4: Summary of Relevant Portions of Company Processes
New sales origination
Cash and carry: A company salesperson visits nursing homes, hospitals, and assisted-living facilities, speaking with potential customers and guardians. The salesperson takes orders and phones/faxes them to warehouse customer service representatives.
Government programs: Same as cash and carry.
Recurring sales
Cash and carry: A customer service representative contacts customers and takes sales orders.
Government programs: Same as cash and carry.
Order fulfillment
Cash and carry: A representative from customer service enters the order into the company’s accounting system. The system produces a pick slip, which is forwarded to Shipping. The employees in Shipping fill the order, which is then given to a third-party courier for delivery. A copy of the pick slip is sent back to the customer service representative.
Government programs: Per regulations, DMS must obtain a valid identification card proving the customer’s eligibility for the government program. To establish medical necessity, a doctor’s order is required to be submitted with each order. A customer service representative prepares fax inquiries to the customer’s physician (to establish medical necessity) and to the customer for valid proof of eligibility (if a copy was not obtained by the salesperson). Upon receipt of this documentation, the order is entered into the accounting system. The system produces a pick slip, which is forwarded to Shipping. The employees in Shipping fill the order, which is then given to a third-party courier for delivery. A copy of the pick slip is sent to a Billing representative. Shipping employees track shipments with the courier’s website to confirm delivery.
Billing
Cash and carry: A representative from customer service examines the pick slips sent back from Shipping and prepares an invoice to the customer. The customer has 30 days to pay the invoice.
Government programs: A representative from Billing prepares a government program claim and submits it. The reimbursement usually takes between 15-60 days.
Other
Government programs: Renewals for nutrition and nondurable goods: Periodically, a customer’s physician order and proof of eligibility documentation are required to be renewed. A billing representative tracks these customers and prepares renewal requests when appropriate.
Government programs: Oversight: Per regulations, DMS is required to have a compliance program staffed with a compliance officer, whose sole responsibility is to oversee compliance issues and related employee training.
Retail store and website transactions
Customers also visit the company’s retail stores and website on their own. For cash and carry customers, the retail store process in similar to point-of-sale transactions of major retail stores. For website sales, a sales representative is not involved. Rather, the customer places the order, which is then sent to a customer service representative. At that point, the customer service representative processes the order in the same way as described under “Order fulfillment.” Transactions with government programs customers visiting the retail stores are still processed in accordance with the steps above. But no sales representative is involved in the transaction. In general, government programs customers do not place orders via the company website.
CASE QUESTIONS
1. Why are government regulators sensitive to the amount of claims submitted to the government insurance programs in comparison to retail prices?
2. Why potentially could/would government programs reimbursement amounts exceed the retail sales prices
for products?
3. Consider the information provided for the two products shown in Table 3. In accordance with the OIG’s suggestions for “substantially in excess,” are the government programs
reimbursement rates for each product presently “substantially
in excess” of the “usual charges”? Provide the details of your calculations in your submission.
4. Assuming at least one of the products violates the OIG’s suggestion for “substantially in excess,” discuss the impact of the following three potential solutions to this dilemma on DMS’s market share, operations, exposure to liability, and so on. In your assessment, consider the future financial implications of the three alternatives along with the assumptions you have made in your analysis.
a. Raise prices charged to cash and carry customers such that the government programs reimbursement rate is no more than 20% higher than the newly calculated amount.
b. When submitting government program claims, request reimbursement amounts below the maximum allowable reimbursement rates in order to be within 20% of the prices charged to cash and carry customers.
c. Attempt to establish “good cause.” Refer to some of the principles and concepts you have learned or are learning in your cost management course (for example, Customer Profitability Analysis and allocations of overhead) in establishing “good cause.” Provide details of your calculations, which will aid DMS in establishing “good cause” and apply them to the two specific products shown in Table 3. (Hint: This will require you to perform cost allocations and select appropriate bases for the allocation(s).) What are your revised total cost per unit and overall profit margin amounts on the two products?
5. Looking back at your calculations and analyses performed in question 4c, do you believe the company can establish and support “good cause’ in submitting claims for the maximum allowable rates offered by government programs? In answering the question, first consider the qualitative evidence you have already developed. Second, develop a quantitative analysis appropriate to use in establishing or supporting your qualitative evidence.
6. In anticipation of the regulating agencies performing an investigation into the pricing structure of DMS, identify the strengths and weaknesses of the work performed by DMS in response to the consultant’s findings as well as the analysis you provided in the previous questions. How should DMS address the weaknesses in preparation for the audit?
ENDNOTES
1 On the other hand, customers with private insurance or access to government medical programs are required to provide evidence of medical necessity, which is often indicated by physician orders, for reimbursement.
2 Medicare is a national social insurance program administered by the U.S. Federal Government since 1966, which guarantees access to health insurance coverage for U.S. citizens age 65 or older who have worked and paid into the program. Medicaid is a U.S. government insurance program for all U.S. citizens whose income or personal resources are unable to pay for their personal healthcare.
3 Department of Health and Human Services (HHS) and the Office of the Inspector General (OIG), “Medicare and State Health Care Programs: Fraud and Abuse; Clarification of Terms and Application of Program Exclusion Authority for Submitting Claims Containing Excessive Charges,” Federal Register Volume 72, No. 116, June 18, 2007.
4 The firm does not have any type of bank borrowings or debt, and thus there is no interest expense in overhead-related expenses to consider.

The Limits of Redistribution and the Impossibility of Egalitarian Ends

By JEREMY JACKSON AND JEFFREY PALM

ABSTRACT

One of the many dangers of the modern egalitarian philosophy is that it hides its true
objectives behind the guise of social justice. Adherents would insist that they reject the
materialistic values of their free-market foes. However, not far below the surface
commitment to relational equality and disruption of social hierarchy lies their true motive:
material equality. The modern egalitarian is shifting from a focus on equality of relationships
to a focus on equality in quality of life and more comprehensive measures of well-being
(Arneson 2000). Whether the egalitarian desires to create policies that lead to equality in
distribution of wealth or to equality in well-being, it does not matter. Both are impossible
ends. Inequalities in wealth and well-being are due in part to inequalities in the distribution of
social capital, which can be neither removed nor transferred from one individual to another.
Thus, inequalities in wealth and well-being are the inevitable result of a system reliant on
humans autonomously making decisions.
Page 9 of 21

The Origins of Egalitarianism

1. Egalitarianism as an academic school of thought did not actually begin to concretize
until the post–World War II era, although certain basic ideas go back as far as biblical
times (equality of souls but not “earthly” equality) (Anderson 2014). Many of
egalitarianism’s roots are traceable to a particular understanding of the philosophy of
altruism: the idea that a person has but two options in life—to sacrifice one’s self in the
service of others or to sacrifice others in the service of one’s self (Kelley 1991, 2009).
From this understanding of altruism, egalitarians derive a fundamental
misunderstanding of “the zero-sum game.” Because they mistakenly think of all goods
and services as slices of a (finite) pie, they deduce that for one person to gain, another
must lose. From this either–or conception of altruism, egalitarianism concludes that the
only moral thing to do is to sacrifice one’s self in the service of others (Kelley 1991).

2. Karl Marx himself was no egalitarian, yet many of his ideas have helped to shape
modern egalitarianism. His focus on conflict and the exploitation of the subjugated
worker, derived from his misconceptions of the labour market and the means of
production, contributed to the mid- to late-nineteenth-century push for a shorter
workday and higher wages (Anderson 2014). This push then fed into Otto von
Bismarck’s creation of the first modern welfare state in Germany in an effort to combat
Marx’s more revolutionary socialism. Anthony P. Mueller states that “social policy was
foremost national policy and the social security system was primarily an instrument to
lure the workers away from private and communitarian systems into the arms of the
State” (2003).

3. By the early 1940s, which saw the publication of the Beveridge Report in the United
Kingdom in 1942 and Franklin Roosevelt’s suggestion of the “Second Bill of Rights” in
1944, contemporary crystallization and acceptance of the principles of “distributive
justice” had taken place (Roosevelt 1944; Anderson 2014; “The Welfare State” 2016).

4. Philosopher John Rawls, another one of egalitarianism’s most prominent historical
standard bearers, was himself not strictly an egalitarian. However, his seminal work, A
Theory of Justice (1971), is counted among the most foundational of contributions. In
this volume, Rawls explains his most influential concept, the “difference principle,”
which “gives expression to the idea that natural endowments are undeserved” (Wenar
2012). Rawls felt (as do the so-called luck egalitarians) that just because a person is
more intelligent or a naturally gifted musician or better looking or raised with better
values, or something else, it does not entitle him or her to be better off than others. To
Rawls, being more successful than others by using one’s natural endowments (or by
any other means) can be justified only if people who are worse off are made better off
because of that success.

5. On the face of it and according to their own descriptions, egalitarians have differing
ideas with respect to defining the concepts “justice” and “equality.” However, all
schools of egalitarian thought lead to the same ultimate goal: distribution. Most
egalitarians do not actually advocate equality of outcomes because most realize that a
rigid insistence on the tall being made short or the intelligent being made less so would
lead to disastrous consequences. What they want is what they consider to be “fair”
distribution (Kelley 1991). So their basic notions of equality hinge on whether
distribution is just or in the case of relational egalitarianism that societal relationships
are just. However, before discussing the two broad categories of luck egalitarianism
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and relational egalitarianism, we must say a few more words regarding the concept of
justice.

6. To many libertarians and classical liberals, the claim that a free market, an impersonal
mechanism governed by the laws of nature, is either just or unjust is absurd. This
claim is evidence of a complete misunderstanding of how the market functions. As
Hayek aptly points out, such claims amount to nothing other than anthropomorphism
(1998, 62, 75).

7. However, those who advocate free markets certainly cannot claim to have ever
actually seen them. Much of the egalitarians’ perceptions of injustice are the symptoms
of the very root causes that such advocates devote the bulk of their work to exposing,
refuting, and denouncing. This feature of the justice problem is twofold: on the one
hand, egalitarianism incorrectly concludes that the corruption observed is simply the
way free market capitalism works; on the other hand, some market advocates
inadvertently defend the corruption as though it were free-market capitalism. It is
imperative to acknowledge that which is correctly perceived as unjust as such and
simultaneously to point to its being but a symptom of corruption that is rooted in
government intervention in the market. It must always be stressed that this corruption
is not a product of free-market capitalism because it then becomes possible to
illustrate the clear distinction between calls for justice that are grounded in reality and
those that are founded on anthropomorphism.

8. Unfortunately, this distinction does not usually carry much weight in the view of the
egalitarian, who frequently finds it completely irrelevant. As David Kelley (1991) points
out, every form of “social justice” rests on the belief that individual ability is a social
asset, a collective good. John Rawls wrote, “Injustice, then, is simply inequalities that
are not to the benefit of all” (1972, 62). On this point, Rawls and Hayek tend to agree.
“The most common attempts to give meaning to the concept of ‘social justice,’” states
Hayek, “resort to egalitarian considerations and argue that every departure from
equality of material benefits enjoyed has to be justified by some recognizable common
interest which these differences serve” (1998, 80).

9. Luck egalitarianism—what Murray Rothbard (1995) refers to as “old” or “classical”
egalitarianism—is more overtly concerned with distribution of income and wealth. It
holds that no one should have to be worse off just because they were born into
unfortunate circumstance or were the victim of a natural disaster or made a mistake in
business or are unintelligent or something else. Rothbard terms this egalitarianism
“old” because modern-day egalitarians have realized the limitations of using the mere
poverty of individuals as moral leverage for their demands for justice.

10. Relational egalitarianism (sometimes referred to as “democratic egalitarianism”) has
been discovered to be a much more effective means of moral intimidation when it
comes to insisting that justice be done. Rothbard (1995) terms this viewpoint “new
group egalitarianism.” The significance of the “group” distinction will become clear as
we delve a bit deeper into its meanings.

11. The new-group egalitarians are concerned primarily with social hierarchies—
specifically, domination and subjection, honour and stigmatization, and high and low
standing in the eyes and calculations of others (calculations as in government policy,
for example) (Anderson 2014). However, one must always remember that these
Page 11 of 21
egalitarians employ this technique to rationalize, justify, and affect their ultimate goal of
distribution. Sometimes they assert that just distribution is what is necessary in order
to bring about just social relationships. At other times, they assert that policies to affect
just social relationships are necessary to bring about just distribution. Whether the cart
comes before or behind the horse makes little difference; the end result is always
governmental use of violence, coercion, and central planning to affect distribution (of
other people’s money) (Rothbard 1995).

12. Groups such as ethnic minorities, genders, laborers, elders, the young, and virtually
any other group conceivable conveniently fit into one or more of the social hierarchies
listed earlier (Rothbard 1995). New groups are readily added to the seemingly endless
list whenever anybody says the magic word injustice, and anyone who would oppose
(re)distribution to one of these groups must be considered an oppressor. Rothbard
sums it up nicely by paraphrasing Joseph Sobran: “[I]n the current lexicon, ‘need’ is
the desire of people to loot the wealth of others; ‘greed’ is the desire of those others to
keep the money they have earned; and ‘compassion’ is the function of those who
negotiate the transfer” (1995, 53). The insidiousness of relational egalitarianism lies in
its approach to distribution. Egalitarians have erroneously concluded that the cause of
economic difficulties is rooted in the unjust social hierarchies. Therefore, it follows
(they conclude) that in order to affect just distribution, they must design a system that
eliminates the unjust social hierarchies (Sowell 2005, 249–66).

13. Although unjust social relationships certainly cause an incalculable amount of (often
catastrophic) damage, the currently fashionable notion that these relationships are the
root causes of economic difficulties rather than the other way around is incorrect
(Sowell 2005; Williams 2011). Economic difficulties can always be shown to be the
ultimate root causes of the unjust social hierarchies or relationships. They arise as
resentment for being treated unjustly, as rationalization or justification for treating (or
having treated) others unjustly, as a means of securing the ability to treat others
unjustly in the future, and so on. Upon observing social injustices, we should ask
ourselves what motives the perpetrators might have for their unjust conduct. The
origins of the injustice are never arbitrary. They are economic. They may be
completely immoral and thoroughly unjust, but the fact remains that they exist because
the perpetrators hope to derive some benefit from them (Williams 2011).
Sources of Inequality

14. Regardless of its rhetoric, at its core egalitarianism has as its main goal the elimination
of wealth inequality. It has been argued (Piketty 2014) that wealth inequality itself
comes from one primary source: capital. Yet capital itself can be placed into many
categories. Physical capital includes the factories, buildings, computers, land, and
infrastructure that are ultimately used as the inputs to production. Human capital
comes from the knowledge and creativity possessed by human beings that gives them
the capability to contribute to production. Commonly overlooked but increasingly
recognized as important is the concept of social capital, which refers to the “trust and
norms of civic cooperation . . . essential to well-functioning societies” (Knack and
Keefer 1997, 1283). To the extent that wealth can be taxed and redistributed, the
egalitarian would argue that the desired end of equality of distribution is achievable.

15. Physical capital and the income stream it produces can be taxed from one individual
and transferred to another. Thus, egalitarians conclude that any wealth inequalities
Page 12 of 21
perpetrated by differences in the distribution of physical capital ownership can be
remedied by the well-intentioned taxing powers. To this end, proposals have
advocated a sweeping global tax on wealth (Piketty 2014) and expansion of the estate
tax (Caron and Repetti 2013). However, taxation and redistribution of wealth will be
able to produce sustained equality in wealth only under a limited set of circumstances.
A wealth tax can be effective if the only sources of wealth inequality are inequalities in
the distribution of physical capital. If there are other sources of wealth inequality, such
redistribution will not be possible with a simple tax system and will be effective only
under continuous management by a totalitarian regime. “So long as the belief in ‘social
justice’ governs political action, this process must progressively approach nearer and
nearer to a totalitarian system” (Hayek 1998, 68).

16. Wealth inequalities caused by differences in the distribution of human capital are more
difficult yet not impossible for the state to overcome. Although it isn’t possible to
directly take one person’s human-capital stock and give it to another, it is possible to
tax the wage income derived from some persons’ human capital in order to provide
educational opportunities for others (Guvenen, Kuruscu, and Ozkan 2013). However,
an increasing amount of evidence has shown that the labor market rewards and
punishes certain noncognitive traits, including personality, with wage differentials
(Heckman 2000; Borghans et al. 2008). An individual’s psychological traits and
characteristics cannot be instilled in others through mere education. The family also
plays a significant role in the development of human capital (Becker and Tomes 1994),
which makes it even more difficult for redistribution to be effective. Rawls himself
states that the family, with its effects on the development of the natural capacities, will
ultimately always stand in the way of “equal chances of achievement,” unless a
solution is found that will “mitigate this fact” (1972, 74; see also Rockwell 2015).

17. Perhaps most problematic for the egalitarian goal of equality of distribution are the
differences in wealth and income that are perpetrated by social capital and networks.
Wage earnings aren’t derived solely from an individual’s human capital. Douglas North
(1990) argues that informal social norms and culture are critical to an understanding of
the sources of prosperity. One way that this idea has been evidenced and measured in
the literature is through the concept of social capital popularized by the works of
Robert D. Putnam (1995, 2001).

18. Social capital itself has proven difficult to define, with no one definition being agreed
upon in the literature. Emily Chamlee-Wright defines it as “a complex structure made
up of community norms, social networks, favours given and received, potluck suppers,
book groups, church bazaars, and neighbourhood play groups” (2008, 45).

19. Even with the complexities and difficulties in measurement associated with social
capital, a large empirical literature has shown that social capital and networks add
significantly to an individual’s labour earnings (Knack and Keefer 1997; Narayan and
Pritchett 1999). Human capital and social capital often function as substitutes
(Boxman, De Graaf, and Flap 1991). Yet not much is known about the production of
social capital, unlike physical capital, with its capacity for direct redistribution, and
human capital, with its capacity for indirect redistribution. We may in a limited sense be
able to tax some of the labour returns to social capital, but it is yet unclear how that tax
income can be used for the creation of social capital. Although we know that there are
great benefits to both the individual and society at large from social capital and that
societies don’t flourish in its absence, we don’t have a well-developed theory or policy
Page 13 of 21
on how to create social trust and cohesion. Perhaps the most obvious policy
recommendations (as evidenced by the empirical relationships) are among the most
illiberal because social capital is known to be highly related to racial, ethnic, and
religious homogeneity (Alesina and La Ferrara 2000; Portes 2014). As it turns out,
people trust those who are most like them.

20. There is also an empirical literature that links free-market institutions to measures of
social capital and trust. Although some of the results in this literature are mixed,
several papers suggest a positive and causal relationship between economic freedom
and social capital (see, e.g., Berggren and Jordahl 2006; Jackson, Compton, and Min
Maw 2016). In this light, it is possible that inequalities caused by gains from returns on
social capital may to some degree be the kind that Rawls deems acceptable. Social
capital brings about benefits to society as a whole. Yet those benefits are not spread
equally among all of society’s members but accrue in increased quantities to those
with the more favoured social network. The inequality of incomes and wealth could be
taxed away, but this increase in taxation and redistribution decreases economic
freedom, with a resultant deleterious effect on social capital. These inequalities serve
the “social good.” Attempting to redistribute them away may cause the benefits that all
receive to disappear.

21. Given the impossibility of equality of distribution, the only option available to meet the
egalitarian end of equality of distribution is complete totalitarianism. Only when every
facet of each individual’s life is completely controlled by the state in a continuous
manner can equality be achieved. If the system is ever left to operate on its own,
inequality in distribution will be the result.
New Directions for Egalitarianism

22. As discussed in a previous section, relational egalitarians may not see equality of
wealth as their most desired outcome. They instead desire equality of social
relationships. To them, equality of wealth has been the most direct path to achieve this
desired end. However, new trends are developing.

23. There has been increased attention in the economics literature on the failings of
policies that target economic growth and income in an effort to make lives better off.
This argument has been the apex of the emerging literature on the economics of
happiness. Ever since the publication of Richard Easterlin’s (1974) work, which
popularized the Easterlin Paradox, some of the literature has set out to explain why
increases in a country’s income do not correlate with higher levels of self-reported
happiness among its citizens. Indeed, now even former Federal Reserve chairman
Ben Bernanke argues that “GDP is not itself the final objective of policy” (2010). The
better objective is well-being (happiness), and the egalitarian now has a new direction
for policy in promoting equality of well-being. Many advocate augmenting the national
measurement of gross domestic product with a national happiness accounting (Diener
2000).

24. In shifting the policy focus away from wealth inequality and toward inequality of wellbeing
(Goff, Helliwell, and Mayraz 2016), a host of interventionist policies are opened
up to the egalitarians’ disposal. Subjective well-being measures are regarded as
Page 14 of 21
comprehensive measures of quality of life, and they have many correlates. A
nonexhaustive list of correlates (Dolan, Peasgood, and White 2008) includes variables
such as income (Diener and Oishi 2000), education (Blanchflower and Oswald 2004),
environment (Welsch 2006), materialism (Kasser 2003), mortality (Kawachi et al.
1997), employment (Stutzer 2004), personality (DeNeve and Cooper 1999), and even
social capital and trust (Helliwell and Putnam 2004). The shift in focus away from
income and toward a more broadly defined well-being measure can open up a
Pandora’s box of progressive policy proposals.

25. However, the egalitarians’ search for policies to attain equality of well-being may in fact
lead to the unraveling of well-being itself. A large literature demonstrates that
autonomy of individual choice leads to greater subjective well-being (Ryan and Deci
2000; Verme 2009), and an ever-expanding literature links high economic freedom to
greater subjective well-being (Veenhoven 2000; Gropper, Lawson, and Thorne 2011;
Nikolaev 2014; Jackson 2016). The problems this literature presents for the goals of
redistribution are in addition to the inherent difficulties in distributing such fundamental
determinates of well-being as personality traits and psychological characteristics.
Perhaps a more pervasive problem for proponents of policies for happiness is that of
adaptation.

26. Adaptation in the happiness literature refers to humans’ innate ability to adapt to new
circumstances. In fact, one explanation of the Easterlin Paradox is that increases in
income can fail to create increases in happiness because people rapidly adjust to their
higher incomes. Although there may be an initial temporal boost in happiness from
increased income, the effects do not persist in the long run. Adaptation also explains
why poor and impoverished countries sometimes report much higher levels of
happiness than might seem reasonable (Graham 2010). People have a baseline
equilibrium level of happiness, and any deviations from that baseline are short-lived. If
well-being inequalities are taken to be meaningful, then any policies implemented with
the intention of combating them must target an element of well-being that isn’t subject
to adaptation. Among the correlates of subjective well-being, social capital is often
referred to as a prominent candidate policy target that is immune to the problems of
adaptation (Bartolini, Bilancini, and Sarracino 2016). Thus, if egalitarianism pursues
equality in the domain of well-being, it will still find itself trying to accomplish an
impossible task in determining the distribution of social capital.
Conclusion

27. Although egalitarians may be reluctant to admit their focus on equality of distribution in
philosophical debate, this singular policy focus has emerged even among the so-called
new-group egalitarians with their emphasis on social hierarchy. Equality of social
relations, they assert, must begin from the establishment of economic equality of
wealth. Unfortunately for these egalitarians, wealth and well-being are partly
determined by the distribution of social capital. Social capital is distinct from physical
capital and human capital in that it can neither be removed from an individual nor
imputed to another. A sovereign’s inability to distribute social capital results in an
impossible equality of distribution in wealth or well-being short of totalitarian control of
the entire system.

SECTION A

QUESTION 1

1.1 Why is it impossible for equality in distribution of wealth? (2)
…………………………………………………………………………………………………
………………………………………………………………………………………………..
…………………………………………………………………………………………………
1.2 What is the moral standpoint of egalitarianism? (2)
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
1.3 Why did Otto von Bismarck create a welfare state in Germany? (2)
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
1.4 According to egalitarianism, what do their basic notions of equality hinge on? (2)
…………………………………………………………………………………………………
……………………………………………………………………………………………..…
…………………………………………………………………………………………………
1.5 What did Hayek accuse the libertarians and classical liberals of when they classified
free markets as just or unjust? (2)
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1.6 On what point does modern day egalitarianism disagree with classical egalitarianism?
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1.7 What does relational egalitarianism advocate should be removed any unjust system?
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1.8 On what grounds do egalitarians agree that equality of distribution is achievable? (2)
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1.9 Why is social capital regarded as the most illiberal? (2)
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1.10 According to the text, what is the only way we can achieve equality of distribution? (2)
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1.11 What is meant by the Easterlin Paradox? (2)
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1.12 If egalitarianism pursues equality in well-being, what obstacle will they face? (2)
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TOTAL: 24 marks

Choose one of the attached data sets and analyze using the techniques discussed in class up to this point. This includes the following: Find the appropriate measure of center. Discuss why the chosen measure is most appropriate. Why did you decide against other possible measures of center? Find the appropriate measure of variation. The measure of variation chosen here should match the measure of center chosen in Part 1. Find the graph(s) needed to appropriately describe the data. These may be done by hand and inserted into the Word document. Define a random variable (X) so that your chosen data set represents values of X. Is your chosen random variable discrete or continuous? Explain how you know. Would the Normal or Binomial distribution be a good fit for the underlying sample distribution of X? If one of them is a good fit, state how you would approximate the distribution parameters. Calculate the probability that a flight will depart early or on-time. Calculate the probability that a flight will arrive late. Calculate the probability that a flight departs late or arrives early. Assume now that the random variable X=Arrival Time is exactly normally distributed with mean m= -2.5 and standard deviation s= 23. Compute the probability of a flight arriving late based on this new information. Does this contradict your answer from Part 8? Write a brief description (250–500 words) of the data set including the discussion required in the points above. Year DAY_OF_MONTH DAY_OF_WEEK DEP_Delay ARR_Delay 2015 13 2 -4 0 2015 13 2 -3 -3 2015 13 2 0 -5 2015 13 2 -7 -1 2015 13 2 8 3 2015 13 2 -1 -5 2015 13 2 3 8 2015 13 2 11 6 2015 13 2 -6 0 2015 13 2 -5 -12 2015 13 2 -8 0 2015 13 2 -4 -2 2015 13 2 -13 -10 2015 13 2 -13 12 2015 13 2 -11 -13 2015 13 2 -14 4 2015 13 2 -16 -1 2015 13 2 -14 2 2015 13 2 -18 -14 2015 13 2 -18 0 2015 13 2 -23 -23 2015 13 2 -23 10 2015 13 2 2 -20 2015 13 2 1 26 2015 13 2 -4 -25 2015 13 2 -6 7 2015 13 2 7 -3 2015 13 2 -8 0 2015 13 2 -8 0 2015 13 2 -4 -2 2015 13 2 -4 -3 2015 13 2 -5 -6 2015 13 2 -13 -9 2015 13 2 -9 6 2015 13 2 -12 -7 2015 13 2 -7 -4 2015 13 2 -12 -9 2015 13 2 1 4 2015 13 2 4 12 2015 13 2 -19 0 2015 13 2 -13 -4 2015 13 2 -19 -17 2015 13 2 3 -18 2015 13 2 12 15 2015 13 2 13 20 2015 13 2 2 12 2015 13 2 0 0 2015 13 2 0 -14 2015 13 2 4 5 2015 13 2 -7 7 2015 13 2 8 8 2015 13 2 9 22 2015 13 2 -1 -5 2015 13 2 -10 1 2015 13 2 -6 0 2015 13 2 -12 2 2015 13 2 -14 -3 2015 13 2 -13 7 2015 13 2 9 1 2015 13 2 -15 -2 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-14 -5 2015 13 2 -14 -3 2015 13 2 -17 -1

In February 2012, the Pepsi Next product was launched into the US market. This case study provides students with an interesting insight into PepsiCo’s new product process and some of the challenging decisions that they faced along the way.

Pepsi Next Case Study

Introduction

Pepsi Next was launched by PepsiCo into the US market in February 2012, and has since been rolled out to various international markets (for instance, it was launched in Australia in September 2012).

The new product is described as a mid-calorie cola beverage, having a mix of sugar and artificial sweeteners, designed to deliver a full cola taste with reduced calories. While filling the market gap between full sugar and diet soft drinks, PepsiCo has indicated that its prime target market is lapsed cola drinkers (giving them a reason to return to the product category).

PepsiCo, which owns range of high profile beverage brands in addition to its flagship brand Pepsi, appear to be highly committed to Pepsi Next providing it with strong launch and management support. In fact, according to PepsiCo themselves, this is their most significant product launch for several years.

About PepsiCo

PepsiCo is the second largest food and beverage company in the world, with revenues now in excess of $60 billion. The corporation has 22 brands that achieve retail sales in excess of $1 billion each. Because of their brand diversification, around half of PepsiCo’s revenue is generated from their food lines, such as Frito-Lay (snack food) and Quaker Oats.

In addition, they have progressively expanded internationally and now access over 80% of the world’s population. Their international (non-US) markets account for almost 50% of their total revenues and they still see significant growth potential from these markets, on the basis that per capita consumption of snacks and beverages in other countries is well below US market levels.

As a result, PepsiCo has achieved solid growth is many international markets. While their US beverage sales fell by 2% in 2011, this has been more than offset by double-digit sales increases in Europe, Asia, the Middle East and Africa.

In terms of their overall strategic approach, PepsiCo (as highlighted on their website) see themselves as innovative and adaptive, as stated in the following website quote:

“Pepsi is constantly on the lookout for ways to ensure their consumers get the products they want, when they want them and where they want them.”

PepsiCo Brand Strategy

In their Annual Report, PepsiCo has structured their brands around three related themes, as highlighted in the following table. This brand structure gives some insight into the role of their brands, and how they see their brand portfolio developing in the future.

Emphasis of Brand	Key Brands
Fun-for-you	Pepsi, Mountain Dew, 7-Up, Lays, Doritos, Cheetos, Red Rock
Better-for-you	Pepsi Max, Diet Pepsi, Lays (oven baked), Quaker bars
Good-for-you	Tropicana, Quaker Oats, Gatorade, Nut Harvest
(Note: The various terms, ‘Fun-for-you’ and so on are PepsiCo’s terminology, not the author’s.)

As you can see from PepsiCo’s classification of their brands, it is appears that the firm has the dual goals of supporting and leveraging its existing ‘fun’ brands, while moving towards a broader range of healthier offerings. While this second goal may appear to be mainly related to improving their corporate image, it does have commercial intent, as explained on the PepsiCo website: “Because a healthier future for all people and our planet means a more successful future for PepsiCo.”

To help implement this corporate goal, across their various brands, PepsiCo has focused on providing a wider range of healthier choices, introducing more natural ingredients, reducing fat content, reducing the environmental impact of their packaging, and so on.

Recent Product Innovations

PepsiCo has a history of developing and launching a number of mid-calorie beverages and Pepsi Next is by no means their first attempt with this style of product. In addition to various Pepsi variations (described in the ‘Before Pepsi Next’ section below), they have had some recent success with reduced calorie versions within their Tropicana and Gatorade brands.

One very successful mid-calorie product initiate is Trop50, which was launched in 2010. Trop50, as implied by its name, is a version of Tropicana with 50% less sugar and calories. This new product was ranked as the sixth most successful new food/beverage product in its launch year with retail sales in excess of $70 million. Its initial success has continued over the last two years, with the Trop50 product line now generating over $150 million in sales.

In addition, even more successful was Pepsi’s launch of Gatorade G2 in 2007. (Note: Pepsi acquired the Gatorade brand with their purchase of the Quaker Company in 2001.) This low-calorie version of Gatorade was identified as the most successful new food/beverage product in 2008 in the US market, achieving sales over $150 million in its first year.

Clearly, these recent product successes with reduced calorie offerings under strong brands would have had the effect of buoying Pepsi’s confidence regarding the viability of this style of product. Hence, they believed that it was the right time to revisit a reduced calorie Pepsi variation.

However, as some commentators have pointed out, it should be noted that their success (with Trop50 and G2) has occurred in their ‘good-for-you’ brand range, where consumers are already quite health-conscious and probably more responsive to healthier options. Therefore, whether this perceived benefit (of less sugar) will carry to ‘fun-for-you’ brands as if Pepsi is less certain for the firm.

Before Pepsi Next

Perhaps surprisingly, Pepsi Next is PepsiCo’s fifth attempt at a mid-calorie beverage. In the 1970’s they introduced Pepsi Light, which was lemon-flavored and contained 70 calories (as opposed to a normal Pepsi can at 150 calories). (Not to be confused with the current Pepsi Light brand marketed in various countries, which is a version of Diet Pepsi.)

Then in the late 1980’s the firm introduced Jake’s Diet Cola, which came in at a mere 15 calories, but did not leverage the Pepsi brand name. At the time, Pepsi stated that the beverage had the potential to “revolutionize” the diet segment of the cola market. Prior to launch, Jake’s was extensively taste-tested against Diet Coke and the firm had strong hopes for its success. According to one of their vice presidents at the time, (Edward E. Jenkins), “Jake’s represents a new taste concept in diet beverages and will provide consumers in the booming diet soft drink category with a better-tasting, low-calorie cola”.

In the mid-1990’s, they then introduced Pepsi XL, another 70 calorie formula. In their promotions, they indicated that X stood for ‘excellent taste’ and the L stood for ‘less sugar’. According to reports at the time, Pepsi XL was a year in development at a cost of $1.5 million and was supported by an $8 million advertising budget.

More recently, in 2004, PepsiCo released a 70-calorie beverage branded as Pepsi Edge. Around the same time, Coca-Cola brought out a similar product under the brand Coca-Cola C2. Coke supported C2 quite aggressively, with an estimated launch promotional budget of somewhere around $40 million, making it their most significant launch since Diet Coke. Both of these brands only lasted around 18 months or so in the market before being withdrawn.

About the Soft Drink Market

The US soft drink market generates over $70 billion in sales. Volumes (units) have weakened slightly since 2005, indicating that the market is in late maturity-early decline stage of the product life cycle. Retail dollar sales have been supported somewhat by price increases.

One of the biggest impacts on soft drink consumption has come from bottled water, which now accounts for over 10% of beverage consumption. This is up from just 2% in 2000. In addition, the soft drink market has also been slightly challenged by sports drinks and energy drinks that have seen a minor increase in market share.

The trend towards diet soft drinks continues, with these offerings now representing 30% of the carbonated soft drink (CSD) market, up from 25% just 10 years ago. Overall, these movements indicate changing tastes of consumers because of a stronger health focus.

One of the brands most impacted by these market changes has been the flagship Pepsi brand. In the most recent market share figures available, Pepsi now has less than 10% share of the US CSD market (which ranks the brand 3rd behind Coke and Diet Coke). While still well positioned, keep in mind that they were sitting at over 13% market share ahead of Diet Coke 10 years ago, at a time when the CSD market was still growing at 3% per year.

Their Diet Pepsi product enjoys a solid 5% market share. That product, along with Pepsi’s other soft drink offerings (Mountain Dew in particular), gives Pepsi an almost 30% share of the US CSD market, behind Coca-Cola at 42% (with Coke at 17% and Diet Coke at 10%) and ahead of Dr Pepper Snapple at 17%.

Competitor Offerings

Pepsi is not the only player seeking to tap into the perceived demand for reduced sugar beverages. Dr Pepper Snapple (who has two products in the top 10 in the US CSD market) has also introduced a low-sugar offering. Their new product, Dr Pepper Ten (with 10 calories), is squeezed between their normal Dr Pepper and their Diet Dr Pepper, much in the same way the Pepsi Next product. Reportedly, Dr Pepper Snapple is pleased with the performance of this new product to date.

Independent to the Pepsi Next offering, Coca-Cola is currently (mid-late 2012) in the process of test marketing (in four American cities) mid-calorie versions of their Fanta and Sprite brands. Carrying the sub-brand ‘Select’ (to make Fanta Select) the concept is quite similar to Pepsi Next in that it uses a mix of sugar and artificial sweeteners to cut the calorie count by half.

Obviously if these tests are successful and these products are fully rolled-out to the market as a standard product, it appears that there could be a third sub-category of soft drinks; traditional, diet, and now mid-calorie beverages. It would then be interesting to see how and if this sub-category develops, particularly with more offerings and overall promotional support. On the other hand, it might be possible that Coke might be test marketing the mid-calorie Sprite and Fanta options as a form of market research only.

Impact of Substitute Products

Why it may seem strange that a highly successful company like PepsiCo would frequently come back to a product concept that they had struggled with a number of times, it appears that one of the key drivers has been the slight decline in the US carbonated soft drink (CSD) market in recent years. It is estimated that the cola category of the CSD market is reducing by around 90 million cases a year. These consumer purchases have tended to shift to other beverage solutions, such as water, energy drinks and juices.

One of the underlying factors driving this change in behavior has been identified as the preference that some consumers have to reduce sugar. Therefore, PepsiCo see the new Pepsi Next product as a viable low-sugar alternative to traditional soft drinks, and a product that could tap into consumer’s emerging dietary needs and to generate sales from outside the traditional cola market and to win back lost cola consumers.

Therefore, PepsiCo is more confident in the success of Pepsi Next (despite numerous withdrawn similar products) because they believe that the market is now more ready for this type of product, that is, Pepsi Next is the “right product at the right time”.

Pepsi Next Strategy, Development and Launch

As stated above, a key goal of the Pepsi Next offering is to try to win back cola drinkers lost to other beverages. Pepsi’s research suggests that sugar and carbohydrates is an issue for some consumers, but a reasonable proportion of these consumers have not warmed to the taste of diet colas. Therefore, these ‘sugar-avoiders’ have migrated to non-cola beverages as a better product solution for their needs and preferences.

Another important goal, as Pepsi continues to battle Coca Cola’s range of brands for market share in the CSD market, is to keep their flagship brand fresh, exciting, energized and innovative. For instance, Coke Zero was a very successful new product (a sub-brand under the Coke family brand), which also had the impact of adding excitement to the Coca-Cola product. This was achieved primarily by Coke Zero’s main communication theme that Coke Zero tasted just like Coke. The firm used a variety of promotional tools, including a series of humorous YouTube videos with pretend (and somewhat inept) Coke brand managers who were intent on taking legal action against Coke Zero.

Another important aspect to keep in mind for Pepsi Next and its likely financial viability is the overall size of the CSD market. In the USA alone, sales in this market are in excess of $70 billion. And although the market is slightly falling (being in the very early stage of decline), the market is only reducing by about 1% per year, which means that it will remain a very large and profitable market for a long time to come.

With this in mind, even a fraction of market share in the CSD market is significant. For instance, Coke Zero (a product launched in 2005) has a market share just over 1% in the US, which equates to retail sales over $700 million per annum in the US alone – and based on Pepsi’s corporate figures (where almost 50% of their revenue is achieved in international markets), they probably achieve at least equal sales revenues internationally. This should deliver good gross margins, as the product would be produced, distributed and marketed using existing infrastructure and facilities.

Of course, while Pepsi has indicated that they are taking a long-term view of the market and this product, these statements may or may not be true. In these types of markets (fun food and drinks), variety and new flavors are often used as an effective short-term tactic. For example, chocolate manufacturer Cadbury frequently brings out new products for a limited time only. It is also a common tactic in the fast food industry.

This variety approach will help boost short-term sales, energize the main brand, generate media attention, disrupt competitor activities, give freshness to the firm’s promotional messages, and hopefully engage consumers.

Market Gap

Pepsi Next is obviously designed to fill the gap between normal sugar cola drinks and diet colas, trying to appeal to consumers that may sometimes prefer lower-calorie drinks but are concerned with the taste or the social image of diet drinks and vice versa.

The clear challenge here is whether this mid-calorie ‘compromise’ offering provides a strong benefit for existing beverage consumers. That is, will regular consumers of diet colas be tempted to switch and will consumers of regular colas be happy enough with the taste of Pepsi Next to take it up? That challenge is obviously one reason that Pepsi has included a heavy free sample aspect in their promotional mix.

Therefore, there appears to be two main risks associated with targeting this market gap. The first is whether the demand from consumers will be large enough to make the segment financially viable. Moreover, the second is virtually the opposite concern; if the product becomes quite successful, will it cannibalize both the Pepsi and the diet Pepsi offerings. While the second ‘risk’ could have the upside of providing a competitive barrier (without necessarily increasing overall sales), which is generally beneficial for PepsiCo in the longer-term, it does not really advantage Pepsi’s retailer partners who may not benefit to any real extent from this broader product line offering.

However, another way to look at this market gap is to not see it as a gap at all, as suggested by PepsiCo. That is, to consider the product to be competing against substitute products outside the existing cola market. Therefore, this offering may appeal to consumers who do not see a benefit in any existing cola drinks, diet or otherwise.

Market Testing

Given PepsiCo’s experience with mid-calorie beverages (with both Pepsi and other key brands), the firm would have a wealth of knowledge and data surrounding this market need and the resultant behavior of consumers and distribution channels. Despite this background, Pepsi Next still went through the firm’s standard approach of taste testing and market tests. For instance, in 2011, they conducted blind taste-tests with some of their bottlers.

As would be assumed from the launch support for the new product, the results from the consumer taste-tests were very positive. According to Angelique Krembs, VP-marketing for the Pepsi trademark, “When people try the product, they’re just really impressed.”

In addition to taste-tests, Pepsi Next was test marketed in Iowa and Wisconsin. In these tests, it was determined that a broad variety of consumers (in demographic terms) were willing to try Pepsi Next. However, the research was also able to identify that the consumers tended to be regular Pepsi drinkers who saw the benefit of reduced sugar but have not been keen on existing diet soda options.

According to released results of the test markets, Pepsi Next exceeded their internal targets for trial, repeat business and incremental business. While there, is a significant risk that this type of product had the potential to cannibalize Pepsi, Diet Pepsi and Pepsi Max, the firm believes (based upon the test market results) that Pepsi Next will attract new consumers and energize their entire Pepsi brand family.

Ingredients

In order to achieve a taste similar to a standard cola beverage with the sugar content, Pepsi Next uses some sugar along with a mix of three artificial sweeteners and high fructose corn syrup. However, the Pepsi Next product introduced in Australia has a slightly different formulation, as it included a natural sweetener called Stevia. Apparently, Stevia was not part of the US beverage design as it can have a bitter after-taste.

In addition, Coca Cola’s Sprite/Fanta mid-calorie offerings (currently being test marketed) will utilize a different mix of sweeteners, with the major players each trying to get that right combination of taste with reduced sugar content.

Brand Name Selection

The brand name selection for Pepsi Next is quite interesting as it has a significant forward-looking emphasis. As many people are aware, for many years Pepsi has used the tag line, “The choice of a new generation”. This tag line was designed to reposition Coca-Cola as an old-fashioned drink, mainly enjoyed by older people.

With the use of the word ‘Next”, Pepsi are highlighting that this refers to the ‘next generation’ of soda drinkers. In addition, as discussed above, Pepsi believes that health and sugar-reduction is a long-term trend that will become more prominent.

The other aspect about the brand name selection to note is that the firm decided to use the family brand (Pepsi) and create a new sub-brand (individual) – creating Pepsi Next. Of course, both Coke and Pepsi have had a long tradition of successfully establishing new brands, so it is always of interest when they decide to leverage their flagship brands.

Obviously, even though Coke and Pepsi both have enormous brand equity throughout the world, there is still a limit to the range of offerings that each firm would want under these brands. That is, they would want to continue to protect their flagship brands and ensure that they are clearly understood by consumers and ensure that too many products do not confuse their positioning.

Launch of Pepsi Next

The new product’s promotion was based around the tag line “Drink it to believe it“. It is a relatively major launch, which is reflective of their desire to finally achieve success with this style of product and to ensure that the new product is well received by the market in order to further enhance the brand equity of Pepsi itself.

In terms of its promotional mix, Pepsi Next was promoted via TV advertising, digital marketing, direct mail, heavy free trials and in-store point-of-promotion.

The main TV commercial, which was also tested in the test markets, shows a couple becoming very excited about the innovativeness of Pepsi Next. In the background, unnoticed by the parents, the baby does a number of highly remarkable stunts. The main message of the TVC is that Pepsi Next is so amazing and innovative that nothing else seems to stand out.

Obviously, in today’s environment, a social media campaign via Facebook as well as YouTube formed a key platform in their overall promotional mix. A key aspect of the YouTube campaign (billed as the world’s first virtual taste-test) is the potential for consumers own taste-test videos to be parodied by a range of celebrities. This approach not only increases the profile of the campaign, but also the level of the consumer’s engagement with the new brand.

Although the firm has not disclosed the actual promotional budget for Pepsi Next, PepsiCo has announced that they have increased their overall marketing budget (across all their beverage brands) from $500 million to $600 million in 2012.

Pepsi Next was also promoted via leveraging the firm’s relationships with retailers and tapping into retailers’ loyalty card programs. Access to this immense loyalty database has enabled Pepsi to identify consumers that have reduced their cola consumption over time, which is stated as the target market for Pepsi Next.

Free trials/samples have also been heavily utilized. For example, in the USA, free samples of Pepsi Next were offered across 800 Walmart stores as well as in 40 cities via events. In Australia, Pepsi is using several ‘challenge vans’ which will be set up in around 300 outdoor locations during the Australian summer. The focus of the ‘challenge vans’ is for consumers to blind taste-test Pepsi Next against normal sugar cola (presumably Coke, but not explicitly stated).

Therefore, it appears that a key goal of their promotional approach is to generate initial trials, with the hope of generating a reasonable proportion of repeat customers.

It is important to note that despite a significant upfront promotional investment, Pepsi are planning to support and monitor Pepsi Next over the long-term. Again, according to Angelique Krembs, VP-marketing for the Pepsi trademark, “I believe a new product is a new product for two years. We will be watching closely, and we will correct what needs to be corrected. We’re taking a long-term view of support for this brand.”

Product-line Extensions

Although Pepsi Next was only launched into the US market in February 2012, by July 2012 two line extensions were introduced into the market. The two variations are both fruit-flavored colas (Cherry Vanilla and Paradise Mango). Upon their launch (which coincided with summer), PepsiCo indicated that both flavors would only be available for a limited time only. Like the standard Pepsi Next product, the new flavors contained 60 calories, but both carry less caffeine.

To help explain the rationale for these line extensions Angelique Krembs stated, “Earlier this spring, Pepsi Next launched to national fanfare, turning cola lovers into believers by delivering on real cola taste with 60 percent less sugar than Pepsi-Cola and for many, it was love at first sip. We’re continuing the momentum by infusing real cola taste with unique fruit flavor blends, and giving cola lovers two more reasons to ‘drink it to believe it.’”

Pepsi Next Results

Indra Nooyi, the Chairman and CEO of PepsiCo, has publicly stated that the new product is “off to a good start… (and it is) consistent with our objective of bringing back lapsed cola drinkers, While it’s very early, the results are ahead of launch expectations”. This comment further reinforces Pepsi’s goal of sourcing demand from outside the traditional consumer base and regard their competitive set for this product to be non-cola beverages, rather than Coke.

However, Nooyi did temper her above comments with, “It’s too early to call this brand and say it’s a gigantic success. But what is surprising to us is that a few weeks after the launch, it’s almost one share point, which has not happened in a long time for any new product launch”.

While an initial market share of almost 1% represents a significant amount of revenue, it should be noted there is a major difference between initial trial sales volumes and ongoing repeat sales volumes – particularly for a well-executed national launch under the banner of a major brand.

Weakening Sales?

In terms of sales data, it has reported that Pepsi NEXT’s volume market share has since fallen to 0.6%, down from 1.0%. Additionally, a survey of the channel convenience stores found that Pepsi Next has achieved very strong distribution (with 94 % convenience store penetration), but many stated that the brand is generating weak repeat sales.

It could also be argued that the early line extensions were designed to help strengthen and energize the brand, as it is struggling with its repeat sales. Perhaps the initial strong sales results were somewhat propped up by the novelty taste, the extensive free sampling and significant initial discounting.

Regardless, the firm has indicated that they remain very confident in the future of Pepsi Next, particularly given their view of the future market for sugary beverages. PepsiCo Americas Beverages CEO Al Carey has stated that they continue to feel “very good” about Pepsi Next and that the new brand was tracking ahead of its targeted 25 million cases in first year sales, primarily because it was re-winning lost Pepsi drinks – either back to Pepsi Next or Pepsi itself.

QUESTIONS

1. Outline the new product process for Pepsi Next. How consistent is their approach to the process described in marketing textbooks?

2. PepsiCo has been quite persistent with pursing mid-calories beverage products – why do you think this is the case? Do you agree with their decision to introduce Pepsi Next? Why/why not?

3. How is the performance and market acceptance of Pepsi Next likely to impact the overall brand equity of Pepsi? Should PepsiCo have launched this product under a new brand instead?

4. The launch strategy seemed to heavily focus on generating trials. Why was this important? How else could the launch program have been structured?

1. Read and construct 10 questions with Correct answers on food safety below

The questions and answers that you provide should be written in the correct “jeopardy” format-answers first and questions second. The purpose of the assignment is to demonstrate an understanding of the course content.

Foodborne Illness in the United States

When certain disease-causing bacteria, viruses or parasites contaminate food, they can cause foodborne illness. Another word for such a bacteria, virus, or parasite is “pathogen.” Foodborne illness, often called food poison- ing, is an illness that comes from a food you eat.

• The food supply in the United States is among the safest in the world— but it can still be a source of infection for all persons.

• According to the Centers for Disease Control and Prevention, 48 million persons get sick, 128,000 are hospitalized, and 3,000 die from foodborne infection and illness in the United States each year. Many of these people are children, older adults, or have weakened immune systems and may not be able to ght infection normally.

Since foodborne illness can be serious—or even fatal—it is important for you to know and practice safe food-handling behaviors to help reduce your risk of getting sick from contaminated food.

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• Your gastrointestinal tract, when functioning properly, allows the foods and beverages you consume to be digested normally. Diabetes may damage the cells that create stomach acid and the nerves that help

Food Safety:

It’s Especially Important for You

As a person with diabetes, you are not alone—there are many people in the United States with this chronic disease. Diabetes can affect various organs and systems of your body, causing them not to function properly, and making you more susceptible to infection. For example:

• Your immune system, when functioning properly, readily ghts off harmful bacteria and other pathogens that cause infection. With diabetes, your immune system may not readily recognize harmful bacteria or other pathogens. This delay in the body’s natural response to foreign invasion places a person with diabetes at increased risk for infection.

your stomach and intestinal tract move the food throughout the intestinal tract. Because of this damage, your stomach may hold on to the food and beverages you consume for a longer period of time, allowing harmful bacteria and other pathogens to grow.

Additionally, your kidneys, which work to cleanse the body, may not be functioning properly and may hold on to harmful bacteria, toxins, and other pathogens.

A consequence of having diabetes is that it may
leave you more susceptible to developing infections—like those that can be brought on by disease-causing bacteria and other pathogens that cause foodborne illness. Should you contract a foodborne illness, you are more likely to have a lengthier illness, undergo hospitalization, or even die.

To avoid contracting a foodborne illness, you must be vigilant when handling, preparing, and consuming foods.

Make safe food handling a lifelong commitment to minimize your risk of foodborne illness. Be aware that as you age, your immunity to infection naturally is weakened.

3

Major Pathogens That Cause Foodborne Illness

Symptoms and Potential Impact

• Fever, headache, and muscle pain followed by diarrhea (sometimes bloody), abdominal pain, and nausea. Symptoms appear 2 to 5 days after eating and may last 2 to 10 days. May spread to the bloodstream and cause a life-threatening infection.

Symptoms and Potential Impact

• Watery diarrhea, dehydration, weight loss, stomach cramps or pain, fever, nausea, and vomiting; respiratory symptoms may also be present.

• Symptoms begin 7 to 10 days after becoming infected, and may last 2 to 14 days. In those with a weakened immune system, including people with diabetes, symptoms may subside and return over weeks to months.

Symptoms and Potential Impact

Associated Foods

• Untreated or contaminated water

• Unpasteurized (“raw”) milk

• Raw or undercooked meat, poultry, or shell sh

Associated Foods/Sources

• Swallowing contaminated water, including that from recreational sources, (e.g., a swimming pool or lake)

Eating uncooked or contaminated food

Placing a contaminated object in the mouth

Soil, food, water, and contaminated surfaces

Associated Foods/Sources

• Many outbreaks result from food left for long periods in steam tables or at room temperature and time and/or temperature abused foods.

• Meats, meat products, poultry, poultry products, and gravy

Associated Foods

• Improperly reheated hot dogs, luncheon meats, cold cuts, fermented or dry sausage,
and other deli-style meat and poultry

Unpasteurized (raw) milk and soft cheeses made with unpasteurized (raw) milk

Smoked seafood and salads made in the store such as ham salad, chicken salad, or seafood salads

Raw vegetables

• Onset of watery diarrhea and abdominal cramps within about 16 hours. The illness usually begins suddenly and lasts for 12 to 24 hours. In the elderly, symptoms may last 1 to 2 weeks.

Campylobacter

Cryptosporidium

Clostridium perfringens

• Complications and/or death occur only very rarely.

Listeria monocytogenes

Can grow slowly at refrigerator temperatures

Symptoms and Potential Impact

• Fever, chills, headache, backache, sometimes upset stomach, abdominal pain, and diarrhea. May take up to 2 months to become ill.

Gastrointestinal symptoms may appear within a few hours to 2 to 3 days, and disease may appear 2 to 6 weeks after ingestion. The duration is variable.

Those at-risk (including people with diabetes and others with weakened immune systems) may later develop more serious illness; death can result from this bacteria.

Can cause problems with pregnancy, including miscarriage, fetal death, or severe illness or death in newborns.

4

Associated Foods

• Undercooked beef, especially hamburger

Unpasteurized milk and juices, like “fresh” apple cider

Contaminated raw fruits and vegetables, and water

Person-to-person contact Associated Foods

• Shell sh and fecally- contaminated foods or water

• Ready-to-eat foods touched by infected food workers; for example, salads, sandwiches, ice, cookies, fruit

Associated Foods

• Raw or undercooked eggs, poultry, and meat

Unpasteurized (raw) milk or juice

Cheese and seafood

Fresh fruits and vegetables

Toxoplasma gondii

Associated Foods/Sources

• Accidentalcontactofcatfeces through touching hands to mouth after gardening, handling cats, cleaning cat’s litter box, or touching anything that has come in contact with cat feces.

• Raw or undercooked meat.

Vibrio vulni cus

Associated Foods

• Undercooked or raw seafood ( sh or shell sh)

Symptoms and Potential Impact

• Severe diarrhea that is often bloody, abdominal cramps, and vomiting. Usually little or no fever.

• Can begin 1 to 9 days after contaminated food is eaten and lasts about 2 to 9 days.

• Some, especially the very young, may
develop hemolytic-uremic syndrome (HUS), which can cause acute kidney failure, and can lead to permanent kidney damage or even death.

Symptoms and Potential Impact

• Nausea, vomiting, and stomach pain usually start between 24 and 48 hours, but cases can occur within 12 hours of exposure. Symptoms usually last 12 to 60 hours.

• Diarrhea is more prevalent in adults and vomiting is more prevalent in children.

Symptoms and Potential Impact

• Stomach pain, diarrhea (can be bloody), nausea, chills, fever, and/or headache usually appear 6 to 72 hours after eating; may last 4 to 7 days.

• In people with a weakened immune system, such as people with diabetes, the infection may be more severe and lead to serious complications including death.

Symptoms and Potential Impact

Escherichia coli O157:H7
One of several strains of E. coli that can cause human illness

Noroviruses (and other caliciviruses)

Salmonella (over 2,300 types)

• Flu-like illness that usually appears
10 to 13 days after eating, may last months. Those with a weakened immune system, including people with diabetes, may develop more serious illness.

• Can cause problems with pregnancy, including miscarriage and birth defects.

Symptoms and Potential Impact

• Diarrhea, stomach pain, and vomiting may appear within 4 hours to several days and last 2 to 8 days. May result in a blood infection. May result in death for those with a weakened immune system, including people with diabetes, cancer or liver disease.

5

Eating at Home:

Making Wise Food Choices

Some foods are more risky for you than others. In general, the foods that are most

likely to contain harmful bacteria or viruses fall into two categories:

• Uncooked fresh fruits and vegetables

• Some animal products, such as unpasteurized (raw) milk; soft cheeses made with raw milk; and raw or undercooked eggs, raw

meat, raw poultry, raw sh, raw shell sh and their juices; luncheon meats and deli-type salads (without

added preservatives) prepared on site in a deli-type establishment.

. . . about Particular Foods:

KEEP YOUR FAMILY SAFER FROM FOOD POISONING

If you are not sure about the safety of a food in your refrigerator, don’t take therisk.

Interestingly, the risk these foods may actually pose depends on the origin

or source of the food and how the food is processed, stored, and prepared. Follow these guidelines (see chart at right) for safe selection and preparation of your favorite foods.

If You Have Questions . . .
. . . about Wise Food Choices:

Be sure to consult with your doctor or health care provider. He or she can answer any speci c questions or help you in your choices.

When in doubt, throw it out!

Wise choices in your food selections are important.

All consumers need to follow the Four Basic Steps to Food Safety:
Clean, Separate, Cook, and Chill.

Check your steps at FoodSafety.gov

6

CLEAN SEPARATE CHILL

CLEAN

WASH HANDS AND SURFACES OFTEN

SEPARATE

SEPARATE RAW MEATS FROM OTHER FOODS

CHILL

REFRIGERATE FOOD PROMPTLY

oF

COOK TO THE RIGHT TEMPERATURE

Common Foods: Select the Lower Risk Options

Type of Food Higher Risk Lower Risk
Meat and • Raw or undercooked • Meat or poultry cooked to a Poultry meat or poultry safe minimum internal tem- perature (see chart on p. 10) Tip: Use a food thermometer to check the internal temperature on the “Is It Done Yet?” chart on page 10 for speci c safe minimum internal temperature.
Seafood	• Any raw or undercooked sh, or shell sh, or food containing raw or undercooked seafood e.g., sashimi, found in some sushi or ceviche. Refrigerated smoked sh • Partially cooked seafood, such as shrimp and crab	• Previously cooked seafood heated to 165 °F • Canned sh and seafood • Seafood cooked to 145 °F
Milk	• Unpasteurized (raw) milk	• Pasteurized milk
Eggs Foods that contain raw/undercooked eggs, such as: At home: • Homemade Caesar salad dressings* • Homemade raw cookie dough* • Homemade eggnog* • Use pasteurized eggs/egg products when preparing recipes that call for raw or undercooked eggs When eating out: • Ask if pasteurized eggs were used *Tip: Most pre-made foods from grocery stores, such as Caesar dressing, pre-made cookie dough, or packaged eggnog are made with pasteurized eggs.
Sprouts	• Raw sprouts (alfalfa, bean, or any other sprout)	• Cooked sprouts
Vegetables	• Unwashed fresh vegetables, including lettuce/salads	• Washed fresh vegetables, including salads • Cooked vegetables
Cheese	• Soft cheeses made from unpasteurized (raw) milk, such as: — Feta — Brie — Camembert — Blue-veined — Queso fresco	• Hard cheeses • Processed cheeses • Cream cheese • Mozzarella • Soft cheeses that are clearly labeled “made from pasteurized milk”
Hot Dogs and • Hot dogs, deli meats, and • Hot dogs, luncheon meats, and deli meats reheated to steaming hot or 165 °F Tip: You need to reheat hot dogs, deli meats, and luncheon meats before eating them because the bacteria Listeria monocytogenes grows at refrigerated temperatures (40 °F or below). This bacteria may cause cause severe illness, hospitalization, or even death. Reheating these foods until they are steaming hot ho destroys these dangerous bacteria and makes these foods safe for you to eat. Deli Meats luncheon meats that have not been reheated
Pâtés	• Unpasteurized, refrigerated pâtés or meat spreads	• Canned or shelf-stable pâtés or meat spreads

7

Taking Care:

Handling and Preparing Food Safely

Foodborne pathogens are sneaky. Food that appears completely ne can contain pathogens—disease-causing bacteria, viruses, or parasites—that can make you sick. You should never taste a food to determine if it is safe to eat.

As a person with diabetes, it is especially important that you—or those preparing

your food—are always careful with food handling and preparation. The easiest way to do this is to Check Your Steps – clean, separate, cook, and chill – from the Food

Safe Families Campaign.

Four Basic Steps to Food Safety 1. Clean: Wash hands and surfaces often

Bacteria can spread throughout the kitchen and get onto cutting boards, utensils, counter tops, and food.

To ensure that your hands and surfaces are clean, be sure to:

Wash hands in warm soapy water for at least 20 seconds before and after handling food and after using the bathroom, changing diapers, or handling pets.

Wash cutting boards, dishes, utensils, and counter tops with hot soapy water be- tween the preparation of raw meat, poultry, and seafood products and preparation of any other food that will not be cooked. As an added precaution, sanitize cut- ting boards and countertops by rinsing them in a solution made of one tablespoon of unscented liquid chlorine bleach per gallon of water, or, as an alternative, you may run the plastic board through the wash cycle in your automatic dishwasher.

Use paper towels to clean up kitchen surfaces. If using cloth
towels, you should wash them often in the hot cycle of the washing machine.

Wash produce. Rinse fruits and vegetables, and rub rm-skin fruits and vegetables under running tap water, including those with skins and rinds that are not eaten.

With canned goods: remember to clean lids before opening.

8

2. Separate: Don’t cross-contaminate

Cross-contamination occurs when bacteria are spread from one food product to another. This is especially common when handling raw meat, poultry, seafood, and eggs. The key is to keep these foods—and their juices—away from ready-to-eat foods.

To prevent cross-contamination, remember to:

• Separate raw meat, poultry, seafood, and eggs from other foods in your grocery shopping cart, grocery bags, and in your refrigerator.

• Never place cooked food on a plate that previously held raw meat,
poultry, seafood, or eggs without rst washing the plate with hot soapy water.

• Don’t reuse marinades used on raw foods unless you bring them to a boil rst.

• Consider using one cutting board only for raw foods and another only for ready-to-eat foods, such as bread, fresh fruits and vegetables, and cooked meat.

3. Cook: Cook to safe temperatures

Foods are safely cooked when they are heated to the USDA-FDA recommended safe minimum internal temperatures, as shown on the “Is It Done Yet?” chart (see next page).

To ensure that your foods are cooked safely, always:

• Use a food thermometer to measure the internal temperature of cooked foods. Check the internal temperature in several places to make sure that the meat, poul- try, seafood, or egg product is cooked to safe minimum internal temperatures.

Cook ground beef to at least 160 °F and ground poultry to a safe minimum internal temperature of 165 °F. Color of food is not a reliable indicator of safety or doneness.

Reheat fully cooked hams packaged at a USDA-inspected plant to 140 °F. For fully cooked ham that has been repackaged in any other location or for leftover fully cooked ham, heat to 165 °F.

Cook seafood to 145 °F. Cook shrimp, lobster, and crab until they turn red and the esh is pearly opaque. Cook clams, mussels, and oysters until the shells open. If the shells do not open, do not eat the seafood inside.

Cook eggs until the yolks and whites are rm. Use only recipes in which the eggs are cooked or heated to 160 °F.

Cook all raw beef, lamb, pork, and veal steaks, roasts, and chops to 145 °F with a 3-minute rest time after removal from the heat source.

9

3. Cook: Cook to safe temperatures (cont.)

Bring sauces, soups, and gravy to a boil when reheating. Heat other leftovers to 165 °F.

Reheat hotdogs, luncheon meats, bologna, and other deli meats until steam- ing hot or 165 °F.

When cooking in a microwave oven, cover food, stir, and rotate for even cooking. If there is no turntable, rotate the dish by hand once or twice during cooking. Always allow standing time, which completes the cooking, before checking the internal temperature with a food thermometer. Food is done when it reaches the USDA-FDA recommended safe minimum internal temperature.

Is It Done Yet?

Use a food thermometer to be most accurate. You can’t always tell by looking.

4. Chill: Refrigerate promptly

Cold temperatures slow the growth of harmful bacteria. Keeping a constant refrigerator temperature of 40 °F or below is one of the most effective ways to reduce risk of foodborne illness. Use an appliance thermometer to be sure the refrigerator temperature is consistently 40 °F or below and the freezer temperature is 0 °F or below.

To chill foods properly:

• Refrigerate or freeze meat, poultry, eggs, seafood, and other perishables within 2 hours of cooking or purchasing. Refrigerate within 1 hour if the temperature outside is above 90 °F.

Never thaw food at room temperature, such as on the counter top. It is safe to thaw food in the refrigerator, in cold water, or in the microwave. If you thaw food in cold water or in the microwave, you should cook it immediately.

Divide large amounts of food into shallow containers for quicker cooling in the refrigerator.

Follow the recommendations in the abridged USDA-FDA Cold Storage Chart (see page 11). The USDA-FDA Cold Storage Chart in its entirety may be found at www.fsis.usda.gov/Fact_Sheets/Refrigeration_&_Food_Safety/index.asp.

USDA-FDA Recommended Safe Minimum Internal Temperatures
Beef, Pork, Veal, Lamb Steaks, Roasts & Chops 145 °F with 3-minute rest time	Fish 145 °F	Beef, Pork, Veal, Lamb Ground 160 °F	Egg Dishes 160 °F	Turkey, Chicken & Duck Whole, Pieces & Ground 165 °F

10

USDA-FDA Cold Storage Chart

These time limit guidelines will help keep refrigerated food safe to eat. Because freezing keeps food safe inde nitely, recommended storage times for frozen foods are for quality only.

Product	Refrigerator (40 °F)	Freezer (0 °F)
Eggs
Fresh, in shell	3 to 5 weeks	Don’t freeze
Hard cooked	1 week	Don’t freeze well
Liquid Pasteurized Eggs, Egg Substitutes
Opened	3 days	Don’t freeze well
Unopened	10 days	1 year
Deli and Vacuum-Packed Products
Egg, chicken, ham, tuna, & macaroni salads	3 to 5 days	Don’t freeze well
Hot Dogs
Opened package	1 week	1 to 2 months
Unopened package	2 weeks	1 to 2 months
Luncheon Meat
Opened package	3 to 5 days	1 to 2 months
Unopened package	2 weeks	1 to 2 months
Bacon & Sausage
Bacon	7 days	1 month
Sausage, raw—from chicken, turkey, pork, beef	1 to 2 days	1 to 2 months
Hamburger and Other Ground Meats
Hamburger, ground beef, turkey, veal, pork, lamb, & mixtures of them	1 to 2 days	3 to 4 months
Fresh Beef, Veal, Lamb, Pork
Steaks	3 to 5 days	6 to 12 months
Chops	3 to 5 days	4 to 6 months
Roasts	3 to 5 days	4 to 12 months
Fresh Poultry
Chicken or turkey, whole	1 to 2 days	1 year
Chicken or turkey, pieces	1 to 2 days	9 months
Seafood
Lean sh ( ounder, haddock, halibut, etc.)	1 to 2 days	6 to 8 months
Fatty sh (salmon, tuna, etc.)	1 to 2 days	2 to 3 months
Leftovers
Cooked meat or poultry	3 to 4 days	2 to 6 months
Chicken nuggets, patties	3 to 4 days	1 to 3 months
Pizza	3 to 4 days	1 to 2 months

	Check Your Steps Check “Sell-By” date Put raw meat, poultry, or seafood in plastic bags • Buy only pasteurized milk, soft cheeses made with pasteurized milk, and pasteurized or juices that have been otherwise treated to control harmful bacteria. • When buying eggs: – Purchase refrigerated shell eggs – If your recipe calls for raw eggs, purchase pasteurized, refrigerated liquid eggs • Don’t buy food displayed in unsafe or unclean conditions
	Is It Done Yet? You can’t tell by looking. Use a food thermometer to be sure. USDA-FDA Recommended Safe Minimum Internal Temperatures Beef, Pork, Veal, Lamb Steaks, Roasts & Chops 145 °F with 3-minute rest time Fish 145 °F Beef, Pork, Veal, Lamb Ground 160 °F Egg Dishes 160 °F Turkey, Chicken & Duck Whole, Pieces & Ground 165 °F
	Ordering “Smart” When Eating Out Higher Risk: ✘ Cheese made from unpasteurized (raw) milk. ✘ Raw or undercooked seafood. ✘ Cold hot dogs. ✘ Sandwiches with cold deli or luncheon meat. ✘ Raw or undercooked fish, such as sashimi or some kind of sushi. ✘ Soft-boiled or “over-easy” eggs, as the yolks are not fully cooked. Lower Risk: ✔Hard or processed cheeses. Soft cheeses only if made from pasteurized milk. ✔Fully cooked smoked fish or seafood. ✔Hot dogs reheated to steaming hot. If the hot dogs are served cold or lukewarm, ask to have the hot dogs reheated until steaming, or else choose something else. ✔Grilled sandwiches in which the meat or poultry is heated until steaming. ✔Fully cooked fish that is firm and flaky; vegetarian sushi. ✔Fully cooked eggs with firm yolk and whites.

Clip out these handy Info Cards and carry them for quick reference when shopping, cooking, and eating out!

In the Know:

Becoming a Better Shopper

Follow these safe food-handling practices while you shop.

• Carefully read food labels while in the store to make sure food
is not past its “sell by” date. (See Food Product Dating

• Put raw packaged meat,
poultry, or seafood into a
plastic bag before placing it
in the shopping cart, so that
its juices will not drip on—
and con taminate—other foods.
If the meat counter does not offer plastic bags, pick some up from
the produce section before you select your meat, poultry, and seafood.

Buy only pasteurized milk,
cheese, and other dairy products
from the refrigerated section. When buying fruit juice from the refrigerated section of the store, be sure that the juice label says it is pasteurized.

Purchase eggs in the shell from the refrigerated section of the store. (Note: store the eggs in their original carton in the main part of your refrigerator once you are home.) For recipes that call for eggs that are raw or undercooked when the dish is served—homemade Caesar salad dressing and ice cream are two examples—use either shell eggs that have been treated to destroy Salmonella by pasteurization, or pasteurized egg products. When consuming raw eggs, using pasteurized eggs is the safer choice.

• Never buy food that is displayed in unsafe or unclean conditions.

When purchasing canned goods, make sure that they are free of dents, cracks, or bulging lids. (Once you are home, remember to clean each lid before opening the can.)

Purchase produce that is not bruised or damaged.

When shopping for food,
it is important to read the label carefully.

on page 13)

12

Food Product Dating

Read the “Safe Handling Label” for food safety information on raw foods.

Types of Open Dates

Open dating is found primarily on perishable foods such as meat, poultry, eggs, and dairy products.

A “Sell-By” date tells the store how long to display the product for sale. You should buy the product before the date expires.

A “Best If Used By (or Before)” date is recommended for best avor or quality. It is not a purchase or safety date.

A “Use-By” date is the last date recommended for the use of the product while at peak quality. The date has been determined by the manufacturer of the product.

CHICKEN SAMPLER PACK

SELL BY JAN 13.06 576 PRICE/LB NET WT LB

270567 005093

BEST IF USED BY

1.99 2.56 lb

MEAT DEPT.

$5.09

TOTAL PRICE

P—7903

“Closed or coded dates” are packing numbers for use by the manufacturer. “Closed” or “coded” dating might appear on shelf-stable products such as cans and boxes of food.

Transporting Your Groceries

Follow these tips for safe transporting of your groceries:

• Pick up perishable foods last, and plan to go directly home from the grocery store.

Always refrigerate perishable foods within 2 hours of cooking or purchasing.

Refrigerate within 1 hour if the temperature outside is above 90 °F.

In hot weather, take a cooler with ice or another cold source to transport foods safely.

13

10 NOV 06

Eating out can be lots of fun—so make it an enjoyable experience by following some simple guidelines to avoid food-

borne illness. Remember
to observe your food
when it is served, and
don’t ever hesitate to ask
questions before you order.
Waiters and waitresses can
be quite helpful if you ask how a
food is prepared. Also, let them know you don’t want any food item containing raw meat, poultry, sh, sprouts, or eggs.