Longterm effect of Melani scandal on Highmark is unclear

When Highmark Inc. employees arrived at work Thursday morning, many already had heard the thumbnail version of the news -- CEO Kenneth R. Melani had been arrested following a Sunday altercation in Oakmont. By lunchtime, almost everyone knew the fuller, more sordid version of the story -- that he had been charged after a fight with his mistress's husband, and that the mistress, according to police, recently had been added to the Highmark payroll.

Dr. Melani, 58, of O'Hara, was charged by Oakmont police with criminal trespass and simple assault, his private life thrown into public view, his professional life in jeopardy after being reprimanded with an unpaid leave of absence.

Highmark's board of directors held an emergency session Thursday evening and announced that board chairman J. Robert Baum will serve as acting chief executive officer, effective immediately.

Dr. Melani has been with Highmark for 23 years, its CEO for nine of those, making about $4 million annually and running a $14.6 billion company with millions of policyholders and aspirations to become a major player in the regional hospital business.

It's an overnight fall from grace for one of the most powerful health insurance executives in the country. And now, the suddenly empty chair in the CEO's office has led to speculation as to how the company will move forward in its war with UPMC over its plan to acquire West Penn Allegheny Health System.

Mr. Baum addressed that issue in a statement announcing his appointment Thursday night.

"We regret that this situation arose," Mr. Baum said. "The board is fully committed to Highmark's mission and the business strategies that will guide us going forward. I'm working closely with Highmark's excellent and experienced senior leadership team to address our top priorities, including: securing a multi-year contract with [UPMC], completing our proposed affiliation with the West Penn Allegheny Health System, and preparing for the many challenges that health care reform brings to the marketplace."

Earlier Thursday, Deborah Rice, executive vice president of health services and a 29-year veteran at Highmark, was at a "sales summit" retreat for client managers and directors at the Omni Bedford Springs Resort, Bedford County, when the news broke. She addressed Dr. Melani's legal issues to those in attendance at the summit, telling employees that he'd been relieved of duties.

A bit later, at 10:56 a.m., Highmark's chief human resources officer, Ray Carson, sent out an email to all employees, saying that "I know many of you aware of the media reports that appeared earlier today involving Dr. Melani."

The memo then explained that Dr. Melani would be taking a leave of absence, and that "if you are asked to comment by the media," to refer all questions to Highmark's corporate communications office.

Many did not heed that directive, though, speaking to the Post-Gazette on the condition of anonymity about the arrest, the charges and their immediate effect on Highmark morale and operations.

Some said that Dr. Melani's arrest, while troubling enough on its face, was doubly so given the stress that the company now finds itself under -- namely, increased competition from area insurers, and the uncertainty over looming health care reform measures and how they will affect the company.

Others noted that Dr. Melani's affair was a badly kept secret within the company -- something his girlfriend, Melissa Myler, alluded to in the police complaint. She "stated that the dispute [with Dr. Melani] led to the relationship being known throughout the company, and that she knew that, once it became known, there would be problems."

As a result, she decided to hire an attorney, the police report said, to assist with her "expected exit from the company," just five months after she'd come on board (her role with the company could not be confirmed Thursday).

And still other Highmark employees, frustrated with the morale at the company, hoped that the arrest and executive suite turmoil could give Highmark's board of directors a chance to move in a new direction.

More than a few were stunned by series of poor decisions that ultimately led to Dr. Melani's arrest.

Workplace expert and HR consultant Kevin Burns said that this sort of news, at a company the size of Highmark, has the effect of opening the CEO's office to even greater scrutiny than is already typical.

"Rumors run rampant in workplaces," he said. "But in a workplace as large as this, did everybody know what was going on? Probably not."

But now, of course, they do, which can lead to feelings of embarrassment, anger and even betrayal, especially among his closest confidants and those who believe in his vision for the company, Mr. Burns said.

Had this been a more "run-of-the-mill" legal issue -- say, a DUI -- Dr. Melani would have had an easier time recovering and employees an easier time forgiving. But given that this was such an ugly romantic entanglement, many of his employees will "never look at the CEO the same way again," Mr. Burns said. "This is unrecoverable ... everything that's ever been done at Highmark, that he had his hand in, is going to be second-guessed."

Although CEOs of billion-dollar companies are routinely fired, suspended or placed on leave, it's typically over performance-related scandals, and not romantic entanglements.

One recent exception: Mark Hurd, the married CEO of computer and printer maker HP, stepped down two years ago amid charges that he'd harassed Jodie Fisher, a reality-television personality who worked for HP as a marketing consultant.

The best parallels, though, might be found in the political world. President Clinton, former U.S. Sen. John Edwards, former South Carolina Gov. Mark Sanford and former California Gov. Arnold Schwarzenegger all saw their lives, and in some cases their careers, come undone as a result of their extramarital dalliances.

Former New York Gov. Eliot Spitzer, disgraced after a sex and prostitution scandal, and homemaking queen Martha Stewart are examples of powerful officials who suffered embarrassing personal lapses, but rebounded.

"I think nobody will look at you in the same way. But can you overcome it? Those are separate questions," said Gilad Chen, a professor of management and organizational behavior at the University of Maryland.

"People are very forgiving, [so] long as you are willing to admit your mistake, pay your price, and move forward."

Mr. Chen also said that the episode could become a "teachable moment" for Highmark. When employees who fail to uphold the company's values are punished -- especially when that employee is a top executive -- it can show the rest of the company that no one is immune, and that the company's board doesn't tolerate such lapses.

"Any time there's a shock like this, it's a opportunity for a change in morale -- upward or downward," Mr. Chen said.

Dr. Melani, born in New Kensington and a Pittsburgh-area resident for most of his life, went to Springdale High School, then majored in chemistry at Washington & Jefferson.

After graduating from what is now Wake Forest University's medical school, he returned to Pittsburgh in 1979 for a three-year residency at West Penn Hospital.

He is married, with three daughters.

Bill Toland: btoland@post-gazette.com or 412-263-2625. First Published March 30, 2012 4:00 AM


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