The Pattern
In the groundbreaking science fiction series "Fringe," "The Pattern" was a series of apparently inexplicable events which eventually pointed to the existence of a parallel universe.
In non-profit hospitals, The Pattern of the discussion of executive compensation is this. Nearly all non-profit hospitals must release minimal data on the total compensation of a few of the highest paid executives. When these reports come out, sometimes the local media take a look, either at an individual hospital or hospital system, or at a number of local hospitals. They almost inevitably find that some, usually most executives make what appears to be lots of money. This could be hundreds of thousands of dollars at small community hospitals, or millions of dollars at larger hospitals and hospital systems. Sometimes the reports end there. Sometimes the reporters ask hospital representatives or local experts to explain the apparently exalted compensation figures. The explanations are usually very similar, and so we have called this part of The Pattern The Talking Points.
The Talking Points
It seems nearly every attempt made to defend the outsize compensation given hospital and health system executives involves the same arguments, thus suggesting they are talking points, possibly crafted as a public relations ploy. We first listed the talking points here, and then provided additional examples of their use here, here here, here, here, and here, and here.
They are:
- We have to pay competitive rates
- We have to pay enough to retain at least competent executives, given how hard it is to be an executive
- Our executives are not merely competitive, but brilliant (and have to be to do such a difficult job).
The talking points are usually supplied by hospital public relations personnel, sometimes by hospital trustees or executives, sometime by various health care consultants. The talking points are rarely questioned.
So let us look at some recent media articles for The Pattern, grouped in chronological order, to illustrate.
Jersey Boys
On April 6, 2014, Crain's New York Business reported some of the biggest yearly compensation figures seen for non-profit hospital CEOs.
Ronald Del Mauro, the former president and chief executive of Barnabas Health, pulled in almost $22 million in 2012, the year after he retired from New Jersey's largest health system. Joseph Trunfio, president and chief executive at Atlantic Health, made $10 million.
Never before have such outsized compensation packages appeared on Crain's annual list of top-paid hospital executives
The explanations fit the pattern. First from a Barnabas spokesperson,
'When Mr. Del Mauro began his career, Saint Barnabas Medical Center was a stand-alone community hospital,' she said, adding that Barnabas is 'well positioned both financially and operationally, despite significant industry challenges. His retirement package is a function of over four decades of service ... and reflects his exceptional legacy.'
He was just another brilliant executive, in other words.
Then about Mr Trunfio,
In a statement, Karen Kessler, board chair of Atlantic Health System, said that while Mr. Trunfio's 'current agreement does not have these bonus provisions, his compensation is performance-based, aligned with industry standards and intended to assure we retain top executive talent to provide the best quality of care to the communities we serve.'
There in italics were the competitive market rates and retention arguments, and a repeat ("top talent") of the brilliance argument.
Meanwhile, on April 28, 2014, NJBiz had its own report on non-profit executive compensation in the state. Their summary included,
Heading up the list is Robert C. Garrett, CEO of the Hackensack University Health Network at $2.12 million, followed by Richard P. Miller, Virtua Health ($1.99 million); John K. Lloyd, Meridian Health System ($1.68 million); Barry H. Ostrowsky, Barnabas Health ($1.67 million); and Stephen K. Jones, Robert Wood Johnson Health System ($1.55 million).
Several New Jersey multi-hospital systems paid several top executives more than $1 million in 2012. Hackensack, for instance, has two executives over the million-dollar mark.
[It is not clear why the two different reports listed two different people from Barnabas - Ed]
Then came The Talking Points, for example, from Hackensack Hospital,
'The pay for HackensackUMC's executives reflects its complexity and is consistent with those levels paid to executives in other similarly situated not-for-profit academic and integrated health systems,' Hackensack said in a statement. "The compensation philosophy is to provide market-competitive base salaries....
The bit about complexity implies the brilliance argument, since only a brilliant CEO could cope with such complexity. Then we had two versions of the competitive market based payment argument.
Here is another version of the same thing, this time from one "Joel Cantor, director of the Center for State Health Policy at Rutgers University,"
On the other hand, hospital systems are large, complex organizations. Ultimately, CEO compensation is driven by the market for senior talent.
My favorite version of the brilliance argument came from one Ms Betsy Ryan, president of the New Jersey Hospital Association,
They literally are on call 24/7, 365 days a year and they are running an institution where lives are at stake
More on that later.....
Smatterings of Data from Connecticut and Pennsylvania
There were a series of reports that simply noted large amounts, but did not look for explanations.
HartfordBusiness.com recounted a state report of the top 10 most highly paid executives of individual hospitals (but did not account for the pay given to executives of hospital system). The figures started at $3.26 million for the CEO of Yale-New Haven Hospital, and finished with $1.48 million for the senior vice-president and chief of staff at the same institution.
The Pittsburgh Post-Gazette reported pay at the West Penn Allegheny Health System, including that given to a former CEO, $1.89 million, and to a former chief administrative officer, $1.29 million.
Then the Pittsburgh Tribune noted even bigger compensation given out at competitor UPMC.
UPMC CEO Jeffrey Romoff got an 8 percent raise two years ago, placing his generous compensation package near the top of the nonprofit hospital industry.The 68-year-old Romoff, who leads the largest integrated health system in Western Pennsylvania and one of the biggest in the nation, brought in $6.6 million in 2012, up from $6.1 million in 2011, according to tax documents UPMC made public on Friday.
Wake Forest Baptist
The Winston-Salem Journal reported details of executive compensation at Wake Forest Baptist on May 16, 2014. Its CEO, Dr John McConnell, had "total compensation [which] rose 0.8 percent to $2.06 million in 2012." Then, however, "Donny Lambeth, the former president of N.C. Baptist, had a 52 percent drop in total compensation to $1.18 million." Also, "Dr. Thomas E. Sibert, president of Wake Forest Baptist Health and chief operating officer, received a 10 percent drop in total compensation to $1.02 million." Then, "Edward Chadwick, chief financial officer, had a 2.3 percent drop in total compensation to $956,465." It is interesting that some executives actually saw small decreases. Then again, the system lost $4.5 million for fiscal 2012-2013.
The article also offered up the usual explanations, first provided by the hospital system itself,
there are few executives with the required skill set to manage and provide leadership for an integrated (center) such as ours
There goes another version of the brilliance argument. Then,
Its executive compensation packages, it said, 'are fiscally responsible, appropriate for the marketplace and an essential part of the effort to recruit and retain skilled executives and visionary leaders for the medical center.'
Those included the competitive market rates and the retention arguments, plus the ante for brilliance was upped to the visionary level.
The article ladled on one another version, this time supplied by "John Challenger, chief executive of outplacement consultancy Challenger, Gray & Christmas,"
'Communities who want the best health-care system they can get should support paying the compensation levels required to attract top talent,' Challenger said.
'Cutting salaries will result in an exodus of top talent to systems that will pay it,...'
So "top talent" = brilliance argument, threatening an "exodus" = retention argument.
So there they go again, again.
Something Different: the New York Times Challenges the Pattern
We have previously challenged the talking points. For example, in August, 2013 we wrote,
As we have noted before, there is little evidence in support of these talking points. What evidence there is on the topic suggests there is no real free market in interchangeable CEOs, and that CEOs are not very mobile, especially not across different kinds of organizations (look here). There is little evidence that hospital (or other health care) executives are particularly brilliant, or any more brilliant than multitudes of physicians, nurses, and other health care professionals who work hard to make their institutions run.Yet most discussions of executive compensation in hospitals, and indeed in health care, follow The Pattern.
So it was refreshing in this season of outsized compensation reports is that the New York Times ran an article that challenged The Pattern, albeit with limitations. The most obvious problem with the pattern is that the arguments are out of context, and not challenged in context. However, in the NY Times,
Physicians, the most highly trained members in the industry’s work force, are on average right in the middle of the compensation pack.That is because the biggest bucks are currently earned not through the delivery of care, but from overseeing the business of medicine.The base pay of insurance executives, hospital executives and even hospital administrators often far outstrips doctors’ salaries, according to an analysis performed for The New York Times by Compdata Surveys: $584,000 on average for an insurance chief executive officer, $386,000 for a hospital C.E.O. and $237,000 for a hospital administrator, compared with $306,000 for a surgeon and $185,000 for a general doctor.
Note that this comparison only refers to salaries, not total compensation, so
And those numbers almost certainly understate the payment gap, since top executives frequently earn the bulk of their income in nonsalary compensation.
We just saw examples of non-profit hospital CEOs making over $1 million to over $6 million in total compensation. That would imply that non-profit CEOs may make from three times to over thirty times the total compensation of a surgeon, and from over five times to over thirty-five times the compensation of a general internist. (And the ratio for such outliers as Mr Del Mauro above would be even higher.)
So is a hospital CEO thirty times more brilliant than a general internist?
That suggests also that we go back to another version of the brilliance argument found in one article above. In the NJBiz article, the NJ Hospital Association President said, about CEOs, not physicians,
They are literally on call 24/7, 365 days a year and they are running an institution where lives are at stake.
They may be on call in a sense, but they are never on first call. Their decisions may ultimately affect lives, and perhaps put lives at risk. But they never have to make a decision about a patient that could literally cost that patient his or her life. And they almost never have to be accountable for what happens to individual patients.
It is easy to argue that physicians' responsibilities for life and death decisions are much more direct. Explain, then, those pay ratios again.
Actually, in an opinion piece about executive compensation in FierceHealthFinance, Ron Shinkman described the life of a typical seven-figure a year hospital executive,
While the days of seven-figure club members are long, they are also predictable--check the census and cash flow reports, confer with the medical staff, get updates on supplies, negotiate with payers, have some meetings on long-term planning. If it is a large hospital in a large market, those meetings are likely focused on site expansion and acquisition. If it is a medium-sized facility, tI expect they spend their time focused on finding a larger partner. Breakfast and dinner meetings and events switch focus to development and fundraising.
There may also be some meetings on quality initiatives, but they are of nominal consequence. Members of the seven-figure club enjoy little to no accountability from their customers.
So is executive compensation in hospitals, or other parts of the health care system, based on executives' brilliance. Or is it based on their ability to be rentiers, rent-seekers, who can control the choke points of money flow, and make sure they get more than their share before what is left can go to real health care?
Of course, hospital executives and their ubiquitous spokespeople do not discuss what they do day to day. Maybe they need to, and also need to address the implications of these statements in the NY Times article, given that the US has the highest health care costs of any developed country, but nowhere near the best results,
And studies suggest that administrative costs make up 20 to 30 percent of the United States health care bill, far higher than in any other country. American insurers, meanwhile, spent $606 per person on administrative costs, more than twice as much as in any other developed country and more than three times as much as many, according to a study by the Commonwealth Fund.As a result of the system’s complexity, there are many jobs descriptions for positions that often don’t exist elsewhere: medical coders, claims adjusters, medical device brokers, drug purchasers — not to mention the 'navigators' created by the Affordable Care Act.Among doctors, there is growing frustration over the army of businesspeople around them and the impact of administrative costs, which are reflected in inflated charges for medical services.
We had previously argued (see above) against the talking points, and specifically that there is nothing to suggest that hospital executives are any more, much less an order of magnitude more brilliant than physicians or other health care professionals. But I confess as a physician I did not have the courage to extend that argument to a direct comparison of executive versus health care professional pay. The Times article, written by someone who is not a physician, did not have to worry about appearing self-serving. I am glad, for it is high time to discuss the degree that the incentives produced by executive pay in health care have become perverse, and how to change these incentives to make health care leaders more accountable for health, and less focused on their own riches.
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