Should We Cry for Non-Profit Hospital System CEOs Paid Less than For-Profit CEOs?

Two recent articles (<a href="http://www.modernhealthcare.com/article/20130810/MAGAZINE/308109991">here</a> and <a href="http://www.modernhealthcare.com/article/20130810/MAGAZINE/308109954/pay-for-value">here</a>) in Modern Healthcare providing an update on the compensation of CEOs of non-profit hospital systems raised new questions.<br /><br /><b>The CEOs' Compensation </b><br /><br /><a href="http://www.modernhealthcare.com/article/20130810/MAGAZINE/308109991">The first article</a> documented the rich compensation of the top paid CEOs of non-profit US hospital systems.  A summary of their total compensation:<br /><br />-  Donald Faulk (now retired), Central Georgia Health System - <b><i>$8 million</i></b> <br />-  George Halvorson, Kaiser Permanente - <b><i>$7.9 million</i></b><br />-  Jeffrey Romoff, UPMC - <b><i>$6.1 million</i></b><br /> -  Pat Fry, Sutter Health - <b><i>$5.2 million</i></b><br />-  Gregory Beier (retired), Novant Health  - <b><i>$5.1 million</i></b><br />-  Dr Steve Safyer, Montefiore Medical Center - <b><i>$5 million</i></b><br />-  David Bernd, Sentara - <b><i>$4.6 million</i></b><br /><br /><b>The Usual Talking Points </b><br /><br />The articles in combination provided the usual talking points as justification for this compensation.   We have noted that nearly every attempt made to defend the outsize compensation given hospital and health system executives involves the same talking points.   We first listed the talking points <a href="http://hcrenewal.blogspot.com/2011/09/talking-points-sans-original-thought-to.html">here</a>, and then provided additional examples of their use <a href="http://hcrenewal.blogspot.com/2011/09/more-repeats-of-talking-points.html">here</a>, <a href="http://hcrenewal.blogspot.com/2012/03/example-of-how-complex-takes-control.html">here</a> <a href="http://hcrenewal.blogspot.com/2012/12/health-care-hired-managers-not-playing.html">here,</a> <a href="http://hcrenewal.blogspot.com/2013/05/executive-compensation-as-legal.html">here</a> and <a href="http://hcrenewal.blogspot.com/2013/06/no-blues-but-lots-of-green-for-st-louis.html">here</a>.   They are:<br />- We have to pay competitive rates<br />- We have to pay enough to retain at least competent executives, given how hard it is to be an executive<br />- Our executives are not merely competitive, but brilliant.<br /><br />So true to form, we found in the Modern Healthcare articles these justifications of the executives multimillion dollar pay.<br /><br /><u>Competition</u><br /><br />In general, <br /><br /><blockquote class="tr_bq">In interviews, health system directors and executives at the systems where these top-paid executives work defended the compensation packages as <i>necessary to remain competitive</i>....</blockquote><br />Re UPMC<br /><br /><blockquote class="tr_bq">UPMC spokeswoman Susan Manko described his [that is, Romoff's] pay as <i>competitive</i> for an institution of UPMC's size and complexity.  </blockquote><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;"><br />Re Novant</div><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;"><br /></div><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;"><blockquote class="tr_bq">Novant spokeswoman Kati Everett said Novant follows IRS rules that call for pay to be <i>compared against the market</i>.... </blockquote><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;"><br />Re Sutter</div><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;"><br /></div><blockquote class="tr_bq"><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;">[Sutter Health board of trustees member and chair of the compensation committee Andy] Pansini said the Sutter board set the CEO's salary <i>halfway between the lowest and the highest amount he could earn elsewhere.</i></div></blockquote><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;"></div><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;">Also,</div><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;"></div><blockquote class="tr_bq"><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;">He said Sutter's board relies heavily on consultants to <i>compare Fry's compensation against the market</i>. </div></blockquote><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;"><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;"></div><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;"></div><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;"></div><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;"></div><div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;"><br /></div></div></div><br /><u>Retention</u><br /><br /> Re Sentara<br /><br /><blockquote class="tr_bq">'Mr Bernd's compensation takes into account his <i>40-year tenure of leadership</i> at Sentara, with nearly 20 serving as the organization's top executives.</blockquote><br /><u>Brilliance</u><br /><br />Re Novant<br /><br /><blockquote class="tr_bq">[Novant spokeswoman Kati Everett said] 'At Novant Health, we recognize (that) our responsibility to serve our community depends on the <i>caliber of talent </i>in our workforce, <i>our leadership group</i>....'</blockquote><br />Re Sentara<br /><br /><blockquote class="tr_bq">[CEO Bernd's] 'pay reflects his <i>experience, expertise</i>....'</blockquote><br />Re Sutter<br /><br /><blockquote class="tr_bq">[Pansini] defended [CEO] Fry's compensation as reasonable and necessary to meet Sutter's strategic goals by hiring a<i> skilled executive team.</i>  </blockquote><br /><u>Explicit Comparison to For-Profit Corporations </u><br /><br />The articles also introduced one new element.  Some defenders of non-profit hospital CEO compensation explicitly argued that should take into account compensation of for-profit CEOs.<br /><br />This argument was made by "Jill Horwitz, a law professor at the University of California at Los Angeles,' who had "defended paying not-for-profit healthcare executives market rates." <br /><br /><blockquote class="tr_bq">She also noted that not-for-profit systems have to <i>compete with the for-profit sector</i> for top talent. 'This idea that people should be donating their labor is a misunderstanding of charity.'</blockquote><br />Defenders of CEO compensation at specific health systems also made similar points.  For example, a Kaiser Permanente spokesman explicitly compared his CEO's pay to that given to CEOs of for-profit health plans, <br /><br /><blockquote class="tr_bq">Kaiser spokesman Won Ha, in a written statement, said Halvorson's pay <i>falls short of the average compensation of $14 million, not including option exercises, earned by CEOs of the 12 largest for-profit healthcare systems</i>, which had average 2011 revenue of $37 billion. <br /><br />'Compensation paid to senior management is <i>substantially less than that of many for-profit health (plans),</i>...'</blockquote><br />Also, re Sutter,<br /><br /><blockquote class="tr_bq">[board committee chair Pansini noted that when comparing his CEO's pay against the market] That comparison includes other executives of similar not-for-profit health systems, and to a lesser degree, of <i>for-profit systems</i>.</blockquote><br /> <b>Summary: An Extension, but Still no Clear Justification for the Talking Points</b><br /><br /><br />The talking points to explain executive compensation in health care are used again and again.  They never seem to be publicly challenged.  However, they should raise some obvious questions.<br /><br />The argument about competition raises several obvious questions.  Why should the top hired managers' pay be only compared to other top managers, and not explicitly to other employees?  Even if the comparison is restricted to other top managers, how can they be used for those at the top of the pay scale for non-profit hospital system CEOs?  How these CEOs' compensation could be dubbed merely competitive, much less "halfway between the lowest and highest amount he could earn elsewhere," is not clear.<br /><br />The retention argument begs the questions of whether any of these managers is really likely to leave, whether they really would be attractive to other organizations at the same or even higher pay, and whether it would really be difficult to find replacements.<br /><br />The brilliance argument raises the question of how brilliance is defined.  Given that it is almost unheard of for a fan of current compensation practices to dub any top manager anything less than brilliant, the obvious question is how can CEOs, like the children of Lake Woebegone, all be above average?  <br /><br /> Furthermore, the talking points seem to be in the process of extension, which should raise even more questions.<br /><br />Defenders of CEO pay, usually "spokespeople" or members of boards of trustees, often cite the need for "competitive" pay.  They usually are not clear about with whom they are competing.  Now it seems to be more popular to say that non-profit health care organizations are competing with for-profit corporations, despite the ostensible difference in their natures.  Non-profits are supposed to have a charitable nature and function, to have some sort of mission that serves the greater good.  To support that apparently benevolent purpose, in the US they are exempt from certain taxes, are are able to receive charitable contributions which in turn earn deductions for their givers.  For-profit corporations are in business ostensibly for their owners.  <br /><br /><br />In addition, by now asserting that the non-profit CEOs should be likened to the CEOs of for-profit corporations, the expanded talking points highlight questions that have been raised about how these hired managers are paid. We have previously discussed some pithy critiques of American practices of executive compensation (look <a href="http://hcrenewal.blogspot.com/2013/05/executive-compensation-as-legal.html">here</a> and <a href="http://hcrenewal.blogspot.com/2012/10/more-reasons-to-doubt-how-ceos-are.html">here</a>.) <br /><br />CEO compensation as a multiple of the pay of the average worker has risen 10-fold since the 1960s (see <a href="http://stateofworkingamerica.org/chart/swa-wages-figure-4-ceo-worker-compensation/">this chart</a>). As a consequence, the top 1% and 0.1% of the US income distribution is increasingly and disproportionately made up of executives, that is hired managers, (see the <a href="http://www.epi.org/publication/pay-corporate-executives-financial-professionals/">recent article</a> by Bivens and Mishel[1] for a summary).  Per the article, the income of top corporate executives has grown even faster than that of other members of the top 0.1%.  It seems evident that these rates of growth cannot be explained by increases in the financial performance of their companies.  Furthermore, while it appears that compensation of US health care corporate executives has grown as fast as their brethren, there is no data that US health care has improved at anything like a similar rate.  It may have hardly improved at all.  A recent JAMA article is just the latest example of studies showing that US health is lagging that of other developed countries, although the US spends far more per capita on health care.(2)      <br /><br />Furthermore, there is more and more criticism about how the compensation of top hired managers is set.  Steve Denning's <a href="http://www.forbes.com/sites/stevedenning/2012/02/22/hbr-blows-the-lid-off-c-suite-over-compensation/">blog  post</a> in Forbes summarized a 2012 Harvard Business Review article(3) suggesting that "market-based" compensation schemes mistake top managers for innovative entrepreneurs, when they are mainly simply "bureaucrats"; reward managers for luck rather than skill; and is "inversely related to shareholder returns."<br /><br />Finally, Elson and Ferrere <a href="http://www.thefreelibrary.com/What+is+a+CEO+worth%3F+Don%27t+look+to+peers%3A+peer+group+comparisons+skew...-a0272184752">critiqued </a>the mechanics of how compensation is set.  In particular, while boards of directors may attend to data on compensation of CEOs at other, supposedly comparable corporations, they almost always "choose a package that is in the 50th, 75th, or 90th percentile of their target peer group.  Targeting levels below the 50th percentile is rarely, if ever done."  Thus, boards nearly always act as if their CEO is above average, while by definition, most CEOs cannot be above average.  Why do boards commit this folly?  The authors postulated that suggesting the CEO is less than average "may raise concerns over the executive's position within the company...."  Perhaps boards also fear that labeling the CEO below average may be an admission of below average governance. <br /><br />Desai suggested that the perverse incentives created by current schemes to compensate managers were a major cause of the 2008 financial meltdown.  As Dennings wrote,<br /><br /><blockquote class="tr_bq">despite the constraints to change, the overcompensation of the C-suite and the financial sector is not sustainable. It causes serious misallocation of capital and talent, repeated governance crises, rising income inequality and an overall decline of the US economy. It obviously cannot continue, if only because, as Margaret Thatcher used to say in a different context, 'Sooner or later you run out of other people’s money'</blockquote><br />Clearly, in the health care context, the results could be even worse.  Perverse executive compensation could not only lead to misallocation of capital and talent in health care, it could lead to bad health care decisions that could harm patients' and the public's health.  However, there seems to be almost no discussion of, much less research about, much less policy changes addressing perverse incentives for health care managers and their likely ruinously bad effects on people and patients.<br /><br />Such discussion and research is a prerequisite to true health care reform, which would require such policy changes.<br /><br />Meanwhile, I hope at least the next time huge compensation of some health care managers is announced, someone asks the next set of questions after the usual talking points are made.   <br /><br />Roy M. Poses MD in Health Care Renewal <br /><br /><b>References</b><br />1.  Bivens J, Mishel L. The pay of corporate executives and financial professionals as evidence of rents in top 1 percent incomes.  J Econ Perspect 2013; 27: 57-78.<br />2. US Burden of Disease Collaborative.  The state of US health, 1990-2010 burden of diseases, injuries, and risk factors.  JAMA 2013; 310: 591-608.  Link <a href="http://jama.jamanetwork.com/article.aspx?articleid=1710486">here</a>. <br />3. Desai M. The incentive bubble.  Harvard Business Review, March 2012.  <br /><br />

Should We Cry for Non-Profit Hospital System CEOs Paid Less than For-Profit CEOs?

Two recent articles (here and here) in Modern Healthcare providing an update on the compensation of CEOs of non-profit hospital systems raised new questions.The CEOs' Compensation The first article do…

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Health Care Executives' Compensation: Head's, They Win, Tail's, You Lose

It seems to be the season for stories about the pay of health care leaders to appear in the press. Here is our latest round-up.<br /><br /><strong>Novant Health</strong><br /><br />First the Winston-Salem (NC) Journal <a href="http://www2.journalnow.com/news/2011/mar/01/wsbiz01-executives-at-novant-health-receive-sizabl-ar-821953">reported</a> hefty pay received by executives of a regional hospital system:<br /><blockquote>Four of the top five executives at Novant Health Inc. received substantial salary increases during 2010, according to the health-care system.<br /><br />However, the overall compensation and benefits for the top three executives were down for the fiscal year.<br /><br /><em>Paul Wiles, the chief executive and president of the not-for-profit system, got a $129,000 raise, or 14 percent, to $1,029,000 in salary. He got a bonus of $836,800, up $9,338. His total compensation was down 3 percent to a little more than $2 million.</em></blockquote><br />Also,<br /><blockquote><em>Greg Beier, the president of Novant Health Operations, received a 15 percent salary increase to $659,000, but total compensation was down 8 percent to $1.48 million.</em><br /><br /><em>Carl Armato, the president of Novant Health Markets, got a 5 percent salary increase to $638,000, but total compensation decreased 3 percent to $1.26 million.</em><br /><br /><em>Jacque Gattis, the system's chief administrative officer, had a 19 percent salary increase to $490,000 and a 5 percent total compensation increase to $951,975.</em><br /><em><br /></em><br /><em>Stephen Wallenhaupt, its chief medical officer, received a 20 percent increase in salary to $481,000 and an 8 percent increase in total compensation to $935,525.</em></blockquote><br />This article made it seem that the substantial compensation received by these executives was related to the system's financial performance:<br /><blockquote>[Senior Vice President of marketing and communication Jim] Tobalski said Novant will release its fiscal 2010 financial report in April. The system <em>likely will report a better overall performance</em> because of the stock market's surge in 2010.</blockquote><br />However, as <a href="http://www2.journalnow.com/news/2011/mar/09/wsmain01-novant-exec-bonuses-irk-some-employees-de-ar-845654/">reported</a> eight days later again by the Winston-Salem (NC) Journal, there are other ways to look at these executives' compensation. First, their bonuses can be compared to those given less exalted employees:<br /><blockquote>Novant Health Inc. has paid two separate bonuses, including a one-time 'thank you' offering, to its Forsyth Medical Center employees recently, but that has not dampened the complaints of some employees that executive payments were too high.<br /><br />Jeff Lindsay, the hospital's president, notified employees of the bonuses in an internal memo Feb. 28.<br /><br />Lindsay's memo said the thank-you bonus was for 'efforts above and beyond the achievement of our 2010 goals.' <em>It was worth $120 for employees who worked more than 1,500 paid hours in 2010 and $60 for those who worked 750 to 1,499 paid hours</em>.<br /><br /><em>Novant also paid a 'discretionary' bonus ranging from $120 to $300</em>, depending on the employee's length of service and employment status. That bonus was contingent on Novant achieving goals in quality, financial vitality, employee commitment and patient satisfaction.<br /><br />By comparison, the top five executives of Novant received a combined $2.62 million in executive bonuses for 2010. The combined bonuses were up $151,713 from 2009.</blockquote><br />Furthermore, it is not clear that the system's financial performance has been as good as its spokesman implied above:<br /><blockquote>Several Forsyth Medical employees criticized Novant's decision to pay the executive bonuses after <em>the hospital cited financial challenges and lower demand for services in cutting 48 jobs there in July.</em><br /><br />'How can any executive with a conscience accept a $129,000 raise and an $836,800 bonus while the company lays off employees who desperately need income to support their families?' said one posting to JournalNow.com.</blockquote><br />So, in summary, some useful comparisons are: top executives' bonuses were approximately one-thousand times the size of those given to regular employees; and top executives' total compensation was justifed by "financial performance" during a year the system had to lay off workers due to "financial challenges."<br /><br /><strong>University of Massachusetts Medical Center</strong><br /><br />The Worcester (MA) Telegram <a href="http://www.telegram.com/article/20110316/NEWS/103160420/1116">reported</a> on the leader's compensation contrasted with the hospital's financial status:<br /><blockquote><em>While facing a $54 million budget shortfall for next fiscal year, the University of Massachusetts last month hiked UMass Medical School Chancellor Michael F. Collins’ salary by more than $60,000 a year — almost a 12 percent pay raise.</em><br /><br />The three-year contract signed by Dr. Collins and outgoing University of Massachusetts President Jack Wilson on Feb. 14 raises the medical school chancellor’s annual base salary and deferred compensation from $524,300 to $585,290.<br /><br />Under the deal, Dr. Collins will no longer get a separate $32,000-a-year housing allowance and instead is required to live rent-free in the furnished and remodeled Grenon House on Flagg Street. The five-bedroom, four-bathroom home has an assessed value of $736,600 and is owned by the University of Massachusetts Foundation, according to city property records. </blockquote><br />Dr Collins' total compensation, however, will be considerably larger than his salary:<br /><blockquote>Dr. Collins, who also serves as the university’s senior vice president for health sciences, will continue to be eligible for additional performance pay of up to 30 percent of his base salary a year, which works out to $164,100 in potential performance pay in the new contract, up from $147,000 under his previous salary.<br /><br />The chancellor also will continue to receive $15,000 a year for his choice of life insurance or an extended care health insurance policy, as well as supplemental retirement contributions totaling $98,000 a year — the IRS maximum for those type of retirement accounts, according to the contract and the medical school.<br /><br />All together, <em>the chancellor’s compensation package and benefits could be worth as much as $862,000 a year if he receives the maximum performance pay</em>. That figure does not include the value of living at Grenon House. </blockquote><br />His raise can be contrasted with those received by lower-level employees:<br /><blockquote>The chancellor’s pay hike stands in contrast to <em>2 percent raises negotiated late last year with some union workers at the medical school and with a previous salary freeze for all university employees earning $120,000 a year or more.</em><br /><br />In announcing that pay freeze two years ago, Mr. Wilson noted, 'We are living at a time when few people are seeing their financial circumstances improve and most are happy to preserve what they have as we ride out the current fiscal and economic storm.' </blockquote><br />Despite the budget short-fall, and consequent salary freezes, the criterion for the Chancellor's salary seemed to be what other top executives were getting at other organizations, even if those organizations were having better financial results:<br /><blockquote>'The university does try to<em> set salaries for senior administrators in relation to what people are paid for discharging comparable duties at comparable institutions</em>,' [university spokesman] Mr. Connolly said. 'In this case, Chancellor Collins would be slightly under the median salary paid at comparable institutions.' </blockquote>Another university spokesman justified the Chancellor's compensation by citing his performance:<br /><blockquote>'The chancellor has a record of success in Worcester,' said [university spokesman] Mr. Keohane, who provided an eight-page medical school report titled 'Accomplishments of Michael F. Collins, MD.'<br /><br />The report lists dozens of improvements to the medical school during the tenure of Dr. Collins, including items such as: leading the campaign to make the university a partner in the state’s $1 billion life sciences initiative; increasing medical school class enrollments by 25 percent; presiding over improving academic performance; growing revenue by more than 27 percent; instituting more formal performance reviews among executive staff; and improving collaboration with UMass Memorial Health Care Inc. </blockquote><br />Oddly enough, he did not mention UMass Memorial's aggressive recruiting campaign for bone marrow donors in part implemented by "flirtatious models" that failed to disclose how the donors would be charged for their generosity as one of the Chancellor's achievements related to "improving collaboration" with UMass Memorial (see <a href="http://hcrenewal.blogspot.com/2010/12/high-heels-short-skirts-and-recruiting.html">this post</a>). <br /><br />So, in summary, a budget shortfall was the justification for freezing line employees' pay, but not the Chancellor's pay, which was raised.  One rationale for the raise was that the Chancellor's pay had to be increased to keep up with pay of executives elsewhere, but the pay of line employees was not compared with such employees elsewhere.  Another rationale for the raise was a list of positive developments at the medical center, but negative developments were ignored, as were the contributions of any employees other than the Chancellor to the positive developments.<br /><br /><strong>Summary: Head's, They Win, Tail's, You Lose </strong><br /><br />Juxtaposing these two examples shows how justifications for executive compensation in health care often seem to be ad hoc, after the fact, and inconsistent with any rationale for compensation for more mundane employees.  If outcomes have been good lately, then the good outcomes may be the rationale for better executive compensation.  If the outcomes have been bad, then the executives must deserve more because they are struggling so hard under tough conditions.  <br /><br />The rules for everyone else, of course, seem to be more stark.  <br /><br />So, once more with feeling, as we have <a href="http://hcrenewal.blogspot.com/search/label/executive%20compensation">said before</a>, far too often the leaders of not-for-profit health care institutions seem more interested in padding their own bottom lines than upholding the institutions' missions. They often seem entirely unaware of their duty to put those missions ahead of their own self-interest. Like the financial services sector in the era of "greed is good," health care too often seems run by <a href="http://hcrenewal.blogspot.com/2009/12/compensation-madness-insiders-hijacking.html">"<strong><em>insiders hijacking established institutions for their personal benefit.</em></strong>"</a> True health care reform would encourage leadership of health care who understand health care and care about its mission, rather than those who see a quick way to make a small fortune.

Health Care Executives' Compensation: Head's, They Win, Tail's, You Lose

It seems to be the season for stories about the pay of health care leaders to appear in the press. Here is our latest round-up.Novant HealthFirst the Winston-Salem (NC) Journal reported hefty pay rece…

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