Tuesday, April 10, 2007

Lifestyles of Rich but Not So Famous Hospital Executives

The Hartford Courant just reported on the ballooning salaries of top executives of not-for-profit hospitals in the state of Connecticut.

The head of Middlesex Hospital earned $1.9 million last year, making him the highest-paid hospital administrator in the state. In just three years, CEO Robert Kiely's compensation nearly tripled, part of a trend in soaring compensation packages for hospital leaders.

Last year, Kiely and seven other Connecticut hospital administrators - three of them top managers in the Yale-New Haven Hospital Health System - made more than $1 million.

The Courant ranked the highest-paid hospital CEOs in Connecticut using data recently filed with the state Office of Health Care Access.

Yet, a close look at the numbers shows how arbitrary compensation can be. In Middletown, Kiely heads a community hospital that has expanded its ER but is not a state-approved trauma center. In New Haven, [Marna] Borgstrom oversees a teaching hospital [Yale-New Haven Hospital] and two smaller hospitals that together bring in three times the revenue. Though both executives made roughly the same in salary, Kiely received an extra $395,000 in benefits-most of it retirement money.

At Stamford Hospital, [Brina] Grissler made $376,000 more last year than Hartford Hospital President John Meehan, who oversees a health system with three times more revenue. A spokesman said Grissler's compensation takes into account his long tenure and the cost of living in Fairfield County.

The article provided some rationalizations for how much hospital executives now make.

The hospitals say they need to offer competitive pay to keep talented managers. The job of running a hospital has grown more complex, they argue, amid falling government reimbursement rates for services and rising demand for charity care.

'We can't do excellence on the cheap,' said James Matschulat, head of the compensation committee at Middlesex and a retired insurance executive. 'We compete with every hospital in the nation for top talent.'

Strong leadership is needed for hospitals to succeed financially, and therefore serve the public good, the hospitals contend. 'These are very complicated and difficult businesses,' said Robert Ritz, CEO at St. Mary's, a Catholic hospital in Waterbury. 'We have a charitable, social and healing mission.'

On the other hand, such lavish compensation of managers of not-for-profit organizations often considered charities makes some people uncomfortable. Although excellence may not come cheap, it is not clear that all hospital executives are excellent. And some of the explanations proposed for the phenomenon are not so rational as those above.

'Think about how many uninsured people that would cover,' said Ellen Andrews, head of the Connecticut Health Policy Project in New Haven.

Compensation at nonprofits is exploding because board members often come from the corporate world, where lavish CEO salaries are accepted, said Pablo Eisenberg, a senior fellow at Georgetown University's Public Policy Institute. Compensation consultants are also driving up pay by referencing corporate salaries in their surveys. As the salary gap widens between top managers and their staff, teamwork and collegiality suffers, he argues.

'Boards are not exercising their fiduciary duty,' he said. 'No one is questioning these excessive compensations.'

Note that we previously posted about arguments that hospital board members see their job mainly as a networking opportunity and a chance to go to fancy social events, at least in Massachusetts, Connecticut's northern neighbor.

As briefly mentioned in the Courant article, Senator Charles Grassley, (R-Iowa) also views lavish pay of hospital administrators with a jaundiced eye, and the scope of his concern is not restricted to the states of Connecticut or Massachusetts. As noted in the Chronicle of Higher Education,

A powerful Republican senator has asked the Government Accountability Office, Congress's investigative arm, to examine how much free care and other services nonprofit hospitals provide to the regions in which they are located.

Sen. Charles E. Grassley of Iowa said he is concerned that hospitals may not be providing enough services to their local areas to justify the tax breaks they receive. Mr. Grassley, the top Republican on the Senate Finance Committee, also said that some hospital executives and board members may be overpaid.

'There have been alarming reports about the lavish lifestyle that some of these individuals lead courtesy of the nonprofit hospital as well as the business ventures that enrich these individuals to the detriment of the nonprofit hospital,' he said.

In my humble opinion, there are some hospital executives who certainly earn every dollar they make.

But it seems that
  • hospital executives' total compensation is often well concealed
  • the relationships among such compensation and hospital size, hospital performance, and CEO performance are not obvious
  • many anecdotes, most muttered quietly in hallways, suggest very well-paid CEOs live lavish life-styles disproportionate to their hospitals' size, charitable mission, and struggling financial status
  • such disproportionate pay and life-style of some hospital CEOs may demoralize their employees and health care professionals, even while delighting their golf-playing buddies among the local gentry
  • I would believe the sincerity of those who espouse pay for performance (P4P) for physicians if they were equally enthused about applying some measure of rationality to the compensation of health care executives.
Note, for an interesting discussion of hospital CEO pay orchestrated by the one hospital CEO who sets an example of transparency by blogging, see this post on Running a Hospital, and its associated comments.


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Anonymous said...

Paul Levy in his blog demonstrates why he is the CEO of a large organization through his clear explanation of his salary. My concern is that at no time does he address the issue of his nonprofit's mission. He does a great job of highlighting numbers and goals, but never really speaks to the main objective of treating people.

His athletic point is a red herring. He would have had a work history with ever increasing salary prior to becoming CEO and if he leaves his current position he will have opportunities to continue making an above average income. he is not a 19 year old with no other job skills other than throwing or running a ball.

My concern with this issue is that this is the pricing information that is used in selecting administrators in other parts of the country that may not have as high a cost of living. As noted, compensation managers do not always look at apples to apples, but how high can we go.

In fairness this issue extends beyond just hospitals. Universities see a great disparity amongst employees with football coaches making much more than even university presidents. Our local school boards find that often the school superintendent is one of the highest income earners in the school district. Religious organizations often find it difficult to hire given unrealistic salary explications and references to high cost of living locations.

We do need to be aware of the 40 year old commentator, with two doctorates making $60,000 per year, because he loves the work. Resentment does becomes an issue and future recruiting becomes problematic.

Steve Lucas

Val said...

Dear Roy, you said, "In my humble opinion, there are some hospital executives who certainly earn every dollar they make." I wonder if you can elaborate? I've been somewhat unkind to hospital administrators in my blog (because I used to work at a struggling Catholic hospital dedicated to serving the poor, and while we couldn't afford to buy toothpaste for the patients, the CEO was making 2-3x more than the highest paid physicians - which was hard to swallow under the circumstances). I would like to be fair and balanced... wonder if you can help me think through cases where the salary is justified?

Roy M. Poses MD said...

I didn't have anyone in particular in mind.
Off the top of my head, an fairly easy case would be that of a community hospital CEO who is known to be honest, transparent, and apparently competent, with relatively reasonable total compensation, i.e., not higher than the highest paid physician at the hospital, whose hospital has a reputation for good, honest clinical care, a caring staff with good morale, a well-functioning physical plant, and which has a stable financial position.
I'm sure there are a few around.

Val Jones said...

Thanks! That's a great description of a noble hospital exec... have you ever heard of one making similar pay to the physicians, though? Do you think that's a reasonable yard stick (physician pay = admin pay)? I don't know the answer... just found it interesting. :)

Roy M. Poses MD said...

I would bet that you can find a fair number of executives at small to mid-size community hospitals making no more than what the highest-paid physicians are paid.

Note that I'm sure I've said before that the amounts paid to the some procedural specialists are hard to justify. But these physicians have been through arduous training lasting years, have had to pass many exams and evaluations, and continue to submit to repeat evaluations to stay licensed, have pledged to uphold professional values, and often have to deal with stressful, high-stakes problems and make decisions that affect peoples' lives and health. It goes without saying that most are very highly skilled and knowledgeable.

Hospital executives, on the other hand, have to meet no particular training requirements, do not have to have any experience on the ground in health care, or knowledge of clinical matters, have no licensing requirements, do not have to pledge to uphold any particular ethical standards, and are not directly responsible for clinical decisions.

Thus, I see no justification for paying them more than the highest-paid physicians.

I could say the same for executives of any health care related organization.

(To those who might predictably reply that health care executives' compensation is set by the free market, I say, show me how it is a free market. There is plenty of evidence that executive pay is set by boards of directors who are themselves executives, and are hence interested in keeping exectuive pay high, and who almost always seem to think that their executives are "above average," even though, by definition, they all cannot be. The boards also often support their decisions with compensation analyses that target the wrong comparison groups.

Anonymous said...

Re: Steve Lucas's comment, "His athletic point is a red herring."

Steve, that was a joke in my post! You can't believe I really meant it as a way to establish CEO salaries. Sorry if it didn't come across as same.

And to this point: "My concern is that at no time does he address the issue of his nonprofit's mission. He does a great job of highlighting numbers and goals, but never really speaks to the main objective of treating people."

I did talk about getting personal performance reviews based on clinical quality, patient satisfaction, and financial performance. Two out three are directly related to treating people. The third relates to staying in business, of special importance to my board since the place almost went out of business before I got there because of poor financial management. More generally, as it is said in the non-profit world, "no margin, no mission."

But for more information about treating people, please read my other blog posts.