Tuesday, February 02, 2010

Hospital Executive Pay in the Land Where All Our CEOs Are Above Average

In the US, it seems to be the season for news reports on the pay of hospital executives.  Here are reports from three states in the southeast, in alphabetical order.


The St Petersburg (FL) Times reported on the total compensation of local hospital executives:
While many workers in the Tampa Bay area have had their wages frozen or reduced in the past few years, life has been kinder to chief executives at nonprofit hospitals in the Tampa Bay area.

A bright light in a dim economy, most local tax-exempt hospitals have continued to post surpluses, despite losses on investments and the growing number of uninsured. And the executives at the helms of these organizations have been duly rewarded by their community-based boards, according to the federal tax filings required of such organizations. In fact, average compensation at tax-exempt hospitals here is well above the national average.

Members of the millionaire men's club include:

• Isaac Mallah, chief executive of St. Joseph's Hospital in Tampa, who received total compensation of $2.2 million in 2008, the most recent year available.

• Mallah's boss, Steve Mason, who heads BayCare Health System, toted up total compensation of more than $1.7 million.

• Tampa General Hospital's chief executive, Ron Hytoff, also earned more than $1.7 million.

• At All Children's Hospital in St. Petersburg, Gary Carnes' pay package was about $1.2 million. Across the street at Bayfront Medical Center, Sue Brody, the only female chief executive of a freestanding nonprofit hospital in the area, was paid $744,149.

• Dr. William Dalton, president and chief executive of Tampa's H. Lee Moffitt Cancer Center and Research Institute, received just over $1 million in total compensation in 2008. But it could have been higher. In both 2008 and 2009, Moffitt's board eliminated bonuses for all managers because of tough economic conditions.

Average compensation for chief executives at 14 nonprofit hospitals in the Tampa Bay area was about $876,000. Meanwhile, according to an IRS survey of more than 500 nonprofit hospitals last year, the national average was $490,000.

How were these generous amounts of compensation justified?
BayCare's Mason said he won't apologize for what he's paid to lead the seven-hospital system, which had more than $2 billion in revenue in 2008.

'I have significant responsibility over a lot of resources, providing a service that improves the health of the community,' said Mason, who joined BayCare in 2004. 'This is what it would cost our board to replace me.'

In addition,
Officials at area hospitals say their boards adhere 'meticulously' to IRS rules, hiring independent consultants every year to ensure their chief executives' salaries are comparable to pay at similarly sized nonprofit institutions. Mason said BayCare's board tries to ensure that its total compensation stays at about 75 percent of the maximum paid.

North Carolina

The Charlotte Business Journal noted:
Carolinas HealthCare paid Chief Executive Michael Tarwater $3.4 million in 2009, down from $3.5 million a year earlier. His 2009 compensation includes a base salary $950,697 and bonuses of $1.87 million.

Paul Wiles, chief executive at Winston-Salem-based Novant, earned total compensation of a little more than $2 million in 2009, roughly the same as in 2008. His base salary last year was $900,000, and he was paid a bonus of $827,462. Novant estimates Wiles received $339,000 in other compensation, including benefits and deferred compensation.

Carolinas HealthCare released compensation information for these other top executives:

•Joseph Piemont, president and chief operating officer, $1,731,581.

•Greg Gombar, chief financial officer and executive vice president, $1,526,254.

•Paul Franz, executive vice president of the physician services group, $1,399,528.

•Dennis Phillips, executive vice president of the Metro Group, $1,084,859.

•David Dunlap, president and chief executive of Roper St. Francis Healthcare, $1,043,078.

•Laurence Hinsdale, executive vice president, regional group, $1,041,586.

•John Knox, executive vice president and chief administrative officer, $992,993.

•Russell Guerin, executive vice president of business development and planning, $922,769.

•Keith Smith, senior vice president and general counsel, $783,643.

Presbyterian also released compensation information for its other top executives. Its figures include 2009 base salaries and 2008 bonuses, which were paid in 2009:

•Greg Beier, president of acute-care services Novant Health, $1,615,322.

•Carl Armato, president Novant core markets, $1,295,030.

•Dean Swindle, president of ambulatory services and chief financial officer for Novant Health, $1,084,155.

•Dr. Hayes Woollen, former president of Novant Medical Group, $1,009,168.

•Jacque Gattis, chief administrative officer for Novant Health, $902,374.

•Sallye Liner, president of Forsyth Medical Center and Winston-Salem market, $887,109.

•Dr. Stephen Wallenhaupt, chief medical officer for Novant Health, $867,740.

•Lawrence McGee, general counsel for Novant Health, $728,584.

•Dr. A.J. Patefield, chief medical information officer Novant Health, $706,889.

Again, how was the pay justified?
'We need to stay on top of what’s going on in the market and stay competitive,' says James Hynes, chairman of Carolinas HealthCare’s board of commissioners and a member of its compensation committee.

'Our process delivers the number we think we ought to have,' Hynes says. 'We feel like we’ve done it correctly.'


Moving on to Texas, the Dallas Morning News reported:
Top executives at Parkland Memorial Hospital collected about $1.7 million in bonuses at the end of last year, according to records released recently to The Dallas Morning News.

The 2009 bonuses, approved in December by the hospital's board of managers, went to vice presidents, senior vice presidents and executive vice presidents at the charity hospital.

The bonuses ranged from $36,054 for the vice president who heads the hospital's community clinics to $143,325 for Parkland's chief financial officer.

And what was the justification for these bonuses?
In previous years, Parkland's top three administrators were rewarded with bonuses for meeting certain goals. Last year, the pay plan was expanded to include the hospital's 'senior executive staff.'

Dr. Lauren McDonald, chairwoman of Parkland's board of managers, objected Wednesday to referring to the payments as bonuses, a term that could imply nothing was done to earn the money.

'We kind of stay away from the word 'bonus,'' she said. 'It's really earned incentives. We have certain goals that we set forth as a board.'

'Working with a consultant, we made sure these were earned, instead of just given.'

Dallas County Commissioner John Wiley Price said that he was aware of the new executive pay plan at Parkland and that he wholeheartedly approved.

'It's a step in the right direction,' he said. 'You pay to keep good talent, and what we're paying them is not unreasonable.'

In particular, Price lauded the work of Anderson, who will earn $853,044 when his bonus is approved next week. His bonus will bring the hospital's total to about $2 million.

'The man has 29 years experience at Parkland,' Price said. 'He's put together the kind of executive team that has won Parkland an excellent bond rating. And it's debt-free, too.'

On the other hand, a second Dallas Morning News article noted,
The Parkland Memorial Hospital board of managers began its monthly meeting Tuesday by strongly endorsing the $1.7 million in 'incentive pay it handed out to 27 top executives at the end of December.

'There are a lot of negatives out there about this,' acknowledged Dr. Lauren McDonald, who chairs the board.

Some employees who received only 2 percent to 3 percent in merit increases last year were unhappy to hear last week that their bosses had gotten 19 percent to 31 percent in extra pay.

Dozens flooded online message boards with angry comments. A few called reporters to register their complaints.


So once again note that the top executives of health care organizations are not like you and me. Their total compensation generally ranges from generous to sufficiently lavish to make them instantly rich. Their pay almost never substantially decreases. If incentives are offered, they almost never fail to earn them.

Furthermore, notice the way the executives, and the boards to whom they supposedly report justify these practices.

It seems that the executives of every hospital are always above average. If pay is determined by comparisons to other institutions, it is never set at or below the average rate.  At every hospital, "our" executives are superior, but without any clear definition of how they might be superior to whom.  The processes by which compensation is made competitive are asserted to be accurate, without any objective confirmation of that accuracy provided (and note above that one leader seemed to justify the process because it produced the numbers he thought were right.)  Bonuses are awarded for reaching "goals," but the goals always seem easily within reach, and the bonuses offered executives are always a much larger proportion of base pay than the bonuses offered anyone else. 

So, to repeat, the sorts of compensation reported in Florida, North Carolina, and Texas are a product of the current management culture that has been infused into nearly every health care organization in the US. That culture holds that managers are different from you and me. They are entitled to a special share of other people's money. Because of their innate and self-evident brilliance, they are entitled to become rich. This entitlement exists even when the economy, or the financial performance of the specific organization prevents other people from making any economic progress. This entitlement exists even if those other poeple actually do the work, and ultimately provide the money that sustains the organization.

Although the executives of not-for-profit health care organizations generally make far less than executives of for-profit health care corporations, collectively, hired managers of even not-for-profit health care organizations have become richer and richer at a time when most Americans, including many health professionals, and most primary care physicians, have seen their incomes stagnate or fall. They are less and less restrainted by passive, if not crony boards, and more and more unaccountable. In a kind of multi-centric coup d'etat of the hired managers, they have become our new de facto aristocracy.

Or as we wrote in our previous post, executive compensation in health care seems best described as Prof Mintzberg described compensation for finance CEOs, "All this compensation madness is not about markets or talents or incentives, but rather about insiders hijacking established institutions for their personal benefit." As it did in finance, compensation madness is likely to keep the health care bubble inflating until it bursts, with the expected adverse consequences. Meanwhile, I say again, if health care reformers really care about improving access and controlling costs, they will have to have the courage to confront the powerful and self-interested leaders who benefit so well from their previously mission-driven organizations. It is time to reverse the coup d'etat of the hired managers.


Nick Dawson said...

Well written and researched post!
Is there room for another view point? Thinking strictly about non-profit hospitals, it is important to remember that salaries are not only compensation but a means to attract talent. To bring in someone with 15 or 20 years expiration, a masters in health administration and the professional skill set to lead a several thousand employee system requires significant compensation. How is that different a corporation with $2 billion in revenues, would we fault them for seeking out qualified talent and paying them accordingly?

Most hospitals operate on a 1-2% margin, surprising little of the overhead comes from human capital. Indeed all hospitals are now faced with reduced reimbursement that is forcing them to lean their ranks. However, as long as MRI machines cost more than the CEO makes in 2 years, and private payors operate 60% efficiency and the federal government reimburses at pennies on the dollar, executive salaries are the least of our concern.

Anonymous said...

Northwestern Memorial Hospital in Chicago has 3 C level executives making over 1 million a year. Nice job if you can get it.

Anonymous said...

Unbelievable! In business I never worry about what I know, it is what I do not know that will catch me up. I would hate to guess the number of other institutions with similar pay packages.

Peter Drucker in his books on management measured a manager’s worth using several factors. Dollars can be tricky since those in finance work with large sums but may have little responsibility and a nonsupervisory role.

The number of people supervised has to be broken down into direct and indirect numbers. Simply adding up all the people in the organization does not work since senior people do not supervise all of those individuals.

Physical plant becomes problematic since a person running a warehouse oversees a large amount of square feet, but little economic activity other than moving and keeping tract of product.

We must not forget the responsibility for pricing. Determining a competitive price in an ever changing market is a skill that test even the best managers.

Looking from the outside I have to question these compensation packages. The dollars and physical plant are large due to the nature of the business. The number of people supervised is rather small given the collaborative nature of the work. The doctors on the floor and department heads are going to set the protocols and interact with patients. There is effectively no pricing control since hospitals are basically captives of the government and insurance companies.

While these senior positions are important, requiring an in depth knowledge of rules and regulations, other than being a cheerleader for the institution, directing a small staff, assuring regulator compliance, these senior mangers do not meet the criteria I learned many years ago for the outsized salaries and bonuses they receive.

Somehow there always seems to be a consultant at the bottom of these messes.

Steve Lucas

Keith said...

The game is rigged if you ask me.

First off, who sits on most of these "community boards" is usually CEO's and other big money players who are recruited not only for their expertise but also the likelihood of fat contributions to the hospital. Since most of these board members are of a similar ilk, deriving from mangerial positions in corporate America, it benefits them to enhance the myth of the financial worth of the hospital CEO. As all these salaries escalate, the compensation consultants who are hired to justify the pay package then have lots of examples of similarly paid hospital CEO's to point to as justification.

Secondly, who hires the compensation consultant is vitallly important. What is the likelihood of the consultant being hired back if he comes back with a recommendation that the CEO is overpayed? I would love to see statistics regarding how often such a consultant is hired and actually reccommends a salary reduction!

It is all part of this persistent tilt of accumulated wealth at the top while we watch the middle classes become non existent.

JackPo said...

I'm not sure why you think these compensations are grossly out of line. Specialty MDs routinely make from a quarter of a million dollars to half a million (and sometimes over a million) dollars. These CEOs are already grossly under compensated compared to market rate for CEOs of comparable organizations.

Roy M. Poses MD said...

JackPo, read the other comments above.

Also, re your comparison with doctors. Doctors actually take care of patients. They are responsible for life and death decisions. They get rigorous training usually at least 7-9 years beyond college. Doctors who do not do procedures generally make considerably less than a quarter of a million dollars.

Most hospital CEOs are now MBAs without any experience in actual health care, or related biomedical research. They mainly make financial decisions, and have no direct role in the patient care that goes on in their institutions. They may have 1-2 years of training beyond college, generally unrelated to health care and medicine.

Finally, if you read the business news over the last few years, you would have seen plenty of evidence that most CEOs of "comparable organizations" are also grossly overpaid.

Anonymous said...

Catching up on my reading I was struck by a Jan. 30-31 WSJ letter to the editor by Bill Bailey of Kingwood, Texas.

“A CEO viewing his own labor as worth 400 times that of the average American worker is arrogant, and fosters resentment – not respect.”

He then goes on to boil down “Albert Einstein: Creator & Rebel” by Banesh Hoffman, (1972) when Einstein came to American and was invited to Princeton there was discussion of his salary. Einstein came up with a figure that was essentially rejected by the university as being too low due to the need to hire other professors at a higher rate.

We then see in the same WSJ HCA Owners’ Big Payout: $1.75 Billion by Peter Lattman. The point being that along with equity partners the Frist family paid $21.3B to buy out HCA. The group invested only about $5.5B in cash, financing the rest.

“The dividend payment will return roughly one-third of the owner’s original investment. Several analysts expect to see an initial public offering from HCA within the next several months.”

So here we have one of the most brilliant men of all time being forced to take a higher salary in order to save face for the institution vs. a large medical institution working on a financial deal measured in the billions. The HCA deal will net untold amounts for the investors.

I have to believe Einstein had it right again.

Steve Lucas

MedInformaticsMD said...

Saw this comment at another blog, on pharma, 'In the Pipeline':

A system that rewards short term profits created through fraud and "rules" will ultimately eat itself. MBAs, lawyers and incompetent managers are really a symptom of a more systemic problem, namely financialism. A system that games money to make more money, without any real increase in productivity, will by necessity be disconnected from reality.

They are not interested in reality, because they can believe in their own shell games. Ironically many people who are hurt by such shell games also believed in them till it screwed them over.

NMB said...

that amount of money for those CEO's are amazing.