Wednesday, November 14, 2012

Will the Circle be Unbroken? - Hospital Executive Compensation Continues to Defy Gravity and Logic

A report from Health Leaders Media, a prominent media site about health care management, shows how non-profit hospital executive compensation continues to levitate.  In general,

For not-for-profit CEOs nationwide the median total cash compensation (base plus incentives) increased 3% to 6.7% over last year, and these organizations' senior leadership teams gained similar pay increases,...

The specifics included

Health system CEOs' median base salaries increased to $717,500 (2012) from $650,000 (2011), while independent hospital CEOs' median base salaries rose to $506,100 from $472,000 during that period, according to IHS. Comparatively, Sullivan, Cotter and Associates shows the base pay for system CEOs nationwide increased while the TCC declined slightly—base pay increased to $334,700 from $325,000, while TCC decreased to $411,100 from $412,100 from 2012 to 2011, respectively. Unlike their health system counterparts, independent hospital CEOs' base pay and TCC climbed between 2011 and 2012—base pay went up to $530,000 from $504,000 (a 4.9% gain) and TCC jumped 4.3% to $600,000 from $574,000.

The report also showed that pay increased for some species of top executives.  CIOs (chief information officers) did the best,

Nationally, system CIOs received one of the largest TCC increases year over year, according to Sullivan, Cotter and Associates (5.8%). IHS reported a median base salary increase of (3.5%).

These increases ought to be compared to the base rate for the population.  In September, the Census Bureau reported that median family income dropped in 2011 (per the New York Times):

 Median household income after inflation fell to $50,054, a level that was 8 percent lower than in 2007, the year before the recession took hold.

The actual decline from 2010 to 2011 was 1.5% (look here).

So executive compensation in health care continues to defy gravity, even as the income of the typical family does the opposite. 

Will the Circle be Unbroken?

Conveniently, the day before, another well regarded site for hospital management information, Becker's Hospital Review, provided a rationale for current health care executive compensation, based on a blog post from Integrated Healthcare Strategies, which claims to be one of the largest US healthcare consulting firms.

The Review article first noted that "executive compensation is a delicate subject," without explaining why it was more delicate than the compensation given to other people.  It then answered the question its title posed, "are hospital executives paid too much?"  In summary,

compensation levels are currently appropriate, on the whole, because employers are generally keeping them on the job with such consistent pay levels.

The syntax is a little difficult, but I believe the translation is the circular cliche, "it is what it is."  More formally, this appears to be a version of begging the question, or circular reasoning.

The Integrated Healthcare Stragies blog post by David Bjork, "thought leader," Senior Vice President and Senior Advisor, who authored two books on executive compensation in health care, rotated this again.
ARE EXECUTIVES PAID TOO MUCH?  The short answer is no. Executives are not overpaid. If they were, employers would not willingly pay them as much as they do.
And again

the intrinsic value of a job can be quantified. Economists and most workers judge the value of a job by how much it pays. A job is worth what an employer is willing to pay an employee to do it, or what an employee is willing to accept as payment for the job. Virtually no one doubts that principle—except when it comes to executive jobs.

Have we got that?  Bjork argued that executive pay is self-justifying.  All executives are worth what they are paid because that is what they are paid.

Another way to understand the fallaciousness of this argument is to try to apply it to jobs other than executive positions.  Presumably, it would mean that everybody's pay is appropriate, and hence nobody's pay could ever be changed.  But one's head begins to hurt just trying to think about this.

Yet those were the main arguments that Mr Bjork made to justify his contention that

There is no rational basis for the view that executives should not be paid as much as they are paid, just a personal attitude, generally held by someone who is paid less.

A Side Trip to the Fallacy of Composition

Mr Bjork did make an attempt to supplement that argument.  For example, he wrote "labor market forces drive pay for executives," without explaining how much they do so, or the nature of the market for executive pay.  Later, he wrote,

Hospitals and health systems continually look for ways to reduce their costs. When they come across jobs that cost more than they are worth, they eliminate the jobs and either eliminate the work, redistribute it to other employees, or outsource it to cheaper labor. They view executive jobs the same way. When hospitals and health systems find an executive job that seems to cost more than it is worth, they eliminate it if they can and redistribute the work to other managers.

Let us unpack this a bit.  First, hospital and health systems are organizations composed of humans.  They do not look for anything, but the executives who run them may certainly look for ways to reduce costs and eliminate apparently unnecessary jobs.  Confusing hospital executives with the organizations they run appears to be a version of the fallacy of composition, which "arises when a person reasons from the characteristics of individual members of a class or group to a conclusion regarding the characteristics of the entire class or group (taken as a whole)."

Taken literally, this paragraph suggested that executives could decide their own jobs "cost more than they are worth," and then fire themselves and give their work to someone else.   

Nonetheless, were this targument to be true, it in fact contradicts the conclusion based on this argument that appeared two sentences later
Therefore, executives must be worth what they are paid, because employers keep them on the job and willingly continue to pay what¬ever they are paid.

Note that this conclusion is yet another restatement of the circular argument above.  . 


We have noted that logical fallacies are increasingly deployed to defend the status quo in health care, and particularly to defend the interests of those who are profiting the most from the current dysfunctional system.  In our latest example we find some particularly ripe repitition of a fundamentally fallacious argument to support ever rising compensation for health care executives.  It is distressing that the arguments were made by a prominent health care management consultant and published author on the subject of health care executive pay, and was picked up without question by a prominent health care management media site.  It suggests, like other posts we have written about the generous use of logical fallacies to protect the powers that be, that these eminences really may have not the slightest idea what they are doing, and have truly risen to their level of incompetence, if not ridiculousness; or else, they do know what they are doing, but have nothing but contempt for the reasoning powers of anyone outside their circle, and feel no need to justify their actions to such hoi polloi.

The sheer foolishness of arguments made to protect the status quo ought to lead the rest of us, particularly health care professionals, to question that status quo further. 

The ability of top executives of many, probably most health care organizations to collect bloated paychecks out of proportion to, if not despite their performance attracts the wrong people to lead these organizations, and provides incentives for even the right people to lead badly.

Until we make health care leaders accountable, and until their incentives reflect their ability to uphold the health care mission, expect more unaccountable leadership that subverts the health care mission, and hence continually rising costs, declining access, and deteriorating quality.


Steve Lucas said...

Non-profit hospitals are not the only ones with questionable pay packages. At this link we find Gordon Gee President of The Ohio State University receiving a bonus and pay raise of about $330,000.

Meanwhile Carol Biliczky in the Oct. 18, 2012 Akron Beacon Journal story Student’s debt levels increase statewide notes that 58% of OSU grads have debt with the average amount being $24,480.

So much for low cost higher public education, but hey, the football team is still winning even though it cannot go to a bowl game.

Steve Lucas

Afraid said...

Senior executives are the newest self policing profession.

We get what we allow.

Anonymous said...

Absolutely LOOOOVVVED your skewering of the ridiculous reasoning used -- thanks!