Wednesday, February 27, 2013

Another Reason for Hope? - Concern about Excessive Executive Pay in Health Care Goes Mainstream

Another recent case suggested that the problem of excess, disproportionate compensation of health care executives is becoming more of a mainstream concern. 

The Case of Eastern Connecticut Health Network

The case appeared in the Manchester (CT) Journal-Inquirer (link requires subscription).  Here are the basics:

ECHN Inc., which owns Mancester Memorial and Rockville General hospitals, reported to the IRS last year that the company paid its president and CEO, Peter J Karl, a total of $1,042,200 in salary and fringe benefits.  That's a 30.7 percent increase over Karl's compensation reported in the previous year,....

ECHN also reported that six other top executives were paid between $254,640 and $591,090, representing increases of as much as 20.6 percent. 

ECHN is yet another relatively small non-profit hospital system with a million dollar plus CEO.

For comment on this, I turn back to the Journal-Inquirer article.  One person the reporter interviewed

says the big salaries and bonuses paid to top officials at Eastern Connecticut Health Network are part of a national scandal over executive compensation propelled by the 'pursuit of talent for short-term gains.'

'The hospital industry is emblematic of what's happened in executive compensation in the United States, where the multiple of the lowest- paid employee to get to the salary of the highest-paid employee has just exploded over the last 30 years,'....

Furthermore, the person interviewed noted that hospital executives were bemoaning decreases in payments to their institutions by state government "while making 10 to 20 times as much money as" the state governor makes.  In this case, the CEO, Mr Karl's "compensation package was 6.9 times [Governor Daniel P] Malloy's salary of $150,000."

A second person interviewed said

Salaries have gotten to the point where they have skyrocketed and are out of control.

He also raised an issue about conflicts of interest affecting the ECHN board

he agreed with state health care advocate, Victoria Veltri, who told the Journal Inquirer last week that nearly $1 million in business deals between ECHN and five members of its board of trustees require further scrutiny
Criticism from the Mainstream

I have been coy about who the commentators were, but bear with me.

So we see in this one somewhat obscure newspaper article about one small regional hospital system points that we have been raising for years about the perverse incentives generated by excess executive compensation in health care.  We have frequently discussed how such compensation is often completely untethered to the organizations' financial results, much less its positive effects on patients' and the public's health.  Compensation often rises faster than inflation, faster than revenue (and sometimes when revenue declines and deficits loom), and even when the organization is facing financial, clinical, or ethical challenges.  Thus it often seems that the primary goal of the organization has become enriching top executives (look here for a recent example).  As the first commentator noted above, this seems to arise out of the business school dogma that puts short-term revenue ahead of all other goals (which we discussed here, and can be termed financialization.)

But our concerns do seem to be getting more mainstream.  The first commentator above was actually the Governor of Connecticut, Dannel P Malloy, himself.  The second commenter was Connecticut state Senator Steve Cassano.  So prominent politicians are beginning to see the perversity of excess executive compensation in health care at a time of still burgeoning health care costs and still threatened health care access and quality. 

So maybe some more people will listen this time when we repeat....  Health care organizations need leaders that uphold the core values of health care, and focus on and are accountable for the mission, not on secondary responsibilities that conflict with these values and their mission, and not on self-enrichment. Leaders ought to be rewarded reasonably, but not lavishly, for doing what ultimately improves patient care, or when applicable, good education and good research. On the other hand, those who authorize, direct and implement bad behavior ought to suffer negative consequences sufficient to deter future bad behavior.

If we do not fix the severe problems affecting the leadership and governance of health care, and do not increase accountability, integrity and transparency of health care leadership and governance, we will be as much to blame as the leaders when the system collapses.

1 comment:

David Clingo said...

Would getting a large portion of the executives’ salaries back to the nonprofit calm much of the public’s concerns over executive pay? What if CEO’s got paid the same but also paid back much of their salaries down the road? Here’s the idea. What if the CEO, rather than getting the $1MM in salary, took, let’s say, $250K as salary and $750K annually as a loan? A life insurance policy death benefit would secure full repayment. That option is available to nonprofit executives. It cuts the salary expense that the employer shows, and the nonprofit gets a really nice check once the CEO passes. (Even the CEO would like the strategy for tax reasons.) I’d really like to know how you would feel about loans replacing salaries and bonuses in total or in part for highly paid executives.