Who Benefits? - Hospital Profits and Quality May Fall, But Hospital Executives' Compensation Keeps Rising

Despite recent attempts at health care reform, US health care dysfunction seems to proceed inexorably with ever rising costs, and continuing problems with access and quality.  A likely reason is that those who find the current system personally profitable are in a position to resist real reform.  The people who seem to gain the most from the status quo are top hired executives of big health care organizations.

In particular, stories about huge pay for hospital and hospital system managers continuously appear in the media.  For example, starting in October, 2015, we saw the following headlines:

- Pittsburgh, PA, October, 2015: "Former Highmark CEO Made Nearly $10 Million in 2014, Tax Records Show"
- Regarding Rochester General and Unity health systems in Rochester, NY, November, 2015: "Here's Why Execs Got Millions After Health Merger"
- Regarding the CEO of North Shore-LIJ Health System in NY, November, 2015: "This Guy Makes $10M a Year to Head a Nonprofit"
- In Idaho, February, 2016, "Pay for 9 Treasure Valley Nonprofit Hospital Employees Hits or Tops $1 Million"

Even more interesting are stories that show massive compensation of executives despite their hospitals' apparent poor performance.  Since October, 2015, we also found the following (in chronological order)


Let Go After "Uneven Financial Performance," CEO of Kaleida Health Got $1.6 Million of Severance in One Year, with More to Come

In November, 2015 the Buffalo (NY) New reported that James R Kaskie, the CEO of Kaleida Health, the "largest healthcare provider in Western New York," per its website, was "forced out" when

the board cited a need for a change in leadership amid an uneven financial performance for the system....

Nonetheless,

Kaleida Health paid $1.6 million in 2014 to its former CEO, James R. Kaskie, after forcing him out early last year, according to its most recent federal regulatory filing.

Also,

Kaleida will pay Kaskie 24 months of severance under the terms of Kaskie’s employment contract with the system, John R. Koelmel, chairman of the Kaleida board, told The Buffalo News on Thursday.

Kaskie was paid 10 months of severance plus deferred compensation, which is the $1.6 million reflected in the latest regulatory filing. He will be paid 12 months of severance in 2015 and a final two months of severance in 2016.

Mr Kaskie was paid even better the year before:

Kaskie earned $1.9 million in 2013, his last year as CEO.

Furthermore, other executives who were let go after Mr Kaskie's departure also were very well paid,

Dr. Margaret W. Paroski, former executive vice president and chief medical officer, who was replaced by Lomeo after he took over as CEO last year, $763,552.

Joseph M. Kessler, former executive vice president and chief financial officer, who was replaced by Lomeo, $608,454.

The article explained that

Hospitals, corporations and other entities negotiate severance agreements as part of the employment contracts when they hire top executives

So not only to these executives earn top dollar, but their earnings continue even if they lose their jobs because of poor performance. When asked to explain these levels of remuneration, and contracts that allow executives to get continuing pay even after being "forced out" for "uneven financial performance," John R Koelmel, the chairman of the system's board, said

Companies pay at market. To recruit the best talent, you need to pay at least market.

Public Hospital MetroHealth Medical Center Scored Below Average on Patient Satisfaction and Quality, but CEO Got $1.1 Million

In March, 2016, Cleveland Ohio television station NewsNet5 reported

MetroHealth Medical Center is a public hospital that is supported with $32.4 million of taxpayer money--roughly 5 percent of the hospital's budget.

Also,

a check with a federal database of patient satisfaction levels and quality measures at hospitals across the country found MetroHealth fell below the national average.

Nonetheless, its CEO, Dr Akram Boutos, got $1.1 million in salary, and presumably considerably more in bonuses.

Dr J B Silvers, '"a nationally recognized expert on hospital CEO compensation and professor at Case Western Reserve's business school," who is a MetroHealth board member,

insisted that Dr. Boutros is being fairly compensated when compared to his peers. 

Furthermore,

He admitted the salary is first tied to profits--then a series of other quality measures like patient care, diversity, hospital improvements and employee satisfaction.

But the ties to satisfaction and quality may not bind, because he then tried to explain away the quality and satisfaction data,

Silvers argues those surveys may be misleading.

'Populations like ours, Medicaid populations, uncompensated care--poor people tend to rate organizations lower,' said Silvers.

But then admitted it was really about the money,

'We have to have a target in terms of financial performance because if you don't make the money you can't be in business,' said Silvers.

In Massachusetts, "As Hospital Profits Fall, Executive Pay Soars"

In April, 2016, the Lowell (MA) Sun published a long report on local hospital executive compensation.  It started

It has been a lean couple of years for the region's hospitals.

Drawn by the higher reimbursement rates that insurers pay to academic teaching hospitals, such as those in Boston, more physicians are affiliating themselves with those institutions. Patients are following, and so is the money.

Some community hospitals, including Lowell General Hospital and Emerson Hospital in Concord, saw profit margins drop by more than half from 2012 to 2014.

Other hospitals' financial indicators, like ratios of assets to liabilities, are also weakening,...

However,

As they look to weather those storms and protect their space in a rapidly changing health-care landscape, the boards of directors of the region's hospitals have doubled down on a key investment: their executives.

'Each organization has to make its own decisions about how it can best compete in the marketplace,' said Gary Young, director of Northeastern University's Center for Health Policy and Healthcare Research.

Senior executives of hospitals and health-care systems -- there's a competitive market for that kind of talent ... some would say when organizations run into trouble, they need to spend more to get leaders.'

So,

At Lawrence General Hospital, compensation paid to top non-physician administrators increased 41 percent from 2012 to 2014, according to tax documents. President and CEO Dianne Anderson, who heads the list, was paid a total package of $884,092 in 2014.

Also,

From 2012 to 2014, Lahey Health's non-physician executives saw a compensation increase of 36 percent. A large part of that increase was in the salary of Dr. Howard Grant, who was promoted from president and CEO of Lahey Clinic to president and CEO of the entire Lahey Health system. The system includes facilities throughout northeastern Massachusetts and southern New Hampshire. Grant received $1.7 million in 2014.

In addition,

Lowell General Hospital's executives saw a slightly smaller increase during that three-year span, at 18 percent, although CEO Normand Deschene remains the highest-paid hospital executive in the region with a package worth $1.9 million in 2014. The hospital also pays the taxes on retirement benefits, which are worth hundreds of thousands of dollars, for Deschene and several other executives.

The justifications for these increases in times of financial trouble were similar.  For example, re Lawrence General Hospital,

'Because we're resource-limited, compared to (academic) hospitals, we're even more dependent in these challenging times to bring in somebody who can manage risk,' said Richard Santagati, chairman of Lawrence General's executive compensation committee. 'It takes a different breed and there's real competition for these people ... and once you have them there, you want to keep them because there's a learning curve there that is unique to each hospital.'

Re Lahey Clinic,

'Our executive compensation is comparable to the programs of other, similarly sized health networks and is reflective of the complex role of an executive leader at a leading health system,' Lahey Health said in a statement.

Finally, at Lowell General Hospital, the CEO defended his own pay:

'Lowell General has weathered significant changes in the delivery of health care,' Deschene said. 'At a time when many hospitals have failed, it's very crucial and critical that we have very talented individuals to lead the hospital.' 

The Usual Talking Points Again Invoked

Hospital management used the usual talking points to justify the pay they received,  As I wrote last year 

It seems nearly every attempt made to defend the outsize compensation given hospital and health system executives involves the same arguments, thus suggesting they are talking points, possibly crafted as a public relations ploy. We first listed the talking points here, and then provided additional examples of their use. here, here here, here, here, and here, here and here. 

They are:
- We have to pay competitive rates
- We have to pay enough to retain at least competent executives, given how hard it is to be an executive
- Our executives are not merely competitive, but brilliant (and have to be to do such a difficult job).

So in the stories above, we found, for example:

- Competitive Rates: "you need to pay at least market" (Kaleida), and "there's real competition for these people" (Lawrence General)
- Retention: "you want to keep them" (Lawrence General)
- Brilliance: "the best talent" (Kaleida),  "very talented individuals" (Lowell General)

It appears that those justifying huge executive payments have all been handed these same talking points.

Yet none of them quite make sense.  The brilliance argument is particularly suspect in cases like those above of CEOs whose hospitals' performance was clearly not brilliant according to the metrics supposedly used to judge them. 

Economists Challenge the Management Dogma Justifying Huge Executive Compensation

Furthermore, these talking points seem to derive from decreasingly credible current management dogma about executive compensation propagated by business schools.

The Invisible Hand, or A Hand on the Scales?

For example, writing in the Independent during January, 2016, Ben Chu questioned the market fundamentalist theory that all employees pay has been perfectly chosen by the infallible invisible hand of the market:

When confronted with an outburst of public anger over massive corporate pay for a privileged few, a common response of the libertarian right is to invoke the economics of the free market.

Such spectacular rewards, we’re informed, are delivered by individuals selling their labour in a free market. And because such pay levels were set through this natural process, no one has the moral right to question them. Further, to interfere with such natural processes would be economically inefficient, making us all worse off in the end.

Such contentions are based on

a venerable economic theory [that is] behind this kind of reasoning. At the end of the 19th century, the American economist John Bates Clark hypothesised that in a perfectly competitive economy, demand for labour is determined by its 'marginal productivity' and wage rates are determined by the 'marginal product' of labour.

To translate, if a firm can make a profit by adding another worker to its payroll, it will do so. And the amount a firm will be willing to pay for that labour in wages will be determined by the additional profit the individual worker adds to the company’s bottom line. So if a worker adds a lot of profit, he or she can command a lot of compensation. But if they add only a little profit, he or she will get only a little. This means people with low personal productivity get small amounts. But people with high personal productivity (chief executives for instance) receive big bucks.

For a start, how does a company know what the marginal product of an individual worker is, or will be? This isn’t something that is directly measurable. The vast majority of us work in teams; how is it possible for management to determine our individual contribution to the financial success of that team, or of that team to the company? How can a business know how much of the profit added was due to the individual’s particular skills? The conditions necessary for the Clark theory that everyone gets what they 'deserve' don’t exist.

But isn’t the marginal product of bosses, who make big strategic decisions, easier to measure? The ASI cites the late Steve Jobs of Apple as an employee who was clearly worth a lot. However, there are plenty of other chief executives whose individual contribution is impossible to measure. Yes, the company’s share price might have gone up. But was this because the boss was smart? Or just lucky?

Furthermore,

The economist Dani Rodrik, in his latest book Economics Rules, argues that such broad theories of income distribution by the market are best viewed as intellectual 'scaffolding', adding: 'They are shallow approaches that identify the proximate causes but need to be backed up with considerable detail'.

And there are other theories of wage determination that are likely to be relevant. One important one is bargaining theory. This suggests that those who have political power within a firm can extract more than those without it. Maybe the reason chief executives tend to get paid ever growing multiples of the pay of the average worker is not because they are 'worth it' but because they are powerful. As the economist JK Galbraith put it: 'The salary of the chief executive of a large corporation is not a market award for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself.'

The Dangers of Pay for Performance

In a February, 2016, article in the Harvard Business Review, Cable and Vermeulen challenged the dogma that managers' (and in health care, physicians' and other professionals') pay should largely be based on "performance."

performance-based pay can actually have dangerous outcomes for companies that implement it.

They cited five points based on at least some research evidence to back up their contention.

1. Contingent pay only works for routine tasks. Companies should abolish contingent pay for their top executives because theirs is the least appropriate job for it. Decades of strong evidence make it clear that large performance-related incentives work for routine tasks, but are detrimental when the tasks is not standard and requires creativity.

***

2. Fixating on performance can weaken it. The goal of most executive incentive plans is to focus leaders on hitting goals and achieving outcomes. After all, that’s why it’s often called performance-based pay.' But as researchers have found, if you want great performance, performance is the wrong goal to fixate on.

Several studies have shown that when employees frame their goals around learning (i.e., developing a particular competence; acquiring a new set of skills; mastering a new situation) it improves their performance compared with employees who frame their work around performance outcomes (i.e., hitting results targets; proving competence; seeking favorable judgments from others).

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3. Intrinsic motivation crowds out extrinsic motivation. When people feel intrinsically motivated, they do things because they inherently want to, for their own satisfaction and sense of achievement. When people are extrinsically motivated, they do things because they will receive bigger rewards. The goal of contingent pay is to increase extrinsic motivation – but intrinsic motivation is fundamental to creativity and innovation.

***

4. Contingent pay leads to cooking the books. When a large proportion of a person’s pay is based on variable financial incentives, those people are more likely to cheat. In academic terms, we would put it this way: extrinsic motivation causes people to distort the truth regarding goal attainment.

When people are largely motivated by the financial rewards for hitting results, it becomes attractive to game the metrics and make it seem as though a payout is due. For example, different studies have shown that paying CEOs based on stock options significantly increases the likelihood of earnings manipulations, shareholder lawsuits, and product safety problems. When people’s remuneration depends strongly on a financial measure, they are going to maximize their performance on that measure; no matter how.

***

 5. All measurement systems are flawed. Incentive plans demand that some metric be used as the trigger for a payout. The problem is that whatever package you construct – bonds, stocks, or bonuses – whatever performance criteria you decide on will be imperfect. For a complex job such as senior management, it is simply not possible to precisely measure someone’s “actual” performance, given that it consists of many different stakeholders’ interests, tangible and tacit resources, and short- and long-term effects. Even with HR executives clamoring for enhanced “people analytics” (and technology companies bending over backwards to deliver them) any measure you choose is going to be an inadequate representation of how you would like your CEO to behave.

Note first that these points suggest that the increased use of performance based pay for health care organizations' top managers may explain why many health care organizations actually perform so badly, and point 4 may help explain why pay for performance may actually help increase health care corruption.  

Note further that pay for performance (P4P) for health care professionals has been strongly pushed by many health policy experts, yet all these points also seem applicable to that usage.

Conclusion - Change Will be Resisted

So even when non-profit hospitals and hospital systems perform poorly, their executives continue to receive ever greater remuneration.  The executives, their public relations flacks, and their often compliant boards of trustees continue to cite the same stale talking points to justify their pay.  Yet these talking points are based on market fundamentalist theory and business school dogma whose credibility is increasingly challenged.  In the absence of anyone willing to confront them with these criticisms, the apologists for soaring health care executive pay continue to prattle their tired talking points.    

Meanwhile, as corporate governance expert Robert A G Monks said in a 2014 interview,

Chief executive officers' pay is both the symptom and the disease.

Also,

CEO pay is the thermometer. If you have a situation in which, essentially, people pay themselves without reference to history or the value added or to any objective criteria, you have corroboration of... We haven't fundamentally made progress about management being accountable.

Moreover, top health care executives' power to make warm personal gestures to themselves correlates with the ability to defend this power, per Mr Monks,

People with power are very reluctant to give it up. While all of us recognize the problem, those with the power to change it like things the way they are.

So I expect that many hospital and health system CEOs, like leaders of other big health care organizations, may talk about health care reform, but will avoid talking about, and will likely oppose attempts at real reform using their command of their organizations' marketers, public relations flacks, lobbyists, and lawyers.


We need true health care reform that would enable leadership that understands the health care context, upholds health care professionals' values, and puts patients' and the public's health ahead of extraneous, particularly short-term financial concerns. We need health care governance that holds health care leaders accountable, and ensures their transparency, integrity and honesty.  What we will get is endless resistance to such reform from those who personally profit from the current dysfunctional, and increasingly corrupt system.