More Gravity Defying Compensation for Not-for-Profit Health Care Leaders

Two recent articles featured more about gravity-defying compensation given to the leaders of not-for-profit health care organizations. We had recently posted about how the CEO of one not-for-profit health care insurer rose while the organization's revenue and enrollment fell. Similarly, from the Detroit News,

Blue Cross Blue Shield of Michigan -- the state's largest insurer -- gave pay hikes to six top-level executives in 2008 and doled out generous retirement packages for four former senior vice presidents, despite the nonprofit organization's loss of $144 million last year.

The organization's deteriorating financial health, a justification for Blue Cross officials wanting to raise rates on its line of individual insurance policies, had prompted widespread job cuts at the Detroit-based insurer.

In January, Blue Cross said it needed to eliminate about a 1,000 positions.

Despite those cuts, CEO Daniel Loepp received a compensation package of base salary, bonuses and other compensation totaling $1.8 million in 2008, up from $1.7 million in 2007.

The CEO's bonus last year was $727,575, up from $696,777 in 2007, according to documents filed last week with the Michigan Office of Financial and Insurance Regulation.

Blue Cross spokesman Andrew Hetzel said the 2007 to 2008 increase was to help bring Loepp's total compensation in line with CEOs at other comparable-size Blue Cross organizations nationwide.

The retirement packages -- ranging from $3.1 million to $994,132 depending on the executive -- were for four senior vice presidents who'd each been with the organization an average of nearly two decades, Hetzel said.

Hetzel added that all the senior level executives are taking pay cuts this year -- including a 5 percent reduction in their base salary.

And the compensation packages for 2008 were set by the Blue Cross board at the end of 2007, Hetzel added, well before the organization saw need to cut its work force.

Note how the pay of the top leaders of many health care organizations seems to defy gravity, going up faster than inflation, going up even when the organizations lose money, going up even when the organizations have to lay off workers. There is always an excuse. But in this case, once the miserable results of 2008 became clear, why could the board not re-assess the CEO's pay? Finally, note that even if there is a decrease in 2009, it is a decrease only compared to the elevated 2008 level.

Locally, the Boston Phoenix assessed the pay of the CEOs and other top leaders of all the states not-for-profit hospitals. Some of its main findings were -

The compensation of the CEO of the state's biggest hospital system is higher than any other New England hospital CEO:

Receiving almost $3 million in annual salary and benefits in each of the last two years, Lifespan CEO George Vecchione is the highest-paid health-care executive in New England. Vecchione collects almost $1 million more each year than the CEO at the region’s largest health care network, Partners HealthCare System in Boston, although Lifespan is much smaller than Partners, and New England’s second largest network, Caritas Christi Health Care, also in Boston. In 2007, only Lahey Clinic CEO David Barrett approached Vecchione’s compensation, thanks to a one-time supplemental retirement benefit of $1.5 million; even with that payment, Barrett received $300,000 less than the Lifespan leader.

The compensation of many RI hospital CEOs, and of other RI hospital leaders is high compared with peers in other states, and has risen much faster than inflation:

Modern Healthcare's executive compensation survey suggests that Vecchione is not the only Rhode Island health-care CEO who is paid well above the national median. When benefits, expenses, and long-term incentive plan payments are subtracted from Care New England CEO John Hynes's compensation package, the remaining $911,562 is well above the $570,000 median base pay and bonus paid to the 60 CEOs of small hospital networks surveyed in 2007.

Once benefits, long-term incentive pay, and terminated life insurance payments are subtracted, Women & Infants Hospital CEO Constance Howes received $481,625 in 2007, and Kent County Memorial Hospital's Mark Crevier collected $551,799. Meanwhile, salary and bonuses for Rhode Island Hospital's Amaral ($693,477) and Miriam's Hittner ($572,132), were more than $100,000 above the national median.

Several other Lifespan administrators received more than $500,000 in compensation in 2007: general counsel Kenneth Arnold ($623,902); treasurer Mary Wakefield ($672,057); chief physician Arthur Klein ($935,291); senior vice president for shared services Frederick Macri ($569,777); and Lifespan Physician Service Organization CEO Joel Kaufman ($542,162). No other Rhode Island hospital executives listed on the tax returns received more than $500,000.

Salaries at the smaller community hospitals present a mixed picture. Modern Healthcare's 2007 median compensation at independent hospitals with revenues under $200 million is $350,500. The CEOs of Westerly and South County hospitals and Roger Williams Medical Center were well below the median, while St. Joseph's John Keimig was slightly above. The 2007 salary and bonuses, however, for Memorial Hospital's Francis Dietz ($572,000), Landmark Medical Center's Gary Gaube ($673,164), and Rehabilitation Hospital of Rhode Island's Richard Charest (440,593) were considerably above the median.

Not only are compensation packages high, they have increased at incredible rates for some executives. Two Care New England executives watched their pay more than double over the last seven years, in part due to long-term incentive plan payments in 2007.

Butler Hospital CEO Patricia Recupero's compensation grew 117 percent, while Hynes' pay increased 107 percent. In addition, Landmark Medical Center CEO Gaube's compensation increased 107 percent as his hospital slid into financial insolvency. The compensation for three other CEOs, Memorial Hospital's Dietz, Emma Pendelton Bradley Hospital's Daniel Wall, and Lifespan's Vecchione, increased between 90 and 99 percent over the last seven years.

Three CEOs of Lifespan hospitals received lesser raises since 2000: Amaral (65 percent), Hittner (62 percent) and Newport Hospital's Arthur Sampson (55 percent). St Joseph Health Service CEO Keimig, who, like Amaral and Gaube, has resigned, received a 72 percent pay increase over seven years.

CEO compensation has risen quickly even at institutions whose finances are failing:

Increases in compensation for Gaube and Charest are among the most notable. In a December 2008 report, the state Department of Health labeled Landmark Rhode Island's financially weakest hospital. Landmark ran a small profit in 2004, but starting in 2005, the Woonsocket hospital slid into insolvency.

In June 2008, the Rhode Island Superior Court appointed a special master to run the troubled institution. Landmark also owns 50 percent of the Rehabilitation Hospital of Rhode Island, where Charest served as president, as well as second in command to Gaube at Landmark.

While the hospital ran in the red, however, Gaube and Charest continued to receive raises. A review of the hospital's tax returns indicates that Gaube's compensation increased 37 percent, or almost $200,000, from 2005 to 2007. Over the same two-year period, Charest's pay increased 32 percent, or more than $100,000.

The article does provide some insight into the thinking of those in charge of awarding these bloated pay packages. For example, regarding the pay received by the Care New England CEO:

'John Hynes earns every penny,' says Care New England board chairman Jonathan Farnum, adding, that few people have the skill set to handle the job. He describes Hynes and Vecchione as workaholics who are always on call and constantly handling crises. 'The people are well-served,' Farnum says. 'I don't think they're [the CEOs] driven to maximize their own personal salaries.'

What a peculiar argument to make in a health care context. Lots of people in health care work long hours and are on call frequently, and unlike a hospital CEO, may have to handle life and death decisions in the wee hours of the morning. And most of them make far less than Hynes, who was still not the highest paid leader in the Phoenix article. What really seems to be the rationale, in my humble opinion, is the belief that the work of executives is somehow much harder and more deserving than the work of anyone else, including physicians.

Those who set executive pay were unmoved by the arguments that medicine and health care are callings, and that not-for-profit should not pay their executives comparably to the richest for-profit corporations:

With 10,000 employees and $1 billion in revenue, Lifespan is more like a for-profit health-care institution, [Lifespan board chairman Alfred] Verrecchia says, adding, 'We wouldn't be paying any different if we were for-profit or not-for-profit.'

Verrecchia also disputes the idea that high CEO salaries may discourage donations to the hospital. 'We're not receiving funds to manage day-to-day operating procedures at the hospitals,' he says. Fundraising pays for specific programs, he explains, like a new emergency or operating room.

In response, let me just quote more of the Phoenix article:

'They may be able to persuade donors of that,' counters Alan Sager, a Boston University professor of health policy and management, 'but money is fungible. Money can be moved.' Sager adds, 'If the CEO gets $2.9 million, that's money the hospital can't use to underwrite care for uninsured or underinsured people.'

Sager notes that 30 nurses could be hired with Vecchione's salary. 'Does this person do as much good in the world as 30 nurses?' he asks. 'I find that hard to believe.'

The follow up to that may make the most important point of all:

As president and CEO at Pawtucket-based toymaker Hasbro, Verrecchia was paid $8.4 million in 2006, and $16.5 million in 2007, according to Security and Exchange Commission documents. This is another part of the problem, says Sager: The corporate lawyers and executives who sit on hospital boards form 'a club' with the hospital executives, in which six- and seven-figure salaries are normal. The result, he says, is a 'financially combustible combination' for nonprofit hospitals.

That really seems to be the bottom line. As hospitals become more like big businesses, their leaders identify more with the power elite, or the "superclass," than with their staff, much less their patients. Their sense of entitlement grows, and their understanding of the problems of ordinary people wanes. Whether their devotion to the healing (and sometimes academic) missions of their organizations can survive under these circumstances is open to question.

(Note, for full disclosure: I am a part-time voluntary teaching attending at one of the Lifespan hospitals, if my position survives this posting.)