Friday, February 11, 2011

Why Weren't Existing Laws About Hospital CEO Compensation Enforced in Washington State?

Public radio station KUOW reported on the generous compensation given hospital CEOs in Washington:
KUOW has learned that 15 hospital executives in Washington made $1 million or more in 2009. That elite group includes 14 nonprofit executives and one head of a government hospital. CEOs at Multicare, Providence, Virginia Mason and Valley Medical each made more than $2 million.

Those numbers can be found in the hospitals' latest tax filings and other public records. The pattern was more lopsided in the two prior years. Nobody working at a public hospital cracked the top 10 list of the state's highest hospital paychecks in 2007 or 2008.

But then the story takes an interesting twist:
Most of Washington's largest hospitals are nonprofit organizations. The state gives the nonprofits a break on their business taxes to help reduce the cost of health care.

The hospitals have to jump through some hoops to qualify for the reduced taxes. For one thing, state law limits how much the hospitals can pay their executives. Their pay has to be comparable to what public servants in Washington make in similar jobs — or else no break on their B&O taxes.

Somehow everyone seems to have forgotten about this part of the law:
The limit on executive pay has been on the law books for 30 years.

Gowrylow: 'Frankly, I don't think it's something that's been on our radar since the mid–80s.'

Mike Gowrylow is a spokesman for the Washington Department of Revenue. He says the recent million–dollar incomes were news to the department.

Gowrylow: 'But it's certainly something that I think we need to take a look at again and examine whether these nonprofits are paying their executives excessively or not.'

Gowrylow says the agency only audits 2 or 3 percent of tax returns. It mostly relies on businesses to comply voluntarily with the state's tax laws.

Gowrylow: 'We can't be everywhere. If we become aware of a nonprofit or any other business that's underreporting their taxes, we investigate those complaints, and if tax is due, we will assess it.'

He says the agency can recover back taxes for the past four years, along with penalties and interest.
Although the article cited an unsuccessful legal action to enforce the law in a particular case in 1986, why the state government seemed to forget about it after that is unclear, and maybe deserving of further investigation.
Right  now, hospital management seems to be trying to avoid the issue, or is arguing about the meaning of "comparable,"
Several present day hospital officials declined to be interviewed on tape. They told KUOW they believe they are in compliance with the state law. But they generally provided little detail to back up that claim.

Providence and Group Health representatives both said their organizations are so large and complex that there may not be any comparable public service jobs in Washington.

Swedish spokeswoman Melissa Tizon told me that CEO Rodney Hochman's pay was generally comparable to what the highest paid public hospital executives made, at Valley and Evergreen hospitals.

On the other hand,
Harborview is the state's largest hospital. Eileen Whalen is its head and an employee of the University of Washington. She makes about $470,000.

[State Senator Karen] Keiser: 'That's really not comparable to the million dollar and more salaries of other hospital directors in our state. We are paying attention here in Olympia to that.'

Other executives at UW Medicine did make more than Whalen. Still, none of them, not even the president of UW, made as much as any of the 15 highest paid executives at nonprofit hospitals in 2009.

I searched high and low to find any public officials making as much as the top nonprofit CEOs.

The only one I found who consistently did so was the UW football coach. But it might be hard to argue that Steve Sarkisian's job is comparable to running a hospital system.

We have discussed numerous cases of executives of not-for-profit hospitals and hospital systems receiving lavish compensation and benefits that seem out of proportion to any reasonable measure of their performance or of their positions' difficulties.  (Remember that advocates of corpulent executive compensation love to cite the size of the company and the number of employees, but the CEO really has only to manage the next tier of executives, rarely numbering more than a dozen.)

As we have said before, far too often the leaders of not-for-profit health care institutions seem more interested in padding their own bottom lines than upholding the institutions' missions. They often seem entirely unaware of their duty to put those missions ahead of their own self-interest. Like the financial services sector in the era of "greed is good," health care too often seems run by "insiders hijacking established institutions for their personal benefit." True health care reform would encourage leadership of health care who understand health care and care about its mission, rather than those who see a quick way to make a small fortune.

However, the twist in this story is that it appears the lavish compensation of hospital executives in this particular state may have violated state law, or at least the tax breaks these hospitals got may have violated the law, given their leaders excessive compensation, and that the law in question is over 30 years old.  However, the law seems to have been forgotten or ignored for nearly all that time, for reasons that are unclear. 

This seems reminiscent of how the Responsible Corporate Officers' Doctrine seems to have been forgotten and ignored.  this post from June, 2010).  However, in the last 30+ years, this notion has been ignored and abandoned by US government regulators at least in so far as it applies to health care organizations, particularly drug, biotechnology and device companies.

The big question is why have such laws and legal practices, which have not been repealed or refuted, instead been ignored and forgotten?  Surely this cries out for investigation.

Of course, It seems that somehow in the brave new world of laissez faire, anything goes capitalism foisted on health care over the last 30 plus years, old practices and customs that limited the power and enrichment of top leaders may have seemed increasingly prudish, and those advocating them may have seemed to be old fuddy duddies to those bent on personal gain.  But unhipness and scorn of prudishness are not reasons to ignore an existing law. 

So it is not that there are no legal tools to prevent abuses by leaders of health care organizations.  Instead, there has been increasing forgetfulness of the existence of such tools, and perhaps a growing effeteness of enforcement that has lead to a reluctance to even try to use them.  So we can start truly reforming health care by simply enforcing the laws that are already there. 


Afraid said...

I am beginning to get very depressed everytime I read Dr. Poses' posts because nothing ever changes and I'm afraid nothing ever will.

Actually, it does change, just keeps getting worse. These folks are above the law, above ethics, above it all, masters of the universe and impossible to stop.

They don't even care when exposed, they simply continue to do what gets them more and more and more.

Anonymous said...

This is an easy fix. Don't hire highly qualified hospital executives. Hire people just out of school with a fresh MBA (but no experience) that will work for $90k a year. Isn't that what we do with other public sector job? If the city controller had the ability to read the market and invest consistently with a 15% - 20% return, don't you think that person would be picked up by a private investing firm willing to pay more money?

I'm so tired of hearing people complain about salaries of what I would consider "mid-market" senior executives. In this case, these people aren't receiving thousands of shares of stock options that they will be able to cash in 10 years down the line. They aren't driving company BMWs, nor do they have stipulations in contracts (most of the time) providing golden parachutes if they leave, or round-about methods to have the company cover their income tax bill. I've known many executives that go to work in for-profit companies with an annual salary of $100,000, but when all of these other benefits are considered, they are making nearly $500,000 annually, much of it tax free. Now we have the audacity to complain about hospital CEOs that have to deal with physicians (who aren't usually employees, just "consultants" to the organization), and is making $470,000 a year?

Oh, by the way, in most parts of the country, these facilities would be called "not-for-profit". The point is, the facilities are allowed to make a profit...and in most cases MUST make a profit to survive. It is this profit that allows the hospital to buy that new $1 million CT scanner or MRI, or to build that new wing at a construction cost approaching $300 a square foot because it is "medical".

Just remember folks, you get what you pay for. Coach Sarkisian made $1.75 million in 2009, with a salary increase taking him to $2.3 million by 2013...this from a guy who increased the University of Washington's record to an outstanding 5 wins and 7 loses in 2009 and 7 wins and 6 losses in 2010. I suspect that more than 3% of Coach Sarkisian's salary comes out of state funds, more than many of the hospitals we are talking about here. Oh...and if we compare the number of work days involved, I would love to see the difference in the hourly rate between these individuals.

Like I said, take that inexperienced MBA or MHA student straight out of school and put them in the CEO for $90k a year. Heck, the chance of their record in their first year being 41.6% is probably pretty good. Then we can just send more money over to University of Washington's football program.

Anonymous said...


I am an MBA, married to an attorney wife, who is going to retire after 30 years of public service. All I can think is you do things a lot differently then we do. Most of the MBA’s I know, with decades of experience, do not make $90K per year, let alone start at that salary.

My wife has never made $90K per year and her fringe package, at its best, added maybe 50% to her salary.

As a private investor of many years I can assure you nobody makes a 15 – 20% return over time. Warren Buffett shots for 8 – 10%.

Doctors I know do not do badly, but, as you point out, they do not have any stock shares coming do, and must provide for their own medical, retirement, and pay all of their Social Security contributions. An old trick is to take that out the door income and cut in half to see what they would make in salary.

The salaries of these hospital CEO’s raise several issues. First in this case: Are they legal? It appears not and they far exceed comparable salaries of other public servants.

Secondly, for me: These salaries tend to isolate the CEO and thus impact his/her decisions. When all of the interactions of the CEO are with people of similar incomes he/she will reflect that group’s social and moral outlook.

In my community we have 13% unemployment and an average household income of less the $30K. I have been unable to find the salary of our largest hospital’s CEO. I am sure the community would be outraged since people tend to hide things that will embarrass them.

Growing up in Columbus, Ohio I can assure you college football is a business. The salaries paid to coaches and staff comes from the gross receipts of the program and donations attributed to athletics. Much like the clergy, a coach does not come out and work for an hour on the weekends.

These are high pressure jobs with many families counting on them for their support.

People running hospitals are smart folks and need to be compensated. The problem is these salaries tend to isolate them from those they are charged with serving and even those who they must work and interact with on a daily basis. The end result is the job often becomes about them, and not about the community at large.

Steve Lucas