More Executives Prospering Despite the Financial Distress of their Hospitals

Cases that demonstrate the contrast between compensation given to the hired executives of health care organizations and their or their organizations' performance continue to appear.  Last week we discussed how freely million dollar plus compensation is given to executives of nominally non-profit hospitals, and discussed how well some executives were paid just prior to charges of financial mismanagement, arrests or guilty pleas that drove them from their jobs.

I have also found a series of cases of executives whose pay seemed disproportionate in the context of their institutions' financial difficulties.  Here they are, discussed in alphabetical order.

Greenwich Hospital, Connecticut

According to GreenwichTime.com, here is the context:

Greenwich Hospital went under the knife on Wednesday, announcing the layoffs of 36 employees and a series of cutbacks to what it characterized as non-core programs to offset the loss of revenue from a newly implemented state hospital tax.

A Yale-New Haven Health System affiliate and the town's largest employer, the hospital estimated it needs to make up for $8.5 million in lost revenue.

The hospital's top administrator blamed the situation on the state, which now gets a 4.6 percent cut of all hospital income as part of a flat tax enacted on July 1.

While the CEO announced cuts in services, he was not about to cut his own compensation:

'If they're doing so much cost-cutting, what are they doing about [hospital CEO Frank] Corvino's $1.5 million salary?' [former town first selectman Richard] Bergstresser said. 'It seems to me that they should do some trimming before they do layoffs.'

Note that a hospital public relations official had the usual explanation:

Yale New Haven Health System uses a third-party consultant to gauge executive compensation levels, according [hospital spokesman George]Pawlush, who said that Corvino wears two hats.

In addition to his duties as hospital president and chief executive, Corvino is executive vice president of Yale New Haven Health System.

'Each organization contributes half of Frank's total earnings,' Pawlush said. 'Frank's experience in hospital administration has given him the skills needed to successfully balance both of these highly demanding roles simultaneously.'

So in summary, the CEO of a hospital forced to make lay-offs and close popular programs was paid more than $1 million a year because of his great "skills."
Hoboken University Medical Center (HUMC), New Jersey

The context here is a bit complicated. First, according to the Jersey Journal,

The Hoboken hospital was ... in a sea of debt when it was called St. Mary Hospital. In early 2008 the city took over the hospital and its $52 million debt, but the city has never sought to remain in the business of running a hospital.

So,

The HMHA, the board that oversees the operations and sale of the HUMC, is in exclusive negotiations with HUMC Holdco, whose proposal was chosen over seven others last month.

As negotiations about the sale of the distressed hospital continued, the Jersey Journal then reported,

the hospital's manager, Hudson Healthcare Inc., recently declared bankruptcy. Earlier this week, HMHA Chairperson Toni Tomarazzo said that declaring bankruptcy was a necessary step in facilitating the sale,

However, just before then, as a reporter from the Newark Star-Ledger found out,

Less than three weeks before the operator of the city-owned Hoboken University Hospital filed for bankruptcy — putting millions of dollars in taxpayer money and union pension funds at risk — the hospital’s chief executive received a six-figure payout, records show.

Spiros Hatiras, 46, stepped down as chief executive on July 16 after two years on the job with a severance package that includes $600,000 in compensation and full medical benefits for a year, according to records obtained under the Open Public Records Act.

In addition,

A physical therapist who rose through the hospital’s ranks, Hatiras was earning a $400,000 a year and incentive bonuses at the time of his resignation, records show; his contract was set to expire in five months, and called for a severance payment only in the event the hospital terminated the contract.

The package was negotiated by Hudson Healthcare Inc., the current operator of the hospital that filed for bankruptcy protection, and was approved by the Hoboken Municipal Hospital Authority.

Initially, no one could come up with a clear explanation. First,

Doug Petkus, a spokesman for the authority, said officials 'cannot' comment on the issue.

Then, the Hoboken mayor made this attempt, per the Jersey Journal,

Asked why the HMHA decided to give Hatiras the generous severance even though it didn't have to, Mayor Dawn Zimmer, also an HMHA commissioner, skirted the question.

'Given the totality of the circumstances, this was the best way to save our hospital and relieve our taxpayers of a $52 million bond guarantee.

Asked if that meant the sale of the hospital was contingent upon Hatiras receiving the lucrative severance, Zimmer said 'Given the totality of the circumstances, this was the best way to save our hospital and relieve our taxpayers of a $52 million bond guarantee.'

Finally, the Jersey Journal reported this version:

The Hoboken Municipal Hospital Authority (HMHA) was obligated to pay out a $600,000 severance package to the former Hoboken University Medical Center CEO because he met the conditions of his contract for the lucrative parting gift, according to HMHA chairwoman Toni Tomarazzo.

Tomarazzo refuted stories that appeared in The Jersey Journal, Star-Ledger, and online at NJ.com that said the HMHA, the city entity that runs the hospital, was not bound to pay Spiro Hatiras the severance amount because he resigned.

Hatiras’ contract called for payment of the severance package 'upon termination, non-renewal or expiration of the term of Employment Agreement,' according to the HMHA resolution authorizing payment.

'It was a contractual obligation,' Tomarazzo said. 'There was nothing we could do about it.'

The resolution said 'even though the employment ended through a mutual agreement to step aside and cease to serve as CEO that shall be documented in a resignation letter...' the HMHA agreed that Hatiras 'is entitled to' the severance package.

So, in summary, the CEO of  a public hospital deeply in debt, and which had to be sold to a for-profit corporation, received a substantial golden parachute just prior to its operating authority's bankruptcy filing.  The only explanation was that this payment was a contractual obligation, which, of course, begged some questions: knowing that the hospital was in a perilous financial condition, why did the authority write such severance into the contract, and if it did not intend that severance should be paid under the conditions which finally obtained, why is the authority not disputing the payments?

Kingsbrook Jewish Medical Center, New York

According to the New York Post, here is the context.

The 326-bed facility is considered one of five Brooklyn hospitals that advocates fear is in danger of being shuttered by Gov. Cuomo's medical redesign team. Many of Kingsbrook's patients are Medicaid recipients.

Furthermore, in 2009,

the hospital was forced to close a clinic and lay off workers and staff members took furloughs because of budget tightening.

However,

hospital officials defended Brady's compensation, noting she was paid $1,094,443 in base salary in 2009 - and that $2,891,335 will be doled out as retirement and deferred compensation she accumulated from 30 years of service.


Brady also received $215,241 in bonuses and nontaxed benefits in 2009.

The Post asserted that her total compensation of over $4 million was "more than any other nonprofit hospital executive in the state."

Her previous two years' compensation was slightly more modest, but still greater than the magic $1 million a year:

In 2008, Brady took home $1,054,406 in base pay plus an additional $137,335 in deferred compensation and nontaxable benefits, tax records show.

In 2007, she hauled in $1,023,452 in base salary plus $195,661 in deferred compensation, the records show.

The chairman of the hospital board's finance committee offered the usual rationalization:

'Dr. Brady's compensation is, in fact, at market rate and reflects the board's full faith in her abilities and execution of her job,' said Ed Lieberstein, chairman of the Kingsbrook board of trustees' finance committee.

So, in summary, the CEO of a small non-profit hospital threatened with closure and forced to lay-off workers and close programs was paid over $4 million, supposedly the "market rate."  One wonders if the "market" here was that including small, financially distressed hospitals?

MetroHealth Medical Center, Ohio

This public, not for profit Cleveland, Ohio health care system has had its share of troubles lately, as the Cleveland Plain Dealer noted,

MetroHealth, the county's safety-net hospital, has faced a myriad of economic hurdles and is still undergoing what its leaders call a turnaround: The system reported a $2.2 million loss on net income in 2007. It continued to bleed money in early 2008, losing $11 million in the first quarter, according to long-time trustee and now MetroHealth Board Chair Ron Fountain.

So, when a new CEO, Mark Moran, was hired to turn the system around, per the Plain Dealer,

'At MetroHealth, starting in 2008, we turned over every chief -- the chief financial officer, chief executive, chief operating officer, chief medical officer, everybody,' said MetroHealth board member Thomas McDonald, who has been on the voluntary board since March 2008. 'We had to get the ship righted.'

While doing so, however, the new leadership saw fit to reward those it pushed out the door,

The MetroHealth System has agreed to pay more than $4 million for consulting contracts in lieu of severance to top executives and high-level employees who have left the county-owned hospital since 2008.

The contracts, similar to the one the hospital granted to departing Chief Financial Officer Sharon Kelley, have provided salary and benefits, in some cases up to one year, to dozens of departing employees. The deals also include up to $114,000 in performance bonuses for three executives.

The agreements allow for continued accrual of vacation pay benefits and continued contributions to the Ohio Public Employees Retirement System. The work required of employees under the contracts is not specified.

CEO Moran later acknowledged that the "consulting agreements" really did not require any consulting to be done, again in the Plain Dealer,

Awarding what Moran called 'employee transition contracts' lowered the risk of potential litigation and provided access to the institutional knowledge of the departing employees. He acknowledged, however, that most of the employees 'probably didn't' do any work.

Mr Moran explained the need for such severance packages thus:

the amount MetroHealth pays its executives, including severance, is necessary to compete against the Cleveland Clinic and University Hospitals for qualified professionals.

However, MetroHealth was not exactly competing to keep these executives, it was trying to get them to leave.

Furthermore, while the health care system has just gotten beyond its financial distress, the compensation given to its current executives has surged ahead, again according to the Plain Dealer,

The pay packages of MetroHealth System's top-tier executives -- base salary plus potential incentives -- ranks near the top 25 percent when compared to that of similarly sized health systems, according to a report by a national compensation adviser.

The report, completed in April and provided to The Plain Dealer last week, provides an inside-look at the way MetroHealth pays 18 executives when county leaders and the public have questioned the spending practices of the county-owned health system.

MetroHealth hired Mercer, as it has for at least four years, to review the system's executive-level pay and severance policy to determine if they were in line with industry averages.

What Mercer found this year was a staff with "more competitive pay levels than has historically been the case" -- including one salary so high that the firm suggested a review of whether it was "reasonable."

That concerned one board member,

MetroHealth board member John Moss, who reviewed the report for the first time late last week, called it "disconcerting." He was particularly bothered by the salaries, saying the health system's administration had told the board that the compensation was "closer to the middle."

"They seem to be closer to the top 25 percentile," Moss said. "[It's] not what we've been told."

Can anyone guess the justification for the lucrative payments given by the CEO?

Moran goes on to write that the contracts 'support our ability to recruit the best and brightest talent.'

So, in summary, many executives of a public hospital that had been in financial distress were discharged, but given large "consulting payments" which appeared to be golden parachutes.  The new executives were paid at very high rates compared to some sort of market because they were "the best and the brightest."
Summary

So we see more cases of executive exceptionalism.  The hired executives of health care organizations, including non-profit and public hospitals, seem to prosper financially regardless of their organizations' financial status.  The executives, their boards of trustees and the hospitals' own hired public relations staff may justify the financial success of their leaders by referring to "market" conditions, which do not seem to be references to "markets" consisting of financially troubled hospitals, and by praising their leaders' abilities, including literally calling them "the best and the brightest," without any obvious evidence supporting their claims.

To an outsider, it just seems like the hospitals are now run primarily for the financial benefit of their hired leaders.  The problems seem to be:

-  Paying the leaders so well (and supporting the public relations staff who sing their praises) costs money that could better be used to provide actual health care.

-  Providing such perverse incentives, which seem entirely unrelated to the hospitals' ability to uphold their primary patient care  and public health missions (and academic mission if applicable), is likely to detract from the hospitals' ability to support these missions.

-  It is likely that employees of such institutions who actually try to uphold the mission will be demoralized by the realization that their leaders' enrichment comes first, further damaging the hospitals' ability to uphold the mission.

-  Finally, it is possible that such perverse incentives attract leaders who are particularly unsuited to the task of upholding the mission.

One cannot help but notice that the quaint notion that hospitals exist to uphold patient care, public health, or academic missions rarely is acknowledged nowadays in discussion of hospital leadership.

Turning blue in the face, I say again... 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.