Monday, December 26, 2011

More Tales of the Hospital CEO Compensation Bubble

The hospital CEO compensation bubble continues to grow. As the year draws to a close, I have found another set of stories about outsized payments to health care executives.  While their repetitive features suggest the magnitude of the issue, they featured some twists on the usual justifications given for large compensation packages. Presented in order of the size of the compensation package.....

Maxis Health System, Pennsylvania

The Scanton Times-Tribune reported:
Mary Theresa Vautrinot, president and CEO of parent company Maxis Health System, earned a little more than $464,000 in salary and other compensation, according to 2010 tax forms filed by the hospital.

These days, compensation under a half a million dollars may not seem like all that much, but it should be viewed in context. Maxis Health Systems actually actually owns only one hospital, Marian Community Hospital. In 2010, that hospital, already small, shrunk further,
In January 2010, the 70-bed hospital scaled back operations to just 35 beds. For the past six months, Marian Community Hospital has had about 20 inpatients each day.

Now it will close:
Last Monday, parent company Maxis Health System announced the Carbondale hospital's impending closure, citing ongoing financial pressures and a dwindling patient population

$464,000 seems like a lot of money to run a tiny hospital under "ongoing financial pressure" into bankruptcy. This seems like another example of pay for poor performance.

Summa Health System, Akron Children's Hospital, Akron General Health System, Ohio

In a survey of local hospital CEO compensation, the Akron Beacon-Journal noted,
Children’s President and Chief Executive William Considine received compensation and other benefits totaling $1,560,659 in 2010.

Thomas J. Strauss, president and chief executive of Summa Health System, received a total compensation and bonus package worth $1,408,062 last year.

For Akron General, 2010 was a year of leadership transition, with a former, interim and current leader all receiving executive pay.

Alan J. Bleyer, who retired as the hospital’s leader in 2009, received $677,267 in compensation. Michael Rindler, a national health-care consultant who was interim chief executive and continued in a consulting role through the year, made $983,744.

Vincent J. McCorkle, who took over as president and chief executive on July 1, 2010, received $568,605 in total compensation last year.
Lest anyone think that these hospitals were paying their CEOs a lot of money,
Nonprofit hospital executives could make substantially more if they worked in for-profit industries, [Ohio Hospitals Association spokesperson Mary] Yost said.

'A million dollars certainly is a decent package, but it’s not the highest thing that these people could command,' she said. 'We’re blessed that there are people who want to work for a nonprofit that has the mission of serving its community and they’re not just in it for the money.'

Only within the protected world of top executives would $1 million a year seem only a "decent package."  The stock defense of lavish executive pay is an appeal to common practice, i.e., the pay is justified because so many organizations pay their executives similar amounts.  This version of the defense lacked even the common accompanying assertions that the particular executives are so brilliant and hard-working that they would be assured of a high market price.

Furthermore, let us consider another comparison.  Consider the following data,
Summa’s revenue exceeded expenses by $31.7 million, for an operating margin of about 3 percent.

Akron General Medical Center’s revenue exceeded expenses by about $8 million, resulting in an operating margin of 1.7 percent.

Parent company Akron General Health System posted a loss of about $1 million on revenue of $854,207, according to IRS filings. The health system's filings reflect investment income and the costs of providing health screenings to the public, not hospital operations, Akron General spokesman Jim Gosky said.

Revenue at Children’s exceeded expenses by about $35.3 million for a 7.4 percent operating margin.
These data implied that the CEOs of Summa and Childrens' each received compensation equal to about 5% of their organization's total operating margins. The two people who acted as CEO at Akron General received together an amount that was larger than their system's operating loss, so had they been paid $1 million less, their system would have broken even. In this case, the newspaper found no one to quote who would assert that the former CEOs' performance was so good as to command that much of the hospital's excees, or the latter CEO's performance was so good as to be worth putting the hospital system into a deficit.  

Mercy Health Systems, Wisconsin

The Janesville, Wisconsin Gazette published a story about one CEOs response to previous reporting of his compensation,
Javon Bea saw the August article in a Madison newspaper that questioned the salaries of area health care leaders.

Bea, the president and chief executive officer of Janesville-based Mercy Health System, was singled out for receiving considerably more than hospital executives in Madison.

The article was based on 2009 tax filings, which show that Mercy paid Bea $3.6 million in total compensation. That included compensation of nearly $2 million and deferred pension payments of just more than $1.6 million.

The newspaper reported that the national average was $630,000 and included base salaries, bonuses, pensions and other benefits.

Many stories of executive pay have shown leaders who make many times other employees' compensation.  In this case, however, a CEO tried to assert that he did many times other employees' work.  Bea defended his salary by arguing he did the work of at least three, perhaps six people:
Bea said the Madison newspaper story compared executives at individual operations to him, an executive of a system that has three hospitals and 61 other facilities in 24 communities in southern Wisconsin and northern Illinois.

'To equal the job description of the CEO of Mercy Health System, you'd have to (add together) the salary of the CEO of DeanCare insurance, the salary of the CEO of Dean Clinic and the salary of the CEO of St. Mary's Hospital,' Bea said. 'And then you'd better throw in the chief operating officers at all three.'

Bea said Mercy doesn't have COOs and that he does that work.
Mr Bea did not explain how he found enough time in a 24 hour day to do the work of three to six people.  This seems to be a particularly hyperbolic version of argument that the executive is so brilliant and hard-working as to command such a high market price. Perhaps Mercy does not have CEOs or COOs of individual hospitals, but its 2010 Form 990 (from Guidestar here) documents that it has ten vice-presidents who each make approximately $200,000 to over $375,000 a year. Why Mr Bea would need to do the work of three or six people when he has so many other well-executives around to help was not clear.

Furthermore, Mr Bea came up with an apparently unique justification for his high pay, that its source was some sort of magic money that did not add to health care costs,
Bea said his salary has no effect on health care costs or the premiums MercyCare subscribers pay each year. He likened his salary to capital costs, which he also said don't affect what patients are charged.

John Cook, Mercy's chief financial officer, said Medicare, Medicaid and private insurance companies don't pay providers based on the costs of capital improvements or salaries, which in Bea's case is determined by a board of directors that works with national consultants and attorneys.

'My salary isn't going to affect your health care cost,' Bea said.

Maybe Mr Bea needs a second opinion from another CFO. His compensation appears to come from the hospital system's budget, per its 990 form, so it affects hospital costs as much as any other expense of the same amount. Furthermore, it is well known that hospital systems negotiate payment rates with private insurers, and that larger systems with more market power may negotiate higher rates.  Finally, it is also well known that different hospitals collect different amounts from government insurance programs for patients with apparently similar problems.  Thus, the notion that executive pay has no effect on health care costs, and the implication that it somehow comes from a magical place outside of the budget, seems to be an entirely new rationale for huge executive compensation.  From a psychological standpoint, it appears to be based on wishful or magical thinking.  Another way to look at it is as a logical fallacy, a special pleading, an assertion without a clear basis that the usual rules or principles do not apply.

Montefiore Medical Center, New York-Presbyterian Medical Center, and Others, New York, New York

A brief article in the New York Post focused on the bonuses given to some local CEOs,
Dr. Kenneth Davis, the head of Mount Sinai hospital and medical school, raked in a $1.2 million bonus in 2010, and Michael Dowling, the CEO of the North Shore-LIJ Health System, got $1 million. Louis Shapiro, president of the Hospital for Special Surgery, got a $1.5 million bonus and $992,215 salary.

Some CEOs also got a housing allowance, car and driver, and first- or business-class air travel.

Montefiore Medical Center in The Bronx paid CEO Steven Safyer $1.4 million plus a $359,845 bonus. The hospital also put $2.2 million into Safyer’s retirement fund, which he can take only when he leaves.

In addition,
The highest total compensation — $4.3 million — went to Dr. Herbert Pardes, the retiring head of New York-Presbyterian Hospital, who got $1.7 million in salary, a $1.9 million bonus and $648,686 as “other” compensation.

The Post found someone to provide the usual rationale,
Brian Conway, a spokesman for the Greater New York Hospital Association, defended the packages.

'Hospital CEO compensation reflects their myriad responsibilities, the complexity of running a medical center, and the national market for their talents,' he said.

That was a quick one-sentence summation of the "market" and "brilliant, hard-working" arguments.  Note that, as usual, no justification of why the particular people involved should be considered particularly brilliant or hard-working, and no comparison of their dedication or brilliance to that of lesser paid hospital employees was supplied.  Note also that CEO compensation is usually determined not by the market, but by a biased benchmarking process, see post here. Note further that this process almost never includes comparisons with employees who are not CEOs, nor includes explicit comparison of particular CEOs dedication, brilliance, etc with either that of other CEOs or other employees.

Premier Health Partners, and Others, Cincinnati, Ohio

The Middletown (Ohio) Journal reported,
Jim Pancoast, president and CEO of Premier Health Partners, the parent organization of Atrium Medical Center in Middletown, had the highest pay in 2010 of information available to date from that year. Pancoast collected about $4.6 million in 2010, most of which is a lump sum paid out through a supplemental executive retirement program.

The year before saw someone get even richer compensation,
Kettering Health Network’s former Chief Executive Officer Frank Perez and UC Health’s former CEO Kenneth Hanover topped the list in 2009, with each receiving more than $2.6 million.

Frank Perez’ total reportable pay in 2009 of more than $5.5 million included a more than $4.5 million lump-sum, taxable retirement payment.

Ron Seifert, executive compensation practice leader for the health care practice at Hay Group, supplied the usual rationale,
'No one, including the boards of these organizations, denies this is a lot of money. But what they’ll tell you is this takes a special leader,' he said. 'They come with a price tag.'

As is also usual, why the particular leader should be considered so special, particularly in comparison to other lesser paid hospital employees,  was not specified..

Northwestern Memorial Healthcare System, Chicago, Illinois

Last but not least, we address the compensation given Dean M Harrison, the CEO of Northwestern Memorial Healthcare System, as discussed in an editorial in FierceHealthFinance, entitled, "The problem of 8-figure hospital paychecks and near-poor patients." In summary,
Harrison was paid an astonishing $10.2 million in 2010, the result of a $7.5 supplemental retirement fund payout.

The ire this generated, so unlike the tone in the typical news article about executive compensation,  is worth quoting:
There are hundreds of nonprofit hospital CEOs like Harrison, compensated with millions of dollars while their institutions throw a few bread crumbs to the poor living in their service areas. Many these institutions spend more on CEO pay than charity care.

Alan Sager, a professor of health policy and management at Boston University, recently told Crain's Chicago Business what a lot of healthcare pay and governance experts dare not say: 'There's an enormous sense of self-entitlement among CEOs. It started in the for-profit corporate sector, but it has sloshed over into the non-profit hospital world.'

I worked up some talking points for Northwestern Chief Financial Officer Peter J. McCanna that he can bring to the next board meeting, although I'm guessing he won't do so. For those CFOs actually willing to rock the boat, these bullet points work for practically any large urban hospital in the country:

• Dean Harrison's 2010 compensation was approximately 170 times that of a charge nurse on their feet 12 hours a day. Does Dean Harrison work 170 times harder?

• Dean Harrison's compensation was approximately 20 times that of a cardiac surgeon performing 300 to 400 high-revenue procedures a year. Does Dean Harrison provide 20 times the benefit?

• Dean Harrison's compensation could be used to cover the first 10,000 uninsured patients who come through the emergency room each year. Which would provide a greater benefit to the hospital and community?

• The purpose of a supplemental retirement plan is to ensure its recipient maintains a reasonable standard of living past their working years. Given the tens of millions of dollars Dean Harrison has already received during his career and the six-figure pension and high five-figure Social Security income he is guaranteed upon retirement, will the $7.5 million payout actually accomplish its goal? Or will it merely be gravy for his heirs?

He concluded,
Meanwhile, if your hospital has a single patient who works hard, will be bankrupted by the bill they receive, and no one on your staff has walked them through every step of a charity care claim, that is where some imagination and original thought is sorely needed.

Too much money in some places, and not enough in others. Someone needs to announce that the buck stops here. And start moving around all the other bucks.


In a health care system with ever rising costs, declining access, and stagnant quality, we no longer can tolerate the perverse incentives generated by unaccoutanably high compensation to top executives. As long as top executives continue their sense of "self-entitlement," and can continue their current management practices reinforced by ever rising pay checks, expect poor leadership to undermine any attempts to improve health care.  Tired repititions of the usual rationales, that the CEOs are brilliant and hard-working, and that their compensation is mandated by the market do not make these rationales true.
We need health care leadership that has compassion for the increasing hardships that their patients have to endure, and that puts doing the right thing for patients' and the public's health ahead of self-interest.


Anonymous said...

It is important to remember that given the current economic conditions even places such as Chicago are loosing population and those that are left are often put into lower paying positions.

Per Allison Bass we see that her husband, even while increasing his work load, is essentially being force out of his position due to his salary. A salary, like most in social work, is very low compared to the services rendered.

I would also note that Akron Children’s paid many of their department heads over $1M. This is an extraordinary amount of money in any market, but given the low cost of living and high unemployment of NE Ohio, this becomes outrageous.

Steve Lucas

Judy B said...

Keep it up Dr. Poses, we need more people like you revealing what is truly going on with executive compensation in hospitals. The hubris of the rationales is unbelievable!

Anonymous said...

The hospital executives are thiefs, stealing from the downtrodden, the patients.

Afraid said...

Ho hum, more of the same. Has the problem gotten any better or is it worse? The citizenry and healthcare workers seem to understand the problem well already, but are powerless.

Thank you Roy for your effort at penning these refrains.