The Long Con - "Charitable" Hospitals Make Multimillionaires out of Their CEOs

The CEOs of ostensibly charitable hospitals founded to serve the poor continue to become rich.  

The latest reminders are in two articles from Maryland, from DelMarVaNow, and from the Baltimore Sun,.and one from the Boston Globe.

All this diligent reporting showed multimillion dollar executive compensation,  as usual not justified by evidence or logic, but also how executive compensation is becoming divorced from the ostensible charitable mission of non-profit hospitals.  

Most Hospital CEOs are Paid a Lot

So jin Maryland, we found via DelMarVaNow,

Peninsula Regional Medical Center paid its top executive and her immediate predecessor a total of $2.37 million in compensation in 2011 as the nonprofit hospital gained millions of dollars in profit.

In particular,

 The analysis shows that R. Alan Newberry was the third-highest paid hospital chief in Maryland, even though he has not run PRMC since 2009. In the year after formally stepping down from the hospital’s top job, Newberry received $1.57 million, about $600,000 more than he had while still working full time.

The Baltimore Sun summarized compensation given to multiple executives,

 Eleven executives earning seven-figure compensation packages including salary, bonus, retirement and other pay saw their total pay rise from as little as 0.13 percent to as much as 308 percent in the fiscal year that ended in 2012, according to tax filings. Another executive earning more than $1 million saw a pay cut.

In particular,

 The state's highest-compensated hospital executive that fiscal year was Kenneth A. Samet, the CEO of the 10-hospital MedStar Health system, who earned $6.3 million. More than half — $3.5 million — was money earned in a supplemental retirement plan during his 23 years of service. He won't get the money until he retires. His base pay was $1.2 million, and he received $1.5 million as a bonus and incentives.

The other top five highest-paid executives in Maryland are James Xinis, CEO at Calvert Memorial Hospital in Prince Frederick; Ronald A. Peterson, CEO of the Johns Hopkins Health Center Corp.; Robert A. Chrencik, CEO of the University of Maryland Medical System; and Thomas Mullen, CEO of Mercy Medical Center.

Xinis saw his compensation package jump 307.8 percent to $3.5 million, $2.8 million of which was a required distribution of vested retirement funds from a plan he begin contributing to in 2003, the hospital said in a statement. Xinis has served as CEO for 26 years and plans to retire in the next 18 months, the hospital said. His base salary in fiscal 2012 was $309,557.

Peterson, who oversees six hospitals, earned a $3.5 million compensation package. Peterson's 86.5 percent pay increase largely reflected pension benefits he'd earned during 40 years at Hopkins. His annual base salary increased about $49,500 to $1.1 million in fiscal 2012.

Chrencik, whose system has 12 hospitals, earned about $2.3 million. Chrencik's total pay grew 23.4 percent. Mercy's Mullen saw his pay rise 24 percent to $1.6 million for the fiscal year ending in 2012.

The one CEO earning more than $1 million who saw his compensation fall was Edward D. Miller, who retired in June 2012 as CEO of Johns Hopkins Medicine and dean of the university's medical school. His reported pay dropped to just over $1 million in fiscal 2012 from nearly $2.3 million the prior year, when he took a one-time retirement payout.

Also,

According to Saint Agnes tax filings, [CEO Bonnie] Phipps received $1.9 million in the 2012 fiscal year, 4.4 percent more compensation than a year earlier.

 Per the Boston Globe, local hospital executives also did really well

Chief executives at the Boston area’s largest nonprofit teaching hospitals drew pay packages of $1 million to $2.1 million in 2011, including salaries, bonuses, and compensation such as health and life insurance and retirement benefits.

Topping the list locally was Gary L. Gottlieb, chief executive of Partners HealthCare System, the state’s largest hospital and physicians organization, who received total compensation of $2.1 million in 2011, according to federal tax documents released Thursday by the nonprofits.

And,

The presidents of Partners-owned Massachusetts General and Brigham and Women’s hospitals also drew seven-figure packages in 2011, with Peter L. Slavin at Mass. General receiving a total of $1.7 million and Elizabeth G. Nabel at Brigham and Women’s a total of $1.9 million.

Also,

Tufts Medical Center reported that Ellen M. Zane, who served as chief executive through September 2011, had total pay of $1.6 million that year.

Eric J. Beyer, who took over from Zane in October, had total compensation of $744,722 that included pay for work as chief executive and at his previous job as president of the Tufts Medical Center Physicians Organization.

James Mandell, chief executive at Boston Children’s Hospital, was paid a total of $1.5 million in 2011. That was down from the $2 million he earned the prior year when he received two separate incentive awards, according to a hospital spokeswoman. Mandell plans to retire next month and will be succeeded by Sandra Fenwick, the hospital’s president and chief operating officer.

Total compensation for Boston Medical Center chief executive Kate Walsh was listed at nearly $1.4 million in 2011, an increase from $1.3 million in 2010.

At Dana-Farber Cancer Institute, chief executive Edward J. Benz Jr. received total compensation of nearly $1.3 million in 2011, up from $1.1 million in 2010.

Beth Israel Deaconess Medical Center paid three different top executives in 2011.

Eric Buehrens, who served as interim chief executive from February to October, drew total compensation of just over $1 million for that role and other executive jobs.

The Justification for this Pay is Stereotyped (and not Supported by Logic or Evidence)

The Usual Talking Points

The articles in combination provided the usual talking points as justification.  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..   

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.

As we have noted before, there is little evidence in support of these talking points.  What evidence there is on the topic suggests there is no real free market in interchangeable CEOs, and that CEOs are not very mobile, especially not across different kinds of organizations (look here).  There is little evidence that hospital (or other health care) executives are particularly brilliant, or any more brilliant than multitudes of physicians, nurses, and other health care professionals who work hard to make their institutions run.

True to form, the reporting from Maryland and Boston found that defenders of executive pay cited the talking points, but without any further logic or evidence. 

Competition

Re PRMC (from DelMarVaNow),

 'We’ve looked at about 17 like institutions. Eight are smaller than we are; eight are larger. Every hospital is different, so you have to always take into account there’s some variation, but we’ve always stayed in the middle. Our goal has been to stay in that 60 percent level as far as compensation goes,' said Martin Neat, chairman of PRMC’s board of directors, which oversees executives’ salaries.­

Note that in this case, no justification was provided for constantly setting the CEOs pay above the median.


Re Maryland, via the Baltimore Sun

 Hospitals argue that they have to offer competitive compensation to attract talent to run a complicated business.

Re Maryland and particularly UMMS, via the Sun,

 The medical institutions say they hire independent consultants and look at the pay of executives at comparable health systems when making their decisions.

Also,

UMMS hospital executives are compensated in line with national benchmarks,' [UMMS spokeswoman Mary Lynn] Carver said.

Note that there was no justification for the comparability of these institutions, or why a national versus regional comparison was made.

Retention

Re PRMC

 Above all, PRMC’s board of directors seeks to ensure that the hospital attracts and retains the best leaders.

Note that there was no evidence given that current leaders might leave were their compensation reduced.

 Brilliance

Re PRMC,

[Board Chairman Neat]  added: 'These are high-paid positions, but these are very capable people who could go elsewhere.'

Re Maryland, from the Baltimore Sun

 Executives need to understand everything from the latest health technologies to regulatory changes, including health reform.

So do doctors and nurses, so why do they not not get similar pay?

Also,

 [Carmela Coyle, CEO of the Maryland Hospital Association, said,] 'Hospital executives are in charge of incredibly complex organizations,' she said. 'They are organizations that are open 24 hours a day and are highly regulated. These are really difficult, difficult jobs'.

Note again the lack of comparison with the doctors and nurses who must staff the hospitals 24 hours a day, and make difficult decisions while caring for patients with sometimes life-threatening conditions.  How often does a hospital CEO get a call in the middle of the night, and how often does it require a decision in a life-and-death situation?

Re Mercy Medical Center,

 'As a result of Mr. Mullen's leadership, vision and skillful stewardship, Mercy has been an economic engine for the city, infusing additional jobs into the local economy,' the hospital said in a statement.

When in doubt, use the v (for visionary) word.  Note that this begs the questions of how many other people were responsible for the economic benefits, and whether such benefits, rather than, say ability to provide good care to patients, should be the main consideration.

Should Brilliance be Measured by Revenue?

At best, some defenders of high CEO pay seem to argue that the main measure of CEO brilliance ought to be their hospitals' financial performance. For example, the DelMarvaNow article included,

Fiscal health is one of the most important considerations in determining [new CEO Peggy] Naleppa's pay, [board chairman] Neat said. 

Also, he was quoted,

'There's no question that the financial performance of the institution is going to affect what you're going to pay', Neat said.

While,

Nationwide, hospital boards subscribe to a similar philosophy.  Financial health was cited by 100 percent of multi-hospital organizations in a 2006 survey as a factor in determining bosses' incentive plans.

Similarly, the Baltimore Sun quoted Dr Stephen F Jencks, "who serves on the board of the cost review commission,"

executives should be judged by whether they are running cost-efficient organizations

However, CEO pay seems to increase even at financially challenged institutions,  as the Baltimore Sun noted,

The CEO pay question — always a hot-button issue — is generating debate again this year after a state panel spurned a push by hospitals for higher rates, instead approving smaller increases and calling on them to do more to curb expenses. Hospitals have sought rate increases in each of the past three years, and this year at least one Baltimore-area hospital responded with layoffs in an effort to trim labor costs.

So,

'If they are laying off staff and decreasing what they invest in the community and executive compensation is increasing, that is a real question,' said Jessica Curtis, project director of the hospital accountability project at Community Catalyst, a national advocacy group that promotes wider access to affordable health care.

Even if one accepts that the compensation of leaders of organizations that take care of sick and injured patients ought to mainly depend on the brilliance of their leadership as measured by how much money the organizations make, rather than the quality of that care, it is not clear that all these leaders are brilliant in that sense.

The Charitable Mission and CEO Compensation

Essentially all US non-profit hospitals and hospital systems have a history of a charitable mission to improve the health of their patients and communities, even if that means taking care of poor people who cannot pay for these services.  Nearly all justify their legal status as non-profit corporations by stating this mission. 

For example, Peninsula Regional Medical Center, the main subject of the DelMarVaNow article, describes its mission thus in its US tax filing,

Peninsula Regional Medical Center is a not-for-profit 501 (c) 3 non-stock corporation founded in 1897 to serve the health care needs of the community.  The Hospital's primary purpose is to provide the highest [sic] primary, secondary, and selected tertiary health care services to residents of and visitors to the Mid-Delmarva Peninsula in a competent, compassionate, and cost effective manner designed to elicit a high degree of consumer satisfaction.  The Hospital's mission is to improve the health of the communities we serve....

Yet it appears that this mission is honored mainly in the breach, at least when it comes to CEO compensation. 

The DelMarVaNow article emphasized that hospitals' charitable functions are not seen as relevant by hospital boards when setting CEO compensation,

Despite the nonprofit status of the organizations they oversee, hospital boards don't appear to put weight toward the amount of free medical services and community outreach activities, good deeds collectively known as charity care, [executive vice president of Integrated Healthcare Strategies Kevin] Talbot

Also,

The head of the consulting firm that helps PRMC's board establish [current CEO] Naleppa's pay said community benefit shouldn't be part of the equation.

'In my over 25 years of consulting on hospital compensation, I have never seen community benefit used as a factor in determining executive pay,' Rian Yaffe said.  'Community benefit has nothing to do with how difficult a hospital is to manage and lead.'

However, community benefit is the mission of the hospital, and is justification for most US hospitals' non-profit status, which allows them to escape certain kinds of taxation, and for donors to make charitable, tax-advantaged contributions to the hospitals.  

The Baltimore Sun listed financial but not charitable performance as a justification for the compensation of a particular executive, the CEO of Johns Hopkins Medical Center, who is

'held responsible for stringent qualitative measures,'  in such areas as financial performance, patient safety and service excellence, [Johns Hopkins] spokeswoman Kim Hoppe said in a statement.

When asked by the Sun to comment, the advocacy group Community Catalyst stated

One of the factors that should be considered, it says, is the role of non-profit hospitals in the community and in providing charity care. 

Meanwhile, while the hospitals gain advantages from ostensibly focused on the mission of providing community care and benefit, not only are there leaders not given incentives to uphold this mission, they are explicitly compared to leaders of for-profit organizations who have no such missions, and who are primarily tasked with increasing short term revenue in this era of "financialization." 

In the Baltimore Sun,

Hospitals note that they compete with private sector businesses where their executives could choose to work instead.

Again, as noted above, there is little evidence that top hired managers are really that mobile, and less that a manager from one sector, e.g., non-profit hospitals, would be in great demand in another, e.g., a for-profit corporation.

The Boston Globe noted an argument made that implied no one should complain about how much non-profit hospital executives make, since executives of for-profit corporations make even more.

 'In a big successful teaching hospital, it’s very rare to see anything less than $1 million in total compensation for the chief executive, and $1.5 million to $2 million is the norm,' [managing director of consulting firm Compensation Resources Paul R] Dorf said. 'Executives at publicly traded pharma or medical device companies can make 10 times as much.'

So if there is little evidence for the mobility of top hired managers, there is less for the desirability of managers of non-profit hospitals as heads of large pharmaceutical or medical device companies.  But furthermore, in trying to justify, albeit illogically, outsize CEO compensation, the defenders of this compensation have provided evidence that the leaders and stewards of non-profit hospitals may no longer care about the hospitals' fundamental mission.  This suggests that hospitals' overt declarations of their mission, especially when used to obtain more donations and tax benefits, may amount to the ethical equivalent of a "long con," that is, a long-term confidence scheme.


Summary

While F Scott Fitzgerald noted that the very rich are different from you and me, it may now be more appropriate to say that top hired managers are very different from you and me.  Again and again we see that they play by very different sets of rules than do other people who work in health care.  Notably, while they often emphasize cost cutting, and may be quick to lay off or outsource other employees, their compensation increases year by year no matter how well their organizations are doing.  While other employees, increasingly now including doctors as well as other health care professionals, have to answer to the hired managers, the hired managers only answer to boards of directors or trustees who often act like their cronies, perhaps because they are often also current or retired hired managers.

Hired managers are subject to incentives that seem designed not to improve patients' and the public's health, but at best to improve the short-term revenue of health care organizations, and at worst to increase the wealth of hired managers.  Such perverse incentives risk promoting ill-considered, mission-hostile, or even corrupt management.  The sorts of people who aspire to be hired managers in such conditions are likely not the sort of people one would expect to really advance the health of patients or of the population.

As a first step to restoring health care leadership to some state of reasonable accountability and responsibility, we need to challenge the rules that only hired managers play by.  It would be nice to see articles in the media about health care CEO compensation that at least attempt to question the usual talking points.  All of us could think about how we could challenge our local million dollar plus hospital CEOs to justify why they should be treated so differently from all other hospital employees.

Since it seems that many hospitals no longer fit at least the spirit of the definition of not-for-profit organizations, even though they use this designation for financial advantage, we need policies to encourage them to uphold their mission, and that provide negative consequences if they do not.