Monday, December 01, 2014

The Hospital CEO as Scrooge - Hired Managers Get Raises While Presiding Over Deficits, Layoffs and Pay Cuts

Million dollar plus managers of non-profit hospitals and health systems are now -forgive me - a dime a dozen. Payments to top managers continue to rise, faster than inflation, and faster than the pay given to other people in the health care field.

Top Hired Managers' Pay Increases Far Faster than Pay of Other Employees

For example, last August, Modern Healthcare published a summary article which included

Total cash compensation grew an average of 24.2% from 2011 to 2012 for the 147 chief executives included in Modern Healthcare's analysis of the most recent public information available for not-for-profit compensation. Of those 147 CEOs, 21, or 14.3%, saw their total cash compensation rise by more than 50%.

Another 51, or 35.7%, received total cash compensation increases of 10% or higher.


The survey results suggest hospital system CEOs received increases in their base compensation that was about four times greater than average workers, who have gotten annual pay hikes of less than 2% in recent years. Of the 143 analyzed, 37, or 25.9%, received raises in their base compensation that were 10% or higher; another 69, or 48.3%, had raises between 2% and 9.9%; and just 23 of the group, or 16.1%, saw a decline in their base compensation, according to Form 990s.
The Talking Points Remain Unchanged

Yet the justification given for such munificent pay of the top hired managers of non-profit organizations that are supposed to put patient care (and sometimes teaching and research) ahead of personal enrichment never seem to go beyond the talking points we have previously discussed.

 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, 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 (and have to be to do such a difficult job).

True to form, the Modern Healthcare article also included,

The "Competitive Rates" Talking Point

Hospital systems, their boards and outside compensation consultants justify these raises as adjustments necessary to keep pace with what the market dictates and to compete for talent that might flee to more-lucrative for-profit positions.

The "Retention" Talking Point

'We want to make sure we can recruit and retain the highest quality of staff, while balancing benefits and the salaries that are reasonable as compared to other organizations,' Mayo's [chief human resources officer Jill] Ragsdale said.

The "Brilliant Executive, Difficult Job" Talking Point

Jill Ragsdale, Mayo Clinic's chief human resources officer  [said] 'We want to make sure we can recruit and retain the highest quality of staff.'


'Not everyone can step up and step into running a healthcare system with 25 to 50 hospitals,' said Tom Flannery, a partner with consulting firm Mercer. 'It's a heck of a complex job.'

Questions Begged

Always left unsaid, and left unsaid in this article are answers to questions like:

Why are so called market comparisons limited to other CEOs or top managers, and never take into account other hospital employees, especially the health care professionals who actually provide the health care?

Why is the complexity of the managers' jobs never compared to complexity of other health care jobs, like the care of complex patients with multiple diseases, or neurosurgery, for example?

How is the "brilliance" of the managers measured, and compared to the brilliance of other employees, especially health care professionals?

These questions become more pointed when the size and rate of increase of executive, that his hired managers' pay seems obviously disproportionate to the trajectory of the financial performance, much less clinical quality of the hospitals the managers run.

In the recent months, we have found some striking examples of non-profit hospital executive pay that seems ridiculous in the context of what is going on at these managers' institutions.  Very briefly, some recent examples, alphabetical by state, include...

California - Washington Hospital Health System CEO Got Total Compensation Near $1 Million After Hundreds of Layoffs, and Charges of Conflicts of Interest and Poor Organizational Transparency

This story appeared in late September, 2014, in the Silicon Valley Business Journal, and noted that a local chapter of the Service Employees International Union (SEIU) was protesting the pay of the hospital's CEO,

Washington Hospital CEO Nancy Farber’s $593,000 salary ... [was] coupled with benefits that push compensation closer to $1 million

However, three months before,

an Alameda County grand jury report noted several potential conflicts of interest and poor organizational transparency at the institution, which the hospital's administration has since refuted or vowed to fix.


The hospital laid off 200 workers two years ago and another 31 earlier this month. Washington Hospital’s most recent federal tax filing available show net assets of negative $16 million, plus expenses of $31.8 million, which outpaced revenue by $1.3 million during 2011.

The 2014 controversy over Ms Farber's pay is particularly notable since her pay has been raising concerns, and hackles, for more that 10 years, as we discussed in this 2013 post.  (In 2003, a local newspaper decried her 10% raise and her then $406,000 base salary.)  Yet none of these concerns seems to have affected her continuing generous remuneration despite ongoing problems at her small, partially publicly funded institution.  

Massachusetts - UMass Memorial Health Care CEO Received $4.8 Million Compensation Months Before Hospital Announced $55 Million Operating Loss

In this story from the August, 2014, Boston Globe, the contrast was between the CEO's rising remuneration and the hospital's worsening losses.  

The departing chief of UMass Memorial Health Care in Worcester earned $4.8 million in 2012, topping the list of Massachusetts hospital executives who received healthy increases in seven-figure pay packages — even as they faced growing pressure to bring costs under control.

John G. O’Brien, who retired in February 2013 after more than a decade at UMass Memorial, nearly doubled his compensation from 2011, when he earned $2.4 million as head of the biggest health care system in Central Massachusetts. Much of his 2012 compensation included retirement benefits earned during his tenure.

O’Brien’s payout came several months before UMass Memorial reported a staggering $55 million operating loss for the fiscal year ending September 2013.

Not only was the hospital losing a lot of money, soon after Mr O'Brien departed with his riches, it began laying off employees.

The system has since laid off hundreds of workers and made other changes to close the gap under the new chief, Dr. Eric W. Dickson.

The justification came from the system's top lawyer, included an example of the "our executives are brilliant" talking point,

Douglas Brown, UMass Memorial’s chief legal counsel, said O’Brien helped expand the health system and did 'a remarkable job' as chief executive.
Note that Mr Brown's official title is "Senior Vice President for Member Hospitals and Chief Legal Officer," per the UMass website, and thus was also a top hired manager who reported to Mr O'Brien.

To gloss over the counter-factual nature of this justification, Brown came up with an example of a double standard that was brilliant in its own way,

'It is true we suffered a lot in 2013,' Brown said. 'We certainly don’t blame that on John O’Brien.  We look at his [entire] tenure.'

So Mr O'Brien got credit for, and millions of dollars justified by all the good things that were said to have happened at UMass Memorial in the past, but somehow got to avoid responsibility for the recent financial losses.  That makes no sense.

Just to gild the lilly, Mr Brown added the "we have to be competitive" talking point, while reaffirming the "brilliant manager" talking point,

Brown added that the health system, which employs 12,000 and collects $2.5 billion in revenues, needs to pay well to attract top talent. 'We want to pay competitively with the markets so that we can get the best,' he said.

Of course, he did not present any facts showing why Mr O'Brien was "the best." But top hired counsel and top hired managers are paid well to come up with such creativity.

North Carolina - Novant Health Executives Got Raises While Core Revenue Drops, and Later Low Level Employees Got Pay Cut 

This story was in the Winston-Salem Journal by Richard Craver in August, 2014,

The top executive of Novant Health Inc., Carl Armato, received $1.05 million in salary during 2013, an 11.8 percent increase during a year in which the system had a slight dip in operating income.

Armato is in his third year as the system’s chief executive and president. His salary has risen 49.4 percent since taking over as top executive Jan. 1, 2012, following the retirement of Paul Wiles.

Armato’s incentive compensation rose 33.6 percent to $917,964. Altogether, what Armato received in direct compensation was $1.96 million, up 20.9 percent. He also received $39,372 in compensation, mostly nontaxable, company-paid insurance benefits. 

Other top executives also did well,

[Chief administrative officer Jacqueline] Daniels received a 1.2 percent raise in salary to $543,607 and an 11.9 percent increase in incentive pay to $545,680 [total direct compensation, $1,089,287]. Fred Hargett, chief financial officer, received a 10.1 percent salary increase to $611,703 and a 22.4 percent increase in incentive pay to $561,004 [$1,172,707].

Sallye Liner, chief clinical officer, received a 3.5 percent increase in salary to $501,462 and a 3 percent increase in incentive pay to $507,094 [$1,008,556]. Dr. Stephen Wallenhaupt, chief medical officer, received a 2.5 percent salary increase to $517,755 and a 12.3 percent in incentive pay at $523,518 [$1,041,273].

In addition, because of a one-time change in the corporate retirement program for top executives, all these managers also received large lump sum payouts, for example,

Making the change required Novant to close out the defined benefit plan, including paying out all the money owed to qualified executives in a lump sum.

For example, Armato received a $6.11 million payout – the second highest of 13 Novant qualified executives. The most, $8.66 million, was paid to Jacqueline Daniels, its chief administrative officer who has been with Novant 31 years. 
Note that this is not the first time we have discussed opulent pay for Novant managers.  As discussed in 2013, the previous CEO got $5.1 million in his last year. 

The article included the usual talking points to justify all this money going to a handful of top managers,

Novant, as do most not-for-profit health-care systems serving North Carolina, stresses high compensation levels are necessary to attract executives to run 'a very complex organization.' 

That was a mixture of the "competitive pay" and "brilliant executive, difficult job" talking points.  However, no one at the organization apparently was willing to explain how the increasing compensation related to what appears to be declining financial performance,

For fiscal 2013, Novant’s total operating revenue was up 1.1 percent to $3.59 billion, and total operating expenses rose 3.6 percent to $3.19 billion. Altogether, income from core health-care operations was down 40.6 percent to $109.8 million.

A few months after these munificent payments to top executives were disclosed, another Winston-Salem Journal article by Richard Craver reported that more lowly workers were taking pay cuts,

Novant Health Inc. confirmed Tuesday that it will reclassify the titles and duties for medical-unit secretaries in early January, as well as cut their pay.

The implementation of electronic health records at Novant facilities over the past year has led to a reduced workload for the medical secretaries, Novant said. Employees were told about the changes last week.

'The total number of individuals affected is 157, which includes employees in both Charlotte and Winston-Salem,' Novant spokeswoman Robin Baltimore said. 'We do not have the specific number broken down by market.'

The Charlotte Observer reported the pay cut could be up to 10 percent.

So Mr Armato's management allowed him and his fellow hired managers to make millions, and get raises, while he cut the pay of lowly unit secretaries because their jobs had supposedly become easier. 
This must be one of those difficult decisions that the CEO and his friends among top management get paid so much to make.  Maybe Mr Armato will get to play Scrooge in some version of A Christmas Carol this year.

Texas - El Paso University Medical Center CEO, Managers Gets Bonuses Despite Budget Deficit, Layoffs

A story from television station KVIA in mid-November noted that challenges for El Paso's University Medical Center,

According to UMC, El Paso Children’s Hospital owes it $70 million, which forced UMC to lay off 56 employees earlier this year.

And the hospital’s relationship with Texas Tech has been rocky.

So, no one at the hospital got a raise this year.  However,

[CEO Jim]Valenti’s base salary is $460,000.

But he did get a bonus because he met goals outlined in his contract. The board awarded him a $119,000 bonus. The El Paso Times reported in 2012 that Valenti received a $117,401 incentive bonus in 2010.

The explanation for giving the CEO a bonus under these circumstances fit the usual pattern.  There was this version of the "our CEO is brilliant" talking point,

board members praised the way Valenti has improved patient care at UMC and his work with medical reimbursements.

They said he’s a masterful manager of talent.

This was actually more specific than the usual "brilliance" argument, but hardly detailed enough to explain why he was apparently "brilliant" enough to deserve a bonus at a time when base pay for less exalted employees was frozen  (Actually, a later story in the El Paso Times suggested that while pay was frozen for the more plebian employees, 26 top managers got bonuses, although Mr Valenti's was the biggest.)  

And there was this version of the "we have to be competitive" talking point, courtesy the UMC board chairman, William Hanson,

'It's reasonable in the context of the market that Mr. Valenti works in,' Hanson said. 

Hanson says the pay is comparable to the salaries of other hospital CEOs around the region.

Again, it was not clear whether the supposed "market" for Mr Valenti's talents would not demand a discount for the leader of a hospital with frozen pay and a history of recent layoffs, or why the market for managerial employees was so different than the market for other employees .  

Washington - EvergreenHealth CEO Pay Up 18%, Average Employees Pay Up 1%

This story was from the Seattle Times in July, 2014,

Union members at EvergreenHealth medical center Thursday highlighted the comparison between the 1 percent pay raise they say the Kirkland hospital is offering them versus the 18 percent raise received by the CEO of the public hospital district facility last year.


[CEO Robert]  Malte’s pay, including retirement and benefits, went from $843,236 in 2012 to $996,268 for 2013.

 The only justification offered by Kay Taylor, the hospital's "vice president for communication," (that is, chief of its public relations department), was the usual "we have to pay competitive rates" talking point,

'Regarding our CEO’s compensation, it is important to remember that our board of commissioners benchmark CEO compensation to other similar organizations and create compensation that is at or near the 50th percentile,' Taylor said. 'With our CEO’s recent raise, his compensation is still on par — if not below — other CEOs of similar-sized healthcare organizations.'

Why it was imperative to compare the CEO's pay to that of other CEOs of other hospitals, meanwhile ignoring the obvious comparison of the size of the increase of the CEO's pay to that of other employees was not clear.


As health care organizations have become increasingly big and influential, their leadership has been increasingly in the hands of generic professional managers, not health care professionals.  These hired managers have commanded generous and ever increasing pay, which has been justified by the common talking points: managers have extremely hard jobs and are brilliant, and high pay is necessary in a competitive market to attract and maintain top leaders.

Yet none of the boosters of high pay for health care managers, who mainly seem to consist of the legal, marketing, and public relations personnel who answer to them, and occasionally the board members who also are hired manager, answer the obvious questions:
What is the evidence that managers are brilliant and their jobs are so hard, especially when compared to the highly-trained health care professionals at their own institutions?
Is their really a free market in hired managers, and why is it so isolated from the market for health care professionals and other people employed by health care organizations?

These justifications seem particularly ridiculous when managers whose results are obviously not brilliant, e.g., marked by deficits, losses, and lay-offs, are getting huge and increasing pay.  They also seem ridiculous when the "market" apparently dictates salary cuts and lay-offs for all employees other than the managers of a particular organization.

 Instead, it seems likely that hired health care managers make more and more because of the influence they have on their own pay.  This influence is partially generated by their control over their institutions' marketers, public relations flacks, and lawyers.  It is partially generated by their control over the make up of the boards of trustees who are supposed to exert governance, especially when these boards are subject to conflicts of interest and  are stacked with hired managers of other organizations.  Furthermore, per the dogma of pay for performance, their pay may be heavily tied to short-term financial results, rather than fulfillment of the patient care or academic mission.

Thus, as in the larger economy, non-profit hospital managers have become "value extractors."  The opportunity to extract value has become a major driver of managerial decision making.  And this decision making is probably the major reason our health care system is so expensive and inaccessible, and why it provides such mediocre care for so much money. 

So to repeat, true health care reform would put in place leadership that understands the health care context, upholds health care professionals' values, and puts patients' and the public's health ahead of extraneous, particularly short-term financial concerns. We need health care governance that holds health care leaders accountable, and ensures their transparency, integrity and honesty.

But this sort of reform would challenge the interests of managers who are getting very rich off the current system.  So I am afraid the US may end up going far down this final common pathway before enough people manifest enough strength to make real changes.

ADDENDUM (30 December, 2014) - This post was reposted on the Naked Capitalism blog on 2 December, 2014, and  on OpEd News on 29 December, 2014.


Judy B said...

I have always wondered if these guys are SO brilliant, how come their organizations are losing money? Guess my definition of brilliant is different...

Anonymous said...

guess fair/equitable compensation wasn't discussed in medical ethics classes but then maybe hospital administration doesn't cover ethics...

Novant Hospital said...

Novant, formerly a “whites only” Presbyterian Hospital, racially discriminated against Dr. Ron Virmani when they terminated him from the hospital in 1995. Cleverly, they used the guise of “protection of patients” by labeling his patient care “problematic” in 24 charts. But North Carolina Medical Board found those charts to be completely within the “standard of care”. Dr. Ron Virmani, born in India but a US citizen and with complete US medical education, has suffered for 20 years and continues suffering. Please see this website for the horrible actions of the hospital and sign the petition for fairness and justice.
Novant Hospital