Outsize Compensation for "Teflon-Coated" Executives - After Many Lawsuits and Negative News Stories, Norton Healthcare Executives Still Get Millions

In an earlier era of chemistry, politicians who continued to acquire votes while shedding doubts, criticisms, and allegations were called "Teflon-coated."  Teflon may be outdated now, but there certainly seems to be some health care executives who have unique non-stick coatings.

The Executives' Compensation

Our latest example comes from the Louisville (KY) Courier-Journal, which just published an article about the compensation received by top executives of one of the region's major hospital systems.  The essentials were:

From 2011 to 2013, the three most recent years available, tax records show the chief executive of Norton Healthcare, Stephen A. Williams, received total compensation that averaged $3.2 million a year.

The yearly numbers were:

2013: $2,447,122
2012: $4,705,333
2011: $2,376,186

Other top executives also were paid handsomely,

The tax reports show Norton paid chief operating officer Russell Cox an average of $1.5 million annually over the three years and chief financial officer Michael Gough $1.2 million. Cox also was promised an average of $547,580 annually over those years in additional future compensation and Gough $375,567 a year.

The Usual Talking Points as Justification

The justification given for such munificent pay for top hired managers of non-profit organizations that are supposed to put patient care (and sometimes teaching and research) ahead of personal enrichment never seems 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, per the Courier-Journal article,

Industry leaders — and Norton board members — say the salaries and bonuses are essential to attract and retain executives with the skills to run complex organizations as they navigate enormous reimbursement and regulatory changes. Norton operates five hospitals and has revenues of about $1.8 billion.

In an interview, Hank Robinson, Norton's finance committee chairman and former board chairman, said Williams' compensation is 'very fair, very competitive and appropriate.'

So there, in three sentences, were direct versions of the "competitive rates," and "retention" talking points, and an indirect version ("skills to run complex organizations") of the "brilliance" talking point.

Also, the Courier-Journal article included,

Norton's chief communication officer, Thomas Johnson, points out that since Williams was named CEO, the company's revenues have climbed sixfold, and its work force has tripled to more than 12,000 employees, making it the third-largest employer in the Louisville area.

That was another indirect version of the "brilliance" talking point, since Mr Johnson seemed to be arguing that the CEO was the person most personally responsible for the "company's" [not "hospital system's?" - Ed)] increased revenue, regardless of the work of the more than 12,000 other employees.  Of course, Mr Johnson doubtless reports nearly directly to the CEO.

Pointedly left out of the discussion was that Norton Healthcare's financial performance in the recent years in which the CEO had received so much money was hardly brilliant.   As apparently first reported in Modern Healthcare in August, 2014, but going back to 2012,

A multimillion-dollar installation of an electronic health-record system dragged down Norton Healthcare's financials in 2012 and 2013, but the Louisville, Ky.-based health system rebounded in the first half of this year.

Norton—like many others racing to adopt the latest health information technology—began implementing an Epic Systems Corp. EHR in 2012. Norton's five hospitals and several physician practices fully converted to the Epic system by 2013. In total, the EHR cost nearly $80 million to install, according to Norton's audited 2013 financial documents (PDF).

According to Modern Healthcare, Norton had a $13.4 million operating loss in the first half of 2013.  However, Norton CEO Williams received nearly $2.5 million in 2013. So these negative financial results in 2012 and 2013 did not apparently drag down the CEO's compensation in those years.

Compared to What?

The Courier-Journal went a bit farther in their reporting of executive compensation at Norton Healthcare than other media outlets have when reporting on the pay of other health care leaders.  In particular, reporter Andrew Wolfson delved into how Mr Williams' compensation was justified by comparing it to the compensation of other health care CEOs.

The Norton finance committee chair, Mr Robinson

said it is derived through a rigid process based on an outside consultant's survey of pay at 66 comparable hospitals nationwide. The board then sets it at the 65th percentile of that compensation, which Robinson described as standard industry practice.

Furthermore,

Norton's consultant, Integrated Healthcare Strategies, says it looks at comparable peer groups — hospital companies, some larger and some smaller — to find a benchmark for Norton's board.

They include Baptist Health of Florida, whose CEO was paid $3.2 million in 2013, and Inova Health Care Services, of Falls Church, Va., whose top executive received total compensation of $4.2 million in 2012.

'Norton tries to set salary a little bit above the middle of the market,' Integrated's Dave York said in an interview. 'They are neither a conservative nor an aggressive payer.'

That still begged the question of why the compensation was "above the middle of the market," specifically, the 65th percentile?  Presumably, the board thought that CEO Williams has been at the 65the percentile of CEO performance.  But why did they pick that figure? What evidence is there that Mr Williams was better than average?

The Courier-Journal article also questioned the choice of the group of CEOs whose pay was used for comparison,

But Paul R. Dorf, managing director at Compensation Resources Inc., a Saddle River, N.J., consulting firm, who reviewed Norton's executive pay at the newspaper's request, said 'it doesn't seem right.
They are exceptionally well compensated,' he said.

The average compensation for the top 147 nonprofit hospital CEOs in 2012 was $2.2 million in 2012, according to Modern Healthcare, an industry publication.

Williams' average compensation from 2011-13 was more than paid in 2012 to the CEOs of 20 of the 25 top grossing nonprofit hospitals in the U.S., all of which were bigger than Norton, according to Becker's Hospital Review, another industry news outlet.

Given that compensation consultants like Mr Dorf usually seem to back the status quo for executive compensation, Mr Dorf's doubts should be underlined.  The Courier-Journal's coverage did suggest that the CEO and other top executives of Norton Healthcare are paid not only much more than the typical hospital employee, and the health care professionals who make the hospital run, but more than CEOs and top executives of other hospitals.  The reasons for this unclear.

Left unanswered were further questions.   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?

Shedding Doubts, Criticisms, and Allegations

A little internet searching and dot connecting, however, did suggest that there may be one argument for the "brilliance" of the Norton Healthcare leadership, but it is an argument that the hospital system's board might not have been eager to make.

It seems, at least in my humble opinion, that the leadership has been brilliant, but brilliant in fending off multiple questions that have been raised in recent years about its management of the health care system, particularly questions about the ethics and integrity of their health care system's acts and practices. 

So far I have found the following issues, in more or less chronologic order,

Top Spine Surgeons' Questionable Royalties

In 2010, the Wall Street Journal reported that spine surgeons at Norton had been collecting millions in questionable royalty payments.

Norton Hospital in Louisville, Ky., may not be a household name nationally. But five senior spine surgeons have helped put it on the map in at least one category: From 2004 to 2008, Norton performed the third-most spinal fusions on Medicare patients in the country.

The five surgeons are also among the largest recipients nationwide of payments from medical-device giant Medtronic Inc. In the first nine months of this year alone, the surgeons—Steven Glassman, Mitchell Campbell, John Johnson, John Dimar and Rolando Puno—received more than $7 million from the Fridley, Minn., company.

Furthermore, Norton surgeons' use of spinal fusion for disc problems, a procedure whose benefits do not clearly outweigh its harms, was particularly notable.

At Norton, spinal fusions on patients who only suffered from aging disks accounted for 24% of the 2,475 fusions the hospital performed for Medicare between 2004 and 2008, compared with 17% nationally. This placed it 11th in percentage terms out of 60 hospitals that performed 1,000 or more spine fusions in those years, and fourth in raw count. Norton ranked third nationally in the overall numbers of spine-fusion surgeries.

Furthermore, the WSJ reported that it had obtained documents from a lawsuit filed by whistle-blowers against Medtronic which alleged

the five surgeons at Kentucky's Norton Hospital became Medtronic's biggest spine client [sic] after they signed consulting and royalty deals in early 2001.

We posted briefly about Norton's spinal fusion enthusiasts here, and Dr Howard Brody discussed it extensively on his blog, concluding,

some of my surgeon colleagues who actually care about professionalism and ethics believe that these 'royalty and consulting' payments are a huge cesspool. It's that much harder to get to the bottom of it because the device companies have been smart about how to cover their tracks.

Yet while there have been continuing questions raised about the actions of Medtronic vis a vis its medical "consultants" since then, it seems that no one has so far thought to question the role of Norton Healthcare, especially given that the hospital system doubtless collected millions for the performance of these procedures in its operating rooms.    

University of Louisville Litigation Claims Contract Violations, Debts Owed by Norton Healthcare

Apparently since at least 2013, Norton Healthcare has been involved in litigation with the University of Louisville over Kosair Children's Hospital, which is run by Norton on land owned by the University.  As summarized in Louisville Business First in October, 2013,

Norton Healthcare Inc. has filed a complaint in Franklin Circuit Court that seeks to establish that the University of Louisville has no legal right to evict the organization from Kosair Children’s Hospital.

Louisville-based Norton owns and operates Kosair Children’s Hospital on land it leases from the state.

U of L executive vice president of health affairs David Dunn issued this response late Friday to Norton's claim:

'It’s unfortunate that Norton filed a lawsuit instead of meeting to negotiate a long-term agreement for the care of children at Kosair Children’s Hospital. The University of Louisville’s repeated attempts to meet and negotiate have been rejected again and again by Norton’s CEO, who told us today that he will neither meet nor negotiate while their lawsuit is pending.'

'This is a disturbing trend in dealing with Norton as we try to resolve these complicated matters in a way that best meets the needs of Kosair Children’s Hospital, the patients we serve and U of L’s Department of Pediatrics. It is our hope that, later today, Norton will take a deep breath, accept our invitation to meet, and we all can focus on securing a long-term agreement to best serve the children of our community.'

Furthermore, the University of Louisville also demanded

that the hospital company rectify alleged violations  of a land lease and other agreements

In addition,

other claims in U of L's letter was that Norton owes U of L millions of dollars related to the Kosair agreements.

The dispute apparently also involves the University of Kentucky and the KentuckyOne hospital system. Some of the other relevant issues were summarized on the Kentucky Health Policy Institute website here.  It seems that patient care and medical education have become caught in the cross-fire between these powerful organizations. It is not obvious that Norton Healthcare is more or less responsible for this state of affairs than the other large organizations involved. However, neither is it obvious that Norton has taken the high ground regarding this matter.

Kosair Charities Sues Norton Healthcare for Misusing Charitable Funds

In mid-2014, another litigation front opened against Norton Healthcare.  As reported then by the Louisville Courier-Journal,

Kosair Charities, which has given more than $6 million annually to Kosair Children's Hospital, is accusing parent company Norton Healthcare of misusing some of that money to enhance its bottom line and 'line the pockets' of its executives.

In a lawsuit filed Thursday in Jefferson County Circuit Court, the charity says Norton has refused to provide an accounting of how Kosair's donations are spent.

'We have an obligation to the kids and our donors to make sure the money is being used to help children,' said Randy Coe, president of Kosair Charities, which is the hospital's largest donor. 'We don't want our money to go into the Norton pot.'

Note that the source of generous executive compensation at Norton Healthcare is a direct point of contention in this legal matter.


This lawsuit stems from the previously cooperative relationship between Kosair and Norton,

 At one time, Kosair Charities and Norton each operated their own pediatric hospitals — Kosair Crippled Children's Hospital and Norton Children's Hospital.

But in 1982, Kosair agreed to close its hospital on Eastern Parkway and to help pay for a new one downtown that was named Kosair Children's Hospital.

Kosair Charities said that, in an agreement struck that year, Norton agreed to keep separate accounts for the children's hospital in exchange for millions of dollars of contributions. Kosair says that arrangement was continued when the agreement was renewed in 2006.

In fact, the charges brought in this lawsuit about Norton executive compensation led the Courier-Journal to publish the 2015 article about the hospital system's executive compensation. Also, in 2014, Norton further belayed this previous spirit of cooperation by counter-suing Kosair, again as dutifully reported by the Courier-Journal. These lawsuits have not been resolved.


Patient Lawsuit Claiming "Unfair, False, Misleading or Deceptive Acts or Practices" by Norton

Also first reported in August, 2014, by the Courier-Journal, was a lawsuit by a patient who claimed that  in the emergency department of a Norton hospital,

he was seen only by a nurse practitioner who failed to diagnose that he was suffering from an acute and potentially fatal version of diverticulitis, an inflammation of the intestinal lining — and sent him home with a prescription for oral antibiotics. Two days later, he began vomiting and was rushed back to the hospital, where he underwent emergency surgery for a perforated bowel and was fitted with a colostomy bag.

However, that hospital had been advertising

 You don't just deserve emergency care. You deserve remarkable care.

This lawsuit, which alleges that Norton Healthcare violated a law prohibiting "unfair, false, misleading or deceptive acts or practices" by advertising "remarkable care," but delivering much less,  has not been resolved, either.

Summary

The 2015 report about executive compensation at Norton Healthcare raise the same points that many, many stories about executive compensation in health care have raised before.  Top managers/ administrators/ bureaucrats/ executives in health care seem to be paid ever increasing amounts, even as other employees, including health care professionals, work harder, burn out more frequently, and may be laid off.  These executives' payments rise faster than inflation, and are seemingly unrelated to the financial performance of the the relevant health care organizations, much less the health care quality provided, or the positive effects on patients' or the public's health

Yet the defenders of excess compensation seem to get away with repeatedly reciting the same tired talking points, without clear logic, and certain without evidence.

In the current case, however, one talking point, the argument that the pay was justified by the executives' hard work and "brilliance" may be justified, albeit in a somewhat twisted way.  Executives at Norton Healthcare have been fending off questions about the ethics and integrity of their system raised by a barrage of news stories and claims, including many for which litigation is in progress, claiming the hospital system engaged in a variety of allegedly deceptive or dishonest practices.  One might think that the doubts raised by these claims might have threatened the compensation of the executives on whose watch they occurred.  Instead, perhaps they got even more pay for being "brilliant," not so much brilliant at providing excellent health care, but brilliant at keeping all these doubts at bay for so long, without so far actually disproving any of them. 

As we have said before, in US health care, the top managers/ administrators/ bureaucrats/ executives - whatever they should be called - continue to prosper ever more mightily as the people who actually take care of patients seem to work harder and harder for less and less. This is the health care version of the rising income inequality that the US public is starting to notice.

Thus, like hired managers 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. 


One wonders how long the people who actually do the work in health care will suffer the value extraction to continue?

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.