The $5.3 Million a Year Government Bureaucrat - The Top Administrator, or CEO of a "Government Entity," Charlotte-Mecklenburg Hospital Authority, "Doing Business as" Carolinas Healthcare Gets a Raise

The pay given to top managers of health care organizations continues its seemingly inexorable rise, and the justifications for it seem to be increasingly perfunctory.  However, a closer look at individual cases can generate even more questions about how we got to this pass.  Our latest example arises from a recent news article about the compensation of top managers at Carolinas Healthcare.  

CEO Pay Levitating Since 2009

In 2011, we started following executive compensation at the hospital system now known as Carolinas Healthcare. Our posts in 2011, 2012, and 2013 all fit the same pattern.The total compensation given to its CEO, Michael C Tarwater, was
- $3.4 million in 2009
- $3.7 million in 2010
- $4.2 million in 2011
- $4.76 million in 2012
- $4.9 million in 2013 (per the Charlotte Observer)


In February, 2014, per Karen Garloch reporting in the Charlotte Observer, we have the newest figure:
- $5.3 million in 2014

The details were

the system’s CEO Michael Tarwater received $5.3 million in total compensation in 2014, an increase of 7.7 percent over the previous year.

Tarwater, 61, who has led the $8 billion nonprofit system since 2002, received a salary of $1.3 million, two bonuses totaling $3.3 million, and other compensation, including retirement and health benefits of $690,280,...

In addition, other top managers also were paid in the millions:

• Joseph Piemont, president and chief operating officer: $3,558,907, 6.3 percent increase
• Greg Gombar, chief financial officer: $2,340,613, 4.7 percent increase
• Laurence Hinsdale, executive vice president: $1,918,371, 2.2 percent decrease
• Paul Franz, executive vice president: $1,721,104, 2.9 percent decrease
• Dr. Roger Ray, chief physician executive: $1,619,584, 5 percent increase
• John Miller, chief executive officer, AnMed Health: $1,598,205, change not available
• John Knox, chief administrative officer: $1,434,112, 2.5 percent increase
• Dennis Phillips, executive vice president: $1,391,918, 3.3 percent decrease
• Debra Plousha Moore, chief human resources officer: $1,269,022, 5.2 percent increase

Not unexpectedly, those who are supposed to be exerting stewardship over Carolinas Healthcare provided just another version of the standard talking points to justify this largesse.

'Having talented leaders capable of managing one of the nation’s most comprehensive health care systems in a very complex environment allows Carolinas HealthCare System to maintain its mission and provide the best care to all of our communities,' said board Chairman Edward Brown, president of Hendrick Automotive Group.

As we have repeated far more often than I would like (most recently here)

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, 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).

For the most recent update on Carolinas Healthcare, the board chairman only bothered with the last point.

So far, the case of compensation of top hired managers at Carolinas Healthcare looks very similar to many other cases at other big health care systems.  But this case has a big twist.

A Public Authority Whose Mission is to Serve the Poor

In 2012, we posted, based on another article that year by the indomitable Ms Garloch, how Carolinas Healthcare really is the Charlotte-Mecklenburg Hospital Authority, a public hospital authority created by North Carolina state law to serve the poor.  But faced with declining revenues in the 1980's, hospital management decided to try to attract paying patients, which allowed the Charlotte-Mecklenburg Hospital Authority to transform into a big hospital system.  Charlotte-Mecklenburg Hospital Authority managers came up with the idea of using a snappy new name, so the public hospital authority began "doing business as" Carolinas Healthcare, never mind whether a public hospital authority should really be considered as "doing business."

Yet the organization is still a public health authority.  Its charter and governance have never been changed.  Since the 1980s, however, Charlotte-Mecklenburg Health Authority bureaucrats have represented the organization as "government entity" when that is advantageous to them, or as a "non-profit hospital system" at other times.  

For example, it still gets to raise capital through directly issuing tax exempt municipal bonds.  For example, see this MunicipalBonds.com summary of a recent bond issue.

Also, at least through 2011, it was financed directly by Mecklenburg county to serve the poor, which, again was the Charlotte-Mecklenburg Hospital Authority's original mission.  In a 2012 article in the Charlotte Observer, Karen Garloch wrote,

last June, county commissioners voted to stop paying Carolinas HealthCare $16 million a year to care for the uninsured. With a profit of $428 million in 2010 and nearly $2 billion in reserves, the system no longer needed taxpayers’ help, commissioners concluded.

County Manager Harry Jones said the subsidy was important at one time, 'but circumstances have changed.' He cited a 1994 county committee report that raised this question:

'Given the current profitability of the hospitals, is it not reasonable to suggest that the hospitals become marginally less profitable by absorbing greater indigent care costs?'

Again, in 2011, the US Department of Labor began investigating Carolinas Healthcare about its provision of health benefits to its employees via Medcost, an entity whose ownership it shared with NC Baptist Hospital.  US federal law (ERISA) in general bans companies from providing health benefits to employees via subsidiaries.  NC Baptist settled similar charges in 2013.  The investigation of Carolinas Healthcare is not complete, but ironically a point of contention is its argument that it is a "government entity," and hence the law does not apply to it.  (See this article in the Winston-Salem Journal.)

On the other hand, Charlotte-Mecklenburg Hospital Authority bureaucrats have maintained that the organization, under the new name they chose, does not have the obligations to be transparent that other public entities have.  As Ms Garloch wrote in 2012,

It’s a public organization with a private attitude – open to 'all God’s children,' as hospital officials like to say, but not as open and transparent as other government agencies.

Then,

Basic facts about the hospital system can be hard to get.

For this series, Observer reporters asked Carolinas HealthCare to disclose total administrative expenses for 2010. A corresponding figure was publicly available from Novant through audited financial statements.

Several months after the question was posed, Carolinas HealthCare spokeswoman Gail Rosenberg

responded: 'We do not have the information … on a system-wide basis.'

Mecklenburg officials have criticized the system for lack of transparency.

Last year, [County Manager Harry] Jones declared the system in breach of contract because it failed to share data about the county-owned psychiatric hospital that is managed by Carolinas HealthCare.

'As a governmental entity, (the hospital system) should be more than willing to account to the taxpayers on how they spend … its money,' Jones wrote to Michael Tarwater, the hospital system’s CEO.

In fact, the argument that Carolinas Healthcare is Charlotte-Mecklenburg Hospital Authority, and hence is as a government agency obligated to a degree of transparency was confirmed by a judge in December, 2014, as again reported by the Charlotte Observer.  A lower court had dismissed a lawsuit that contended that Carolinas Heathcare had "violated state public record laws" by keeping confidential a legal settlement it had made with the former Wachovia bank.  However, the lawyer appealed, and

Hospital lawyers had argued that the state public records law doesn’t cover settlements arising from litigation by a government agency.

But in Wednesday’s ruling, a three-judge panel of the appeals court unanimously rejected that argument. The public records act doesn’t specifically exempt such settlement documents, the court concluded.

Disproportionate Pay for Non-Profit Hospital Executives, Much Less Government Bureaucrats

Thus there is a very good argument that the CEO and other top "executives" of Carolinas Healthcare are really the top government bureaucrats at Charlotte-Mecklenburg Health Authority.  But these executives' pay seems out of line even if they were the managers of a non-profit health care system.  In particular, the rising compensation given top management does not square with top management's recent layoffs of middle management.  In 2014, the Charlotte Observer reported,

Carolinas HealthCare System has eliminated more than 100 management positions – including two jobs that paid a total of about $3 million – as part of a goal to trim $110 million in expenses from next year’s budget, hospital officials announced Tuesday.

Cutbacks are necessary, in part, because of federal and state budget cuts in Medicare and Medicaid reimbursement for seniors, low-income and disabled patients, CEO Michael Tarwater said.

Furthermore, despite the board chairman's assertion that the "executives'" pay is deserved for fulfilling the mission, officially the mission of the Charlotte-Mecklenburg Health Authority is still to serve the poor, as far as I can tell.  Yet, in recent years, there have been questions raised about how well the organization serves the poor.  In 2012, we noted that the system had become known for its aggressive attempts to get payment from indigent patients.  In 2013, we noted that the system had pursued legal action against tens of thousands of patients.


Summary

The public discussion about Charlotte-Mecklenburg Hospital Authority, "doing business as" Caroloinas Healthcare, has been confusing.  However, it seems clear, in my humble opinion, that it is still a public, that is government entity.

This raises huge questions.  One is why has it not been more subject to the appropriate political leadership?  In fact, Ms Garloch's 2012 article noted that

The 1943 hospital authority law intentionally kept elected officials and politics out of operations. The link is that the commissioners’ chairman must sign off on hospital board nominees.

It has been a rubber stamp.

County officials remember once in 30 years that a proposed board member was rejected. That was in 2008 when nominees included Gloria Pace King, who had been ousted as CEO of the United Way of the Central Carolinas because of public outcry over her $2 million pension package.

So it appears political leadership could have been exerted, at least to the extent of vetoing the board's proposed new candidates for board membership, but that has never been done, for unclear reasons.

Other questions are how did the bureaucrats in charge of this entity get away with massively changing the nature of its operations de facto without being subject to any political oversight, and without having to change its charter and governance to correspond to these changes?  Finally, how did its top hired bureaucrats (whether they are called managers, or executives really is immaterial) get to pay themselves at least an order of magnitude more than any government bureaucrat of whom I am aware, to pay themselves according to the current outrageous standard for executives of for-profit corporations?

I do not have the capacity to do the investigations necessary to answer these questions.  Hopefully, not only will reporters like Ms Garloch continue to dig deeper, but given this case's implications, it will become subject of more official investigations.

Meanwhile, it has become not merely a great example of how top hired management pay in health care continues to rise past any levels that can be rationally justified, but of what I once called the managers' coup d'etat.  It shows how hired bureaucrats, absent adequate supervision and accountability, have managed to transform health care organizations into instruments of their own enrichment.  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.