Should We Cry for Non-Profit Hospital System CEOs Paid Less than For-Profit CEOs?

Two recent articles (here and here) in Modern Healthcare providing an update on the compensation of CEOs of non-profit hospital systems raised new questions.

The CEOs' Compensation

The first article documented the rich compensation of the top paid CEOs of non-profit US hospital systems.  A summary of their total compensation:

-  Donald Faulk (now retired), Central Georgia Health System - $8 million
-  George Halvorson, Kaiser Permanente - $7.9 million
-  Jeffrey Romoff, UPMC - $6.1 million
 -  Pat Fry, Sutter Health - $5.2 million
-  Gregory Beier (retired), Novant Health  - $5.1 million
-  Dr Steve Safyer, Montefiore Medical Center - $5 million
-  David Bernd, Sentara - $4.6 million

The Usual Talking Points

The articles in combination provided the usual talking points as justification for this compensation.   We have noted that nearly every attempt made to defend the outsize compensation given hospital and health system executives involves the same talking points.   We first listed the talking points here, and then provided additional examples of their use 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.

So true to form, we found in the Modern Healthcare articles these justifications of the executives multimillion dollar pay.

Competition

In general,

In interviews, health system directors and executives at the systems where these top-paid executives work defended the compensation packages as necessary to remain competitive....

Re UPMC

UPMC spokeswoman Susan Manko described his [that is, Romoff's] pay as competitive for an institution of UPMC's size and complexity. 

Re Novant

Novant spokeswoman Kati Everett said Novant follows IRS rules that call for pay to be compared against the market....

Re Sutter

[Sutter Health board of trustees member and chair of the compensation committee Andy] Pansini said the Sutter board set the CEO's salary halfway between the lowest and the highest amount he could earn elsewhere.

Also,

He said Sutter's board relies heavily on consultants to compare Fry's compensation against the market.

Retention

 Re Sentara

'Mr Bernd's compensation takes into account his 40-year tenure of leadership at Sentara, with nearly 20 serving as the organization's top executives.

Brilliance

Re Novant

[Novant spokeswoman Kati Everett said] 'At Novant Health, we recognize (that) our responsibility to serve our community depends on the caliber of talent in our workforce, our leadership group....'

Re Sentara

[CEO Bernd's] 'pay reflects his experience, expertise....'

Re Sutter

[Pansini] defended [CEO] Fry's compensation as reasonable and necessary to meet Sutter's strategic goals by hiring a skilled executive team. 

Explicit Comparison to For-Profit Corporations

The articles also introduced one new element.  Some defenders of non-profit hospital CEO compensation explicitly argued that should take into account compensation of for-profit CEOs.

This argument was made by "Jill Horwitz, a law professor at the University of California at Los Angeles,' who had "defended paying not-for-profit healthcare executives market rates."

She also noted that not-for-profit systems have to compete with the for-profit sector for top talent. 'This idea that people should be donating their labor is a misunderstanding of charity.'

Defenders of CEO compensation at specific health systems also made similar points.  For example, a Kaiser Permanente spokesman explicitly compared his CEO's pay to that given to CEOs of for-profit health plans,

Kaiser spokesman Won Ha, in a written statement, said Halvorson's pay falls short of the average compensation of $14 million, not including option exercises, earned by CEOs of the 12 largest for-profit healthcare systems, which had average 2011 revenue of $37 billion.

'Compensation paid to senior management is substantially less than that of many for-profit health (plans),...'

Also, re Sutter,

[board committee chair Pansini noted that when comparing his CEO's pay against the market] That comparison includes other executives of similar not-for-profit health systems, and to a lesser degree, of for-profit systems.

 Summary: An Extension, but Still no Clear Justification for the Talking Points


The talking points to explain executive compensation in health care are used again and again.  They never seem to be publicly challenged.  However, they should raise some obvious questions.

The argument about competition raises several obvious questions.  Why should the top hired managers' pay be only compared to other top managers, and not explicitly to other employees?  Even if the comparison is restricted to other top managers, how can they be used for those at the top of the pay scale for non-profit hospital system CEOs?  How these CEOs' compensation could be dubbed merely competitive, much less "halfway between the lowest and highest amount he could earn elsewhere," is not clear.

The retention argument begs the questions of whether any of these managers is really likely to leave, whether they really would be attractive to other organizations at the same or even higher pay, and whether it would really be difficult to find replacements.

The brilliance argument raises the question of how brilliance is defined.  Given that it is almost unheard of for a fan of current compensation practices to dub any top manager anything less than brilliant, the obvious question is how can CEOs, like the children of Lake Woebegone, all be above average? 

 Furthermore, the talking points seem to be in the process of extension, which should raise even more questions.

Defenders of CEO pay, usually "spokespeople" or members of boards of trustees, often cite the need for "competitive" pay.  They usually are not clear about with whom they are competing.  Now it seems to be more popular to say that non-profit health care organizations are competing with for-profit corporations, despite the ostensible difference in their natures.  Non-profits are supposed to have a charitable nature and function, to have some sort of mission that serves the greater good.  To support that apparently benevolent purpose, in the US they are exempt from certain taxes, are are able to receive charitable contributions which in turn earn deductions for their givers.  For-profit corporations are in business ostensibly for their owners. 


In addition, by now asserting that the non-profit CEOs should be likened to the CEOs of for-profit corporations, the expanded talking points highlight questions that have been raised about how these hired managers are paid. We have previously discussed some pithy critiques of American practices of executive compensation (look here and here.)

CEO compensation as a multiple of the pay of the average worker has risen 10-fold since the 1960s (see this chart). As a consequence, the top 1% and 0.1% of the US income distribution is increasingly and disproportionately made up of executives, that is hired managers, (see the recent article by Bivens and Mishel[1] for a summary).  Per the article, the income of top corporate executives has grown even faster than that of other members of the top 0.1%.  It seems evident that these rates of growth cannot be explained by increases in the financial performance of their companies.  Furthermore, while it appears that compensation of US health care corporate executives has grown as fast as their brethren, there is no data that US health care has improved at anything like a similar rate.  It may have hardly improved at all.  A recent JAMA article is just the latest example of studies showing that US health is lagging that of other developed countries, although the US spends far more per capita on health care.(2)     

Furthermore, there is more and more criticism about how the compensation of top hired managers is set.  Steve Denning's blog  post in Forbes summarized a 2012 Harvard Business Review article(3) suggesting that "market-based" compensation schemes mistake top managers for innovative entrepreneurs, when they are mainly simply "bureaucrats"; reward managers for luck rather than skill; and is "inversely related to shareholder returns."

Finally, Elson and Ferrere critiqued the mechanics of how compensation is set.  In particular, while boards of directors may attend to data on compensation of CEOs at other, supposedly comparable corporations, they almost always "choose a package that is in the 50th, 75th, or 90th percentile of their target peer group.  Targeting levels below the 50th percentile is rarely, if ever done."  Thus, boards nearly always act as if their CEO is above average, while by definition, most CEOs cannot be above average.  Why do boards commit this folly?  The authors postulated that suggesting the CEO is less than average "may raise concerns over the executive's position within the company...."  Perhaps boards also fear that labeling the CEO below average may be an admission of below average governance. 

Desai suggested that the perverse incentives created by current schemes to compensate managers were a major cause of the 2008 financial meltdown.  As Dennings wrote,

despite the constraints to change, the overcompensation of the C-suite and the financial sector is not sustainable. It causes serious misallocation of capital and talent, repeated governance crises, rising income inequality and an overall decline of the US economy. It obviously cannot continue, if only because, as Margaret Thatcher used to say in a different context, 'Sooner or later you run out of other people’s money'

Clearly, in the health care context, the results could be even worse.  Perverse executive compensation could not only lead to misallocation of capital and talent in health care, it could lead to bad health care decisions that could harm patients' and the public's health.  However, there seems to be almost no discussion of, much less research about, much less policy changes addressing perverse incentives for health care managers and their likely ruinously bad effects on people and patients.

Such discussion and research is a prerequisite to true health care reform, which would require such policy changes.

Meanwhile, I hope at least the next time huge compensation of some health care managers is announced, someone asks the next set of questions after the usual talking points are made.  

Roy M. Poses MD in Health Care Renewal

References
1.  Bivens J, Mishel L. The pay of corporate executives and financial professionals as evidence of rents in top 1 percent incomes.  J Econ Perspect 2013; 27: 57-78.
2. US Burden of Disease Collaborative.  The state of US health, 1990-2010 burden of diseases, injuries, and risk factors.  JAMA 2013; 310: 591-608.  Link here.
3. Desai M. The incentive bubble.  Harvard Business Review, March 2012. 

Now Kaiser Permanente Hospital Criminally Charged for Patient Dumping

This is getting painful. After Kaiser Permanente was recently in the news for problems with its new electronic medical record system, and allegations of the poor management of the system development process (see posts here, here and here), now the Los Angeles Times is reporting

The Los Angeles city attorney's office filed false-imprisonment and dependent-care-endangerment charges against hospital giant Kaiser Permanente on Wednesday, the first criminal prosecution of a medical center accused of 'dumping' patients on skid row.

The charges stem from an incident earlier this year when a 63-year-old patient from Kaiser Permanente's Bellflower hospital was videotaped as she left a taxi in gown and socks, and then wandered skid row streets.
In addition to the criminal charges, the city attorney filed a civil lawsuit against Kaiser, using a state law on unfair business practices that city prosecutors usually implement against unscrupulous slumlords to force them to clean up their buildings. The suit seeks a judge's order to forbid all Kaiser medical facilities from dumping homeless patients on skid row or impose financial sanctions if it violates the order.

A Kaiser spokeswoman on Wednesday said she was 'very surprised' by the charges.

'I can't understand how these charges would be levied based on what I know of the incident,' said Diana Bonta, vice president of public affairs for Kaiser Southern California.

She said Kaiser had changed some of its practices since the March incident to better serve discharged homeless patients.

[The patient] Reyes also is being represented by the American Civil Liberties Union of Southern California and Public Counsel. Representatives from both organizations said Wednesday that they planned to file a second lawsuit on Reyes' behalf soon.

'This is the first case in the nation where there is a joint effort by government and civil rights groups to halt the practice of hospital dumping,' said Mark Rosenbaum, the ACLU's legal director.

Rosenbaum said that meetings with Kaiser and hospitals failed to yield reform — and that was part of the reason for the court filings. 'It is like they lit a match to the Hippocratic oath,' he said.

Dan Grunfeld, president and chief executive officer of Public Counsel, the largest pro-bono legal firm in the nation, echoed that sentiment. 'This is as stark a case as you are likely to find,' he said. 'You have a relatively older woman in adult diapers and gown dumped on a skid row sidewalk. That is a pretty profound statement. Ms Reyes is not alone. There are a lot of Ms. Reyes' out there. We hope to achieve a systemic change.'

You have to start to wonder if something has really gone systemically wrong with the upper management of the once proud Kaiser Permanente organization, which is still, as best as I can tell, staffed by quite a few dedicated doctors, nurses, and other health professionals. Of course, what we have so far are only allegations. But the story as reported by the Los Angeles Times is very disturbing, and the city attorney obviously thought this case was egregious enough to merit criminal charges. Stay tuned.

The Mismanaged Initiation of the Kaiser Permanente Kidney Transplant Program: "Simply Out of Whack"

The Los Angeles Times published a series of articles (1-3) resulting from an investigation of how Kaiser Permanente mismanaged the initiation of its new kidney transplant program in northern California.

Kaiser Permanente is unusual among contemporary US managed care organizations in that it is not-for-profit and provides health services as well as simply financing and "managing" them. Heretofore, it has enjoyed a reputation as one of the best US managed care organizations. (Other problems at Kaiser Permanente were mentioned in this post, however, which noted allegations that the organization had posted real patient records on an unprotected web-site, and a dispute Kaiser had with a former employee who had revealed that Kaiser maintained this web-site.)

The background is that Kaiser Permanente used to contract with the University of California-San Francisco (UCSF) and the University of California -Davis (UCD) medical centers to perform kidney transplants on Kaiser patients. "In June, 2004, Kaiser informed kidney patients on the waiting lists at UC San Francisco and UC Davis that from then on their transplants would take place at Kaiser's hospital.... The first transplant was performed that October."

The LA Times charged -

• Kaiser's paperwork snafus failed to give patients transferred to the Kaiser hospital credit for the time spent previously on waiting lists at other hospitals, thus dropping them to the bottom of transplant priority lists. "Kaiser took nearly a year to transfer the time [a particular patient] had spent on the waiting list at UC Davis." Also, "the same was true for hundreds of others at UC Davis and UC San Francisco who were stranded between programs for months by Kaiser's delays or paperwork snafus. Even today, UC San Francisco has about 220 Kaiser patients on its list whose time has not been properly transferred to Kaiser...."
• Kaiser seems to have rejected an unusually high proportion of kidneys for transplant, thus delaying patients' surgeries although possibly increasing the chances of succesful transplants. "Through June 2005 Kaiser accepted only 16.7% of the kidney offers on behalf of its patients, far less than neighboring programs: ... UC San Francisco 24.1% in the same reporting period."
• Kaiser failed to use a pool of high risk donors, which other programs have tapped with patients' consent. This further may have delayed surgery for patients willing to take such risks.
• Because of bureaucratic problems, patients were denied the possibility of transplants with highly-matched cadaver kidneys.(2) "Kaiser never properly completed the paperwork to transfer the patients' cases to its program from UC San Francisco Medical Center.... At the same time, Kaiser would not authorize UC San Francisco to continue accepting kidneys and transplanting them into Kaiser patients...."
• Kaiser failed to warn the United Network for Organ Sharing in advance of its intent to transfer patients to its own program. "The transition was further complicated by Kaiser's own paperwork, which was full of 'errors or inconsistencies'...." Furthermore, "hundreds of Kaiser patients were never told that their transfers had not been processed, in effect placing a new kidney out of reach...."(3)
• The kidney transplant program had ongoing personnel issues. "Much of the core staff had never worked with transplant patients - or one another. In early 2005, the program's first transplant administrator left. Barely a year later, her replacement was terminated." One nephrologist "cleared out of his office and has not returned.... Officials say he is technically on leave." A physician who had complained about how the program was being run was put on leave after "feuding with [the] medical director...." The medical director has since been "relieved" of her administrative duties. She is now in fact the only nephrologist taking care of patients for the program. In summary, "since the program opened, 10 permanent employees have quit or been fired out of a staff of 22."
• "The program has provided the Times with incomplete or misleading information." Kaiser denied until two days ago its instructions to UCSF not to transplant kidneys into patients whom Kaiser had failed to transfer to its own hospital's program. "But after being confronted with evidence to the contrary by the Times, the officials called back to say they could not stand by that position. One of Kaiser's own kidney specialists had confirmed that he directed UC San Francisco to turn down at least on e of the near-perfect-match kidneys, they acknowledged."

The Times got this comment from the ubiquitous Arthur Caplan of the University of Pennsylvania Center for Bioethics:

Something is simply out of whack with the health plan's priorities.

The San Francisco Chronicle also reported that the California Department of Managed Health Care is now investigating the Kaiser kidney transplant program.

It saddens me how Kaiser Permanente, which once seemed to be a model of how managed care could be accomplished, has fallen in this instance. I can only speculate whether constant pressure from less patient- and physician-centric competitors was partially responsible.

Perhaps it's time to rethink the whole managed care model that the US has so avidly embraced.

ADDENDUM (May 7, 2006) - Please note that an earlier version of this post included a badly written and possibly misleading summary of my earlier post on Kaiser. I have rewritten the summary above. I believe that this earlier post did correctly summarize the story as reported by an article in the San Francisco Chronicle in 2005. My apologies for writing this summary too quickly.


References
1. Kaiser Put Kidney Patients at Risk (May 3, 2006).
2. Kaiser Denied Transplants of Ideally Matched Kidneys (May 4, 2006).
3. Kaiser Slow to Transfer Patients (May 5, 2006)

A Cautionary Tale About Health Care IT in the Real World

The Los Angeles Times reported another cautionary tale about the down-side of health care information technology (IT) in the real world. Apparently the Kaiser Permanente managed care organization, while testing electronic medical record (EMR) software, put up records of about 150 real patients on an unprotected web-site in 1999, and kept the web-site active until January 2005. Kaiser did not tell patients that their unprotected data had been available on the web for years until three months ago, according to the Times.
The problem first became public when a former Kaiser employee, Elisa D Cooper, posted about it, including links to the Kaiser web-site, on her blog. (I can't find her original blog, which may no longer be available on the web, but her current blog is here.) Kaiser then sued Cooper for invasion of privacy and breach of contract, even though, according to the San Francisco Examiner, she had been fired by Kaiser in 2003.
Beth Givens, the director of Privacy Rights Clearinghouse, commented that the incidents shows "just how vulnerable these systems can be." This is just one more case to think about the next time someone touts the EMR as the cure for all health care ills.
And it's also a reminder how large health care organizations, even ones with reputations as benign as Kaiser's is, at least out here in the East, react to whistle-blowers who publicly point out their managers' errors.