Will the Circle be Unbroken? - Hospital Executive Compensation Continues to Defy Gravity and Logic

A report from Health Leaders Media, a prominent media site about health care management, shows how non-profit hospital executive compensation continues to levitate.  In general,

For not-for-profit CEOs nationwide the median total cash compensation (base plus incentives) increased 3% to 6.7% over last year, and these organizations' senior leadership teams gained similar pay increases,...

The specifics included

Health system CEOs' median base salaries increased to $717,500 (2012) from $650,000 (2011), while independent hospital CEOs' median base salaries rose to $506,100 from $472,000 during that period, according to IHS. Comparatively, Sullivan, Cotter and Associates shows the base pay for system CEOs nationwide increased while the TCC declined slightly—base pay increased to $334,700 from $325,000, while TCC decreased to $411,100 from $412,100 from 2012 to 2011, respectively. Unlike their health system counterparts, independent hospital CEOs' base pay and TCC climbed between 2011 and 2012—base pay went up to $530,000 from $504,000 (a 4.9% gain) and TCC jumped 4.3% to $600,000 from $574,000.

The report also showed that pay increased for some species of top executives.  CIOs (chief information officers) did the best,

Nationally, system CIOs received one of the largest TCC increases year over year, according to Sullivan, Cotter and Associates (5.8%). IHS reported a median base salary increase of (3.5%).

These increases ought to be compared to the base rate for the population.  In September, the Census Bureau reported that median family income dropped in 2011 (per the New York Times):

 Median household income after inflation fell to $50,054, a level that was 8 percent lower than in 2007, the year before the recession took hold.

The actual decline from 2010 to 2011 was 1.5% (look here).

So executive compensation in health care continues to defy gravity, even as the income of the typical family does the opposite. 

Will the Circle be Unbroken?

Conveniently, the day before, another well regarded site for hospital management information, Becker's Hospital Review, provided a rationale for current health care executive compensation, based on a blog post from Integrated Healthcare Strategies, which claims to be one of the largest US healthcare consulting firms.

The Review article first noted that "executive compensation is a delicate subject," without explaining why it was more delicate than the compensation given to other people.  It then answered the question its title posed, "are hospital executives paid too much?"  In summary,

compensation levels are currently appropriate, on the whole, because employers are generally keeping them on the job with such consistent pay levels.

The syntax is a little difficult, but I believe the translation is the circular cliche, "it is what it is."  More formally, this appears to be a version of begging the question, or circular reasoning.

The Integrated Healthcare Stragies blog post by David Bjork, "thought leader," Senior Vice President and Senior Advisor, who authored two books on executive compensation in health care, rotated this again.

ARE EXECUTIVES PAID TOO MUCH?  The short answer is no. Executives are not overpaid. If they were, employers would not willingly pay them as much as they do.

And again

the intrinsic value of a job can be quantified. Economists and most workers judge the value of a job by how much it pays. A job is worth what an employer is willing to pay an employee to do it, or what an employee is willing to accept as payment for the job. Virtually no one doubts that principle—except when it comes to executive jobs.

Have we got that?  Bjork argued that executive pay is self-justifying.  All executives are worth what they are paid because that is what they are paid.

Another way to understand the fallaciousness of this argument is to try to apply it to jobs other than executive positions.  Presumably, it would mean that everybody's pay is appropriate, and hence nobody's pay could ever be changed.  But one's head begins to hurt just trying to think about this.

Yet those were the main arguments that Mr Bjork made to justify his contention that

There is no rational basis for the view that executives should not be paid as much as they are paid, just a personal attitude, generally held by someone who is paid less.

A Side Trip to the Fallacy of Composition

Mr Bjork did make an attempt to supplement that argument.  For example, he wrote "labor market forces drive pay for executives," without explaining how much they do so, or the nature of the market for executive pay.  Later, he wrote,

Hospitals and health systems continually look for ways to reduce their costs. When they come across jobs that cost more than they are worth, they eliminate the jobs and either eliminate the work, redistribute it to other employees, or outsource it to cheaper labor. They view executive jobs the same way. When hospitals and health systems find an executive job that seems to cost more than it is worth, they eliminate it if they can and redistribute the work to other managers.

Let us unpack this a bit.  First, hospital and health systems are organizations composed of humans.  They do not look for anything, but the executives who run them may certainly look for ways to reduce costs and eliminate apparently unnecessary jobs.  Confusing hospital executives with the organizations they run appears to be a version of the fallacy of composition, which "arises when a person reasons from the characteristics of individual members of a class or group to a conclusion regarding the characteristics of the entire class or group (taken as a whole)."

Taken literally, this paragraph suggested that executives could decide their own jobs "cost more than they are worth," and then fire themselves and give their work to someone else.   

Nonetheless, were this targument to be true, it in fact contradicts the conclusion based on this argument that appeared two sentences later

Therefore, executives must be worth what they are paid, because employers keep them on the job and willingly continue to pay what¬ever they are paid.

Note that this conclusion is yet another restatement of the circular argument above.  . 

Summary

We have noted that logical fallacies are increasingly deployed to defend the status quo in health care, and particularly to defend the interests of those who are profiting the most from the current dysfunctional system.  In our latest example we find some particularly ripe repitition of a fundamentally fallacious argument to support ever rising compensation for health care executives.  It is distressing that the arguments were made by a prominent health care management consultant and published author on the subject of health care executive pay, and was picked up without question by a prominent health care management media site.  It suggests, like other posts we have written about the generous use of logical fallacies to protect the powers that be, that these eminences really may have not the slightest idea what they are doing, and have truly risen to their level of incompetence, if not ridiculousness; or else, they do know what they are doing, but have nothing but contempt for the reasoning powers of anyone outside their circle, and feel no need to justify their actions to such hoi polloi.

The sheer foolishness of arguments made to protect the status quo ought to lead the rest of us, particularly health care professionals, to question that status quo further. 

The ability of top executives of many, probably most health care organizations to collect bloated paychecks out of proportion to, if not despite their performance attracts the wrong people to lead these organizations, and provides incentives for even the right people to lead badly.

Until we make health care leaders accountable, and until their incentives reflect their ability to uphold the health care mission, expect more unaccountable leadership that subverts the health care mission, and hence continually rising costs, declining access, and deteriorating quality.

Traits that "Define a Great Hospital CFO" - Honesty, Integrity, Accountability not Included

A recent article in Becker's Hospital Review entitled, "6 Traits That Define a Great Hospital CFO" [Chief Financial Officer] was most remarkable for what traits were not included.

The Six Traits

Based on interviews with a managing director of health care recruiting for a large executive search firm, and an experienced CFO of large hospital system, the included traits were:
- "Conviction," including "some type of conviction and confidence that their decision-making abilities will lead the hospital to great healthcare outcomes, a healthy population and — as a result — a more financially stable organization."
- "Nimbleness and flexibility"
- "Calm demeanor"
- "Willingness to understand the clinical aspects," in particular, the ability to "at least understand the [clinical] processes from a layperson's point of view, and the most effective CFOs have great working relationships with physicians, nurses, technicians and others."
- "Ability to think long term"
- "Sense of humor"

To be fair, I am glad to see expectations that hospital leaders, even chief financial officers, know something about clinical care, and that they have some sort of commitment to it. This seems to be in contrast to our frequent posts about how the leadership of health care organizations often seems ignorant and uncaring about the health care context and health care values. (However, the phrase above about conviction was not clearly worded. In particular, it did not explicitly suggest quality clinical care ought to be a higher priority than revenue, and could have been read to mean that good care is just a means to increase revenue.)

I am also glad that the article promoted long-term thinking. It also seems to contrast with concerns (e.g., here) about how health care leadership may put short-term revenue ahead of all other goals, also called "financialization." However, again, the article did not explicitly give long-term goals a higher priority than short-term ones.

What was Missing

However, what was more striking were the dogs that did not bark. In particular, transparency, honesty and integrity or even being law-abiding were not on the list of key traits for a CFO. This is particularly noteworthy given how often we have discussed bad behavior by large health care organizations, including various kinds of deception and dishonest behavior, as well as outright crime, such as fraud, bribery or kickbacks, etc.

Also, the list of important traits did not include responsibility or accountability.   This is also noteworthy given that rarely if ever have the leaders of these organizations taken any responsibility or paid any penalty for bad behavior occurring on their watches. Although may large health care organizations have made numerous legal settlements of accusations that include fraud, kickbacks, etc, the leadership almost never admitted wrongdoing in any of them, and almost never had to accept any financial penalty form the organization. This parallels how the US legal system has rarely sought to punish any leader of a large health care organization in such cases, suggesting that health care leaders now have developed impunity.

Given that the article appeared in Becker's Hospital Review, a leading publication for hospital leaders, its apparent cynicism about what once were considered indispensable characteristics of good leadership was disturbing.  It is also disturbing that at the time this was written, the only comment on the on-line version of the article, also the only comment to note this lack, was written by your this humble scribbler.

Summary

This may test some CFOs' sense of humor, but instead let me propose my hopes for better health care leadership. To truly reform health care we should seek reasonable leadership that draws on the collective knowledge and values of health care professionals, and that shows accountability, integrity, transparency, honesty, and ethics.  Not asking our leaders to be honest, ethical and accountable just enables the current dysfunction. 

The Case of the Vanishing Graduate Medical Education Funds

While primary care falters in the US, those who teach it seem to feel increasingly poverty stricken.  Now it appears that one reason for this is an amazing example of multiple failures of transparency and accountability.  Let me work through it, begging your pardon for a little bit of "inside baseball," medical education style.  The results suggest how we desperately need some medical disciples of Sherlock Holmes.

Background

My personal experience and increasing data suggests that most medical school faculty believe that their teaching is not valued by their institutions because teaching brings in no external funds.  In 2004, Dr Catherine DeAngelis, then the editor of JAMA, wrote "few medical schools provide adequate, if any, reimbursement for teaching time."(1)  (See this 2005 post.)   This seems absurd on its face, since what are medical schools for if it is not to provide teaching. 

However, there is evidence of this mission-hostile behavior.  In 2007, we quoted from a revealing interview with Dr Lee Goldman, Executive Vice President for Health and Biomedical Sciences at Columbia University,(2) who stated that "taxpayers," faculty who "generate more [money] than they cost," are valued most, and implied that faculty who focus on teaching are regarded as "welfare recipients," who bring in less external funding, and are valued least.  In 2010, we noted the results of a large-scale survey presented by Dr Linda Pololi in which 51% of faculty felt that the administration only valued them for the money that they brought in, and half felt that their institutions did not value teaching.(3)

Yet while faculty seem to believe that educational institutions receive little if any money to pay for teaching, it is not clear why the believe something so counter intuitive, and it is less clear what money actually goes to pay for medical education.

US Government Funding for Graduate Medical Education

However, several recent publications affirm that actually a lot of money goes towards one important form of medical education, yet the specifics of the money flows are shrouded in secrecy.  In the May, 2012, SGIM Forum, Dr Mark Liebow and colleagues summarized some of what is known about federal support of graduate medical education, that is, education of interns, residents, and other house officers.(4)  There are two streams of money that flow from Medicare to US hospitals:

Direct GME (DGME) payments help hospitals pay the salaries of residents, teaching faculty, and support staff. DGME is the product of three numbers: a per resident amount that varies by hospital, adjusted annually for inflation; the number of residents in the hospital (capped for each hospital at 1997 levels); and the fraction of discharges from the hospital that are Medicare beneficiaries. The Indirect Medical Education (IME) payment is a percentage amount added on to each DRG payment. The percentage is calculated via a complex formula (the only US statute containing an exponent!), where the key factor is the ratio of interns/residents to beds (IRB ratio).

These two streams are of considerable size:

Of the $9.2 billion Medicare paid for GME in 2010, $3 billion was for DGME and $6.2 billion for IME. The money is paid to hospitals sponsoring training programs rather than to the training programs or other hospitals where training occurs. While about 1,100 hospitals receive GME payments, 66% goes to the 200 hospitals that have the largest numbers of residents.

So, the 200 largest hospitals get about $2 billion in direct GME money (and presumably about another $4 billion in indirect money). This averages then to about $10 million DGME and $20 million indirect GME per hospital.

Thus, teaching, at least the teaching of interns, residents, and other house-staff does pay, and much more than trivial amounts. (Note that these amounts are not for teaching of medical students, which ought to be supported by other funding streams.)

Why then do faculty think that teaching does not bring in any money?

The GME Money Vanishes

An article by Dr Saima I Chaudhry and colleagues in the American Journal of Medicine begins to explain, although the explanations are found between the lines.(5)

First of all, while the graduate medical education money is paid by the government to the hospitals, the government does not publish what it pays to individual hospitals:

It has been previously reported that the amount of GME funding individual hospitals receive is not publicly reported by the Centers for Medicare and Medicaid Services,....

The government also does not hold the hospitals accountable for how they spend this money, nor for the quantity or quality of education they supply in exchange for it.

Remarkably, Chaudhry et al imply that that the people who run graduate medical education teaching programs also may not know how much money their hospitals receive from the government to fund their programs. The introduction to their article noted:

It is unclear how much program directors know about the amount and flow of DME funds to their programs. Program directors' beliefs about the transparency of funding to their programs, or their desire to influence how funds are distributed to them, also are unknown.

The article reported on a survey of internal medicine residency program directors which asked about "their knowledge of D[G]ME funding for their programs, the transparency with which funds are distributed to them, and their desire to influence this disbursement." The researchers sent surveys to 372 member programs, representing 97.1% of all US internal medicine residencies. They got 268 responses, a 72.0% response rate.

The main results were that only 159/268 (59.3%) of program directors had tried to find out how much DGME money their programs received, and of those, only 84 (52.8% of those enquiring, but only 31.3% of all respondents) actually knew how much money their programs got.

Of the 92 program directors who did not even try to discover how much money their programs received, approximately 21% said that "no one would tell me," 21% said that the "information would be inaccurate," 14% said they "don't know who to ask," and 2% were "afraid to ask."

Summary

US medical school faculty, especially those in primary care, increasingly feel pressured to perform activities that they perceive brings in money from external sources. They tend to believe that their own teaching somehow does not bring in any money, and that their careers will fail if they do not put more emphasis on other activities that the institution views as more profitable.

However, literally billions of US government dollars go to support the education of house staff, including the salaries of faculty who teach interns and residents, who probably are the majority of physician faculty. Faculty probably do not know this, because the government does not publish the amounts given to individual hospitals, nor demand of the hospitals any accountability for how they spend the money they receive.

Presumably, the top executives of each hospital know how much money the government gives them. Nonetheless, the majority of physician leaders of residency programs are never told these amounts, apparently because their hospital executives kept the amounts secret. Many of those educators who have tried to find out the figures were unsuccessful. Some did not even try to find out based on beliefs that their attempts would be unsuccessful, any amounts they discovered would be inaccurate, the people who knew the amounts were hidden, or that it would be dangerous to their careers to even try.

Thus billions of dollars of money flowing from the government to fund graduate medical education seems to have vanished in an amazing example of widespread deficiencies in accountability and transparency.

There are many people who blame government for many social ills. In this case, one can blame the US Congress for not writing a law that makes the money flows transparent and hospitals accountable for providing good educational value for the money provided. One can also blame the executive branch, particularly the Center for Medicare and Medicaid Services (CMS) of the US Department of Health and Human Services (DHHS) for not making the money flows and the values received for them transparent.

There are a few people, including this author, who also blame the leadership of health care organizations for many of the problems besetting health care. In this case, one can blame top leadership, presumably CEOs and chief financial officers (CFOs) of hospitals for hiding the amounts of money they receive from Medicare to finance graduate medical education. One can also blame the physician leaders of residency programs for not insisting that they know the true sources of financial support for their programs, obtain budgets that reflect this support, and recognition that their faculty really do bring in external funds for their teaching of house staff (and are thus valuable "taxpayers" in Dr Goldman's parlance.)

It is amazing that such amounts of money have been flowing for years mostly in secret. The secrecy has fueled incorrect, and in retrospect, bizarre ideas about the funding of medical education, and the value of medical educators to their institutions. This secrecy, in turn, has helped suppress the morale of medical educators, support the control of managers of health care professionals, and distort the flow of money within academic institutions and to compensation for certain favored individuals.

Would our dysfunctional health care system not be better off if we demanded transparency and accountability from its leaders?  In particular, the US government should make payments to hospitals for graduate medical education completely transparent, and develop a system to hold these hospitals accountable for how they spend the money.  Meanwhile, top leaders of hospitals receiving this money should make the amounts transparent, first to the people who are supposed to be doing the education that the money pays for, and to the public at large.  This would allow those running the relevant educational programs to develop reasonable and realistic budgets, to treat their faculty with respect, and to demonstrate what value they provide for the money received. 
The ongoing anechoic effect, and related deception and secrecy fostered by leaders in health care are major reasons our health care system is so dysfunctional, that costs are so high, and access and quality so poor.  True health care reform would ensure health care leaders put the mission before their personal enrichment, and act ethically with accountability, transparency, and honesty. 
References
1.   DeAngelis CD. Professors not professing. JAMA 2004; 292: 1060-1.  Link here.
2.  Goldman L, Halm EA.  A view from the top: general internal medicine from the perspective of a chair and dean.  SGIM Forum, April, 2007.  Link here.
3.  Pololi L, Ash A, Krupat E.  Faculty Values in the Culture of Academic Medicine: Findings of a National Faculty Survey. Link here.
4.  Liebow M, Jaeger J, Schwartz MD. How does Medicare pay for graduate medical education? SGIM Forum, May, 2012.  Link here.
5. Chaudhry SI, Khanijo S, Halvorsen AJ, McDonald FS,Patel K. Accountability and transparency in graduate medical education expenditures. Am J Med 2012; 125: 517-522. Link here.

An Example of How the Complex Takes Control - A Board Dominated by Hired Managers Levitates Its Hired CEO's Pay

The Indianapolis Star published the latest story about anti-gravity health care executive compensation.  The report emphasized how the largest hospital systems in the metropolitan area raised CEO pay faster than any reasonable metric:

CEO pay is up, sharply in some cases, at Indianapolis' four large hospital groups, as the systems have grown and dumped more responsibilities on their top leaders.

Total pay for those CEOs rose anywhere from 15 percent to 53 percent from 2008 to 2010. While experts say the pay is in line with executive compensation at other large hospital groups, the rate of the increases far outpaces the minimal wage gains that area health-care workers (1.7 percent) and hourly workers (3.1 percent) have seen over the same time.

The rising CEO pay comes at one of the shakiest financial periods ever for hospitals, as they struggle with cuts in reimbursements for care from federal Medicare and Medicaid programs and private insurers.

CEO Pay Up More than Revenue

Pay at specific health care systems also rose faster than revenue. At the Indiana University Health System:

At the top of the best-paid list: IU Health's President and Chief Executive Daniel F. Evans Jr., who pulled down $2.08 million in compensation in 2010, up 17 percent from 2008. Subtracting Evans' retirement payouts, which vary year to year, his base pay jumped 19 percent since 2008.

However,

From 2008 to 2010, IU Health has seen revenue grow 10 percent to $2.46 billion,...

At St Vincent Hospital and Health Care

Close behind comes Vincent Caponi, CEO of St. Vincent Hospital and Health Care Center, who took in $1.86 million in 2009-10, a two-year jump of 44 percent, or 64 percent when retirement is removed.

However,

Revenue over the two years rose 28 percent at St. Vincent,...

At Franciscan Alliance,

Robert Brody of Franciscan Alliance earned $1.27 million in 2010 (53 percent more than in 2008),...

However, over that period revenue only rose 17%.

At Community Health Network,

Bryan A. Mills, the relatively new CEO of Community Health Network, received $1.35 million, or 15 percent more than his predecessor, William Corley, collected in 2008. (Corley retired in 2009.)

while revenue only rose 4%.

The Usual Talking Points

At this point, it should come as no surprise that hospital leadership trotted out the same old talking points to account for the ever upward trajectory of CEO pay as used in other areas and to account for the pay of leaders of other kinds of health care organizations (look here). These included...

We Pay What Everyone Else Pays

It was easy to find a professional compensation consultant to repeat this one:

Jim Otto, senior principal in Atlanta for the Hay Group, a consultant on executive benefits, said pay to top hospital CEOs in Indianapolis appears in line with rising compensation, including retirement benefits and bonuses, being paid nationally to most large-system hospital executives.

CEOs Work Hard and Are Brilliant

So we read:

At IU Health, formerly Clarian Health Partners, where Evans has been CEO since 2002, 'The system's grown significantly. It makes us think twice about the difficulty of running such a system. We literally cover the entire state of Indiana. And much of that has been under Dan's oversight,' said Charles Golden, an IU Health board member and chair of its compensation committee.

Also,

Golden says Evans 'has done a really superb job. Almost everything favorable to our system has been positive in his time.'

Here is the version pertaining to St Vincent's

Caponi 'is on an airplane and out of town a good bit, running a much bigger area' for Ascension, said Bill Estes, chairman of St. Vincent's board. 'That's the way we justify (higher CEO pay) and feel comfortable with that.'

High Pay is Needed to Attract Competent, if not Brilliant People

From Mr Otto, the compensation consultant:

Large hospital groups make certain they pay similar to their peers to remain competitive.

One reason for rising pay, Otto says: 'These aren't easy jobs. They are not easy to fill. The candidate pool isn't terribly large.'

Furthermore, Mr Golden, from the IU Board, added,

'Unless you want to default to mediocrity, I suppose you can do that (cut CEO pay),' he said. 'But I don't think that's where we are going. I don't think these (hospital) systems will get any easier to manage.'

Talking Points Sans Justification

As in previous cases, no one that reporter Jeff Swiatek could find provided any specifics to back up these talking points. It is striking that those who stewarded all the major hospital systems in this one area
felt the need to raise executive pay substantially faster than the rate of rise of revenue, that is from 1.7 times to 3.75 times the rate of revenue rise.

Why Are Hospital Boards So Nice to CEOs?

In the interests of full disclosure, I noticed this article because reporter Jeff Swiatek chose yours truly, plus fellow blogger Dr Howard Brody (look here) to comment for it.

'Whenever the nonprofit sector starts acting more like the for-profit sector, I start to get worried,' said Dr. Howard Brody, director of the Institute for the Medical Humanities. 'It just becomes crony capitalism. If one executive gets paid $3 million instead of $1 million, then every executive wants $3 million. It just becomes a vicious cycle of inflation of CEO benefits.'

Also, I suggested:

Put more noncorporate members on hospital boards because they'd be less inclined to endorse large compensation packages that are more typical of for-profit companies.

'Boards are populated by wealthy executives, who themselves are getting increasing compensation, rather than by community representatives or patient representatives,' Poses said.

Could the Composition of the Board Explain Excess Deference to the CEO?

I made the above comments after hearing approximations of the compensation given out by the hospital systems, but without any knowledge of the composition of the boards that approved that compensation. I am guessing that Dr Brody also was not told anything about board composition when he suggested the possibility of crony capitalism.

However, now that the article is out, I think it makes sense to look at the composition of at least one of the boards involved. I chose IU Health, since it is the largest of the systems, paid the most to its CEO, and was kind enough to list board members' brief biographies on a web-page.  Here they are, listed with their primary affiliations, and some notable other affiliations.

- Judge Sarah Evans Barker, former federal district court judge.
- Dr D Craig Brater, "dean of the Indiana University School of Medicine and director of IU Medical Center." Also on  the Board of Advisors of Spring Mill Venture Partners, "an early stage venture capital firm focused on investing in high-growth information technology and life sciences companies;" recipient of consulting and travel money from Pfizer (per ProPublica); and who was listed as having "a financial interest/relationship or affiliation in the form of: Consultant for AstraZeneca Pharmaceuticals; BioGen, Inc.; Forest Laboratories; Merck & Co., Inc.; Pfizer Inc.; and Pharmacia and Upjohn Company" per CMECorner.
- William R Cast, "CEO of NoMore Clipboard, an online, patient-controlled personal health record management system."
- Thomas W Chapman, "president and CEO of The HSC Foundation in Washington, DC, the parent corporation for two subsidiaries, The HSC Pediatric Center and Health Services for Children with Special Needs. He was previously senior associate vice president for Network Development and Professor of Health Services Management and Policy at George Washington University Medical Center in Washington, DC."
- Bishop Michael J Coyner, "Bishop of the Indiana Area United Methodist Church"
- J Scott Davison, "chief financial officer for OneAmerica and its affiliated companies," and member of the board of directors for Indiana Bond Bank."
- Daniel F Evans Jr - CEO of IU Health, also member of the board of Lakeland Financial Corp, (per Bloomberg)
- Charles E Golden, "retired from Eli Lilly and Company in 2006 as executive vice president and CFO and a member of the board of directors. He was previously a corporate vice president of General Motors...." He is also currently on the boards of Unilever, which makes health care related products, and Hill-Rom, which makes medical devices and supplies.
- David W Goodrich, "retired in 2005 as president and CEO of Central Indiana Corporate Partnership, Inc."
- V William Hunt, "chairman of Hunt Capital Partners, LLC, a venture capital and consulting firm based in Indianapolis. Until August 2001, he was the vice chairman and president of ArvinMeritor Inc...."
- Dr James E Lingeman, "long-standing member of the IU Health Methodist Hospital medical staff," but also according to a 2009 American Urologic Association Education and Research paper, Consultant or Advisor to, and Meeting Participant or Lecturer for Boston Scientific Corp and Lumenis, scientific investigator for Boston Scientific and Olympus, investor in Beck Analytical Laboratories and Midstate Mobile Lithotripsy, and having "Other" financial relationships with Beck and Midstate.
- Angela Barron McBride, " distinguished professor and university dean emerita at Indiana University School of Nursing"
- Michael A McRobbie, "Indiana University President," also on the board of OneAmerica (look here).
- Anne Nobles, "senior vice president for Enterprise Risk Management and chief ethics and compliance officer for Eli Lilly and Company."

When considering the composition of this board, note that members of non-profit organizations' boards generally are said to have three duties, as per BoardSource:
- The Duty of Care: "a board member owes the duty to exercise reasonable care when he or she makes a decision as a steward of the organization."
- The Duty of Loyalty: "a board member must give undivided allegiance when making decisions affecting the organization. This means that a board member can never use information obtained as a member for personal gain, but must act in the best interests of the organization."
- The Duty of Obedience: "The duty of obedience requires board members to be faithful to the organization's mission. They are not permitted to act in a way that is inconsistent with the central goals of the organization."

The Duties of Care and Obedience require board members to exercise prudent and reasonable supervision over hired managers, and provide these managers reasonable pay and incentives.  However, boards dominated by hired managers may put the interests of such managers ahead of their organizations' missions. 

So of the 14 members of the IU Health board, 8 are current or retired top level corporate executives or corporate board members, 4 of which have such leadership positions at financial service companies, (two at OneAmerica). In addition, 5, including 4 apparently ex-officio members, had or have top leadership positions in academic institutions. The board also included one Methodist Bishop and one federal judge. All but two board members are thus current or former top level hired managers of for-profit corporations or non-profit organizations.

Thus this board is largely populated by executives who are likely to be wealthy. Thus it is similar to many other boards of health care corporations (e.g., look here and here) and non-profit organizations  (e.g., look here,  here, and here) which we have discussed.  It stands to reason that boards dominated by hired managers will feel comfortable with and look kindly on the hired managers whom they are supposed to supervise, and view their compensation sympathetically.  Thus such boards may not exercise the Duties of Care and Obedience.

Furthermore, the Duty of Loyalty requires boards not to be affected by conflicts of interest. 
 
However, many of the IU Health board members have financial relationships that could be considered conflicts of interest. Two have or had executive positions at the same pharmaceutical company, Eli Lilly, one of whom also was on the board of medical device and supply company. In addition, both of the doctors on the board have or had significant disclosed financial relationships with drug, device, or biotechnology firms.  Again, it is like other boards affected by such conflicts that we have discussed.  Again, such boards may not exercise the Duty of Loyalty.
 
Summary
 
Combined with other examples of the composition of boards of for-profit health care corporations, and non-profit health care organizations, the latest example suggests the complex has taken control.  Nearly every board we have scrutinized is dominated by hired managers of other companies, and salted with conflicts of interest.  It seems likely that such boards will put the interests of hired managers ahead of those of the shareholders of for-profit corporations, and ahead of the missions of non-profit organizations. 
 
The complex that has taken control looks like a confederation of hired managers.  In 2003, five years before the fall of Lehman Brothers ushered in the global financial collapse, John C Bogle warned of the "grotesque transformation" of capitalism into an oligarchy of hired managers:

The root causes of the disease in our system are deep, and the remedies that are required to cure it will not be easy to come by. For what we have witnessed in the failure of corporate governance in America has been, as journalist William Pfaff described it, 'a pathological mutation in capitalism.' He was right on the mark. The classic system—owners capitalism—had been based on a dedication to serving the interests of the corporation’s owners, maximizing the return on their capital investment. But a new system developed—managers capitalism—in which 'the corporation came to be run to profit its managers, in complicity if not conspiracy with accountants and the managers of other corporations.' Why did it happen? 'Because,' in Mr. Pfaff’s words, 'the markets had so diffused corporate ownership that no responsible owner exists. This is morally unacceptable, but also a corruption of capitalism itself.'

This plague of managers' capitalism seems not to have spared health care, and to have infected the non-profit as well as public for-profit sphere.

To stave off the coming dystopia, we must return the control of for-profit corporations, including health care corporations, to their owners, and stewardship of non-profit organizations to those who will put their missions ahead of self-interest.

The Bloat Continues: More Tales of Non-Profit Hospital Executive Compensation

While unemployment remains high, and mortgage foreclosures continue in the US, nothing seems to stop the rise of health care costs, lead by compensation for top health care leaders. So, it is time once again for a round-up of inflated executive compensation at non-profit and government hospital systems.  We will describe the bloat in order of the appearance of the information in public.

Cincinnati

The December, 2011, the Cincinnati Business Courier tabulated the pay of the best compensated hospital employees, and discussed the results in an accompanying article.  By my count, 19 local hospital employees made more than $1 million in 2010.  These included 6 system CEO, 4 division CEOs, 5 chief level executives or vice presidents, 1 clinical department chair, and 3 doctors.  The top compensation went to Kenneth Hanover, CEO of Health Alliance/ UC Health, $2,799,338. Three others made more than $2 million.

Western New York

In January, 2012, Buffalo Business First reported:

The top hospital administrators in Western New York took home more than $53 million in compensation during 2010, with four executives earning $1 million-plus paydays.

Hospital presidents and chief executives at the region’s two largest health systems were among the top earners, with James Kaskie, president and CEO of Kaleida Health , earning $2.36 million; and Joseph McDonald, president and CEO at Catholic Health , earning nearly $1.1 million.

Kaskie’s compensation, as well as Kaleida executives Connie Vari, Robert Nolan and Margaret Paroski, included a deferred retirement plan payout. All four were among the top five earners for 2010, the most recent year for which complete data is available.

The life of a top hospital executive near Buffalo was not quite as plush as in Cincinnati. Only 4 made more than $1 million, including the CEO, Chief Medical Officer/ Executive Vice President, and Chief Operating Officer of Kaleida Health, and the CEO of Catholic Health System. Eleven more executives got more than $500,000.

North Carolina

It was a very good year for executives from some of the state's biggest health care systems, per a February, 2012 article in the Charlotte Observer.

Carolinas HealthCare System paid its CEO $4.2 million in 2011, $523,000 more than the year before, as the system celebrated a profitable year and met all of its systemwide goals, according to hospital officials.

Chief Executive Officer Michael Tarwater, 58, who has led the $6 billion public hospital system for 10 years, received a base salary of about $1 million, two bonuses totaling $2.5 million, and other compensation, including retirement and health benefits, of about $700,000.

That represents a 9 percent increase in base salary and a 14 percent overall increase compared to 2010, when Tarwater's salary was $986,172 and total compensation was $3.7 million.

Meanwhile, at Novant Health,

The most recent compensation figures for Novant executives are from 2010. In that year, Novant's CEO Paul Wiles, 64, received total compensation of $3.2 million, including his salary of $1 million, a bonus of about $837,000, and $1.37 million in other income, including retirement and health benefits.

Wiles retired at the end of 2011 and was succeeded by Carl Armato, who was previously chief operating officer for Novant.

A data table within the article showed that there were 10 employees, all executives, at Carolinas Healthcare System in 2011, and 6, again all executives, at Novant Health in 2010, who got more than $1 million in compensation.

Why did the Carolinas CEO warrant a multi-million dollar pay package? One of his employees endeavored to explain,

'We've had extremely good performance,' said Debra Plousha Moore, the system's chief of human resources. 'All performance goals this year were either met or exceeded.'

Why the credit for that performance should not be spread amongst more hospital employees, especially those who actually took care of patients, she did not explain.
Northern New York City Suburbs

In February, 2012, LoHud.com reported:

Eight executives from 15 Lower Hudson Valley hospitals received more than $1 million in salary, bonuses, benefits and other pay in 2010 at a time when the state struggled to control health-care costs.

The details included:

Three executives received more in total compensation than Westchester Medical Center CEO Michael Israel, who earned $1.3 million and oversees a hospital that’s more than twice the size of other facilities in the region.

Also,

The highest-paid hospital employees include White Plains Hospital CEO Jon Schandler with $1.6 million in total compensation, Dr. Edward Lundy at Good Samaritan Hospital in Suffern with $1.48 million and Edward Dinan, CEO of Lawrence Hospital in Bronxville, with $1.41 million.

Others in the million-dollar range include John Federspiel, president of Hudson Valley Hospital Center in Cortlandt; Joel Seligman, CEO of Northern Westchester Hospital in Mount Kisco; and Keith Safian, CEO of Phelps Memorial Hospital Center in Sleepy Hollow. A year earlier, Federspiel received a compensation package of nearly $2 million due partly to an $800,000 deferred compensation payout.

The average CEO compensation rose 13 percent from 2009, to $939,751.

Ten hospitals paid $7.7 million in bonuses to top executives, an increase of 15 percent over 2009. White Plains Hospital alone distributed $2.1 million in bonuses, including $650,000 to Dr. Jesus Jaile-Marti, chief of neonatology, and $575,000 to Schandler.

This article highlighted the contrast between compensation for executives and for employees who provide front line care:

The high salaries also come as hospitals pressure many employees for wage freezes, rising insurance costs and watered-down pensions, said Deborah Elliott, a nurse and deputy executive officer of the New York State Nurses Association, a statewide union representing nurses at Sound Shore, Mount Vernon, St. John’s Riverside, St. Joseph’s and Nyack hospitals as well as Westchester Medical Center.

'It never ceases to amaze me that we sit at the bargaining table with these executives who are making $1 million and they give us such a hard time about a half-percent increase for a nurse who is making $63,000,' Elliott said. 'It’s galling.'

Again, contrast that one half percent with the average chief executive increase of 13%.

While it is a rare hospital that would disparage the performance of its dedicated nurses and physicians, somehow executive talent seems to matter more. For example, here is how Hudson Valley Hospital Center president John Federspiel's compensation was justified by his board chair:

Edward B. MacDonald Jr., chairman of Hudson Valley Hospital Center’s board of directors, said Federspiel deserves his paycheck. The hospital has earned a profit for 22 of the 25 years that Federspiel has been at the helm and has expanded both its services and payroll in that time, he said.

'He’s the best administrator, planner and motivator I have ever had the privilege to work with,' MacDonald said. 'I wish I could pay him more.'

Again, why the CEO, but not the nurses and doctors deserves the credit for the hospital's performance was not stated.
Summary

It all gets so tedious, doesn't it? CEOs of all but the smallest non-profit hospitals now seem entitled to at least $1 million a year. At larger systems, multiple executives per system seem entitled to that level of compensation, and CEOs may get multiple millions a year. Yet these are ostensibly non-profit organizations dedicated or providing care to their communities, and often to serving the poor. Thus the health care bubble continues to inflate, and executives are ever more distracted by money, and seem less focused on mission.

Note that reporting of this ever rising compensation seems to be becoming more perfunctory as the results seem more routine (and tedious). Two of the four articles noted above did not provide any justifications for the high pay, while two only trotted out brief versions of the "our CEO is so brilliant" meme.

As I said in December, in a health care system with ever rising costs, declining access, and stagnant quality, we no longer can tolerate the perverse incentives generated by unaccountably high compensation to top executives. As long as top executives continue their sense of "self-entitlement," and can continue their current management practices reinforced by ever rising pay checks, expect poor leadership to undermine any attempts to improve health care. Tired repetitions of the usual rationales, that the CEOs are brilliant and hard-working, and that their compensation is mandated by the market do not make these rationales true.

We need health care leadership that has compassion for the increasing hardships that their patients have to endure, and that puts doing the right thing for patients' and the public's health ahead of self-interest.

"You Can't Say That" - Non-Disparagement Clauses and the Anechoic Effect

Here is another example of why health care organizations' leaders are different from you and me, and why that may not be a good thing for health care.  A few days ago, the San Jose (California) Mercury News reported on the upcoming departure of a local hospital CEO:

El Camino Hospital's handsomely-paid president and CEO Kenneth Graham is out of a job, the hospital announced Thursday afternoon.

Graham's contract will end June 30 'without cause, at the request of the hospital's Board of Directors,' according to a statement released to the media.

Until then, Graham will continue to fulfill his duties as the hospital's top administrator, according to the statement. Graham has been president and CEO of the hospital for 4½ years.

The brief statement did not explain why Graham has been ousted, focusing instead on his accomplishments. Graham earns an annual base salary of $632,640.

Not only was the CEO "handsomely paid," he will be handsomely paid to depart, as reported two days later by the same newspaper:

Former El Camino Hospital president and CEO Ken Graham may be out of a job, but he won't be hurting for a paycheck anytime soon.

Fired 'without cause' by the hospital's board of directors on Wednesday, Graham is now entitled to nearly $1 million in severance pay, according to his contract, which the hospital provided to The Daily News on Friday.

Specifically, the hospital will pay Graham a lump sum of 18 months' salary when he officially steps down June 30. Based on his annual salary of $632,640, he would receive $948,960.

The reporter could not get any clearer fix on the reason for his departure:

Hospital officials Friday were tight-lipped about their decision to drop Graham. Reached by phone, board Chairman Wesley Alles would only say it was 'without cause.'

'I guess as a generic (explanation) the only thing I can say is it's without cause, that (the board wants to take) some different directions, perhaps, as a generic (explanation),' Alles said.

El Camino Hospital spokeswoman Chris Ernst said she couldn't say more than what was written in a statement released to the media Thursday, which simply stated Graham's contract was ended 'without cause, at the request of the hospital's Board of Directors.'

'I know everyone wants to know if there's something really there, but it was clearly without cause,' Ernst said. 'It's not like you can point to one particular thing and say this is why this action was taken.'

Now wasn't that informative? It appears the CEO was let go "without cause." But reporter Diana Samuels did uncover why nobody was saying anything meaningful about this lucrative departure:

The contract also includes a 'non-disparagement' clause, which says the hospital and Graham cannot make any statements about each other that could cause 'any embarrassment or humiliation or otherwise reflect negatively on the other party(ies).'

I discussed the subject of executive contracts with one of our Health Care Renewal scouts who knows about such things. For high level executives in business, seemingly tidy severance packages are the rule.  We have discussed the problem with excess executive compensation in health care here.

Furthermore, various confidentiality, non-compete, and non-disparagement clauses are often common.

However, whether or not these are common practices in the larger business world, these contract provisions, especially non-disparagement clauses, pose problems in health care.  As we have discussed, there are lots of good reasons that the governance and leadership of health care ought to be maximally transparent.

Just to provide one example, consider the problem of medical errors, a subject which has received unending discussion since the report by Institute of Medicine entitled "To Err is Human."  One widely espoused doctrine about medical error prevention is that such errors ought to be disclosed and discussed openly so that their root causes can be found, and methods to prevent them developed.  Now suppose, for example, that the CEO of a hospital had discovered some medical errors, but made himself unpopular by pursuing them.  Were he to have a bilateral non-disparagement clause in his contract, and were this unpopularity to cause him to lose his job, he could say nothing about these errors, possibly allowing them to recur, but more seriously.  Of course, the example could be turned on its head.  Suppose the CEO had introduced a new process that was thought to be the cause of such errors.  Were he to lose his job because of this, hospital officials could say nothing about the problem, etc, etc.  Similarly, other problems at the hospital either discovered by the CEO or possibly caused by the CEO could remain anechoic due to non-disparagement clauses in hospital executives' contracts.

Of course, in the current case, the CEO might have left due to simple personality differences, and his departure might have nothing to do with medical errors, etc, etc.

However, this case suggests that the sort of non-disparagement clauses that may appear in contracts for executives in various type of businesses have metastasized to contracts for hospital executives.  These clauses, and their cousins, confidentiality clauses and non-compete clauses, may be major reasons for the anechoic effect, and the general lack of transparency of hospital leadership and governance. 

However, up to now, such clauses seem to be, you guessed it, anechoic in discussions of health care policy and health care reform. 

Thus, one step to true health care reform would be for there to be some open discussion of the reasons we cannot openly discuss many important issues in health care, particularly the likely increasing use of contractual clauses such as non-disparagement clauses.  Likely an even more important step would be discrediting such contractual provisions that reduce transparency.

Why Weren't Existing Laws About Hospital CEO Compensation Enforced in Washington State?

Public radio station KUOW reported on the generous compensation given hospital CEOs in Washington:

KUOW has learned that 15 hospital executives in Washington made $1 million or more in 2009. That elite group includes 14 nonprofit executives and one head of a government hospital. CEOs at Multicare, Providence, Virginia Mason and Valley Medical each made more than $2 million.

Those numbers can be found in the hospitals' latest tax filings and other public records. The pattern was more lopsided in the two prior years. Nobody working at a public hospital cracked the top 10 list of the state's highest hospital paychecks in 2007 or 2008.

But then the story takes an interesting twist:

Most of Washington's largest hospitals are nonprofit organizations. The state gives the nonprofits a break on their business taxes to help reduce the cost of health care.

The hospitals have to jump through some hoops to qualify for the reduced taxes. For one thing, state law limits how much the hospitals can pay their executives. Their pay has to be comparable to what public servants in Washington make in similar jobs — or else no break on their B&O taxes.

Somehow everyone seems to have forgotten about this part of the law:

The limit on executive pay has been on the law books for 30 years.

Gowrylow: 'Frankly, I don't think it's something that's been on our radar since the mid–80s.'

Mike Gowrylow is a spokesman for the Washington Department of Revenue. He says the recent million–dollar incomes were news to the department.

Gowrylow: 'But it's certainly something that I think we need to take a look at again and examine whether these nonprofits are paying their executives excessively or not.'

Gowrylow says the agency only audits 2 or 3 percent of tax returns. It mostly relies on businesses to comply voluntarily with the state's tax laws.

Gowrylow: 'We can't be everywhere. If we become aware of a nonprofit or any other business that's underreporting their taxes, we investigate those complaints, and if tax is due, we will assess it.'

He says the agency can recover back taxes for the past four years, along with penalties and interest.

Although the article cited an unsuccessful legal action to enforce the law in a particular case in 1986, why the state government seemed to forget about it after that is unclear, and maybe deserving of further investigation.
Right  now, hospital management seems to be trying to avoid the issue, or is arguing about the meaning of "comparable,"

Several present day hospital officials declined to be interviewed on tape. They told KUOW they believe they are in compliance with the state law. But they generally provided little detail to back up that claim.

Providence and Group Health representatives both said their organizations are so large and complex that there may not be any comparable public service jobs in Washington.

Swedish spokeswoman Melissa Tizon told me that CEO Rodney Hochman's pay was generally comparable to what the highest paid public hospital executives made, at Valley and Evergreen hospitals.

On the other hand,

Harborview is the state's largest hospital. Eileen Whalen is its head and an employee of the University of Washington. She makes about $470,000.

[State Senator Karen] Keiser: 'That's really not comparable to the million dollar and more salaries of other hospital directors in our state. We are paying attention here in Olympia to that.'

Other executives at UW Medicine did make more than Whalen. Still, none of them, not even the president of UW, made as much as any of the 15 highest paid executives at nonprofit hospitals in 2009.

I searched high and low to find any public officials making as much as the top nonprofit CEOs.

The only one I found who consistently did so was the UW football coach. But it might be hard to argue that Steve Sarkisian's job is comparable to running a hospital system.

We have discussed numerous cases of executives of not-for-profit hospitals and hospital systems receiving lavish compensation and benefits that seem out of proportion to any reasonable measure of their performance or of their positions' difficulties.  (Remember that advocates of corpulent executive compensation love to cite the size of the company and the number of employees, but the CEO really has only to manage the next tier of executives, rarely numbering more than a dozen.)

As we have said before, far too often the leaders of not-for-profit health care institutions seem more interested in padding their own bottom lines than upholding the institutions' missions. They often seem entirely unaware of their duty to put those missions ahead of their own self-interest. Like the financial services sector in the era of "greed is good," health care too often seems run by "insiders hijacking established institutions for their personal benefit." True health care reform would encourage leadership of health care who understand health care and care about its mission, rather than those who see a quick way to make a small fortune.

However, the twist in this story is that it appears the lavish compensation of hospital executives in this particular state may have violated state law, or at least the tax breaks these hospitals got may have violated the law, given their leaders excessive compensation, and that the law in question is over 30 years old.  However, the law seems to have been forgotten or ignored for nearly all that time, for reasons that are unclear. 

This seems reminiscent of how the Responsible Corporate Officers' Doctrine seems to have been forgotten and ignored.  this post from June, 2010).  However, in the last 30+ years, this notion has been ignored and abandoned by US government regulators at least in so far as it applies to health care organizations, particularly drug, biotechnology and device companies.

The big question is why have such laws and legal practices, which have not been repealed or refuted, instead been ignored and forgotten?  Surely this cries out for investigation.

Of course, It seems that somehow in the brave new world of laissez faire, anything goes capitalism foisted on health care over the last 30 plus years, old practices and customs that limited the power and enrichment of top leaders may have seemed increasingly prudish, and those advocating them may have seemed to be old fuddy duddies to those bent on personal gain.  But unhipness and scorn of prudishness are not reasons to ignore an existing law. 

So it is not that there are no legal tools to prevent abuses by leaders of health care organizations.  Instead, there has been increasing forgetfulness of the existence of such tools, and perhaps a growing effeteness of enforcement that has lead to a reluctance to even try to use them.  So we can start truly reforming health care by simply enforcing the laws that are already there. 
  

More on Hospital Executives' Disproportionate Pay

Local US news media brought some more striking examples of disproportionate pay given to health care organizational leaders. 

Carolinas HealthCare System: Corporate-Style Compensation for a Public Hospital CEO

Carolinas HealthCare System declares it is "the largest health care system in the Carolinas and the third largest public system in the nation" in its membership blurb for the National Association of Public Hospitals and Health Systems.  That association describes its members thus,

Since the establishment of the first public hospital in the United States in the early 1700s, safety net hospitals and health systems have been an essential part of our nation’s health care delivery system.

In the 21st century, safety net hospitals continue their long tradition of quality and service to the community. By delivering care to America’s growing number of working uninsured families, providing world-class trauma and emergency care, preparing for and responding to the threat of terrorism, epidemics, and natural disasters, and training the next generation of doctors, nurses, and dentists—safety net health systems ensure our nation’s communities are health and strong.

The Charlotte Observer just noted how much this "safety net hospital," which declared solidarity with "working uninsured families," pays its CEO:

Carolinas HealthCare System paid its CEO $3.7 million in 2010, $287,000 more than the year before as the system lifted a pay freeze and paid bonuses for reaching annual and long-term goals.

Chief Executive Officer Michael Tarwater, 57, who has led the $6.3 billion public hospital system for nine years, received a base salary of $986,172, two bonuses totaling $2 million, and other compensation, including retirement and health benefits, of $630,346.

In 2009 his compensation package totaled $3.4 million.

So the leader of an organization that serves the poor and uninsured gets enough compensation to make him  quite rich.    

Mary Washington Healthcare: Net Income Increases, but 20% Goes to Bonuses of Top 20 Executives

According to the Fredricksburg (Virginia) Free Lance-Star, from 2008 to 2009, Mary Washington Healthcare saw its total revenues increase, but its net surplus decrease,

The company's net income was $25 million in 2008, up from $20 million in 2007.

Then

The company opened its second hospital that year [2009] and recorded revenues of more than $666 million, up from $551 million in 2008. However, net income dropped to $8 million, in part because of the opening of Stafford Hospital.

So what happened to its executive compensation?

The top employees at Mary Washington Healthcare earned more than $1.1 million in bonuses in 2009, their reward for a successful 2008.

More than two dozen key executives and employee physicians earned annual bonuses ranging from $2,000 to $246,278. The median bonus for the company was more than $28,000.

Fred Rankin, president and chief executive officer, received the largest bonus among managers: $151,430. Rankin continues to be the firm's highest-paid employee, with a 2009 salary package of $955,282.

The hospital's net income increased $5 million (25%) from 2007 to 2008.  It then dropped $17 million (66%) from 2008 to 2009.  Reflecting 2008 results, its top 20 executives received 2009 bonuses of over $1 million, an amount that exceeded 20% of the hospital's 2008 net revenue increase on which the bonuses were based.  The total compensation of these 20 people in 2009 was approximately $6.5 million (see here), which exceeded the hospital's entire increase in net revenue from 2007 to 2008.  The hospital CEO's compensation in 2009 would have consumed one-eighth of the net revenue that year.  This all suggests that the top executives of this hospital consume an inordinate part of the organization's total revenue stream.    

Hutcheson Medical Center: CEO Compensation and Deficits Rise

Here is how the Rome News-Tribune described the financial status of Hutcheson Medical Center, located in Fort Oglethorpe, Georgia:

HMC reported a profit of $766,766 in 2007 and a $7.3 million loss in 2009.

In addition,

In 2008 more than 80 Hutcheson employees lost their jobs when the hospital eliminated its emergency medical services.

And after the profitable year of 2007, the Hutcheson administration approved major renovations for the hospital’s front lobby and entered into a $35.5 million dollar bond issue to fund further renovations and pay off debt.

That bond issue is currently in default, which prohibits the next $10 million payment from being released to HMC.

Things look worse in the future:

At a meeting Thursday, Jan. 28, of the Hospital Authority Board, HMC chief financial officer Gerald Faircloth revealed that the hospital had losses of $3.3 million in the first quarter of budget year 2011 and projected total 2011 losses at around $9 million.

Faircloth, whose compensation went down by $15,000 from 2008 to 2009, also reported that HMC has an estimated 15 days of operating cash on hand.

'So the wolf is at the door,' said Bill Cohen, a trustee who represents Catoosa County on the Hospital Authority Board.

Faircloth agreed.

Wolves notwithstanding, however, the Hutcheson CEO has done very well:

In the face of Hutcheson Medical Center’s financial losses over the past several years, financial documents reveal that president and CEO Charles Stewart’s compensation package has increased more than 26 percent from 2007 to 2009.

According to Internal Revenue Service documents for the 2007 and 2009 budget years, Stewart received $337,081 and $425,745, respectively, in total compensation. The Fort Oglethorpe hospital’s budget year runs from October through September.

Stewart’s 2009 income includes a “bonus and incentive compensation” of $69,750.

So despite a major financial loss, lay-offs and service discontinuations, and a bond default, the CEO got "bonus and incentive compensation" in 2009.   At least that drew some attention:

'I’m really surprised that the board (Stewart) works for would give him such an increase,' said Walker County commissioner Bebe Heiskell, referring to the HMC board of directors that oversees the day-to-day operations of the hospital. 'For a failing hospital that’s exorbitant.'

So while the hospital's financial performance continued to decline, the total compensation provided its CEO continued to increase.

Summary

Here were three instances in which the compensation of top non-profit hospital leaders seemed out of all proportion to the hospitals' financial results, let alone their accomplishment of their missions. In the first case, the CEO of a public hospital system meant to serve poor and uninsured patients was paid enough in one year to make him an instant multi-millionaire. In the second, the bonuses alone handed out to a handful of top executives ostensibly based on a net revenue increase would have consumed one-fifth of that increase, and when net revenue declined the next year, those executives' compensation would have almost consumed that entire year's net revenue. In the third, a CEO got increasing compensation while his hospital suffered increasing losses.

As we have said before, far too often the leaders of not-for-profit health care institutions seem more interested in padding their own bottom lines than upholding the institutions' missions. They often seem entirely unaware of their duty to put those missions ahead of their own self-interest. Like the financial services sector in the era of "greed is good," health care too often seems run by "insiders hijacking established institutions for their personal benefit." True health care reform would encourage leadership of health care who understand health care and care about its mission, rather than those who see a quick way to make a small fortune.

BLOGSCAN - Why Problems at Local Marquee Hospitals May be Anechoic

We have often discussed how the shortcomings of leadership of big health care organizations may be anechoic.  (See this post for a recent example.) 

Now, on the HealthBeat blog, Maggie Mahar discussed how journalists often fail to look closely at the actions of large, well-known local hospitals.  She noted some possible causes:
- "Hospitals, after all, are major advertisers."
- "the marquee hospital’s patrons tend to be powerful local figures."
- " most readers really don’t want to hear that their local academic medical center is having problems...."
She also summarized just how unhealthy relationships among the news media and marquee hospitals can become, but also provided some examples of incisive investigative reporting.  As they say, read the whole thing.

More Tales of Hospital Executive Compensation: Pay for What?

I have collected another series of stories from the wild and wacky world of health care executive compensation.  These are from three different hospitals/ hospital systems, ordered from smallest to largest.

Jefferson Healthcare

This story, from Jefferson County, Washington state, came from the Peninsula Daily News:

When Mike Glenn takes over the Jefferson Healthcare CEO office Oct. 4, he will be receiving $225,000 annually to run the 25-bed publicly funded hospital.

And he will become the highest-paid public official in Jefferson County.

Jefferson Healthcare's budget is $65 million, and it employs 360 full-time workers and about 550 part-timers.

Note that the amount above is apparently salary, not total compensation, which could well be higher.

Lakeland Regional Medical Center

This story, from Lakeland, Florida, came from the Lakeland Ledger.

The latest IRS report available on Lakeland Regional Medical Center shows, for the first time, how much LRMC officials receive in base pay and how much in 'bonus and incentive compensation' based on meeting goals assigned them.

Not-for-profit hospitals are required to release their IRS reports. Previously, those reports combined salary and bonuses, which may or may not be awarded in a given year.

Jack Stephens, president and chief executive, was paid $856,514. Of that, $644,034 was his base pay and $212,480 was bonuses.

Second-highest paid was Paul Powers, vice president and chief financial officer. He earned a total $435,581, of which $352,661 was base pay and $82,920 in bonuses.

Third was Dr. William Sadowski, psychiatrist, earning $430,117, of which $149,226 was base pay and $280,891 bonuses.

Others listed as highest compensated:

Dr. Edward Sammer, chief medical officer, $404,789 ($327,607 base pay, $77,182 bonus).

Dr. Olumide O. Sobowale, who heads trauma services, $306,792 ($227,692 base pay, $79,100 bonus).

Janet Fansler, vice president/cardiac and specialty care, $266,672 ($215,954 base, $50,718 bonus).

Mary Ford, chief information officer, $264,283 ($213,978 base, $50,305 bonus).

Carole Philipson, vice president support services and facilities, $246,530 ($199,474 base, $47,056 bonus).

Hugh Autry, vice president acute/surgical care, $245,216 ($198,408 base, $46,808 bonus).

Jeffery Payne, vice president human resources, $229,304 ($185,696 base, $43,608 bonus).

John Schliesser, vice president planning and external relations, $226,571 ($183,363 base, $43,208 bonus).

Dr. Michael A. Campanelli, neurosurgeon, $197,887, not divided into base/bonus.

Ken Menefee, executive director LRMC Foundation, $181,045 ($151,142 base, $29,953 bonus).

Dr. Joy L. Jackson, physician adviser, $164,923, not divided into base/bonus.

Dr. Rajan K. Raj, trauma surgeon, $141,344, not divided into base/bonus.

Note that LRMC is a bigger institution that Jefferson Healthcare, with operating revenue just under $650 million. However, it is now having financial woes, as reported in a separate story in the Ledger.

Lakeland Regional Medical Center's rates will increase an average 10 percent, for the third year in a row, in the fiscal year starting Friday.

These continual increases reflect the financial pressures affecting hospitals, patients and the health care system nationwide.

Costs are increasing for almost everything LRMC pays for - drugs, bad debts, charity care, write-offs to managed-care and government insurance plans, insurance and utilities among them.

The number of hospitalized patients is expected go up very little, an increase of slightly less than 2 percent, according to Vice President and Chief Financial Officer Paul Powers.

UCLA Medical Center

Our last story, from the Los Angeles Times, is about a large, prestigious academic medical center.

First, the board [of regents] approved $3.1 million in bonuses for medical center executives that are linked to efficiencies and improvements in patient health. That money, which comes from hospital revenues, will be distributed among 37 UC hospital leaders across the state.

As part of that group, Feinberg, UCLA's hospital system chief executive officer, will receive a $210,000 bonus. But in a more divisive matter, UCLA officials also received the regents' approval to give Feinberg an extra raise of about $410,000, boosting his total compensation to more than $1.3 million.

Why was this divisive? It turns out that the University of California system is in deep financial trouble.

The University of California regents took steps Thursday to shore up the university's badly underfunded retirement plans by raising the amounts employees and the university will be expected to contribute to them.

In particular,

Meeting at UC San Francisco, the regents unanimously approved a plan that will raise contributions to the pension and retirement health plans over two years to 5% from the current 2% of employees' paychecks, and to 10% from 4% of payroll for the university. The change will take effect quickly for about half of UC's 115,000 employees, including its faculty, but must be negotiated with its unionized employees.

More tough choices are ahead as UC tries to fill an estimated $21-billion liability gap in its retirement plans. Until this spring, neither the university nor its employees had made any contributions to the plans for 20 years.

In December, the regents are expected to review proposals for even more extensive changes, including one that would create a less generous program for employees hired after 2013 and boost the minimum retirement age to 55 from 50.

So in times of such financial stress, why increase the compensation of the UCLA medical center CEO so much?

UCLA Chancellor Gene Block said Feinberg was doing an excellent job and was being wooed by other employers. 'Keeping this team together is essential,' he said.

Summary

So to summarize, the CEO of a tiny hospital gets $225,000 in salary, presumably more in total compensation. The CEO of a mid-size medical center with stagnant revenues and rising costs got over $850,000 in total compensation, while 11 other executives, mostly non-physicians, all got more than $180,000. The CEO of a large medical center, within a university system with a seriously underfunded pension plan which is increasing deductions from all employees' pay, and contemplating reduced retirement programs for new hires, got a $210,000 bonus and a $410,000 raise for total compensation of more than $1.3 million.

So once again we see that even in tiny, public hospitals, the CEOs are paid well, and in bigger hospitals, even those in the midst of financial problems, the CEOs are paid very well. 

There does seem to be a rough correlation with hospital size.  Executives, and their boosters like to imply that the bigger the institution, the harder the job.  Keep in mind, however, that most hospitals, like most modern corporations, are highly pyramidal.  The CEO hardly manages each and every worker.  Rather, the CEO manages a few top executives, who in turn manage a few middle-managers, etc, etc.  For example, a Bloomberg report noted that only 11 top executive report to the CEO of the huge Bank Of America. 

Another claim by CEOs and their defenders is that it is all about pay for performance.  As noted above, and in other posts about executive compensation, the criteria for performance are rarely stated, and hardly explicit.   Anecdotally, there are many examples, including one above, of financially stressed institutions cutting back in other areas, but paying top executives more.  As in the last case above, nearly every CEO seems to be doing a wonderful job, at least according to the boards of directors or trustees to whom he or she is supposed to be accountable. 

In fact, the real lesson seems to be that top managers almost always do well financially, regardless of performance, regardless of financial pressures on their organizations, and do better and better the longer they hold their jobs.  Top executives are really different from you and me.

I say again, if we do not hold health care leaders accountable, if we do not provide them with incentives that are proportional to their actual performance, why should we expect health care organizations to do any more than satisfy their leaders' self-interest?

More Than $1 Million to Run a Public Health Agency

After a well-publicized story that managers of small town in California were paid in the high six-figures, reporters in California have gotten interested in the pay of public officials.

Thus the San Diego Union-Tribune reported on the compensation received by CEOs of local public health agencies, called public health care districts, two of which run hospitals. One in particular received generous compensation:

The top official at Palomar Pomerado Health, a public agency serving health-care needs in Poway and Escondido, receives in excess of $1 million in compensation per year.


Michael Covert, who has run the North County hospital district since 2003, receives a base salary of $736,000 a year. Retirement, bonuses and other benefits push Covert’s total pay past $1.1 million.

One other public health CEO, also responsible for a hospital, made somewhat less:

Tri-City chief executive Larry Anderson collects a base salary of $480,000 and benefits that drive his total compensation past $625,000 a year. He also received a $50,000 relocation benefit when he arrived last year.

Two CEOs of health districts that did not run hospitals, having leased them out, made less still:

Grossmont chief executive Barry Jantz makes about $183,000 a year in base pay and benefits that increase his total compensation to just under $250,000 a year.

Fallbrook administrator Vi Dupre, ... is paid a base salary of $61,000 a year and benefits that raise her compensation to just over $69,000,....

Why is Mr Covert paid so much?

Bruce Krider, the health-care district chairman, said Covert does an excellent job managing a complex enterprise that includes two major hospitals. Covert juggles the interests of staff, physicians, patients, volunteers, board members and other stakeholders, he said.

'A million dollars sounds pretty good to anybody, but my view is, pay a lot and expect a lot,' said Krider, a management consultant who also is a former hospital executive. 'You can’t have some mediocre public servant. You need somebody that has got vision, that can see the issues that are most important and put it all together.'

So now even the managers of public health agencies have become million dollar babies. And of course, according to the boards of trustees who are supposed to supervise them, they all do excellent work and therefore are underpaid even then. As we have noted before, it seems that every board supervising every health care executive thinks their executives are above average, if not stellar. Note, though, that the chair of the board overseeing Mr Covert is himself a retired hospital administrator. So, as we have noted before, it seems that the boards of such organizations often have a preponderance of members who are not inclined to be critical of their hired executives, much less limit their pay.

So the rules for top leaders of health care organizations seem to be different from those for you and me.  All these managers seem to be entitled to be above average.  (The only ones who are eventually deemed below average seem to be those up to no good in ways that do not financially benefit their organizations, e.g., see this.)

In my humble opinion, it is unseemly for the leader of a government run public health organization to make so much. 

True health care reform would decrease perverse incentives throughout the systems, spread the power in organizations more broadly, and make leaders accountable.

Health Care Leaders: the Best and the Brightest?

We have recently discussed how even executives of relatively small, not-for-profit health care organizations are paid enough to make them rich.  The compensation and privileges given to leaders of health care organizations are often justified by the notion that they are the "best and brightest," such arguments sometimes accompanied by a few choice logical fallacies (e.g., here).  So here are a few news stories about the activities of some choice health care executives.

Canopy Financial

This company provided financing for health care services.  As reported by the Associated Press,

A former executive of the bankrupt health care company Canopy Financial Inc. has agreed to plead guilty in an alleged multimillion-dollar fraud.

Court documents released Wednesday say former chief technology officer Anthony Banas will plead guilty to wire fraud.

Chicago-based Canopy was known as one of the nation's fastest growing businesses before its 2009 bankruptcy. Many clients relied on it to pay medical bills.

Danbury Hospital

This is a community hospital in Connecticut. As reported by the Danbury News Times,

Danbury Hospital's former Chief Financial Officer William Roe pleaded not guilty Thursday morning to defrauding the hospital and a previous employer out of nearly $200,000. Roe was freed on bond after he agreed to a stringent set of conditions imposed by a federal judge.

Here are more details of the charges:

The 54-year-old Roe is accused of wire fraud and two counts of interstate transportation of stolen money, stemming from fraudulent invoices he allegedly submitted to Danbury Hospital and his previous employer, St. Rita's Medical Center of Lima, Ohio, a member of Catholic Healthcare Partners. The invoices were from a software company Roe set up in Pennsylvania in 2008, and, according to investigators, no services were ever provided to either institution.

The wire fraud charge carries a maximum penalty of up to 20 years in prison, and the other two charges carry potential maximum penalties of up to 10 years each behind bars, Assistant U.S. Attorney Rahul Kale said.

Kale initially expressed reservations about releasing Roe on bond because the court determined that hours after his arrest by FBI agents on Aug. 17, Roe violated a previous no-contact order by barraging Danbury Hospital president Dr. John Murphy with e-mails and cell phone calls and begging him to make the charges 'go away.'

A day later, on Aug. 18, Roe also sent an e-mail to the hospital's vice president for human resources, asking her to arrange a meeting with Murphy, Kale said.

Those actions resulted in the judge revoking the $100,000 bond Roe had posted and filing additional charges against him, including witness tampering and harassment.

In the Aug. 18 e-mail, Roe acknowledged that he wasn't supposed to contact any hospital officials, but sought a 'brief conversation' with Murphy 'before any court proceedings begin,' Kale said.

The prosecutor said the order had been entered because 'Danbury Hospital had expressed a concern about the employee's return' and referenced a shooting at the hospital earlier this year and another incident of workplace violence in Manchester.

Not only did Roe violate the no-contact rule, but he also traveled to Pennsylvania on Aug. 18 without notifying court officials, Kale said, even though he was supposed to seek permission before leaving the state.

H. C. Healthcare

This company operated a community hospital in Florida. As reported by the Gainesville (Florida) Sun:

The former chief financial officer of a Gainesville company that ran medical facilities in several small North Florida counties has been arrested in Illinois on racketeering charges for allegedly misusing grant money, reported the Florida Department of Law Enforcement.

Arrested was Natalie Ann Krasnow, 35, of Huntley, Ill., on various felony charges including racketeering, aggravated white-collar crime and operating a scheme to defraud. Krasnow is now being held on a $250,000 bond pending an initial appearance before a judge in McHenry County, Ill.

Krasnow was the former CFO of H.C. Healthcare Inc. of Gainesville. It operated and owned Trinity Community Hospital in Jasper. Krasnow's arrest is a continuation of the joint investigation by the Attorney General's Medicaid Fraud Control Unit, FDLE and the State Attorney's Office for the 3rd Judicial Circuit into activities at the now closed Trinity Community Hospital and its affiliated clinics in Hamilton, Suwannee and Columbia counties.

Krasnow is the eighth person employed by or associated with H.C. Healthcare who has been arrested during the investigation. In July, investigators with the Attorney General's Medicaid Fraud Control Unit, FDLE and the McHenry County Sheriff's Office arrested owner Robert A. Krasnow, 36, of Gainesville; Dr. Yong Am Park, 66, of Lake City; Robert T. Krasnow, 58, of Gainesville, the father of Robert A. Krasnow; hospital administrator Christina L. Ortega, 42, of Lake City; and licensed practical nurse Ashley Lane Butler, 37, of Live Oak.

The former medical director at Trinity Hospital, Dr. Wayne A. Rahming, and former Trinity staff physician, Jorge Prieto, were arrested by Medicaid fraud investigators in a separate scheme involving the unlicensed practice of medicine at a clinic in High Springs. Additional arrests may follow.

The investigation of Trinity Community Hospital established that more than $660,000 in state grant funds dedicated to hospital improvements were received by the corporation, but little if any of the money was used to make such improvements, FDLE reported.

Natalie A. Krasnow was the corporation's grants liaison officer with the Florida Department of Health and was instrumental in applying for and accounting for the proper disposition of these funds.

Most of the money was used either to support the activities of the criminal enterprise or diverted to the personal use of Krasnow or her brother, hospital owner Robert A. Krasnow, FDLE said.

North Memorial Health Care

This is a health care system in Minnesota. Per the Minneaopolis - St Paul Star Tribune:

David Cress, the hospital executive arrested and charged with engaging in prostitution this week, has been suspended indefinitely without pay as president and chief executive of North Memorial Health Care, officials said late Thursday.

Cress, 60, was one of about a dozen men arrested at a Richfield hotel during a daylong vice operation. He was released from jail Wednesday and is scheduled to appear in court Sept. 15 on a misdemeanor charge.

He has been at North Memorial since 1982, and took over as the top executive in 2005.

Summary

So the box score is one guilty plea to fraud charges, arrests for wire fraud. interstate transport of stolen money, witness tampering and harassment; for racketeering, white collar crime, and operating a scheme to defraud; and for engaging in prostitution; and violation of a no-contact order.  The people involved were all "C-level" executives, including a CTO, two CFOs, and a CEO.

Of course, all people who are arrested are not guilty.  There are only four organizations, all relatively small, involved in this series of cases.

Again, however, should not the standard of conduct for health care leaders be somewhat higher than that of, for example, garbage haulers?  (I am sorry if that appears to insult garbage haulers.  Such was not my intention.)  For people generally paid so well because they were thought to be the best and the brightest, should not our expectations be higher.