What Goes Up - Non-Profit Hospital CEO Compensation Continues to Defy Gravity

We have frequently discussed the disconnect between incentives, particularly total compensation, given to the leaders of health care organizations and their roles, or lack thereof, in improving the health care of their patients or the public. One measure of that disconnect is how leaders' pay continues to defy gravity while the economy continues to suffer, and health care dysfunction continues to fester.

In particular, total compensation given to CEOs of ostensibly not-for-profit hospitals and hospital systems is increasingly passing the magic $1 million mark. A round up including two recent articles and others from the last four months that we have not discussed before revealed more "million dollar babies" amongst the ranks of these leaders.  (Note that most of the data came from 2009, not a particularly good year for the economy as a whole.)

UA Healthcare, Phoenix area, Arizona - $1.7 million

As reported by the Arizona Daily Star in April, "UA Healthcare interim CEO Kevin Burns received a financial package worth about $1.7 million when he left his post last week, the chairman of the UA Healthcare board said. Under terms of his contract, Burns qualified for two years' base pay plus benefits when he left his position. His annual base pay as interim CEO was $620,000, said Granger Vinall, UA Healthcare board chair."

Baptist Health, Jacksonville area, Florida - $1.2 million

According to the Florida Times-Union in May, Hugh Green, CEO of the Baptist Health system, made $1.2 million.

Florida Hospital Waterman, Orlando area, Florida - $1.7 million

As reported by the Orlando Sentinel in May, in 2009, Ken Mattison, president and CEO of Florida Hospital Waterman had total compensation of $1.7 million, which included "a lump sum pay-out of pension monies."

Multiple hospitals, Boston, Massachusetts - $1.2 - $2.1 million

According to an August Boston Globe article, in 2009, reported salaries of CEOs at Boston hospitals including: for the late CEO of Partners HealthCare, "then-chief executive James J. Mongan earned a total of $2.1 million, including salary, bonus, and other compensation"; for CEOs of two Partners hospitals, "current Partners chief executive, Gary L. Gottlieb, earned $1.6 million in 2009 as president of Brigham and Women’s, the same amount he got in 2008. Peter L. Slavin, president of Mass. General, earned $1.4 million in 2009, also the same as the year before"; "Elaine S. Ullian, former chief executive of Boston Medical Center, a Boston University teaching hospital, drew total compensation of $1.8 million in 2009"; and "Tufts Medical Center paid its chief executive, Ellen M. Zane, about $1.2 million in 2009, equal to her 2008 compensation."

Multiple hospitals, mid-west US - $1.8 - $6 million

Per MedCity News in August, "Nine percent of nonprofit hospital chief executives in the Midwest are paid more than $1 million a year, according to a new report." The top 20 CEOs in terms of compensation, based on the latest (2008 or 2009) figures were:

Randall O’Donnell; Children’s Mercy Hospital and Clinics; Kansas City, Missouri: $6 million
Javon Bea; Mercy Health System; Janesville, Wisconsin: $4.5 million
James Skogsbergh; Advocate Health Care; Oak Brook, Illinois: $4 million
Dean Harrison; Northwestern Memorial Hospital; Chicago, Illinois: $3.4 million
Richard Pettingill; Allina Health System; Minneapolis, Minnesota: $3.3 million
Joseph Swedish; Trinity Health; Novi, Michigan: $2.7 million
Lowell Kruse; Heartland Regional Medical Center; St. Joseph, Missouri: $2.5 million
Steven Lipstein; BJC Health System; St. Louis, Missouri: $2.2 million
Kevin Schoeplein; OSF Healthcare System; Peoria, Illinois: $2.2 million
Thomas Sieber; Genesis Healthcare System; Zanesville, Ohio: $2.1 million
Paul Pawlak; Silver Cross Hospital; Joliet, Illinois: $2 million
Toby Cosgrove; Cleveland Clinic; Cleveland, Ohio: $1.9 million
William Petasnick; Froedtert Memorial Hospital; Milwaukee, Wisconsin: $1.9 million
Fred Manchur; Kettering Medical Center; Dayton, Ohio: $1.9 million
Patrick Magnon; Children’s Memorial Hospital; Chicago, Illinois: $1.8 million
Kenneth Hanover; University Hospital; Cincinnati, Ohio: $1.8 million
J. Luke McGuinness; Central Dupage Hospital; Winfield, Illinois: $1.8 million
Daniel Evans Jr.; Clarian Health Partners; Indianapolis, Indiana: $1.8 million
James Madera; University of Chicago Medical Center; Chicago, Illinois: $1.8 million
James Anderson; Cincinnati Children’s Hospital Medical Center; Cincinnati, Ohio: $1.8 million

Where All CEOs Are Above Average

A repeated theme of these articles was that CEO pay continues to rise because those who set it often seem to believe that their CEOs, like the children of mythical Lake Woebegone, are above average, or at least that they are never below average. For example, in the Arizona Star article we learn:

UMC Corp. raised Burns' pay after consulting with a third-party compensation and benefits expert, and the salary is in approximately the 25th percentile when compared to like institutions on a national basis, [UA Healthcare board of trustees chair Granger] Vinall said. He said that UA Healthcare board's approved policy is to pay in the 50th percentile

In addition, in the [Jacksonville, FL] Times-Union article we find this about Baptist CEO Hugh Greene:

He deserves more because he doesn't just manage one hospital, said Robert Hill, chairman of the Baptist board. Greene oversees a complex health system that includes four adult hospitals, a children's hospital, a large physician network and other subsidiaries.

'We think he's an exceptional CEO,' said Hill, CEO of sales and marketing company Acosta.

That article also included this summary:

hospital boards, which usually consist of community heavy-hitters and local business leaders, often rely on consultants to help set CEO pay.

'The consultants survey the field, looking at salaries of CEOs at nonprofit and for-profit institutions, see what the 50th percentile is and then in many cases offer 20 percent or 30 percent above to qualified candidates,' Maggie Mahar of the nonpartisan think tank the Century Foundation wrote in a recent blog.

There's a problem with this system, she added: 'Mathematically, this keeps the 50th percentile moving up, and what the IRS considers 'reasonable' also moves up.'

Furthermore, the report on mid-west CEOs in the MedCity News provided this opaquely worded corroboration:

'It seems there is a possibility that when executive compensation firms are hired by boards and/or CEOs to provide multiple examples of comparable compensation, the firms may report out the higher end of the comparables,' said Pamela Knecht, president of Accord Limited, a Chicago-based healthcare governance consulting firm, in the report.

Summary

I am willing to admit that it may make sense to set compensation for hospital (and other health care) leaders in the context of what the population of such leaders are paid.  However, it makes no logical sense for the boards of trustees who set non-profit hospital CEOs' pay to deny the possibility that some of these CEOs must be below average.  Yet boards never seem to allow that their CEOs could be below average at the times when the pay decisions are made.  The only times we seem to hear about less than average CEOs are when their performance has been publicly embarrassing enough for them to lose their jobs, if not go to jail.  Even in such situations, the bad behavior never seems to have been foreshadowed in any way, particularly not by previous pay cuts (see this post for recent examples.) 

So why do hospital (and other health care) boards seem to deny the possibility that their CEOs may be below average, or worse?  As we have discussed before, perhaps it is due to ego bias.  Judgment and decision psychologists have shown that people often overestimate their own performance, or the performance of those with whom they are affiliated.  Also, the boards of trustees who are supposed to steward hospitals and other health care non-profits are often made up of current or retired CEOs or other top leaders of other organizations.  They may overestimate the performance of fellow members of the C-level officers' guild, or be afraid to criticize it.

In any case, we are seeing more and more flagrant examples of the perverse incentives existing in health care, especially as given to health care leaders, resulting in worsening accountability and increasing sense of entitlement.  So I say again.... 

Health care organizations need leaders that uphold the core values of health care, and focus on and are accountable for the mission, not on secondary responsibilities that conflict with these values and their mission, and not on self-enrichment. Leaders ought to be rewarded reasonably, but not lavishly, for doing what ultimately improves patient care, or when applicable, good education and good research. On the other hand, those who authorize, direct and implement bad behavior ought to suffer negative consequences sufficient to deter future bad behavior.


If we do not fix the severe problems affecting the leadership and governance of health care, and do not increase accountability, integrity and transparency of health care leadership and governance, we will be as much to blame as the leaders when the system collapses.

Where No Hospital CEOs are Below Average

In Lake Woebegon, all children are above average.  Now it seems that hospital CEOs have moved there. 

Ventura County, Where No CEO is Below Average

The Ventura County (California) Star reported on the uniformly high remuneration of the CEOs of local, mostly small, not-for-profit hospitals and hospital systems.

T. Michael Murray reaped $330,545 in 2008 as chief executive officer of St. John’s hospitals in Oxnard and Camarillo. He drew an additional $187,071 in bonuses with $73,113 more in benefits and other compensation.

His total package, according to IRS records, reached $590,729.

And he may have been underpaid, according to a statewide survey of 118 nonprofit hospitals. The report by the Payers & Providers healthcare business publication suggests the base salary for CEOs averaged $514,237.

Kick in bonuses, retirement money, reimbursement for education costs, expense accounts and the average total compensation hit $732,004.

Public records show similarly lofty numbers at Ventura County’s three nonprofit, tax-exempt hospital groups. Gary Wilde of Community Memorial Health System, which runs hospitals in Ventura and Ojai, was the highest paid CEO in 2008. He earned a base salary of $508,682 and his total compensation was $853,528, with much of the additional money placed into a retirement fund that won’t be paid out until Wilde serves six more years as CEO.

Simi Valley Hospital changed its leadership in 2008, with a total compensation of $1.25 million recorded in 990 tax forms for two different CEOs. That’s slightly more than the hospital provided in treatment for poor uninsured patients where there was no attempt to collect payment, though hospital leaders say charity care definitions encompass only a fraction of the total care they provide without pay.

Outside the county, tax records from the Cottage Health System in Santa Barbara showed a base salary of $848,826 for CEO Ronald Werft and other compensation of $546,846. His total topped $1.3 million.

Ken Anderson of the John Muir Health System, which operates hospitals in Walnut Creek and Concord, was the highest compensated CEO in the Payers & Providers study. He made $745,000 in base salary and nearly $7 million in other compensation, much of it deferred over his career for retirement.

Recall that these people are leading relatively small, not-for-profit community hospitals whose missions are to provide health care to the community.  Total compensation ranging from three-quarters of a million dollars to multi-millions seems vastly disproportionate to the jobs and their settings.

Explanations and Excuses
As expected, those supporting the CEOs have all sorts of explanations and excuses:

Hospital leaders in Ventura County and throughout California say the numbers are inflated by retirement plan accumulations that must be included on tax records even before executives qualify to receive the money. They defend the half-million-dollar salaries, with bonuses on top, as the only way to compete with for-profit hospitals for executives who can lead a facility that may employ more than 1,000 workers, drive a community’s economy, provide access to the uninsured and deliver care that saves lives.

'Given the context, it’s not out of line,' said Murray, a CEO with 28 years of experience who is now semiretired after resigning from St. John’s at the end of March. 'I think you need to retain and also attract sufficient talent. I’m not saying there aren’t inappropriate salaries out there. I don’t think mine was one of them.'

Also,

But [economist Sung Won] Sohn said that paying below average is risky.

'When you try to get somebody at $400,000 rather than $700,000 you will get plenty of takers but they’re not competent,' he said. 'Hospitals are so important in the community that you want to make sure it’s run properly.'

Nor does he see any problem with paying more than average if a hospital board wants to reward an executive.

Furthermore,

John Romley, an economist at the Schaeffer Center for Health Policy and Economics at USC, said the amount hospitals spend on executive pay is a sliver of their total expenses and can’t legitimately be blamed for driving the rising cost of healthcare.

'I guess I’m not shocked even though I’m jealous,' he said of the compensation.

Some people were not pleased about this use of health care dollars:

Others worry the compensation may push hospitals into spending more on executives than their nonprofit mission of providing care for the poor. Federal regulations already limit compensation for CEOs of corporations bailed out by the government to $500,000. Similar caps placed on nonprofit hospitals could create dramatic differences, said Ron Shinkman, author of the Payers & Providers statewide survey on CEO salaries.

'You’re looking at close to $39 million that could be used on uncompensated patient care,' he said. 'It’s a lot of money.'

Consumer advocates aim much of their concern at nonprofit hospitals that not only reward CEOs with lucrative paydays but also provide little charity care to poor, uninsured patients. The Payers & Providers research identifies 17 hospitals — all outside of Ventura County — where the total compensation to CEOs exceeded the cost of charity care.

'It would be outrageous if hospitals are paying more to their (entire) executive teams than in indigent care in their community,' said Anthony Wright of Health Access California. 'For some hospitals to provide more to one individual just seems wrong.'

The Mechanism: Ego Bias

The mechanism making CEO compensation constantly increase appears to be simple:

Typically, hospital boards hire consultants to conduct studies showing market averages for comparable hospitals in their regions. They often try to pay somewhere around the 50th percentile.

That’s a reasonable way to do it, but such studies tend to push up the salaries, said economist Sung Won Sohn, who was involved in setting compensation at two Minneapolis hospitals.

'People at the low end try to increase the CEO closer to the average,' said the professor at CSU Channel Islands. 'If everyone does that, the average CEO salary will go up.'

So there you have it. At no hospital is the CEO deemed by a sympathetic (and sometimes crony filled board) below average. If the CEO's compensation has somehow dropped below average one year, it is immediately raised to at least average the next. Apparently almost never is the CEO's pay deemed to be too high.

That notion is corroborated by the assumption by the CEO documented above that all CEOs have "sufficient talent," and the assertion above that anyone who would accept a lower salary would be "not competent."

So every year all the CEOs who had below average compensation the previous year get compensation increased at least to last year's average.  Almost no CEO gets a reduction.  So the average moves up relentlessly year after year. 

Of course, unless all CEOs are exactly alike, some CEOs must be below average. 

So this becomes a great example of the ego bias at work. Ego bias is a common cognitive bias usually discussed in the context of making probabilistic judgments. A simple definition is that people tend to believe that outcomes of what they do, or what a group with whom they identify does will be above average. A long time ago, colleagues and I showed that interns in an intensive care unit judged the survival of their patients on average to be better than their judgments of the mean survival of all patients in the ICU. On the other hand, ICU attending physicians displayed a slightly more sophisticated version of the bias. They judged their patients' survival accurately, but judged the mean survival of their ICU's patients to be higher than it really was. [Poses RM, McClish DK, Bekes C, Scott WE, Morley JN.  Ego bias, reverse ego bias, and physicians' prognostic judgments.  Crit Care Med. 1991 Dec;19(12):1533-9.  Link here.]

So we have the ego bias writ large in judgments made about the performance and compensation of hospital CEOs, at least in Ventura County, California.

The Implications

I agree that paying a CEO more than a hospital's entire expenditures for the care of the poor is unseemly.

However, in my humble opinion, the issue is even bigger than that. It is not so much how much of the hospital's budget goes to executive compensation, but what lessons this teaches CEOs.  I propose they are:
-  I am a wonderful person.   I can do no wrong.
-  If I do wrong, I cannot be punished.
-  I can get rich and powerful doing this.

Of course, as we have written many times, being the CEO of a small community hospital is supposed to be a calling, whose goal is to uphold the institution's mission.  Instead, CEOs are learning to be tin-pot dictators.  Some are probably sensible enough to resist learning this message.  I am afraid many are not.

Furthermore, there is no reason to think that this phenomenon is confined to Ventura County, California, or to small community hospitals.  We have discussed how the management of health care organizations have become unsympathetic to, or even hostile to the mission.  We have discussed their organizations' institutional conflicts of interests.   We have discussed how they have wound up with imperial CEOs. 

The resulting ill-informed, mission-ignorant or mission-hostile, self-interested, conflicted, or even corrupt leadership is a major, but still largely anechoic cause of our health care dysfunction.

As I have said endlessly, true health care reform will require finding well-informed leaders who understand and support the mission, put the mission before their own self-enrichment, and are unconflicted and honest.