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.