Pack­age deals

De­spite in­creased scru­tiny, ex­ec­u­tive pay at not- for- profit hos­pi­tals still on the rise

Modern Healthcare - - COVER STORY - Me­lanie Evans

With not-for-profit health­care sys­tems fac­ing grow­ing scru­tiny of their ex­ec­u­tive com­pen­sa­tion, me­dian to­tal pay for the top 25 high­est paid chief ex­ec­u­tives climbed 12% while base salaries grew 3% year over year, ac­cord­ing to Mod­ern Health­care’s anal­y­sis of re­cent pub­lic in­for­ma­tion avail­able on not­for-profit com­pen­sa­tion.

Ac­cord­ing to Form 990s filed by not-for­profit sys­tems to the IRS for 2011, me­dian to­tal com­pen­sa­tion was $3.8 mil­lion with me­dian base pay of $1.1 mil­lion. Data for 2011 were not avail­able for all 25 be­cause all 990s were not avail­able through Guides­ by June, when Mod­ern Health­care closed its sur­vey. In 2010, me­dian to­tal com­pen­sa­tion for the top 25 ex­ec­u­tives was roughly $3.8 mil­lion, with me­dian base com­pen­sa­tion of $994,709, ac­cord­ing to 990s filed for 2010.

The top paid, ac­tively em­ployed ex­ec­u­tive on the list was Ge­orge Halvor­son, the out­go­ing chair­man and CEO of Oakland, Calif.based Kaiser Per­ma­nente, who re­ceived to­tal com­pen­sa­tion of $7.9 mil­lion in 2011 with $1.2 mil­lion in base salary and $5 mil­lion in in­cen­tive pay. His to­tal com­pen­sa­tion in­creased 2.5% in 2011. Kaiser, which op­er­ates a gi­ant health plan, 32 hos­pi­tals and more than 600 med­i­cal of­fices, ended 2011 with rev­enue of $47.9 bil­lion and op­er­at­ing in­come of $1.6 bil­lion.

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

“Com­pen­sa­tion paid to se­nior man­age­ment is sub­stan­tially less than that of many for-profit health (plans), and less than would be ex­pected when com­pared to non­profit health­care or­ga­ni­za­tions, once the size and com­plex­ity of Kaiser Per­ma­nente is taken into ac­count,” Ha said.

Law­mak­ers, state at­tor­neys gen­eral, the me­dia and watch­dog groups seek more trans­parency from not-for-profit hos­pi­tals, while de­mand grows for them to in­crease their pro­vi­sion of ser­vices that ben­e­fit their com­mu­ni­ties in re­turn for the big tax breaks they re­ceive.

The high­est-paid ex­ec­u­tive iden­ti­fied by Mod­ern Health­care was Don­ald Faulk, CEO of Cen­tral Ge­or­gia Health Sys­tem, which op­er­ates a 659- bed hos­pi­tal in Ma­con, Ga. That was largely due to a big re­tire­ment pay­out. Faulk earned a to­tal of $8 mil­lion in 2010 with a base salary of $ 705,046. His hos­pi­tal sys­tem re­ported an­nual rev­enue for the year ended in Septem­ber 2010 of $738.5 mil­lion, with op­er­at­ing rev­enue of $46.4 mil­lion.

Mod­ern Health­care’s anal­y­sis of not-for­profit ex­ec­u­tive com­pen­sa­tion comes as pay in that health­care sec­tor con­tin­ues to re­ceive close pub­lic scru­tiny. Law­mak­ers, state at­tor­neys gen­eral, the me­dia and watch­dog groups seek more trans­parency from not-for-profit hos­pi­tals, while de­mand grows for them to in­crease their pro­vi­sion of ser­vices that ben­e­fit their com­mu­ni­ties in re­turn for the big tax breaks they re­ceive.

In in­ter­views, health sys­tem di­rec­tors and ex­ec­u­tives at the sys­tems where th­ese top- paid ex­ec­u­tives work de­fended the com­pen­sa­tion pack­ages as nec­es­sary to re­main com­pet­i­tive and in com­pli­ance with good gov­er­nance stan­dards set by the In­ter­nal Rev­enue Ser­vice, which reg­u­lates not­for-prof­its to pre­vent abuse of the or­ga­ni­za­tion’s char­i­ta­ble sta­tus. Not-for-prof­its re­ceive cer­tain tax breaks in ex­change for op­er­at­ing in the com­mu­nity’s ben­e­fit, and or­ga­ni­za­tions must ad­here to lim­its on com­pen­sa­tion to pre­vent abuse of that sta­tus and the or­ga­ni­za­tion’s as­sets.

One out­side ex­pert de­fended pay­ing not­for-profit health­care ex­ec­u­tives mar­ket rates. “Peo­ple can’t be over­paid,” said Jill Hor­witz, a law pro­fes­sor at the Univer­sity of Cal­i­for­nia at Los An­ge­les who spe­cial­izes in not-for-profit health­care. Le­gal rules for the not-for-profit sec­tor re­quire that CEOs earn no more than a com­pet­i­tive mar­ket rate, she said. “There is a rea­son­able in­ter­est to en­sure that char­i­ta­ble as­sets aren’t used for in­ap­pro­pri­ate pur­poses,” she said.

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

Next af­ter Halvor­son on the list is Jef­frey Ro­moff, pres­i­dent and CEO of UPMC in Pitts­burgh. He earned to­tal com­pen­sa­tion of $6.1 mil­lion in 2011 with a base pay of $958,992. His to­tal com­pen­sa­tion in­creased 1.6% from 2010. UPMC spokes­woman Su­san Manko de­scribed his pay as com­pet­i­tive for an in­sti­tu­tion of UPMC’s size and com­plex­ity. “This is a $10 bil­lion or­ga­ni­za­tion with more than 55,000 em­ploy­ees, en­com­pass­ing non­profit, for-profit and in­ter­na­tional op­er­a­tions,” she said. UPMC closed its books for 2011 with $9 bil­lion in rev­enue and $454.3 mil­lion in op­er­at­ing in­come.

Fol­low­ing Ro­moff on the list was Gre­gory Beier, who re­tired in 2012 as ex­ec­u­tive vice pres­i­dent and pres­i­dent of op­er­a­tions of the 12-hos­pi­tal No­vant Health, based in Win­ston-Salem, N.C. The $3.5 mil­lion re­tire­ment

pay­out to him in 2011 boosted Beier’s to­tal com­pen­sa­tion to $5.1 mil­lion, with a base salary of $622,574. His to­tal com­pen­sa­tion grew by 61% from 2010 while his base salary in­creased by only 1%. No­vant fin­ished 2011 with rev­enue of $3.5 bil­lion and op­er­at­ing in­come of $20.2 mil­lion.

No­vant spokes­woman Kati Everett said No­vant fol­lows IRS rules that call for pay to be com­pared against the mar­ket and ap­proved by board mem­bers with no po­ten­tial con­flicts of in­ter­est. No­vant also ties ex­ec­u­tive pay to per­for­mance on qual­ity, em­ployee and pa­tient sat­is­fac­tion, fi­nan­cial per­for­mance and com­mu­nity ben­e­fit. Beier’s 2011 salary was dou­bled by in­cen­tive pay that to­taled $649,505 based on per­for­mance, she said.

“At No­vant Health, we rec­og­nize (that) our re­spon­si­bil­ity to serve our com­mu­nity de­pends on the cal­iber of tal­ent in our work­force, our lead­er­ship group and our clin­i­cal fac­ulty,” Everett said in a pre­pared state­ment.

At Cen­tral Ge­or­gia Health Sys­tem, Bernard Price, in­terim head of hu­man re­sources, said his sys­tem com­plies with IRS rules for com­pen­sa­tion. “I can un­der­stand very clearly why you and other folks would have their eye­brows sig­nif­i­cantly raised,” he said about Faulk’s to­tal com­pen­sa­tion. “It is ex­treme when you look at it on the sur­face.”

But Price noted that $5.6 mil­lion of Faulk’s 2010 com­pen­sa­tion was a re­tire­ment pay­out that ac­crued since he be­gan work­ing for the sys­tem in 1974. An­other $1.3 mil­lion was re­ported for 2010 tax pur­poses but not paid to Faulk un­til 2012.

Ac­count­ing rules for de­ferred com­pen­sa­tion skewed the fig­ures for some of the top 25 ex­ec­u­tive com­pen­sa­tion pack­ages. That was the case for Dr. Steve Safyer, pres­i­dent and CEO of the 1,418-bed Mon­te­fiore Med­i­cal Cen­ter in New York, whose to­tal com­pen­sa­tion was $5 mil­lion in 2011 with base pay of $1.4 mil­lion. His to­tal pay­out in­cluded $2.8 mil­lion earned dur­ing Safyer’s 30-year ten­ure with the hos­pi­tal, said Kathryn Hast­ings, a man­ag­ing di­rec­tor and head of ex­ec­u­tive com­pen­sa­tion for Sul­li­van Cot­ter, who works with Mon­te­fiore Med­i­cal Cen­ter. That helped in­crease his to­tal com­pen­sa­tion by 23.6% from 2010.

Of Safyer’s to­tal com­pen­sa­tion, $2.5 mil­lion had been re­ported as com­pen­sa­tion dur­ing prior years as well un­der ac­count­ing rules, she said. Safyer’s com­pen­sa­tion falls be­tween the me­dian and 75th per­centile for top ex­ec­u­tives at other health sys­tems in ma­jor cities or aca­demic med­i­cal cen­ters, she said. Mon­te­fiore re­ported roughly $3 bil­lion in rev­enue and $33.4 mil­lion in op­er­at­ing in­come for 2011.

Ac­crued re­tire­ment ac­counted for one- quar­ter of the $4.6 mil­lion in com­pen­sa­tion that Nor­folk, Va.-based Sen­tara Health­care paid Pres­i­dent and CEO David Bernd in 2011, an in­crease of 11.3% from 2010. The sys­tem, with $3.9 bil­lion in an­nual rev­enue and op­er­at­ing in­come of $244.5 mil­lion that year, op­er­ates 10 hos­pi­tals.

“Mr. Bernd’s com­pen­sa­tion takes into ac­count his 40-year ten­ure of lead­er­ship at Sen­tara, with nearly 20 serv­ing as the or­ga­ni­za­tion’s top ex­ec­u­tive,” spokes­woman Cheri Hin­shel­wood said in a writ­ten state­ment. “His pay re­flects his ex­pe­ri­ence, ex­per­tise and the per­for­mance of Sen­tara as mea­sured by clin­i­cal qual­ity out­comes, pa­tient sat­is­fac­tion and fi­nan­cial per­for­mance.”

Sut­ter Health, a Sacra­mento-based sys­tem with two dozen hos­pi­tals in Cal­i­for­nia and Hawaii, paid $5.2 mil­lion in to­tal com­pen­sa­tion to Pres­i­dent and CEO Pat Fry in 2011, an in­crease of about 9% from 2010. His base pay of $1.6 mil­lion, in­clud­ing some ad­just­ment based on an eval­u­a­tion of his in­di­vid­ual per­for­mance, in­creased 7.2% from 2010 to 2011. Sut­ter re­ported 2011 rev­enue of $ 9.1 bil­lion and op­er­at­ing in­come of $697 mil­lion.

Andy Pansini, a San Fran­cisco real es­tate ex­ec­u­tive who has served as chair­man of the com­pen­sa­tion com­mit­tee of the Sut­ter Health board of di­rec­tors, said no one has asked him to jus­tify Fry’s pay. But he is aware of reg­u­la­tors’ in­tense in­ter­est in how tax-ex­empt health­care or­ga­ni­za­tions pay their ex­ec­u­tives.

Pansini said the Sut­ter board set the CEO’s salary halfway be­tween the low­est and the high­est amount he could earn else­where. He de­fended Fry’s com­pen­sa­tion as rea­son­able and nec­es­sary to meet Sut­ter’s strate­gic goals by hir­ing a skilled ex­ec­u­tive team. “In or­der to do that, we have to be com­pet­i­tive and we have to be fair,” he said. He said Sut­ter’s board re­lies heav­ily on con­sul­tants to com­pare Fry’s com­pen­sa­tion against the mar­ket. That com­par­i­son in­cludes other ex­ec­u­tives of sim­i­lar not-for-profit health sys­tems, and, to a lesser de­gree, of for-profit sys­tems. “We would re­cruit from the en­tire pool,” he said. Sep­a­rately, two con­sult­ing com­pa­nies re­view the Sut­ter CEO’s fi­nal pack­age of salary, ben­e­fits and bonuses.

That al­lows the board to pay com­pet­i­tively, but also signals to reg­u­la­tors that Sut­ter did not over­pay its CEO. Sut­ter’s board ad­heres to steps laid out by reg­u­la­tors that, if fol­lowed, make it more dif­fi­cult to chal­lenge CEO pay as ex­ces­sive. For ex­am­ple, no board mem­bers with fi­nan­cial ties to the sys­tem ap­prove Fry’s pay, Pansini said.

Sut­ter ties Fry’s bonus pay to per­for­mance on a half-dozen strate­gic pri­or­i­ties: qual­ity, em­ployee and pa­tient sat­is­fac­tion, profit, af­ford­abil­ity and com­mu­nity ben­e­fit. It’s mostly heav­ily based on per­for­mance on re­duc­ing Sut­ter’s costs and in­creas­ing ef­fi­ciency. One-quar­ter of the bonus is based on meet­ing cost tar­gets; 20% is based on qual­ity; pa­tient sat­is­fac­tion, 15%; com­mu­nity ben­e­fit, 10%; em­ployee sat­is­fac­tion, 10%; and profit per­for­mance ac­counts for 20%.

Sut­ter is seek­ing to slash the cost of its op­er­a­tions by $1 bil­lion over five years and is halfway to the goal. “We had to re­duce the costs in or­der to sur­vive,” Pansini said. “That’s true of any or­ga­ni­za­tion th­ese days.”

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