What's behind soaring CEO pay
The nation's non-profit hospital chiefs rake in more than CEOs in any other non-profit sector
Last week’s report showing consumer prices rose 7.5% over the past year sent shock waves through financial markets and made it all but certain the Federal Reserve Board will raise interest rates at its next meeting in mid-March.
By burrowing deep into the report, I discovered inflation in medical services rose nearly as much, just a shade under 7%. Higher hospital prices accounted for more than a third of the increase, according to the Bureau of Labor Statistics.
But unlike general consumer prices, which until the past year had hovered around the Fed’s 2% target for several decades, medical prices have been increasing for by more than twice that rate. Hospital prices led the way with an average increase of 5.3% per year for the past quarter century.
“In other words, hospital services costing $500 in the year 1996 would cost $1,817.66 in 2021 for an equivalent purchase,” reported the Official Data Foundation, whose website’s inflation calculator uses BLS data. “Compared to the overall inflation rate of 2.2% during this same period, inflation for hospital services was significantly higher.”
You’d think the boards of trustees at the nation’s non-profit hospitals, which account for 80% of all staffed beds in this country, would be up in arms over top management’s inability to keep prices and thereby patient costs under control. At the least, they might want to incentivize their chief executive officers and other C-suite staff to take cost control seriously.
Compensation committees endorse the status quo
But few do. On Tuesday, Feb. 15, at 1 p.m. EST, I will be participating in the Lown Institute webinar discussing “Hospital CEO Compensation: Why are they paid so much?” (You can register here.)
The Boston-based think tank created an innovative hospital ranking system. Its measurements include a ranking for pay equity that compares chief executive officer salaries to the median wage at each hospital.
Its researchers found the typical hospital CEO earns more than twice as much as CEOs in the rest of the non-profit world. The median hospital CEO salary in 2018 was $415,648, more than eight times the median wage for workers at that hospital.
The list was topped by the CEO at New York University’s Langone hospital, who earned $10.26 million in 2018. His pay was more than 60 times the median worker’s wage. The CEO salaries at large multi-hospital systems are also in that range.
I recently spoke with several consultants who advise hospital boards’ compensation committees. I wanted to know why the biggest hospital non-profit CEOs get paid so much more than other non-profit institutions. What are they being incentivized to accomplish through their annual bonuses, which usually account for anywhere from a quarter to half of total compensation?
No incentives for cost control
I was shocked that cost control did not make the list. “Eliminate top line growth? They can grow the top line as much as they want,” said one.
The consultants said up to 40% of a CEO’s bonus depended on measures that directly affect hospital finances. They included net operating income; quality measures subjected to rewards and penalties by Medicare; patient satisfaction (the basis for star ratings by Medicare); and physician and staff engagement.
Over the past decade, that list has been expanded to include improvements in the hospital environmental record with an eye toward sustainability. Incentives for addressing community social factors and improving governance by including more community representation are increasingly common. More boards are including bonuses for measured improvements in diversity, equity and inclusion.
But any one of those factors represents just a minor portion of the overall annual bonus, which is itself just a quarter or so of the total annual pay package. “If you have too many measures, you have no measures because there’s not enough impact,” said another consultant (all asked for anonymity to avoid jeopardizing their livelihoods). “The financial measures are where most of the incentives come from.”
The culture inside the non-for-profit boards is a major barrier to redressing unseemly CEO salaries in the hospital sector. Many come from local private sector firms that have business relationships with the hospital or hospital system. They’ve seen their own salaries soar in recent decades and the income distance between themselves and their workers widen.
Pulling up everyone in the C-suite
It’s not just the CEOs whose salaries have been rising exponentially. The entire C-suite (chief operating, chief financial, chief medical, chief nursing, chief information and the growing number of other “chief” officers) has seen major salary bumps. Physician department leaders – especially those in specialties that fill hospital beds with patients – routinely receive seven-figure salaries from their grateful hospital leaders.
How about value-based care? Were any of the CEOs incentivized based on their ability to deliver higher quality care at a lower cost? How about working to improve the overall health of the local population, which would reduce the need for high-cost hospital care?
The short answer was no. “I’ve seen systems that made huge movements to value-based approach lose their shirts financially,” said one. “I’ve seen groups totally hurt themselves by trying to do the right thing.”
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