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Rising Executive Compensation At Children’s Hospitals Threatens The Public Trust



September 14th, 2012

Editor’s note: The themes discussed in this post are among those discussed in the new book “Unaccountable,” by Dr. Marty Makary.  A video trailer about the book is available here.  In addition to Dr. Makary (photo and linked bio above), this blog post is coauthored by Andrew Ibrahim, MD, Case Western Reserve School of Medicine, and Dominic Papandria, MD, Indiana University School of Medicine.

Freestanding children’s hospitals (FCHs) are reporting record profits and paying their executives millions, all while soliciting for community donations.  FCHs have an opportunity to be leaders in healthcare by adopting new standards of transparency and new guidelines for executive salaries, while addressing rising costs and aggressively pursuing innovation in patient safety.  If they do not enact these reforms, Congress should reconsider the not-for-profit status of these institutions and the large government subsidies they receive.  Moreover, FCHs risk damaging the longstanding trust of doctors and hospitals among their donors and communities.

According to Internal Revenue Service filings, the nation’s 42 children’s hospitals have some of the largest cash surpluses and executive pay among American non-profit organizations.  For example, in 2009, the last year in which public records are available, Children’s Hospital of Philadelphia posted a record $359 million profit, and Texas Children’s Hospital recorded a $275 million profit, while Reuters reported that half of the nation’s full-service hospitals were not breaking even.

In the same year, Children’s Hospital of Los Angeles provided a top executive with the unprecedented compensation of $3.9 million, and the CEO of Children’s Hospital of Philadelphia was paid $3.4 million.  These figures trump those of larger full-service hospitals which have double to triple the number of patient beds. To place FCHs’ multimillion dollar executive pay in perspective, Gail McGovern, President and CEO of the American Red Cross, sparked heated controversy when she was paid $565,000 in 2008.

A $510,774 base salary supplemented with a $477,817 bonus paid to the CEO of The Boys & Girls Club of America in 2009 caused public outcry on Capitol Hill and stalled government funding. Senators found that a nearly $1 million salary and benefit package for a nonprofit executive is “not only questionable on its face but also raises questions about how the organization manages its finances in other areas.” This compensation package was widely regarded to be in direct conflict with the organization’s fundraising strategy and its non-profit mission to provide a public service.

The unique advantages FCHs enjoy. Different from many other health care facilities of comparable size, most FCHs benefit from a steady revenue stream of cash provided from community donations and government non-research grants. (See Table 1 below.)  In our review of public data, the combined revenue from the ten highest-grossing FCHs generated more than $1.1 billion in profits.   These hospitals also received $755 million in total grants, gifts and contributions, of which $311 million was provided in the form of government grants. Among these ten institutions, the highest-paid executives received compensation of nearly $6 million annually (See Table 2 below.) — 332 percent of the median salary paid to their peers in non-profit hospitals with revenues over $500 million.

Escalating salaries of senior executives at non-profit health care facilities are also becoming a source of public embarrassment for the hospitals they operate.  Already, CEO compensation has prompted state-level investigations in New Jersey, Vermont, New Hampshire and Illinois.  At the federal level, Senator Charles Grassley has demanded increased accountability from non-profit hospitals for lavish compensation packages, arguing that “there is often no discernible difference between the operations of taxable and tax-exempt hospitals.”

In a landmark decision last year, the Illinois Supreme Court ruled against a hospital’s self-determined non-profit status because it only provided free or discounted care to 302 patients out of greater than 100,000 admissions at a cost to the hospital of $831,724.  Other Children’s hospitals take care of essentially zero uninsured patients given the near-universal health care coverage of children which ensures hospitals will be paid for pediatric care.

Any non-profit organization receiving billions in taxpayer subsidies should be accountable with meaningful and objective performance metrics.

An opportunity to lead. Surely all FCH donors have legitimate expectations that their contributions and payments be directed toward efforts that improve and expand the care of patients.  Innovation in patient safety and quality requires investment.  Children’s hospitals now find themselves uniquely poised, both academically and financially, to fund ambitious, highly innovative and measurable ways to improve safety.  Should donors, taxpayers and the families of current and future patients expect any less of the directors and executives providing leadership at the nation’s premier hospitals for children?

In embracing badly needed quality improvement programs at all levels, leadership at FCHs can also seize a critically important opportunity to improve the deficiencies of public reporting of patient outcomes and internal financial data, creating model systems of transparency and accountability.  By uniformly and unambiguously publishing information that has been previously concealed or distorted (such as the total values of all forms of compensation, the formulae and performance triggers that determine executive pay, and the terms of other contractual agreements), the nation’s non-profit children’s hospitals should create new standards of governance that couple objective performance metrics to fair pay that is comparable across institutions.

While some argue that there is a slippery slope to curbing executive compensation, there are good self-imposed models for reigning in excessive spending in healthcare.  In the same way that lavish gifts to doctors from the industry were managed with guidelines from the American Medical Association, so too should ethical standards for executive compensation be set from within the profession.  This solution would create a reasonable guideline based on a wide consensus from within the field, such as the executive pay model of the Mayo Clinic.  Such guidelines would help inform FCHs in determining how much to pay their executives. However, as reform of institutional governance proceeds, input at the national level may be helpful to harmonize efforts and provide mediation between public and private interests, especially for those institutions supported by federal funding and tax-exempt status.

The limits of attracting capable executives as a justification for high salaries at FCHs. Hospitals, like many enterprises of similar scale, frequently counter questions of executive compensation with concerns that attracting and retaining capable management requires the compensation levels described here.  Yet we have seen the logic that escalating pay always delivers increasingly talented executives tested to failure in the extreme within the private banking sector during the sub-prime mortgage crisis and its aftermath. Disproportionately high executive compensation relative to the average hospital’s worker can create an internal hierarchy which has the potential to create an oppositional work environment between management and workers. From talking with doctors in U.S. hospitals, it is clear that there is increasing frustration with hospital management which has a tendency to detach from front-line operations as the size of the enterprise increases.  Executives should be aware of this pitfall and make active efforts to engage with front-line providers to assess their needs and safety concerns.  Programs such as CUSP (Comprehensive Unit based Safety Program) and executive walk-rounds are aimed at bridging this growing divide.

Moreover, emerging business theory on employee motivation values monetary awards on equal footing with institutional culture, fair and transparent management, and the importance and meaningfulness of one’s job.  Children’s hospitals would therefore seem to have a unique advantage in attracting executive talent independent of compensation: what greater meaning or importance is to be found than in leading an institution with a mission of treating sick children?  But FCHs not only lead non-profit hospitals in pay to top executives, they also lead among the non-profit sector as a whole.

A stark choice. While current trends threaten to erode the trust FCHs have built over decades with their employees, with government officials, and with the public, these institutions face a clear choice.  Meaningful reform will require a new approach to bridging the growing and dangerous divide between hospital executives and their front-line providers.

We do not want our tax dollars or donations supporting record surpluses and extravagant CEO pay. We learned the hard way from Fannie Mae and Freddie Mac’s mission to increase home ownership that, however noble the cause, any non-profit industry that gets billions in taxpayer funds needs accountability.

 

Table 1 (click to enlarge). Financial Performance of Freestanding Children’s Hospitals.  Data from 2009 Internal Revenue Service 990 Tax forms. NR = Not Reported.

Table 2 (click to enlarge). Executive Compensation and Organization Tax Exempt Status.

 

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2 Trackbacks for “Rising Executive Compensation At Children’s Hospitals Threatens The Public Trust”

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2 Responses to “Rising Executive Compensation At Children’s Hospitals Threatens The Public Trust”

  1. Matthew Holt Says:

    Great piece and I enjoyed the movie trailer (although it looks very similar to other books like Overtreated, who’s author is featured heavily in the trailer so will be keen to see the difference).

    But what’s so special about Childrens Hospitals? There are nearly 5,000 community hospitals and average CEO salaries there are over $500,000 and many are also in the millions. They also barely give out real charity care, they also receive lots of community help (some FOR-PROFITS still have “pink lady” volunteers). For that matter non-proft blue Cross plans have similar and even higher salaries. (And lets not discuss the big for-profit health plans and the big drug and device companies).

    But there’s lots and lots of room for accountability and more transparency.

  2. bmacaux Says:

    As one who has written and spoken extensively on Responsible Leadership, I am pleased to see Dr. Makary raise this issue of public trust. The role of leadership is essentially normative in function, and if we are outraged at the 500:1 multiple of CEO compensation in corporate America, we should be all the more disappointed in those who feign the role of stewards to the noble mission of these institutions while lining their pockets with the same greed of Wall Street Bankers. We should be equally offended at the failure of governance of the boards of these hospitals, whose members are so frequently populated by wealthy donors rather than competent fiduciaries.

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