Non-profit hospitals' top salaries may be due for a check-up

Julie Appleby

Non-profit hospitals — already on the defensive over billing and collection practices against the uninsured — have another worry: how much the boss is paid.

Hospital systems might soon be asked to justify executive perks, both before Congress, which is considering new rules for tax-exempt organizations, and to the Internal Revenue Service, which this summer launched a review of compensation at the nation's charities, including hospitals.

Executives at the six largest non-profit, tax-exempt hospital systems all make more than $1.2 million a year, according to IRS documents and information provided by the organizations. The jobs come with generous benefits. One large system has given $5.1 million in forgivable loans to eight top executives since 1998. Another paid $1.8 million last year so two executives could live in other states and commute to work.

Hospital executives were the five most highly paid CEOs in the non-profit world, according to a survey released Monday by the Chronicle of Philanthropy.

Hospital leaders say salaries are competitive with perks in for-profit America, but non-profit hospital salaries have become fodder for industry critics.

“We can understand someone making several hundred thousand, but when they're pulling in seven figures, they're acting like they are part of the NBA of the hospital sector,” says K.B. Forbes, who heads an advocacy group working to get hospitals to offer free or discounted care to the uninsured.

In addition to the IRS review of compensation at up to 2,000 charitable organizations, including non-profit hospitals, Congress is expected to continue hearings into the tax-exempt status of the nation's hospitals and charities.

At issue is whether tax-exempt organizations are meeting their obligation to provide community benefits — and are not being run to enrich individuals, which would violate federal law.

The debate about salaries is set against a backdrop of general concern about executive privileges in Corporate America and worries about rising hospital costs.

Still, the public's perception of salaries in the non-profit hospital sector might be skewed.

“Society has this idealized view of non-profit organizations as all being run by Mother Teresa, but that's not the way it is,” says John Colombo, a professor of law at the University of Illinois at Urbana-Champaign. “People with this initial reaction that non-profit executives ought to get paid less should ask themselves, ‘Would you believe that if you needed a heart valve replacement tomorrow?' ”

Not-for-profit hospital systems are big businesses: Many systems bring in billions in annual revenue and employ thousands of workers.

Median cash compensation in 2003 for hospital system CEOs was $625,000, according to a survey in the trade publication Modern Healthcare. Pay at stand-alone hospitals was less, with a median of $341,000, the survey said. Financial disclosure forms for the largest systems and those that are well-known, show:

•At Ascension Health, the nation's largest non-profit hospital system, with $8.6 billion in net patient revenue in 2003, then-CEO Douglas French was paid $1.6 million in salary and benefits last year: He resigned in May citing personal reasons. The incoming CEO, Anthony Tersigni, was chief operating officer in 2003, earning salary and benefits of $1.4 million, plus $85,000 in expenses to commute from his home in Michigan to Ascension's St. Louis headquarters. The chief financial officer lives in California — and was paid $99,583 in commuting expenses.

“Ascension Health's philosophy is to recruit, hire and retain the best executives in the field. Because of this focus, and our organization's emphasis on family and work-life balance, Ascension Health's policy since its founding allows officers to live outside the St. Louis area and commute,” the system said in a written statement.

•At California-based Kaiser Permanente, whose executives oversee both an insurance plan and a system of 30 hospitals, outgoing Kaiser Foundation Hospital President Dale Crandall was paid a total of $7.4 million in 2002, reflecting salary, deferred compensation, a bonus, retirement and a one-time payment for termination of his contract. George Halvorson, the new CEO, was paid $2.2 million in 2002.

“George Halvorson's and Dale Crandall's roles and responsibilities are unique and different than other non-profit hospital executives,” said spokesman Matthew Schiffgens. “They are national officers for both a non-profit hospital system with 30 hospitals and 437 medical centers and a non-profit health plan that finances and arranges care for 8.2 million members.”

•At Catholic Healthcare West, executives not only have good salaries, but also have access to large loans they don't have to pay back.

Non-profits make up the 85% of the nation's nearly 5,000 hospitals. Unlike their for-profit counterparts, non-profit hospitals cannot have shareholders. They issue tax-exempt bonds and solicit donations from supporters. They cannot sell stock. Any surplus revenue at year's end must be used for the hospital.

Hospitals say non-profits must pay good salaries to attract the best talent, drawing from a pool of executives who could work in a variety of industries, including the for-profit sector, where compensation often includes equity in the company.

“A big hospital in an urban area with multiple campuses may have 10,000 employees and one or two billion a year in revenue,” says Douglas Anning, a Kansas City lawyer who specializes in hospital law. “It takes a pretty sophisticated and knowledgeable business person.”

At Catholic Healthcare West, which owns 43 hospitals and medical centers in California, Arizona and Nevada, the new leadership team — several of whom received large loans for mortgage assistance — is credited with a financial turnaround. In fiscal 2003, the hospital system reported $51 million in operating income, reversing six years of operating losses ranging from $47 million to more than $300 million.

Chapman says the investment in the executives, including the loans that helped them move to the expensive San Francisco Bay Area, was worth it.

“Health care may be the most complex industry in the U.S. today,” Chapman says. “Without good leadership, we might not have a system here to provide health care.”

But critics say some non-profit hospitals have lost sight of their mission.

“I would not begrudge the salaries if they weren't at the same time putting so many families in financial ruin with their billing and collections practices,” says Anthony Wright of the California group Health Access, an advocacy group seeking discounts or free care for low-income uninsured.

At CHW, for example, Chapman says that the nine top executives' salaries hardly put a dent in the expense budget: “If all our top executives came to work for $1 a year, it would reduce our costs by only 0.2%.”

If a hospital or system, in setting its executive compensation, has done a thorough review of comparable salaries, it might be protected from IRS penalties.

“If you go through that process, there's a presumption of reasonableness,” says Wayne Henry, a tax attorney in Omaha. But he continues to be surprised when he learns that “a lot of them haven't done that.”

Still, several tax attorneys, executive recruiters and other experts say they doubt the IRS review will uncover massive problems in the hospital industry.

“There are many more hospital CEOs that are underpaid than there are the one or two egregious examples the IRS will find,” says Neill Marshall, a senior consultant with Witt/Kieffer, an executive search firm specializing in health care and education.

But fallout from the review could affect the industry in other ways.

“What non-profits have to worry about is the public perspective,” Colombo says.

“What's the public going to think when all these numbers are highlighted? At some level, if fuel keeps being added to the fire, state legislators … might jump in and say it's time to get rid of tax exemption for hospitals or change it in a significant way. That's the real risk.”