Hospital CEO Compensation and Community Benefit: Where is Accountability?

In June, we reported on hospital CEO Compensation in Washington State.  The compensation—as self reported by the hospitals to the Washington State Department of Health in May 2013—showed a wide range. The top four CEOs were:

  • Gary Kaplan, MD, Virginia Mason—$3,737,678
  • John Evans, Jr. Central Washington Medical Center, Wenatchee–$1,766,084
  • Rich Roodman, Valley Medical Center, Renton–$1,285,860
  • Elaine Couture, Providence Sacred Heart, Spokane–$1,034,994
  • Medrice Calcuccio, Providence St. Peter, Olympia–$1,010,027

Swedish, Evergreen, University of Washington and Harborview were clustered in the $550,000 to $800,000 range.  These figures include salary, bonuses, deferred compensation and other compensation, such as retirement contributions. Neither Evergreen, University Medical Center nor Harborview had bonus or incentive compensation.   See original post with link to the Department of Health website:  http://oconnorreport.com/2013/06/what-hospital-executives-earn/

Kaiser Health News reported about the same time on selected CEO compensation nationally. One of the highest was Kaiser Permanente, in California.  Surprisingly, for all the sterling reputations for quality and outcomes, the CEOs of the Mayo Clinic and the Cleveland Clinic, were relatively modest and included no bonus or incentives:

  • George Halvorson, Kaiser Permanente, CA–$7,936,510 + $5,039,506 (performance bonus)
  • John Noseworthy, MD, CEO, Mayo Clinic, MN–$2,002,896 (no bonus or incentives)
  • Delos Cosgrove, MD, The Cleveland Clinic, OH–$2,564,214  (no bonus or incentives)

For the complete list: http://www.kaiserhealthnews.org/Stories/2013/June/06/hospital-ceo-compensation-chart.aspx

These are all non-profit 501(c)(3) organizations recognized by the IRS.  We looked at the IRS rules governing non-profit hospitals and found that the IRS conducted a study of non-profit hospitals, CEO compensation and community benefit requirements from 2006—-2009:  http://www.irs.gov/pub/irs-tege/execsum_hospprojrept.pdf

The IRS study examined four types of hospitals:  high population urban; other urban and suburban hospitals; critical access hospitals; other rural hospitals and as well as examined five groupings of hospitals based on revenues:  under $25 million; $25 million to $100 million; $100 million to $250 million; $250 million to $500 million and over $500 million.

1) CEO Compensation Findings

CEO compensation is set by the hospital’s board of directors.  The IRS requires that hospitals may not pay more than ‘reasonable compensation’ to their CEO and other executives.  The board must rely on “rebuttable presumption” by using distinterested third parties to review comparability data to set compensation.  It also takes into account hospital size and revenues.

“Rebuttal presumption” is a legal term indicating that a fact is accepted as fact unless it is disproved. Meaning—it is accepted as fact unless someone comes forward to contest the fact and prove otherwise.

Hospitals must also report on the process used to determine the executive compensation.  Even with these criteria in mind, it would not explain the variations in the salaries for the hospitals in Washington State.

The IRS writes: “….Amounts reported appear high, but also appear supported under current law.”  While the IRS indicated that it would continue to examine compensation issues, such as using for-profit hospitals as standards for comparable executive compensation.  The specific next steps were vague.

2) Community Benefit Findings

As non-profit hospitals, each institution must provide some ‘community benefit.’  The IRS found that between 9% to 6% of hospital revenues were for community benefit. Community benefits include: uncompensated care (care for patients without insurance and no payments); research; medical education and training;  and community programs.

Many of the hospitals also reported and included expenses to study unmet health needs of the community (28%); immunization programs (40%); programs to improve access (54%); and other health promotion programs (32%).

But here is where community benefit gets tricky: what hospitals reported as community benefit varied significantly.  Many hospitals included bad debt and Medicare shortfall as part of uncompensated care; and the IRS had conflicting data on what were ‘costs’ vs. what were charges.

3)      IRS 2009 Conclusions and Recommendations

The IRS concluded that both CEO compensation and community benefit were difficult for the IRS to administer.  “Both involve application of imprecise legal standards to complex, varied and evolving fact patterns.”

Any suggestion to revise the standards would seriously impact the existing tax-exempt standard because of hospitals’ “varying practices and financial capabilities.”

One of the forms in the 990 tax filing is Schedule H, which has been revised.  Data from the revised forms started to be reported in 2010 and 2011.  The IRS Commissioner indicated the IRS would take a new look at data after that time.  Commissioner’s statement:  http://www.irs.gov/pub/irs-tege/lernerstatement_hospitalproject_021209.pdf

Coming Next:  Implications of Community Benefit and CEO Compensation for Taxpayers, Consumers and the Community

As health care reforms moves forward, one of the issues we will be tracking is transparency and accountability.  A troubling question is “rebuttable presumption” which depends on someone coming forward to challenge or dispute a fact.  Who will do that?

If the CEO, for example, is accountable to the Board of Directors, to whom is the hospital Board of Directors accountable?  What agencies, if any, are watchdogs for community benefit?  What are the implications, if any, for a venture capital firm setting the price for treatments when the facility is part of several non-profit hospitals, such as Children’s Hospital and Medical Center, the University of Washington, Fred Hutchinson Cancer Research Center and the Seattle Cancer Care Alliance?

Follow us as we dig into these issues.

Kathleen O’Connor, © September 3, 2013

About Kathleen

Kathleen O’Connor: 30+ year health care consumer advocate, non-profit executive and author. For more information about Kathleen, please see "About" on the main content bar above.
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2 Responses to Hospital CEO Compensation and Community Benefit: Where is Accountability?

  1. Pingback: What Hospital Executives Earn: Part III–What You Can Do | The O'Connor Report

    • Kathleen says:

      Hello, thanks for writing. You are right, it is only claims/cost data and only Medicare data, but as the report said on page 4, this was a place to start. You can read the full report on the website of the Washington Healthcare Alliance.

      Virginia Mason is a member of the Alliance. Should you have questions about the study, I suggest you contact them directly.

      Thank you for writing.

      Cordially, Kathleen

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