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HEALTH CARE: CHANGES AND CHOICES

part five

ST. LOUIS • Trimming medical costs is the latest mantra among hospital executives, government bureaucrats, insurers and benefit managers as they grapple for ways to contain U.S. health care spending.

But executive compensation in the health care industry shows few signs of hitting a ceiling. One sure bet: The salaries and benefits for hospital administrators will continue to rise.

A recent survey by Equilar, an executive compensation data firm based in Redwood City, Calif., found that — for the fourth time in five years — health care chief executives commanded the highest pay packages last year among publicly traded companies.

On average, Equilar found, health care CEOs were paid more than their counterparts in six other industry sectors, including technology, financial services and industrial goods.

The value of executive pay at large, for-profit health companies tends to be higher than nonprofit organizations, but the gap appears to be narrowing.

In recent years, executives at St. Louis-area nonprofit health organizations have seen annual double-digit increases of as much as 40 percent in their total compensation packages, which typically include salaries, bonuses, pensions and health benefits.

Such pay hikes occurred as these nonprofit organizations enjoyed their largest operating margins in years, and also at a time when health providers speak of a new era of transparency in pricing, improved quality of care, and personalized medicine.

“Health care is a remarkably complex business, so in some ways, you might say they deserve higher pay,” said Professor Harold Miller, executive director of Center for Healthcare Quality Payment and Reform at Carnegie Mellon University in Pittsburgh. “And the salary that goes to the CEO is still a small piece of health care costs. ...

“But if a health care executive’s pay is based on the amount of revenue they generate, the problem is in the incentive,” he said. “Basically, hospitals get rewarded by putting more heads in beds. It works against the goal of affordable health care. We need to start paying these executives to keep people healthy.”

Catalyzed by the Affordable Care Act, a growing number of health executives talk of transforming a broken health care system by focusing on preventive medicine and primary care, reducing unnecessary tests and surgeries, and eliminating excessive costs.

Thomas Getzen, executive director of the International Health Economics Association and a professor at Temple University, said that “an argument can be made that an innovative health care CEO is as valuable as a college basketball coach.”

But, he added, “for me the big problem, whether it’s a for-profit or nonprofit, is when executives start chasing their own compensation rather than the good of the company. We’ve seen that in banking, and that can happen in health care.”

FOR SERVICES RENDERED

Hospital administrators say they have their organizations’ best interests at heart.

“I’m not in this job because of the salary,” said William Thompson, chief executive of Creve Coeur-based SSM Health Care, which operates 18 hospitals in four states. He received total compensation of $2.3 million in 2011 — a 26 percent increase over 2010.

Some of that pay hike was attributable to a change in jobs. Thompson, SSM’s former chief operating officer, assumed the role of chief executive in August 2011. In 2010, his pay increased 95 percent from $918,229 to $1.8 million.

“I’ve been (at SSM) for 33 years, and for a lot of those years I wasn’t paid nearly the salary I’m paid now,” Thompson said. “If you look at the revenue, I don’t think I’m over- or underpaid.”

Health administrators often justify their salaries by noting the challenge of running multibillion-dollar systems on thin operating margins and overseeing hospitals that demand high safety standards. A lapse in quality control can result in medical errors such as the botched brain surgery in April at SSM St. Clare Health Center in which a neurosurgeon operated on the wrong side of a woman’s skull and brain.

Steven Lipstein, president and chief executive of St. Louis-based BJC Healthcare, received a total compensation package of about $3.3 million in 2011, the latest year currently available per BJC’s tax filings. That’s a 40 percent hike over his compensation of $2.3 million in 2010. A year earlier, he received a 4 percent increase.

Lipstein declined to comment.

BJC spokeswoman June Fowler said in a written statement that Lipstein’s 2011 compensation “reflects a deferred payment of a substantial amount of compensation from several prior years. There was no significant increase in base pay over previous years.”

No further details about compensation from previous years were provided.

Fowler also said that a substantial amount of BJC executives’ compensation is “at risk, based on improving patient satisfaction, reducing the cost of services to patients, patient safety and quality measures and operational performance.”

Health administrators also stress that their pay packages are determined by independent committees of their boards of directors. Those panels rely on market surveys and “benchmarking data” that examine compensation levels at similar-size health institutions. Any bonuses and incentive pay are calculated using formulas based on performance objectives.

FOR-PROFIT AND PUBLIC SECTORS

 Walter Kopp, a health care consultant based in San Anselmo, Calif., said that executives who run nonprofit health systems “are generally making a fraction of what their counterparts in for-profits are making.”

One case in point: Tenet Healthcare Corp., which operates St. Louis University Hospital and Des Peres Hospital. The nation’s third-largest for-profit hospital chain operates 49 hospitals in 10 states. The company’s net revenue exceeds $9 billion, but its net income is slim: $141 million in 2012, and $58 million in 2011.

Dallas-based Tenet’s chief executive and president, Trevor Fetter, received total compensation in 2012 of $11.2 million — up nearly 5 percent from 2011, according to Tenet’s annual proxy statement.

In contrast, the CEO of nonprofit Ascension Health Alliance — whose organization generates more than 180 percent of Tenet’s revenue — received only 36 percent of Fetter’s compensation package last year.

Defenders of generous health care salaries and benefits speak of hospital executives’ depth of knowledge, leadership skills and responsibility for tens of thousands of employees as well as patients.

Some public officials bear responsibility for even larger organizations, but the compensation of public officials is much smaller than the pay packages of nonprofit health executives.

Kathleen Sebelius, secretary of the U.S. Department of Health and Human Services, receives a salary of $199,700 a year, plus retirement and health benefits. Her agency has an $874 billion budget and 74,193 employees.

Margaret Donnelly, former director of Missouri’s Department of Health and Senior Services, received a salary and benefits last year totaling $151,708. The agency’s budget is about $1 billion.

NONPROFIT HEALTH SYSTEMS

Labor — including salaries, wages and benefits — is often the leading expense for large health systems, followed by supplies and professional fees. It’s not uncommon for labor to exceed 50 percent of a health system’s budget. But most hospital workers do not see double-digit increases in their pay.

Edmundson-based Ascension Health — a subsidiary of Ascension Health Alliance — is the nation’s largest Catholic and nonprofit health system. Ascension operates about 80 hospitals in 20 states and the District of Columbia, with operating revenue of $16.6 billion in 2012, according to its annual report.

Anthony Tersigni, chief executive of Ascension Health Alliance, received total compensation in fiscal year 2012 of $4 million — a 12 percent increase over the previous year. A year earlier, he received a 6.5 percent increase over the previous year in his former role as chief executive of Ascension Health. He declined to comment.

“When we look for leadership of our ministry, we need to draw from the best and brightest to serve those who are poor and vulnerable,” said Jon Glaudemans, chief advocacy and communications officer for Ascension. “We are required to be competitive, but we also have a mission to care for those who are poor and vulnerable. Candidly, many of our executives could do better for themselves working in other environments.”

Glaudemans said that Ascension is seeking “to remain competitive in a market that is increasingly complex and characterized by challenging regulatory circumstances, including implementation of the Affordable Care Act.”

Nine executives at Ascension’s headquarters received total compensation in fiscal year 2012 exceeding $1 million.

BJC, whose operating revenue totaled about $3.6 billion in 2011, owns and operates 13 hospitals in Missouri and southern Illinois, including Barnes-Jewish Hospital, Children’s Hospital and Christian Hospital. BJC had operating income of $205.8 million in 2011, and $189.4 million in 2010, according to its audited financial statements. In addition, BJC had investment earnings of $50.3 million in 2011 and $332.2 million in 2010.

In 2011, BJC’s labor costs accounted for 48 percent of its annual expenses. The health system paid about $1.7 billion in salaries and benefits in 2011 to its 28,559 employees — an overall increase of nearly 5 percent over its labor costs in 2010, when it had about 250 fewer employees.

BJC employees — which include a spectrum of jobs from administrators, physicians and nurses to medical technicians, office workers and supply clerks — earn annual salaries and benefits on average totaling about $58,343. Lipstein’s pay package of $3.3 million for 2011 was 56 times greater than the average BJC employee’s compensation.

According to BJC’s 990 tax filing, Lipstein’s 2011 compensation of $3,279,956 included a base salary of $920,576; bonuses and incentive pay of $2,213,555; other compensation of $15,733; deferred compensation of $99,651; and $30,441 in “nontaxable benefits.” 

Five BJC executives received total compensation packages in 2011 exceeding $1 million.

Mercy Health, a Chesterfield-based nonprofit corporation “within the Catholic Church,” operates 26 acute care hospitals in Oklahoma, Arkansas, Missouri and Kansas. With annual revenue of about $4 billion, it is the sixth-largest Catholic hospital system.

Lynn Britton, chief executive of Mercy, received $2.2 million in total compensation in fiscal year 2012 — a 15 percent increase over 2011. A year earlier, he received an 18 percent increase. Britton declined to comment.

Five current and former Mercy executives received total compensation in fiscal year 2012 exceeding $1 million.

Myra Aubuchon, a former Mercy senior vice president who left the health system in 2010, received a payout in fiscal year 2011 of $3.4 million for retirement benefits, severance and other compensation. In fiscal year 2012, she received an additional $405,339 in compensation.

Mercy executives are provided additional perquisites, including first class and charter travel on Mercy’s aircraft and the opportunity at times for their spouses to accompany them to business and other events. Executives and staff fly to and from some business meetings in Mercy’s midsize corporate jet, a Rockwell Sabreliner.

Mercy board members and executives also hold retreats in Dublin to commemorate where the health system’s sponsor — the Sisters of Mercy religious order — was founded in about 1830.

Cynthia Mercer, senior vice president for human resources for Mercy Health, said that she has not noticed any substantial differences in the value of compensation packages for nonprofit and for-profit health care executives. However, nonprofit executives — unlike their counterparts in the for-profit sector — cannot be paid in company stock or stock options.

“We’re competing for the same pool for talent,” Mercer said. “It’s difficult to secure talent. ... We pay for performance.”

She said that Mercy executives receive bonuses that are geared to the Catholic ministry’s “focus on stewardship” and related goals, including quality of care, safety, service, and financial data such as operating margin.

“We are in a highly competitive market. It’s a complex industry. It’s changing daily,” Mercer said. “We feel that it’s very important as a ministry to be just in our approach, respecting the dignity of each of our co-workers regardless of their position.”

Unlike many other health systems, SSM does not award annual performance bonuses to its executives. Instead, it provides them with higher cash salaries that are roughly equivalent to the average amount of bonus pay in other systems.

SSM’s Thompson voiced surprise when asked about the details of his 2011 pay increase. “I’m at a loss because a lot of those dollars did not come to me as income during (that) period of time,” he said. “There was a change of position and responsibilities. ... and additional pension benefits.”

Salaries and benefits for nonprofit health executives “need to be competitive if we are going to be able to attract the talent needed to run these very complex organizations,” he said.


Editor's note: An earlier version of this report misstated perquisites reported to the IRS by BJC Healthcare on behalf of its president and chief executive, Steven Lipstein. The perks do not include first-class or charter air travel or travel for companions. Also, Mercy Health is the sixth-largest Catholic hospital system. An earlier version of this report said it was the eighth-largest. Mercy no longer pays for the country club and social dues of select executives. 

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