How Much Should Nonprofit Hospital CEOs be Compensated?

Hospital
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July 2, 2012; Source: Bloomberg Businessweek

Did anyone notice how hospital stocks—the shares of hospitals that are traded on the stock exchange—jumped after the SCOTUS decision on health-care reform? Try an 11 percent increase in the value of Hospital Corporation of America, 8 percent for Community Health Systems, and 9 percent for Health Management Associates

Nonprofit hospitals aren’t selling shares on the stock exchange, but the clarity that Justice Roberts gave the Affordable Care Act has to improve their outlook at much as their for-profit competitors’. In New Hampshire, the Attorney General asked the New Hampshire Center for Public Policy Studies for a report on CEO salaries in nonprofit hospitals and learned that the CEOs at New Hampshire’s 23 nonprofit hospitals received four-year pay increases averaging 18 percent between 2006 and 2008. That’s not bad, but CEOs for all nonprofit hospitals in New England during that time averaged 29 percent.

We looked at the full report [PDF] from the center and found other interesting aspects of nonprofit hospital compensation practices, at least in the New Hampshire survey:

  • Not many nonprofits can afford to pay bonuses, but apparently nonprofit hospitals do. New Hampshire’s nonprofit hospitals paid their CEOs bonuses averaging $112,523 in 2008, though dropping a little in the full recession year of 2009 to an average of $79,512.
  • While CEO salaries are positively correlated to the size of the hospitals’ operating budgets, the researchers found absolutely no correlation of CEO salaries with the quality of care, hospital costs, or charity care provided per person in poverty.
  • Overall, the rate of increase in nonprofit hospital CEO salaries was greater (in New Hampshire) than any other private sector position.

Those are numbers for hospitals prior to the SCOTUS decision, even prior to the approval from Congress of the Affordable Care Act. It would be hard to imagine that nonprofit hospitals wouldn’t be anything less than effervescent about their economic prospects with the changes in insurance coverage and the infusion of billions of federal dollars into health care, even with the arcane and complex structure of national health care reform. With expanded insurance coverage, nonprofit and for-profit hospitals can anticipate, one might expect, a sharp decrease in portion of their services delivered to people who can’t pay and a sharp increase in health care services for people with newly mandated (or individually purchased) insurance coverage.

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While the Attorney General’s office might be nonplussed by the rapid increase and significant size of nonprofit CEO salaries in the state, one might guess that these hospitals went through at least some of the required steps of compensation review to make sure that the salaries passed IRS muster. One might consider state policies that somehow get the nonprofit hospitals to connect their salaries to hospital performance, but after health care reform really kicks in, what ought to be the appropriate standard for measuring reasonable compensation? “We have a report that concludes that there's no clear link between the use of those charitable assets and performance of the charitable mission, I think that's something as a state we need to recognize and we need to try to improve on," NH Attorney General Michael Delaney concluded.

Let’s assume that the SCOTUS decision helps nonprofit hospital finances as much as it gives a boost to for-profit hospitals. In that instance, what makes a nonprofit hospital a nonprofit and how should that be reflected in nonprofit CEO salaries?—Rick Cohen

About

Rick Cohen

Rick joined NPQ in 2006, after almost eight years as the executive director of the National Committee for Responsive Philanthropy (NCRP). Before that he played various roles as a community worker and advisor to others doing community work. He has also worked in government. Cohen pursues investigative and analytical articles, advocates for increased philanthropic giving and access for disenfranchised constituencies, and promotes increased philanthropic and nonprofit accountability.

  • Michael Wyland

    There is an interesting tension in role definition for nonprofit hospitals that doesn’t seem to be mearly as present in most other types of nonprofits. We assign so much importance and, yes, some measure of deference, to health care as a profession and a mission that we’re not sure how to balance the “hospital” definition with the “nonprofit” designation.

    The IRS regulations governing nonprofit executive compensation clearly allow comparison with both for-profit and nonprofit organizations of similar size performing similar functions in a similar territory. If state AGs seek to impose arbitrary compensation caps that conflict with the IRS regulations, we might see litigation in those states. We may also see a rise in for-profit hospitals attracting top executive talent.

    It’s true that you get what you incent, and it’s also true that moral suasion may change behavior. State AGs can pressure hospitals to provide more charity care without directly challenging executive compensation.