$450K Cap Proposed on Hospital CEO Salaries in California

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June 6, 2016; Desert Sun (Palm Springs, CA)

One of America’s largest labor unions is taking a third attempt at capping hospital CEO salaries. The latest proposal by Service Employees International Union (SEIU)-United Healthcare Workers West would give authority to the California attorney general’s office to oversee a salary ceiling equal to the compensation of the President of the United States, or $450,000 a year.

However, unlike the U.S. president’s total package, which also includes housing, a personal chef, transportation, and so on, the proposed compensation cap for California hospital CEO’s is all-inclusive. The proposal states that the $450,000 per year is to include “wages, salary, paid time off, bonuses, incentive payments, lump-sum cash payments, loan forgiveness, housing payments, travel, meals, reimbursement for entertainment or social club memberships, the cash value of housing or automobiles, scholarships or fellowships, the cash value of stock options or awards and payments, or contributions of severance.”

According to a letter from the Legislative Analyst’s Office (LAO) to California’s Attorney General Kamala Harris, the regulation would apply to the state’s private for-profit and nonprofit hospitals, as well as district hospitals. The AG’s office would have the authority to pull nonprofit status and/or enforce civil penalties up to $200,000 on hospitals found to be out of compliance.

SEIU’s inclusion of nonprofit and for-profit hospitals in the proposed measure creates an interesting and complex discussion. The LAO was unable to provide any detail on California’s for-profit hospitals in their letter to the attorney general; however, they were able to predict that the new requirement would have an impact on a few hundred nonprofit hospital CEOs who reported incomes above $450,000.

The proposed salary cap centers on discussions of excessive pay and debates over what is appropriate pay for a hospital CEO. The president of the union, Dave Regan, is quoted as saying that “it is an absurdity to say you can’t find talented people to work for $450,000.” On the other hand, Aubrey Sperling, who has been CEO of Eisenhower Medical Center in Rancho Mirage, California for 16 years, sees market disruption and talent flight in the proposal:

The vast majority of CEOs are making a multiple of that and they’re not going to stay and work in the state of California. […] What would I do? I would plan my retirement and say, “It’s been great but it’s time to move along.”

Picking a number and applying a blanket process is not too far from what has been found to be a current practice for determining nonprofit hospital compensation. For example, the Atlantic reported on a Harvard study published in the Journal of the American Medical Association: Internal Medicine that found that nonprofit CEO payments were solely based on the hospital’s size, location and type. They could not find a link between salary and important indicators such as quality, readmission, charity care, or financial performance. Nonprofit Quarterly’s Rick Cohen also observed the lack of pay-for-performance in nonprofit hospitals at the CEO level as salaries increased back in July of 2012.

Nonprofit hospital CEOs often find themselves in the spotlight due to salary reporting requirements that quickly gain attention against the backdrop of other nonprofit CEO salaries, yet reports suggest they continue to make less than their for-profit peers in the market. Kaiser Health News and Modern Healthcare reported the highest paid executives in 2013. The highest-paid hospital CEO in California was reported to be Lloyd Dean at nonprofit Dignity Health, earning a total compensation of $5.1 million. The top nonprofit CEO salary reported by Modern Healthcare for 2013 was held by the CEO of Ascension-St. Louis, Anthony Tersigni, whose compensation was $8.5 million once all bonuses and incentives were included.

Interestingly, Tersigni was paid for performance metrics, including increased numbers in charity care. According to Nick Ragone, Ascension’s chief communications and marketing officer, the performance metrics are working and charity care increased “nearly 47 percent since 2012 and approached $2 billion this past year.”

Tersigni also brought in significantly less than the two for-profit CEOs reported by Modern Healthcare, who were also in the top earner position. In comparison, Wayne Smith, CEO at the for-profit Community Health Systems-Franklin, TN, and Alan Miller CEO at for-profit Universal Health Services were the top two for-profit earners in 2013–2014, bringing in $26.4 million and $18.6 million respectively.

Regardless of the rise or variance in CEO salaries, the motives behind the deal could be considered questionable. The SEIU has negotiated with the California Hospital Association in the past and taken similar caps off the table. Dave Regan withdrew ballot initiatives capping what hospitals can pay executives in exchange for a partnership agreement with the California Hospital Association in 2014. The two groups created a joint advocacy fund to boost Medicaid payments by $6 billion a year. Reports suggest that CHA employers invested $80 million and SEIU-UHW invested $20 million to create the fund and launched efforts that, ironically, include bonuses and incentives tied to the effectiveness of SEIU lobbying efforts.

If this latest measure is not simply a means to sit at the bargaining table with the California Hospital Association, the ceiling cap will undoubtedly result in a significant step toward addressing concerns of excessive spending. The question is whether this is the right tool.—Michelle Lemming