Where No Hospital CEOs are Below Average

In Lake Woebegon, all children are above average. Now it seems that hospital CEOs have moved there.

Ventura County, Where No CEO is Below Average

The Ventura County (California) Star reported on the uniformly high remuneration of the CEOs of local, mostly small, not-for-profit hospitals and hospital systems.

T. Michael Murray reaped $330,545 in 2008 as chief executive officer of St. John’s hospitals in Oxnard and Camarillo. He drew an additional $187,071 in bonuses with $73,113 more in benefits and other compensation.

His total package, according to IRS records, reached $590,729.

And he may have been underpaid, according to a statewide survey of 118 nonprofit hospitals. The report by the Payers & Providers healthcare business publication suggests the base salary for CEOs averaged $514,237.

Kick in bonuses, retirement money, reimbursement for education costs, expense accounts and the average total compensation hit $732,004.

Public records show similarly lofty numbers at Ventura County’s three nonprofit, tax-exempt hospital groups. Gary Wilde of Community Memorial Health System, which runs hospitals in Ventura and Ojai, was the highest paid CEO in 2008. He earned a base salary of $508,682 and his total compensation was $853,528, with much of the additional money placed into a retirement fund that won’t be paid out until Wilde serves six more years as CEO.

Simi Valley Hospital changed its leadership in 2008, with a total compensation of $1.25 million recorded in 990 tax forms for two different CEOs. That’s slightly more than the hospital provided in treatment for poor uninsured patients where there was no attempt to collect payment, though hospital leaders say charity care definitions encompass only a fraction of the total care they provide without pay.

Outside the county, tax records from the Cottage Health System in Santa Barbara showed a base salary of $848,826 for CEO Ronald Werft and other compensation of $546,846. His total topped $1.3 million.

Ken Anderson of the John Muir Health System, which operates hospitals in Walnut Creek and Concord, was the highest compensated CEO in the Payers & Providers study. He made $745,000 in base salary and nearly $7 million in other compensation, much of it deferred over his career for retirement.

Recall that these people are leading relatively small, not-for-profit community hospitals whose missions are to provide health care to the community. Total compensation ranging from three-quarters of a million dollars to multi-millions seems vastly disproportionate to the jobs and their settings.

Explanations and Excuses
As expected, those supporting the CEOs have all sorts of explanations and excuses:

Hospital leaders in Ventura County and throughout California say the numbers are inflated by retirement plan accumulations that must be included on tax records even before executives qualify to receive the money. They defend the half-million-dollar salaries, with bonuses on top, as the only way to compete with for-profit hospitals for executives who can lead a facility that may employ more than 1,000 workers, drive a community’s economy, provide access to the uninsured and deliver care that saves lives.

'Given the context, it’s not out of line,' said Murray, a CEO with 28 years of experience who is now semiretired after resigning from St. John’s at the end of March. 'I think you need to retain and also attract sufficient talent. I’m not saying there aren’t inappropriate salaries out there. I don’t think mine was one of them.'

Also,

But [economist Sung Won] Sohn said that paying below average is risky.

'When you try to get somebody at $400,000 rather than $700,000 you will get plenty of takers but they’re not competent,' he said. 'Hospitals are so important in the community that you want to make sure it’s run properly.'

Nor does he see any problem with paying more than average if a hospital board wants to reward an executive.

Furthermore,

John Romley, an economist at the Schaeffer Center for Health Policy and Economics at USC, said the amount hospitals spend on executive pay is a sliver of their total expenses and can’t legitimately be blamed for driving the rising cost of healthcare.

'I guess I’m not shocked even though I’m jealous,' he said of the compensation.

Some people were not pleased about this use of health care dollars:

Others worry the compensation may push hospitals into spending more on executives than their nonprofit mission of providing care for the poor. Federal regulations already limit compensation for CEOs of corporations bailed out by the government to $500,000. Similar caps placed on nonprofit hospitals could create dramatic differences, said Ron Shinkman, author of the Payers & Providers statewide survey on CEO salaries.

'You’re looking at close to $39 million that could be used on uncompensated patient care,' he said. 'It’s a lot of money.'

Consumer advocates aim much of their concern at nonprofit hospitals that not only reward CEOs with lucrative paydays but also provide little charity care to poor, uninsured patients. The Payers & Providers research identifies 17 hospitals — all outside of Ventura County — where the total compensation to CEOs exceeded the cost of charity care.

'It would be outrageous if hospitals are paying more to their (entire) executive teams than in indigent care in their community,' said Anthony Wright of Health Access California. 'For some hospitals to provide more to one individual just seems wrong.'

The Mechanism: Ego Bias

The mechanism making CEO compensation constantly increase appears to be simple:

Typically, hospital boards hire consultants to conduct studies showing market averages for comparable hospitals in their regions. They often try to pay somewhere around the 50th percentile.

That’s a reasonable way to do it, but such studies tend to push up the salaries, said economist Sung Won Sohn, who was involved in setting compensation at two Minneapolis hospitals.

'People at the low end try to increase the CEO closer to the average,' said the professor at CSU Channel Islands. 'If everyone does that, the average CEO salary will go up.'

So there you have it. At no hospital is the CEO deemed by a sympathetic (and sometimes crony filled board) below average. If the CEO's compensation has somehow dropped below average one year, it is immediately raised to at least average the next. Apparently almost never is the CEO's pay deemed to be too high.

That notion is corroborated by the assumption by the CEO documented above that all CEOs have "sufficient talent," and the assertion above that anyone who would accept a lower salary would be "not competent."

So every year all the CEOs who had below average compensation the previous year get compensation increased at least to last year's average. Almost no CEO gets a reduction. So the average moves up relentlessly year after year.

Of course, unless all CEOs are exactly alike, some CEOs must be below average.

So this becomes a great example of the ego bias at work. Ego bias is a common cognitive bias usually discussed in the context of making probabilistic judgments. A simple definition is that people tend to believe that outcomes of what they do, or what a group with whom they identify does will be above average. A long time ago, colleagues and I showed that interns in an intensive care unit judged the survival of their patients on average to be better than their judgments of the mean survival of all patients in the ICU. On the other hand, ICU attending physicians displayed a slightly more sophisticated version of the bias. They judged their patients' survival accurately, but judged the mean survival of their ICU's patients to be higher than it really was. [Poses RM, McClish DK, Bekes C, Scott WE, Morley JN. Ego bias, reverse ego bias, and physicians' prognostic judgments. Crit Care Med. 1991 Dec;19(12):1533-9. Link here.]

So we have the ego bias writ large in judgments made about the performance and compensation of hospital CEOs, at least in Ventura County, California.

The Implications

I agree that paying a CEO more than a hospital's entire expenditures for the care of the poor is unseemly.

However, in my humble opinion, the issue is even bigger than that. It is not so much how much of the hospital's budget goes to executive compensation, but what lessons this teaches CEOs. I propose they are:
- I am a wonderful person. I can do no wrong.
- If I do wrong, I cannot be punished.
- I can get rich and powerful doing this.

Of course, as we have written many times, being the CEO of a small community hospital is supposed to be a calling, whose goal is to uphold the institution's mission. Instead, CEOs are learning to be tin-pot dictators. Some are probably sensible enough to resist learning this message. I am afraid many are not.

Furthermore, there is no reason to think that this phenomenon is confined to Ventura County, California, or to small community hospitals. We have discussed how the management of health care organizations have become unsympathetic to, or even hostile to the mission. We have discussed their organizations' institutional conflicts of interests. We have discussed how they have wound up with imperial CEOs.

The resulting ill-informed, mission-ignorant or mission-hostile, self-interested, conflicted, or even corrupt leadership is a major, but still largely anechoic cause of our health care dysfunction.

As I have said endlessly, true health care reform will require finding well-informed leaders who understand and support the mission, put the mission before their own self-enrichment, and are unconflicted and honest.