Hospital CEO Pay Comes Under Scrutiny

Sen. Charles Grassley (R-Iowa), the ranking Republican on the Senate Finance Committee, has stepped up his criticism of not-for-profit hospitals by slamming what he regards as the high salaries paid to hospital CEOs. He told The Boston Globe that he is planning to introduce legislation to address the issue.

This revelation follows the release of an IRS report that looked at the salaries paid to chief executives at not-for-profit institutions. The IRS found that the average CEO received $490,000 in total compensation in 2006, and that top executives at 20 of the larger hospitals in the IRS survey received an average of $1.4 million.

According to a report from Sullivan, Cotter & Associates, CEO pay averages $1.2 million at hospital systems with more than $1 billion in annual revenue. But some hospital executives get far more. For example, Jeffrey Romoff, CEO of the University of Pittsburgh Medical Center, pulled down $3.95 million for fiscal 2007, which was 19.7 percent more than he was paid the year before. And that booty was dwarfed by the incomes of the top executives at the Cleveland Clinic ($7.5 million) and Chicago’s Northwestern Memorial Hospital ($16.4 million).

In good times, such salaries may be overlooked. But at the University of Pittsburgh Medical Center, where income dropped steeply last year, Romoff and 10 other officials who were paid more than $1 million in 2007 are facing 25 percent cuts in compensation. The institution, the largest employer in Pittsburgh, explains that it’s trying to reduce its expenses in response to the recession.

What has upset Grassley is that some not-for-profit hospitals are paying big salaries to CEOs, despite the tax exemptions that they receive in return for the community benefits they’re supposed to be providing. The Senate Finance Committee’s Republican staff estimates that the federal, state and local tax exemptions are worth between $12.6 billion and $20 billion a year.

Hospital boards often rely on consultants’ advice about salaries at comparable institutions when they decide how much to pay CEOs. The consultants’ benchmarks may include for-profit hospitals as well as not-for-profits. If a question arises about executive pay, the burden is on the IRS to show that compensation is excessive. Grassley is considering whether to change that so that hospital boards will have to prove that a CEO’s compensation is reasonable.

Hospital boards have also come under fire in recent years for not doing enough to protect patient safety in their institutions. Notably, Donald Berwick, president of the Institute for Healthcare Improvement, and coauthor Chiquita Brooks-LaSure have said that some boards “view the improvement of care as a strategic agenda at best secondary to maintaining revenues and stabilizing public reputation.”

That’s undoubtedly true, yet it appears that boards of not-for-profits are in a no-win situation. Like any big corporation in a competitive market, they have to pay a premium for executive talent. At the same time, they also have to pay some attention to community benefit, and they are under increasing pressure to improve the quality of care. It would be interesting to find out whether there’s any relationship between executive salaries, the proportion of revenue that really benefits the community, and a hospital’s ratings on quality and safety measures.