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Hospital CEO Compensation

By October 24, 2013Commentary

A study in JAMA Internal Medicine examined hospital chief executive officer pay and attempts to identify correlates of that pay.   (JAMA Internal Medicine Article)   The study covered 1877 CEOs at 2681 non-profit hospitals.  The researchers looked at various characteristics of the hospitals, such as financial performance, quality performance, patient satisfaction, level of technological sophistication, and level of public benefit, such as charity care.  The overall median compensation was $595,781.  In the top decile of these supposedly non-profit hospitals, CEOs were paid $1,662,548.  Compensation tended to higher for CEOs in charge of multiple hospitals and with more beds.  Major teaching hospital CEOs were paid substantially more.  Having more poor and Medicare patients was correlated with lower pay, notwithstanding the fact that this might indicate greater provision of public benefit by the hospital.  Financial metrics like margin, liquidity and capitalization were not associated with pay.  Neither was performance on various quality measures, including mortality rates or readmission rates.  So much for pay for performance.  Higher pay was associated with greater use of technology and with higher patient satisfaction.

Non-profit hospitals are typically tax-exempt and receive a variety of other favorable treatment.  A non-profit institution supposedly has as its primary purpose the provision of goods and/or services in a manner that is not designed to make money but rather to render a benefit to the public.  That is the rationale for the tax exemption and other favorable treatment.  It is antithetical to this rationale and purpose for a non-profit institution to pay large compensation to its executives.  There is simply no excuse for the compensation hospital executives are receiving.  If we took this set of  non-profit hospitals in the US and reduced CEO pay to a maximum of $300,000 (a good salary by any standard), over $800 million would be saved annually.  Reduction of other benefits and severance and pension benefits to a more reasonable level would save at least the equivalent sum.  And the flow-down effect of these reductions to other executives would add billions in savings.  These billions of reductions in executive compensation should in turn be available to reduce prices, which would actually be a public benefit.  This is an area where governments do need to step in and take action.

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