Hospital CEO pay: red herring or key in state funding debate?

As hospital leaders warn of potential job and service reductions in response to state funding cuts, the six- and seven-figure pay packages of Connecticut hospital executives have emerged as a point of contention.

To some, the focus on CEO pay is a red herring meant to distract from years of underfunding Medicaid while increasing taxes on hospitals. Others see it as a way to point out misplaced priorities at nonprofit hospitals that rely heavily on government money, at a time when executive pay and income disparities have become a rallying cry in national politics.

“You can cut the executive compensation of just three executives” to make up for projected deficits being blamed for planned job cuts and service reductions at Windham Hospital, state Rep. Gregg Haddad, D-Mansfield, said this summer as hospital workers and lawmakers protested the cuts.

AFT Connecticut, the union representing Windham Hospital workers, suggested that the parent company, Hartford HealthCare, reduce executive pay “before slashing vital services.” Executive Vice President John Brady called this week for Connecticut hospital executives to “lead by example, demonstrate shared sacrifice, and put patients before profits.”

And this week, after hospital leaders joined Republican legislators to decry $192 million in state and federal funding cuts to hospitals Gov. Dannel P. Malloy imposed last week, the governor’s spokesman described the event as “asking taxpayers to subsidize multimillion-dollar salaries.”

Hospital officials say competitive compensation is needed to attract and retain qualified leaders – the same logic used to justify the salaries of top-paid state employees. Some have questioned why their pay is singled out when the state has provided tax breaks to corporations that pay executives millions more.

And they say the focus on executive pay distracts from the budget hits their organizations have faced in recent years. After the cuts Malloy issued last week, hospitals’ tax burden this fiscal year is expected to be almost $500 million higher than it was in 2011.

“The [hospital] CEOs in the state could all work for free and it wouldn’t make an impact on the cuts we’re talking about,” said Vin Petrini, a spokesman for the Yale New Haven Health System.

It’s legitimate to discuss what pay is appropriate for hospital executives, said Stephen Frayne, senior vice president for health policy at the Connecticut Hospital Association. But he questioned its role in the context of funding cuts.

“It seems like every time the state wants to justify withdrawing now hundreds and hundreds and hundreds and hundreds and hundreds of millions of dollars from taking care of those who have the misfortune of being ill enough to have to go to a hospital, the justification is, ‘Well, you pay hospital CEOs too much, and therefore that covers all the sins,’” he said.

Gian-Carl Casa, undersecretary for legislative affairs in Malloy’s budget office, said the administration looks at more than executive pay and believes hospitals’ cost structures overall are too high. That has a direct impact on taxpayers, he added, since the state pays for the care of more than 700,000 Medicaid clients as well as more than 200,000 state employees, retirees and their families.

Casa said that while hospital officials have blamed the state budget for layoffs and service cuts, Connecticut hospitals made $664.9 million more than they spent last fiscal year. Hospital corporate systems, which include parent companies and subsidiaries, took in $916.4 million more than they spent last fiscal year.

“We’re looking at things overall,” Casa said. “Executive pay is part of that, and part of that that is tangible and real, and that people understand.”

Asked about the focus on executive pay, Malloy spokesman Devon Puglia pointed to what he called hospitals’ “hyperbole and claims of drastic layoffs and cuts in services” in response to the governor’s cut, and suggested they instead focus “on what really matters.”

“With a billion dollars in profit in our hospital systems and executive compensation in the tens of millions of dollars annually, perhaps the focus should be on driving down the cost of care for all of us? Or being efficient with the services offered?” Puglia said.

What CEOs make

The Yale New Haven system, which includes Bridgeport, Greenwich and Yale-New Haven hospitals, topped the state in CEO pay during the 2014 fiscal year, the last year for which figures are available. CEO Marna Borgstrom received $3.5 million in salary and fringe benefits, according to filings with the state Office of Health Care Access.

The lowest-paid CEO was Kimberly Lumia of Sharon Hospital (the state’s only for-profit hospital), whose salary and fringe benefits amounted to $277,021.

(Note: The compensation for Johnson Memorial Hospital’s president and CEO has been corrected in the chart above. The original version of the chart, based on figures reported to the state Office of Health Care Access, reflected payments to both current CEO Stuart Rosenberg and former CEO David Morgan, who received severance compensation. During the 2014 fiscal year, Morgan received $198,324 in severance from Johnson Memorial. Rosenberg was paid $442,406 in salary and fringe benefits by St. Francis Hospital and Medical Center, which is affiliated with Johnson Memorial and where Rosenberg worked for nearly 30 years before taking the position at Johnson Memorial.)

Connecticut’s 29 acute-care hospitals report the top 10 highest-earning positions to the state. In all, those 290 employees received $142.7 million in salaries and fringe benefits in 2014, averaging $4.9 million per hospital. Just over half of those listed were administrators.

Based on the state filings, the average hospital CEO salary was about $850,000; adding fringe benefits raised it to $1.1 million. But the actual average is likely somewhat higher because the filings don’t include the leaders of four hospitals run by Hartford HealthCare, or the organization’s CEO. According to federal tax filings, Hartford HealthCare CEO Elliot Joseph received $2.1 million in 2012, while the then-CEO of Hartford Hospital was paid just over $1 million.

How does that compare nationally?

According to an analysis last year by the publication Modern Healthcare, the average cash compensation in 2012 was $2.2 million for chief executives at nonprofit hospitals. Pay ranged widely, the analysis found, from $178,810 to $10.7 million.

What’s the basis for CEO pay?

A study of CEO compensation data from nonprofit hospitals, published last year, attempted to identify what factors were associated with higher executive compensation. (The authors used figures from 2009, when pay averaged $595,781 among nonprofit hospital CEOs nationwide.)

They found that leaders of larger hospitals and teaching hospitals were paid more, while those whose hospitals had more poor or Medicare patients were paid less. Higher levels of patient satisfaction and higher levels of advanced technology were both linked with higher executive pay.

Factors that had no significant relationship to CEO compensation, according to the analysis: hospital financial performance, charity care, community benefit, or quality measures including patient mortality or readmission rates.

Union officials have pointed to a 2010 study by two UConn School of Business professors who analyzed CEO pay at 29 nonprofit Connecticut hospitals between 1998 and 2006. They found that higher CEO pay was associated with a higher occupancy rate of staffed beds, while having more patients covered by Medicare and Medicaid – which tend to pay less than private insurance – was associated with lower pay.

The authors, Rexford Santerre and Jeffrey Kramer, suggested that if nonprofit hospital CEOs are motivated by pay, they would face incentives to increase hospital size and admit more privately insured patients, but not to provide charity care or serve patients with Medicare or Medicaid.

Asked this week about the role of CEO pay in the debate over hospital funding, Santerre said he sees references to executive pay as “an attempt to gain popular support for the Medicaid cuts.”

Santerre, who said he thinks state funding for hospital care should be based on the cost of treating Medicaid patients rather than hospital CEO pay, suggested a different focus.

“I think the debate should focus on whether nonprofit hospitals provide enough community benefits to justify their tax exemption,” he said.

Are hospitals different from other businesses?

Hospital officials note that the Malloy administration has not made CEO pay an issue with other industries, including those that have received tax breaks from the state.

That message was echoed by Republican legislative leaders, who issued a statement this week calling the administration’s focus on CEO pay “another diversionary tactic used by the governor to avoid having a real conversation about the damaging impact of his budget cuts.”

“If the governor really cared so much about CEO compensation, he wouldn’t have given $52 million to a hedge fund in a taxpayer funded billionaire bailout,” Senate Minority Leader Len Fasano, R-North Haven, and House Minority Leader Themis Klarides, R-Derby, said, referring to the hedge fund Bridgewater Associates, which was offered up to $52 million in state subsidies as it expands its Westport headquarters.

Are hospitals substantively different from other companies?

Yes, said Benjamin Barnes, Malloy’s budget director, when asked in June. At the time, the administration was pushing for changes to recently passed tax increases that drew criticism from corporations including Aetna and Travelers.

“They rely on $2 billion a year in state subsidy in order to operate, which is not true for the Aetna or Travelers or any of those other companies,” Barnes said of hospitals. (Connecticut hospitals received $1.74 billion in Medicaid payments last fiscal year, the bulk of which were fee-for-service payments for care. According to the Office of Health Care Access, Medicaid paid hospitals 63 cents for every dollar of cost during the 2014 fiscal year.)

Barnes added, “To act as though they are a normal market participant is a huge fallacy.”

A key difference, Barnes said, is that hospitals rely on both direct government payments from Medicaid and Medicare, and payments from private insurance plans that are largely paid for with untaxed income.

“So the notion that they are independent businesses and should be treated the same way we treat widget manufacturers is hugely misguided in my view,” Barnes said.

Petrini, the Yale New Haven spokesman, countered that there are other well-respected private employers in Connecticut that also do significant business with government, including United Technologies and Electric Boat – but state officials haven’t taken issue with what their leaders are paid.