OIG plan to study hospital exec pay puts AHA on alert

HHS' Office of the Inspector General's announcement of a plan to study hospital executive compensation is roiling C-suites.

One of dozens of projects announced as part of the OIG's 2014 work plan, the compensation study will examine how employee pay at hospitals is reflected on Medicare cost reports. The study will look at whether Medicare spending would decrease if the CMS imposed limits on the compensation that the federal program will cover.

The study is related to the requests sent out to hospitals last year by the OIG's Atlanta office that asked hospitals and health systems to disclose the salaries of their highest-compensated employees. The letters that went to hospitals described it as an “audit of excessive compensation at Medicare participating hospitals,” according to the American Hospital Association. The requests were intended to find out whether compensation was reasonable and necessary and directly related to Medicare patient care.

After the study plan was publicized, AHA officials published a note to their 5,000 hospital members saying they had met with OIG officials who assured them the study was not part of an effort to place caps on hospital executive compensation. OIG staff members have agreed to meet directly with AHA officials to discuss the project further.

A Dec. 11 letter from the AHA to the OIG noted that the study's premise was flawed because Medicare doesn't compensate hospitals directly for employee pay. Rather, those costs are rolled into hospitals' overall per-procedure payments.

Executive compensation at hospitals is a perennial target for scrutiny. A widely cited 2009 analysis by the Internal Revenue Service found that not-for-profit hospital CEOs earned an average of almost $500,000 in 2006. Because most hospitals are not-for-profit, their executive salaries are set using well-defined comparative processes that take into account what other providers are paying. That shields them from IRS rules that could limit what tax-exempt providers can pay their executives.

“It seems intuitive that, if the reported costs (for salaries) were reduced, the Medicare Trust Fund would save money,” said Ralph DeJong, a partner at McDermott Will & Emery focusing on compensation at tax-exempt organizations. “However, in our experience, the providers are able to show that their compensation practices for executive leadership are competitive with market practice and are the result of a very supportable practice of demonstrating fair-market value.”

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