Not-for-profit health systems working to get around tax on high exec pay
Skip to main content
MDHC_Logotype_white
Subscribe
  • My Account
  • Login
  • Subscribe
  • News
    • This Week's News
    • COVID-19
    • Providers
    • Insurance
    • Government
    • Finance
    • Technology
    • Safety & Quality
    • People
    • Regional News
    • Digital Edition
    • Biden admin throws out Texas Medicaid waiver
      Hospitals face specialty pharmacy challenges with insurer competition
      Pandemic propels medical supply companies
      Payers, providers clash over telehealth reimbursement as Congress mulls changes
    • Pandemic propels medical supply companies
      U.S. setting up $1.7B national network to track virus variants
      Next Up Podcast: Managing the COVID-19 vaccination rollout with Dr. Gary Little
      Barbers, artists help defy vaccine myths for people of color
    • Some healthcare associations moving full steam ahead with conferences starting in summer
      COVID hospitalizations in Michigan top fall surge; Beaumont seeing nurse 'burnout'
      Calls mount for Biden to track U.S. healthcare worker deaths from COVID
      Front-line workers want more assistance after a year of COVID-19
    • UnitedHealthcare sees Q1 profits rise and other key earnings takeaways
      California re-opens enrollment for health insurance coverage
      Insurers are partnering to offload the costs of kidney failure patients
      Cigna and Oscar expand their small business partnership
    • Biden admin throws out Texas Medicaid waiver
      J&J vaccine pause a minor blip, but efforts must press on, experts say
      Effort to keep Arkansas Medicaid plan falls short in state Legislature
      A year into pandemic, federal officials design new mask guidelines to better protect more workers
    • Private equity's estimated healthcare spending halved in first quarter
      UH reports $54.7M operating income for 2020 despite significant COVID-related costs
      CMS issues new guidance to enforce price transparency rule
      Massachusetts to crack down on highest-cost hospitals, insurers
    • Bright Health scoops up telehealth startup
      FCC to open next round of COVID-19 telehealth program applications
      CHIME, HLTH to host joint spring conference next year
      Anthem, Blackstone launch new joint venture
    • Michigan expands antibody treatment to cut hospitalizations
      J&J vaccine pause a minor blip, but efforts must press on, experts say
      A year into pandemic, federal officials design new mask guidelines to better protect more workers
      FDA pauses enforcement of in-person dispensing requirement for abortion pill
    • Oscar names new virtual-first care division president
      Redfield joins Big Ass Fans, which promotes controversial COVID-killing technology
      Next Up Podcast: Modern Healthcare's editor Aurora Aguilar talks new content direction
      Novant Health adds chief payor performance officer
    • Midwest
    • Northeast
    • South
    • West
  • Insights
    • ACA 10 Years After
    • Best Practices
    • Special Reports
    • Innovations
    • The Affordable Care Act after 10 years
    • A close-up of a woman receiving a COVID-19 vaccine.
      Providers in underserved communities work toward equitable vaccine distribution
      Josh Bradshaw
      How one rural Illinois county vaccinated 84% of its senior citizens by early March
      Dr. John Fischer
      Patient-reported outcomes tool for hernia surgery helps physicians improve care
      New care model helps primary-care practices treat obesity
    • A family photo of the the Hangens.
      Stressing the already burdened pediatric behavioral health system
      Jennifer Pannone and her daughter Victoria.
      Mental health access for children needs attention
      What's next for on-demand telehealth companies?
      A CalOptima PACE vaccination clinic.
      Will COVID-19 be the catalyst for creating a more sustainable healthcare system?
    • Ryan McGinnis
      Finding efficiencies in the OR using tech
      Dr. Daniel Hall
      UPMC pilots machine learning, telehealth to inform patient transfers
      A woman being recorded using her inhaler on a smartphone.
      Digital check-ins, connected inhalers help control asthma
      A phone screen showing the question, "Mary we hope this information was helpful and we'd like to keep guiding you. Are you interested in knowing when it's your turn to receive the vaccine?"
      Chatbots, texting campaigns help manage influx of COVID vax questions
  • Transformation
    • Patients
    • Operations
    • Care Delivery
    • Payment
    • Mayo Clinic launches two tech companies
      Diabetes patients at high risk for COVID-19 are managing conditions more effectively
      Nearly 1 in 5 Americans skipped care due to cost last year
      COVID-19 long-haulers need holistic treatment, providers say
    • Amazon gives out $12M under next phase of AWS diagnostics development initiative
      Malpractice premiums peak in 2020, AMA survey shows
      A rendering of a cancer research institute at the University of Southern California that will include 5G.
      Healthcare providers determine how to best use ultrafast 5G
      Two-thirds of largest hospitals aren't complying with price transparency rule
    • Hospitals face specialty pharmacy challenges with insurer competition
      Addressing long-standing barriers needed for mental and physical health integration
      A close-up of a woman receiving a COVID-19 vaccine.
      Providers in underserved communities work toward equitable vaccine distribution
      The waiting room of a Kaiser Permanente clinic at a Target location.
      Health systems revamp their approach to retail clinics
    • Payers, providers clash over telehealth reimbursement as Congress mulls changes
      When money talks. Why cash pay is becoming more popular
      CMS wants to bump pay for hospices, SNFs next year
      CMMI pauses new Direct Contracting model applications
  • Data/Lists
    • Rankings/Lists
    • Interactive Databases
    • Data Points
    • Health Systems Financials
      Executive Compensation
      Physician Compensation
  • Op-Ed
    • Bold Moves
    • Breaking Bias
    • Commentaries
    • Letters
    • Vital Signs Blog
    • From the Editor
    • Dr. Alan Kaplan
      The risks, rewards of taking organizations 'where they haven’t gone before'
      Wellstar CEO calls adapting for the pandemic her bold move
      Howard P. Kern
      Recognizing the value of telehealth in its infancy
      Dr. Stephen Markovich
      A bold move helped take him from family doctor to OhioHealth CEO
    • Drs. Hal Paz and Joshua J. Joseph
      Mobilized to fight the COVID crisis: a blueprint for community and academic partnerships
      Dr. Stephen Markovich
      Making sure we're aligned along the path to achieving inclusion
      Barry Ostrowsky
      Ending racism is a journey taken together; the starting point must be now
      Laura Lee Hall and Gary Puckrein
      Increased flu vaccination has never been more important for communities of color
    • It's time we fulfill the ACA's promise to broaden access to lower-cost drugs
      Five lessons for securing our children's future
      We're losing engaged providers, and healthcare will pay the price
      Bonnie Castillo and John Welton
      Dueling opinions: The role of mandated nurse staffing ratios
    • Letters: Eliminating bias in healthcare needs to be ‘deliberate and organic’
      Letters: Maybe dropping out of ACOs is a good thing for patients
      Letters: White House and Congress share blame for lack of national COVID strategy
      Letters: VA making strides to improve state veterans home inspections
    • Sponsored Content Provided By Optum
      How blockchain could ease frustration with the payment process
      Sponsored Content Provided By Optum
      Three steps to better data-sharing for payer and provider CIOs
      Sponsored Content Provided By Optum
      Reduce total cost of care: 6 reasons why providers and payers should tackle the challenge together
      Sponsored Content Provided By Optum
      Why CIOs went from back-office operators to mission-critical innovators
  • Awards
    • Award Programs
    • Nominate
    • Previous Award Programs
    • Other Award Programs
    • Nominations Closed - 50 Most Influential Clinical Executives
      Nominations Open - Top 25 Innovators
      Nominations Open May 24 - Top 25 Emerging Leaders
    • 100 Most Influential People
    • 50 Most Influential Clinical Executives
    • Best Places to Work in Healthcare
    • Health Care Hall of Fame
    • Healthcare Marketing Impact Awards
    • Top 25 Emerging Leaders
    • Top 25 Innovators
    • Minorities in Healthcare
      • - Luminaries
      • - Top 25 Minority Leaders
      • - Minorities to Watch
    • Women in Healthcare
      • - Luminaries
      • - Top 25 Women Leaders
      • - Women to Watch
    • Excellence in Nursing Awards
    • Design Awards
    • Top 25 COOs in Healthcare
    • 100 Top Hospitals
    • ACHE Awards
  • Events
    • Conferences
    • Galas
    • Webinars
    • COVID-19 Event Tracker
    • emburse certify modern healthcare custom media webinar logo lockup
      Sponsored Content Provided By Emburse
      Webinar: Making it easy to manage costs
      virtualmed staff modern healthcare custom media logo lockup
      Sponsored Content Provided By VirtualMed Staff
      Webinar: Best practices for creating a successful telepsychiatry program
      telehealth visit man touching neck while speaking to doctor on computer
      Sponsored Content Provided By Accumen
      Webinar: How telehealth has evolved into a standard of care
      modern healthcare custom media and trimedx custom webinar logo lockup
      Sponsored Content Provided By TRIMEDX
      Webinar: Bridging the gap between clinicians and administration to improve capital equipment planning
    • Women Leaders in Healthcare Conference
    • Social Determinants of Health Symposium
    • Healthcare Transformation Summit
    • Leadership Symposium
    • Virtual Briefings
      • - Hospital of the Future
      • - Mental Health
      • - Patient Safety & Quality
      • - Strategic Marketing
      • - Virtual Health
      • - Workplace of the Future
    • Best Places to Work Awards Gala
    • Health Care Hall of Fame Gala
    • Top 25 Minority Leaders Gala
    • Top 25 Women Leaders Gala
  • Listen
    • Podcast - Next Up
    • Podcast - Beyond the Byline
    • Sponsored Podcast - Healthcare Insider
    • Video Series - The Check Up
    • Sponsored Video Series - One on One
    • Next Up Podcast: Managing the COVID-19 vaccination rollout with Dr. Gary Little
      Next Up Podcast: Modern Healthcare's editor Aurora Aguilar talks new content direction
      Dr. Chris DeRienzo
      Next Up Podcast: Building team spirit in the wake of COVID-19
      Mikelle Moore
      Next Up Podcast: Mikelle Moore on recognizing all hospital workers during the pandemic
    • Beyond the Byline: Kids' unchecked mental health needs pose long-term consequences
      Beyond the Byline: How COVID-19 has impacted hospital finances
      An older man sitting on a hospital bed with his back toward the camera.
      Beyond the Byline: Upcoding could explain why hospitals are increasingly billing for the most complex treatment
      Beyond the Byline: Insurers are betting on virtual-first plans as COVID-19 shifts care pathways
    • James garvert neustar healthcare insider podcast image
      Building on basics
      Healthcare Insider Podcast Episode Art - Premier
      Why Roger Weems and other consultants are leaving the big firms to join Premier
      James garvert neustar healthcare insider podcast image
      Outreach during COVID-19
      ann barnes healthcare insider podcast image
      Leading with intention to promote diversity and inclusion
    • The Check Up: Dr. James E.K. Hildreth
      The Check Up: Dr. James E.K. Hildreth of Meharry Medical College
      The Check Up: Matt Eyles
      The Check Up: Matt Eyles of AHIP
      The Check Up: Dr. Tom Shanley
      The Check Up: Dr. Tom Shanley of Lurie Children’s Hospital of Chicago
      The Check Up: Dr. Harold Paz
      The Check Up: Dr. Harold Paz of Wexner Medical Center at Ohio State University
    • ivana naeymi-rad one on one intelligent medical objects
      Video: Ivana Naeymi Rad of Intelligent Medical Objects
  • MORE +
    • Advertise
    • Media Kit
    • Newsletters
    • Jobs
    • People on the Move
    • Reprints & Licensing
MENU
Breadcrumb
  1. Home
  2. Providers
June 23, 2018 01:00 AM

Not-for-profit health systems working to get around tax on high exec pay

Tara Bannow
  • Tweet
  • Share
  • Share
  • Email
  • More
    Print

    Not-for-profit health systems—no strangers to paying top dollar for talented executives—are using sophisticated methods to avoid the penalties on high employee compensation.

    Effective tax year 2018, the Tax Cuts and Jobs Act imposes a 21% excise tax on not-for-profit compensation that exceeds $1 million, a threshold that encompasses just about all major not-for-profit health systems.

    Total CEO pay, including bonuses, retirement and other benefits, across the top 25 largest not-for-profit health systems averaged about $5.1 million in 2016, the most recent year for which data are available. That's up from $4.5 million in 2015.

    The tax is significant. This year, a $5.1 million salary, for example, would hit a health system with a roughly $860,000 tax. Bernard Tyson, CEO of Oakland, Calif.-based Kaiser Permanente, made about $10 million in total compensation in 2016. A 21% tax on all of his pay over $1 million would be $1.9 million—perhaps not a huge hit to a $73 billion organization.

    St. Louis-based SSM Health's former CEO Bill Thompson made nearly $2 million in 2016, which would yield a roughly $200,000 tax this year. Again, likely not significant for a $6.5 billion operation.

    But for smaller health systems, the new tax, which applies to all W-2 reportable compensation, could bring pain.

    "If they're going to have to pay this excise tax, where is that going to come from?" asked Elliot Dinkin, CEO of consulting firm Cowden Associates. "It's not budgeted."

    The law also includes a calculation whereby health systems can be taxed for providing excessive parachute payments to high-paid employees upon their departures. Patrick Fry, who retired as Sutter Health's CEO in January 2016, received $10.6 million in deferred retirement pay that year, bringing his total compensation to nearly $13.5 million.

    Doug Mancino, a partner with the law firm Seyfarth Shaw, said that's precisely the kind of payment that would likely trigger a substantial tax today.

    "That's meaningful money," he said.

    INTERACTIVE: Total compensation for the CEOs of the largest not-for-profit health systems.

    Tricks for lowering tax exposure

    Luckily for them, health systems have savvy tax experts recommending maneuvers that will reduce their exposure to the new tax. Even then, systems must tread carefully to ensure they're staying within the law.

    The first step many health systems took shortly after Congress passed the tax law was to rush through hefty compensation payouts at the end of 2017 that would have otherwise been subject to the tax this year.

    "Everyone that I've spoken to wanted to take advantage of the opportunity to accelerate to avoid any excise tax," said Tom Flannery, a senior client partner with the healthcare consultancy at Korn Ferry. He wouldn't name specific clients.

    Flannery said he expects 2017 health system financial disclosures will show higher executive compensation, followed by lower compensation in 2018 and 2019, after which pay will likely climb back up.

    The move appears to be allowable under the new law, and fits with the goal of any prudent board: to minimize non-healthcare-related payments, Flannery said.

    "If you had the opportunity to avoid paying a tax, would you do it?" he asked.

    In some cases, systems accelerated seven-figure deferred compensation packages that had accrued over a number of years, Mancino said. He also wouldn't name specific clients, but said such accelerations should have buy-in from both the companies and the affected employees.

    Section 409A of the Internal Revenue Code is designed to prevent artificial acceleration of deferred compensation agreements. Health systems would have needed to use specific exceptions to that section in order to use the accelerations legally, Mancino said.

    Some health systems are also getting around the excise tax by replacing traditional deferred compensation packages with what are known as split dollar loan arrangements. Under such arrangements, employers make substantial loans to executives that go toward their life insurance premiums. Loans are not considered wages, and are thus not subject to the excise tax.

    Split dollar loan arrangements then allow those executives to, upon retirement, borrow accumulated, non-taxable cash from those life insurance companies every year. The cash borrowing has to be done within prescribed limits so that the employer and the executives' beneficiaries are paid the full benefits under the life insurance policy upon the executive's death, Mancino said.

    Those arrangements are a "win-win" for employees and employers alike, Mancino said, with employees getting the same economic benefit from the loans as they would under deferred compensation.

    "This becomes a very, very attractive option," Mancino said.

    Major health systems like Kaiser Permanente, Sutter Health, SSM Health, Dignity Health and Baylor Scott & White Health said they aren't using either tactic.

    "We plan to administer our total rewards package as it exists today and continue to abide by all appropriate tax reporting guidelines," Sutter spokeswoman Karen Garner wrote in an email.

    Congress has asked the IRS to write rules preventing not-for-profit organizations from avoiding the excise tax by letting people perform services other than as employees, or by paying people through pass-through entities such as partnerships, limited liability companies or S corporations, Mancino said.

    He said health systems have for years classified medical directors as independent contractors rather than employees, which tends to be a front-burner issue in hospital audits. Mancino said he expects the IRS will determine that performing services through a limited liability company will be subject to the excise tax if the compensation for those services exceeds $1 million.

    "There's a lot of techniques that are in use today that will probably be scrutinized if it appears they are being used in an abusive fashion," he said.

    There are a number of unresolved questions surrounding the new law that the IRS is expected to clarify when it issues proposed regulations at the end of the month. For example, the law includes an exemption for providing medical care, which raises the question of whether physician compensation that exceeds $1 million would be subject to the tax, especially if a portion of their time is spent on administrative duties.

    "The question is, would those administrative duties related to medical services be deductible or not?" Flannery pondered. "There is a level of uncertainty around some of these issues."

    CEO pay fluctuations

    Several not-for-profit health system CEOs made more or less in 2016 than the prior year because of the health system's performance or payouts from deferred compensation packages.

    The reason Joel Allison, the former CEO of Dallas-based Baylor Scott & White Health, made about $700,000 less in 2016 than in 2015 was because the health system did better in 2015 when it came to meeting its performance goals in areas such as finances and patient satisfaction, said Julie Smith, a spokeswoman for the health system.

    At Kaiser, although Tyson's $10 million total compensation in 2016 far exceeded his $6 million package in 2015, most of the increase was due to bonus and incentive pay, retirement and other deferred compensation. His base pay was $1.3 million in 2016.

    Tyson's $4 million pay hike resulted from an incentive program that dates back to his hiring as CEO in 2013. It also reflects changes to retirement and other deferred compensation, according to a statement from the health system, which also noted that the board aims to provide a reasonable and competitive program for executives of similar size and complexity.

    The most recent numbers also reiterate the dramatic variation in not-for-profit CEO compensation, with Tyson, Ascension's Anthony Tersigni, Sutter's Patrick Fry and Dignity Health's Lloyd Dean making more than $10 million in total compensation in 2016. Others are paid more modestly. Dr. Ram Raju, the former CEO of the nation's largest public health system, New York City Health & Hospitals, made about $504,000 that year.

    Most health systems contacted by Modern Healthcare said they set CEO compensation largely based on what their competitors are paying in an effort to stay competitive and attract top people. But Flannery said that method won't be enough going forward. Health system boards need to consider the return on investment they're getting with respect to what they're paying CEOs, which necessitates a higher focus on their performance, he said. Health systems should incorporate quality monitoring, including patient satisfaction and physician engagement performance, into their compensation decisions, Flannery said.

    "Most of our clients are becoming much more sophisticated in how they're thinking through their executive compensation," he said, "and not relying on traditional approaches."

    Letter
    to the
    Editor

    Send us a letter

    Have an opinion about this story? Click here to submit a Letter to the Editor, and we may publish it in print.

    Recommended for You
    Some healthcare associations moving full steam ahead with conferences starting in summer
    Some healthcare associations moving full steam ahead with conferences starting in summer
    COVID hospitalizations in Michigan top fall surge; Beaumont seeing nurse 'burnout'
    COVID hospitalizations in Michigan top fall surge; Beaumont seeing nurse 'burnout'
    Sponsored Content
    Get Newsletters

    Sign up for enewsletters and alerts to receive breaking news and in-depth coverage of healthcare events and trends, as they happen, right to your inbox.

    Subscribe Today
    MH Magazine Cover

    MH magazine offers content that sheds light on healthcare leaders’ complex choices and touch points—from strategy, governance, leadership development and finance to operations, clinical care, and marketing.

    Subscribe
    Connect with Us
    • LinkedIn
    • Twitter
    • Facebook
    • RSS
    • Instagram

    Our Mission

    Modern Healthcare empowers industry leaders to succeed by providing unbiased reporting of the news, insights, analysis and data.

    MDHC_Logotype_white
    Contact Us

    (877) 812-1581

    Email us

     

    Resources
    • Contact Us
    • Advertise with Us
    • Ad Choices Ad Choices
    • Sitemap
    Editorial Dept
    • Submission Guidelines
    • Code of Ethics
    • Awards
    • About Us
    Legal
    • Terms and Conditions
    • Privacy Policy
    • Privacy Request
    Modern Healthcare
    Copyright © 1996-2021. Crain Communications, Inc. All Rights Reserved.
    • News
      • This Week's News
      • COVID-19
      • Providers
      • Insurance
      • Government
      • Finance
      • Technology
      • Safety & Quality
      • People
      • Regional News
        • Midwest
        • Northeast
        • South
        • West
      • Digital Edition
    • Insights
      • ACA 10 Years After
      • Best Practices
      • Special Reports
      • Innovations
    • Transformation
      • Patients
      • Operations
      • Care Delivery
      • Payment
    • Data/Lists
      • Rankings/Lists
      • Interactive Databases
      • Data Points
    • Op-Ed
      • Bold Moves
      • Breaking Bias
      • Commentaries
      • Letters
      • Vital Signs Blog
      • From the Editor
    • Awards
      • Award Programs
        • 100 Most Influential People
        • 50 Most Influential Clinical Executives
        • Best Places to Work in Healthcare
        • Health Care Hall of Fame
        • Healthcare Marketing Impact Awards
        • Top 25 Emerging Leaders
        • Top 25 Innovators
        • Minorities in Healthcare
          • - Luminaries
          • - Top 25 Minority Leaders
          • - Minorities to Watch
        • Women in Healthcare
          • - Luminaries
          • - Top 25 Women Leaders
          • - Women to Watch
      • Nominate
      • Previous Award Programs
        • Excellence in Nursing Awards
        • Design Awards
        • Top 25 COOs in Healthcare
      • Other Award Programs
        • 100 Top Hospitals
        • ACHE Awards
    • Events
      • Conferences
        • Women Leaders in Healthcare Conference
        • Social Determinants of Health Symposium
        • Healthcare Transformation Summit
        • Leadership Symposium
        • Virtual Briefings
          • - Hospital of the Future
          • - Mental Health
          • - Patient Safety & Quality
          • - Strategic Marketing
          • - Virtual Health
          • - Workplace of the Future
      • Galas
        • Best Places to Work Awards Gala
        • Health Care Hall of Fame Gala
        • Top 25 Minority Leaders Gala
        • Top 25 Women Leaders Gala
      • Webinars
      • COVID-19 Event Tracker
    • Listen
      • Podcast - Next Up
      • Podcast - Beyond the Byline
      • Sponsored Podcast - Healthcare Insider
      • Video Series - The Check Up
      • Sponsored Video Series - One on One
    • MORE +
      • Advertise
      • Media Kit
      • Newsletters
      • Jobs
      • People on the Move
      • Reprints & Licensing