Highest-paid not-for-profit health system executives earn 33% raise in 2017

When Ascension announced the first iteration of an ongoing reorganization, it included a cut to the not-for-profit health system’s executive pay.

In a March 2018 video to the organization’s employees, outgoing CEO Anthony Tersigni outlined a range of changes as the $23 billion Catholic health system shifts from its acute-care focus, including a reduction in Tersigni’s salary as well as all of those who report to him.

“In response to the challenges we face together that directly impact our associates across our national health ministry, I, together with other members of the Ascension office of the president—which are all of the leaders who report directly to me—have taken a reduction in our salaries,” he said in the video.

Ascension’s move was rare. Only under extreme circumstances, typically dire financial straits, do top healthcare executives take pay cuts, executive compensation experts said. Executive pay is one of the last levers pulled as providers reduce costs, arguing that systemwide strategies make a bigger dent. Recruitment and retention strategies almost always trump compensation cuts.

Hence, the 25 highest-paid not-for-profit health system executives received a combined 33.2% increase in total compensation in 2017, as their compensation rose to $197.9 million from $148.6 million in 2016, Modern Healthcare found.

Total compensation includes base salary plus bonuses, other compensation, deferred pay and nontaxed earnings. It excludes reported deferred compensation rolled over from previous years.

That combined total increase masks huge raises at some systems. Bon Secours Mercy Health CEO John Starcher earned 223% more in 2017 than he did in 2016 while Providence St. Joseph Health CEO Dr. Rod Hochman received a 157% raise. Gregory Adams, executive vice president and group president of Kaiser Foundation Health Plan and Hospitals, took home 110% more in total compensation and Kaiser Chairman and CEO Bernard Tyson received a 74% raise. Some of the highest-paid executives took home salaries more than 400 times higher than one of their minimum-wage employees.

Only two executives in the top 10 took pay cuts, both from Ascension. Outside of the top 10, the CEO of Memorial Sloan Kettering Cancer Center saw a 21% decrease in total compensation while UPMC’s chief executive took a 13% pay cut in 2017.

Starcher’s raise reflected his new role as CEO of then-Mercy Health, as well as fulfilled incentives that were not reached in 2016, the organization said in a statement, adding that all employees received bonuses. Mercy’s community-benefit spending doubled over that span, the company noted.

Kaiser said in a statement that it is flawed to compare the largest integrated healthcare provider in the country to other not-for-profit systems given that executives oversee a health plan with 12.3 million members, 723 hospitals and a total care delivery system in multiple states. Delivering care that is affordable is critical, which is why about a third of Kaiser senior leaders’ total compensation is tied to performance-based incentives compared with around half for its most senior executives, the company said.

Providence St. Joseph Health said it uses third-party salary studies to measure pay amid a highly competitive market. “We need to innovate rapidly to get to affordability, and in a complex sector like healthcare, that means we need strong leadership.”

That upward trend in executive compensation clashes with executives’ push for more affordable care and their charitable missions. Hospital workers in small communities protest alleged understaffing and service reductions as top executives have taken home an average of 4% to 6% raises each year since 2015, related data show.

A Modern Healthcare analysis of more than 2,000 not-for-profit hospitals via their IRS Form 990s and financial statements found that top executives earned an average of 0.36% of total payroll expenses in fiscal 2017, which has remained relatively consistent since 2013. Total compensation as a share of total payroll was 0.33% for the top 25 highest-paid executives, given their larger respective organizations. Total payroll includes salaries, wages, benefits and related costs.

The complexity of healthcare and the scale of these organizations demand highly paid leaders, health systems say. Another common defense is that it’s a competitive executive market, with fewer qualified leaders available.

Still, some CEOs earned more than their peers running a larger organization. Philip Incarnati, CEO of Grand Blanc, Mich.-based McLaren Health Care Corp., was one of a few in the top 25 who earned relatively higher pay in 2017 for overseeing a smaller organization, accounting for 0.59% of McLaren’s total payroll. His peers within $1 million of his $6.7 million take-home earned an average of 0.42% of total salary and benefit expenses. Excluding two well-paid doctors in that peer group who at the time oversaw departments at single hospitals, the average was 0.21%.

Incarnati's pay also equals about 58% of the system’s $11.5 million in traditional charity care and 2.4% of total community benefit of $277.9 million.

“Incarnati has created and overseen tremendous growth and expansion in his 30 years as CEO of McLaren Health—an incredible tenure compared to the industry average,” the organization said in a statement, adding that the 14-hospital system had only one when Incarnati joined McLaren.

“Leadership costs are much smaller for large systems, which is partly why organizations have been scaling up in size over the last decade,” said Ralph DeJong, a partner at McDermott Will & Emery who specializes in executive compensation issues. “The complexity is still there for small systems, but you don’t have the base to spread those costs.”

The framework of how compensation is set for executives fundamentally needs to change, said Tom Flannery, a senior client partner for Korn Ferry’s executive pay and governance practice. “Market studies need to be reframed—how advisers advise has to change,” he said.

There is a shift from higher base pay to more variable pay taking place. Dignity Health for instance, which merged with Catholic Health Initiatives to form CommonSpirit Health, bases a significant share of executive compensation on incentives related to clinical-quality and patient-satisfaction measures, as well as community health investments and financial performance.

“Boards and compensation committees are moving toward greater incentives and less base pay as they sense they need to keep up with the market,” DeJong said. “Boards and leadership are aware that costs have to be controlled and reined in, but I don’t know that you impact cost by looking at your leadership cost.”

Still there are often flaws in how incentives are calculated, Flannery said. The data used to set benchmarks often has holes and is thus unreliable, he said.

“Consultants are hired primarily to deal with compliance issues, which should be an outcome for doing executive compensation right and better,” Flannery said. “The way to do it right and better is not just focusing on your CEO pay relative to five other CEOs—what is the return on investment for the dollars you are spending?”

Executive pay is at times more reactionary than performance-based, DeJong said. “We are entering a period where the top CEOs are starting to retire and organizations are scrambling to identify the next leaders,” he said. “The reaction is probably more about that recruitment or poaching activity than market studies.”

Even so, focusing on executive pay and not the core operating structure is often a rubbernecking issue, compensation consultants said.

“The optics are probably worth more than the underlying validity of it,” said Steve Sullivan, a managing director at executive compensation consulting firm Pearl Meyer.

Health systems sometimes stash executive compensation in different sections of the IRS Form 990 or in separate 990s. Mount Sinai Health System in New York City, for instance, reported much of its CEO Dr. Kenneth Davis’ $7.3 million in total compensation as other reportable compensation as well as compensation from related organizations.

Two Mount Sinai executives also received $500,000 and $1 million loans for their mortgages in 2016 through the Icahn School of Medicine, federal tax documents show. Mount Sinai said in a statement that Icahn “proudly offers a relocation loan program to help secure appropriate housing in a very competitive real estate market.”

Some systems retain dual chief executives when they merge with other institutions. Advocate Aurora Health for instance, offered voluntary severance packages to about 300 employees when integration costs exceeded expectations. It also eliminated annual bonuses for rank-and-file employees. The organization did not say whether it plans to retain both of its CEOs.

“Aligned with our commitment to transform care and accelerate affordability, we offered a voluntary early retirement program to management who meet certain eligibility requirements based on age and years of service,” the company said in a statement.

The U.S. healthcare system is more expensive than any other in the world. Nearly every element in the system is costlier, from equipment to drugs to labor, while quality lags, said Paul Bohne, a managing partner and leader of executive search firm Witt/Kieffer’s healthcare practice.

“Maybe executive talent is one of the many elements that deserves a closer look,” he said.

The Tax Cuts and Jobs Act, implemented in 2018, imposed a 21% excise tax on not-for-profit compensation that exceeds $1 million as well as a tax on parachute payments for outgoing high-paid employees. But some health systems are using creative loopholes such as replacing traditional deferred compensation packages with loans that go toward their life insurance premiums to avoid the excise tax.

Mercy Bon Secours said that due to changes in the excise tax, bonuses for both 2016 and 2017 were paid to Starcher during calendar year 2017, rather than in early 2018.

Meanwhile, some communities and employee groups are pushing back. Nurses and caregivers unveiled a giant 24-foot inflatable rocket in January at Swedish Hospital First Hill in Seattle and Providence Regional Medical Center-Everett (Wash.) to try to raise the alarm about executive pay raises at Providence St. Joseph. Sarah Taylor, a registered nurse at Providence Hospice and Home Care, said she and her cohorts have been negotiating a new contract for three years.

“The wage increase they offered us is only 1%,” she said. “It’s like a slap in the face that (the CEO) gets 157% and we get 1%. I just feel like Providence is not recognizing or valuing our commitment.”

Over a period of a year, Providence Hospice has lost about 50 of its staff members who left the organization for jobs that pay $7 to $15 more per hour, Taylor added. Providence Hospice needs a more equitable pay scale that rewards employees who have been there longer, she said. Providence said in a statement that the workers were offered “a very competitive wage proposal with guaranteed annual increases.”

“Boards are very sensitive to rural and small markets where CEO pay is an issue,” Bohne said, adding that if a CEO is a top earner in that community, it creates friction. “I once had a CEO tell me that at times after their annual compensation was published in the local newspaper, they walk through town feeling like they had a number on their forehead,” he said.

Voluntary cuts to a healthcare CEO’s pay are few and far between, experts said. But it’s more common in other industries.

When Nintendo’s Wii U console didn’t sell as expected in 2014, its president, Satoru Iwata, who passed away in 2015, cut his pay in half, similar to when its 3DS flopped in 2011.

Even as healthcare attracts more industry outsiders, that scenario is unlikely, Sullivan said.

“It’s an open market and you get what you pay for,” he said. “If a board is serious about affordability and transparency, it will pay whatever they have to pay to get an individual.”

Crain’s Chicago Business’ Stephanie Goldberg contributed to this report.