By Andrea K. Walker, The Baltimore Sun
2:09 PM EDT, August 18, 2013
Many Maryland hospital and health system CEOs received pay increases in recent years even as they complained of shrinking profit margins and warned of cutbacks unless they could increase the rates they charge.
Eleven executives earning seven-figure compensation packages including salary, bonus, retirement and other pay saw their total pay rise from as little as 0.13 percent to as much as 308 percent in the fiscal year that ended in 2012, according to tax filings. Another executive earning more than $1 million saw a pay cut.
Some of the larger compensation increases included retirement benefits earned over years of service that were reported as income under new tax rules. In those cases, the CEOs won't collect the money until they retire.
But many of these same CEOs took home tens of thousands of dollars more than the previous year because of bonuses and increases in base pay. Others got money for social clubs and gym memberships in an era when many companies have stopped offering these perks.
Hospitals defend the compensation, saying CEOs are paid fairly for the high-profile, complex duties that come with their jobs.
And at least two hospital systems — Saint Agnes Healthcare and the University of Maryland Medical System — have since instituted pay cuts or freezes for executives, given budgetary constraints.
The CEO pay question — always a hot-button issue — is generating debate again this year after a state panel spurned a push by hospitals for higher rates, instead approving smaller increases and calling on them to do more to curb expenses. Hospitals have sought rate increases in each of the past three years, and this year at least one Baltimore-area hospital responded with layoffs in an effort to trim labor costs.
Health care watchdogs and union leaders say more scrutiny should be paid to what executives earn for running nonprofit institutions, which get tax breaks and set-asides to treat the poor.
Those critics say hospital CEOs need to examine their own salaries as they face financial pressures and look to cut costs.
"If they are laying off staff and decreasing what they invest in the community and executive compensation is increasing, that is a real question," said Jessica Curtis, project director of the hospital accountability project at Community Catalyst, a national advocacy group that promotes wider access to affordable health care.
Hospitals argue that they have to offer competitive compensation to attract talent to run a complicated business.
Executives need to understand everything from the latest health technologies to regulatory changes, including health reform. Hospitals note that they compete with private sector businesses where their executives could choose to work instead.
Is value received?
"I would say no matter whose compensation you're looking at, the question is if there is value being received for that service," said Carmela Coyle, CEO of the Maryland Hospital Association, a trade group that lobbies on behalf of hospital members that operate in the state.
"Hospital executives are in charge of incredibly complex organizations," she said. "They are organizations that are open 24 hours a day and are highly regulated. These are really difficult, difficult jobs."
The Baltimore Sun analyzed the compensation packages of the CEOs and presidents from more than 40 Maryland hospitals and health systems using the 990 forms they must file with the Internal Revenue Service each tax season. The survey relied on forms for the fiscal year ending in 2012, which were posted on the website of the Health Services Cost Review Commission, the body that sets hospital rates in Maryland.
Those who operate large health systems earned the most.
The state's highest-compensated hospital executive that fiscal year was Kenneth A. Samet, the CEO of the 10-hospital MedStar Health system, who earned $6.3 million. More than half — $3.5 million — was money earned in a supplemental retirement plan during his 23 years of service. He won't get the money until he retires. His base pay was $1.2 million, and he received $1.5 million as a bonus and incentives.
The other top five highest-paid executives in Maryland are James Xinis, CEO at Calvert Memorial Hospital in Prince Frederick; Ronald Peterson, president of the Johns Hopkins Hospital and Health System; Robert A. Chrencik, CEO of the University of Maryland Medical System; and Thomas Mullen, CEO of Mercy Medical Center.
Xinis saw his compensation package jump 307.8 percent to $3.5 million, $2.8 million of which was a required distribution of vested retirement funds from a plan he begin contributing to in 2003, the hospital said in a statement. Xinis has served as CEO for 26 years and plans to retire in the next 18 months, the hospital said. His base salary in fiscal 2012 was $309,557.
Peterson, who oversees six hospitals, earned a $3.5 million compensation package. Peterson's 86.5 percent pay increase largely reflected pension benefits he'd earned during 40 years at Hopkins. His annual base salary increased about $49,500 to $1.1 million in fiscal 2012.
Chrencik, whose system has 12 hospitals, earned about $2.3 million. Chrencik's total pay grew 23.4 percent. Mercy's Mullen saw his pay rise 24 percent to $1.6 million for the fiscal year ending in 2012.
The one CEO earning more than $1 million who saw his compensation fall was Edward D. Miller, who retired in June 2012 as CEO of Johns Hopkins Medicine and dean of the university's medical school. His reported pay dropped to just over $1 million in fiscal 2012 from nearly $2.3 million the prior year, when he took a one-time retirement payout.
In May 2012, the hospitals complained to the state cost review commission about financial pressures, pushing for higher rates. The commission lowered hospital rates for inpatients by 1 percent but raised the rates for outpatient services by 2.59 percent, giving hospitals an overall increase of 0.3 percent.
During the debate last year, Chrencik warned that hospitals would need to make up the lost revenue somehow. "There is a lot of pressure on hospitals to come up with ways to reduce costs," said Chrencik, who declined to be interviewed for this article.
"We are now cutting muscle," Coyle worried at the time.
The hospital association, a nonprofit that also must report top pay packages to the IRS, reported that Coyle made $715,441 in the fiscal year ending in 2012. That's 9 percent more than she made the prior year.
Coyle said that, like hospital CEOs, her compensation is determined through a transparent process by a board of trustees. She said her pay is comparable to that of people in similar positions around the country and that her job is also multi-faceted with duties that include advocacy work, data and research, public policy analysis and member relations.
Former state Sen. George W. Della Jr. has advocated for more public awareness of hospital executive pay. The Baltimore City Democrat introduced legislation in 2008 that passed the Maryland General Assembly requiring the state to make hospital IRS filings more accessible to the public.
"Everybody is being asked to tighten their belt, and I don't know why they think they are immune to doing this," Della said. "I am very cynical when I talk about this. They are overpaid."
But hospital officials point out that executive pay makes up but a small portion of a hospital's overall finances. Johns Hopkins Medicine, for instance, expects to generate more than $6.5 billion in 2013 revenue and employs more than 41,000 people. Peterson's compensation is 0.05 percent of that revenue.
A recent analysis by Modern Healthcare of tax year 2011 shows that Maryland hospital executives make less than those at some of the country's top-paying hospitals. The publication found that the median total compensation for the 25 highest-paid CEOs of health systems was $3.8 million. The median compensation in Maryland was $744,532 in fiscal year 2012.
Pay not the problem
Dr. Stephen F. Jencks, who serves on the board of the cost review commission, said that some hospital CEOs make a "chunk of money" but that their pay is not what's driving health care costs higher. He said executives should be judged by whether they are running cost-efficient organizations.
"You can cut salaries in half, and it wouldn't really make a lot of difference to the cost of health care," said Jencks, who is also a health care safety and quality control consultant.
Steve Ports, deputy director of policy and operations at the commission, said the body "generally does not delve into these salaries as it defers to hospital management to manage effectively and efficiently."
He said the commission, in setting rates, provides hospitals with sufficient revenue.
At the University of Maryland Medical System, officials said executives won't get raises in the fiscal year that began last month because of the financial pressures facing hospitals.
"No senior leader at UMMS will be seeing an increase in compensation no matter how successful they are in steering their organizations through some of the roughest waters and most change health care has ever faced," said Mary Lynn Carver, a spokeswoman for the system.
At Saint Agnes Healthcare, CEO Bonnie Phipps took a voluntary pay cut in fiscal year 2013 and would do so again in 2014. Saint Agnes said in a statement the decision was made "in order to compensate for major financial decisions outside of Saint Agnes' control, that have affected Maryland hospitals."
She also donated two previous pay increases, in fiscal years 2011 and 2012, to the Saint Agnes Foundation, dedicated to supporting the hospital and its patients, but those donations had to be reported as income in the tax filings, the statement said.
According to Saint Agnes tax filings, Phipps received $1.9 million in the 2012 fiscal year, 4.4 percent more compensation than a year earlier.
Saint Agnes noted that Phipps' job has expanded to more than overseeing the South Baltimore hospital. In 2011, in her role as Baltimore market leader for parent Ascension Health, she took on oversight of other hospitals in Missouri, Idaho and Washington.
Mercy officials said Mullen's job also involves more than just running the hospital and noted that the institution has been recognized nationally as an urban hospital success story.
"As a result of Mr. Mullen's leadership, vision and skillful stewardship, Mercy has been an economic engine for the city, infusing additional jobs into the local economy," the hospital said in a statement.
Johns Hopkins pointed out that Peterson plays three roles heading the hospital and medical system and acting as executive vice president of Johns Hopkins Medicine, the umbrella group overseeing the main hospital, the hospital group and the medical school.
"Each of those three roles are held responsible for stringent quantitative measures" in such areas as financial performance, patient safety and service excellence, spokeswoman Kim Hoppe said in a statement.
MedStar spokeswoman Jean Hitchcock also noted Samet oversees a large system and that his pay is tied to performance goals.
Hospital executive pay is typically approved by the organization's board of trustees on the recommendation of a compensation committee. The medical institutions say they hire independent consultants and look at the pay of executives at comparable health systems when making their decisions. They also follow certain IRS guidelines.
"UMMS hospital executives are compensated in line with national benchmarks," Carver said. "The reason hospitals in Maryland are in a difficult place financially is because of four years of below-inflation reimbursement, not CEO salaries."
The hospitals have said years of below-inflation rate increases set by the Health Services Cost Review Commission, including a 1.65 percent increase approved in June, have left the institutions with barely enough revenue to operate.
Many are operating at a loss, according to a recent survey by the Maryland Hospital Association.
As a group, the hospitals' operating margin was 0.8 percent for the first eight months of the 2013 fiscal year, their second-lowest return in 14 years.
In June, the University of Maryland Medical Center in Baltimore said it would reduce labor costs by 3 percent through layoffs and attrition because of financial pressures, including federal budget cuts.
Where the cuts come
Representatives for the Maryland/DC division of 1199 SEIU Healthcare Workers East, the labor union that represents 9,000 Maryland health care workers, criticized hospitals for cutting costs on the "backs of rank-and-file workers."
"Maryland CEOs complain about the most recent state hospital rate increases and how low they are but, at the same time, these so-called low increases have not stopped executives from increasing their own pay," said Vanessa Johnson, vice president at large for the union.
Community Catalyst, the advocacy group, contends that CEO compensation should be evaluated on an individual hospital basis. One of the factors that should be considered, it says, is the role of nonprofit hospitals in the community and in providing charity care. These institutions receive tax breaks to meet this need.
"We see a lot of tightening of the belt right now," said Curtis, of the hospital accountability project.
The issue of CEO pay could become more challenging as health care shifts toward trying to treat fewer people at hospitals.
"You end up with a situation where you have a smaller institution and technically people pay less to CEOs of smaller institutions," said Harold Miller, executive director of the Center for Healthcare Quality and Payment Reform.
"But do we say as a CEO we want you to do all this hard work and be able to improve quality and reduce costs and then we're going to cut your pay because your institution is smaller?"
A previous version of this story gave an incorrect title and organization for Ronald A. Peterson.
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