Hospitals might limit executives' pay hikes after run of big increases

May 3, 2014

Before local hospitals slashed staff and expenses last year, they had been boosting the pay packages of their top executives faster than hospitals around the country.

Seven of every 10 senior executives at the major hospital systems in Indianapolis saw their total compensation rise more than 10 percent from 2010 to 2012, according to the latest compensation information hospitals have filed with the Internal Revenue Service.

More than half of the region’s 40 top hospital executives enjoyed compensation boosts of 15 percent or more during that three-year period—bringing the group’s average compensation in 2012 to $771,000.

Evans IU Health CEO Dan Evans earned nearly $2.3 million in compensation in 2012.

But those figures might reflect a high-water mark for hospital executive pay. All four of the major hospital systems operating in Indianapolis rolled out cost-cutting programs last year, which included hundreds of layoffs that even reached into the executive ranks.

The financial problems hospitals now face mean they no longer can afford to employ as many executives making a quarter-million dollars or more, said Tom Fischer, who until December was the chief operating officer and chief financial officer at Indianapolis-based Community Health Network.

“There are a lot of people being paid $300,000 or above across a very wide span of control,” he said. “They’re hard-working, dedicated people; don’t get me wrong. But we’re going to have to reduce the amount of overhead costs.”

The compensation figures in IBJ’’s analysis include salaries, bonuses, benefits and gains in retirement plans. IBJ included all executives whose compensation was reported by the four major hospital systems operating in Indianapolis in each of the past three years, as well as the CEOs of individual hospital campuses in the counties immediately surrounding Indianapolis.

Executives who retired in 2012 were excluded from this analysis, because their 2012 compensation was inflated by large retirement payouts.

The hospital systems have not yet filed 2013 compensation with the IRS.

Mills Mills

Nationwide, cash compensation increases in 2011 and 2012 hovered around 5 percent—or 10 percent over two years—according to surveys of hospital executives’ compensation conducted by consulting and search firms such as Integrated Healthcare Strategies, the Hay Group and Cejka Executive Search. Those firms expect increases to remain at that level for the foreseeable future.

Most Indianapolis hospital executives easily surpassed that 10-percent average growth rate.

Not all Indianapolis-area hospitals provide sufficiently detailed information to the IRS to compare cash-only compensation from year to year. For those that do—Indiana University Health and Franciscan Alliance—10 of 12 executives received cash-only increases of at least 10 percent and two-thirds enjoyed bumps of at least 15 percent.

Among Indianapolis hospital executives for which cash compensation figures are available, the average amount of cash received was $631,000. Cash made up 82 percent of those executives’ total compensation.

‘Recovery years’

Brody Brody

One reason for the compensation hikes is that the period from 2010 to 2012 was considered “recovery years” after the deep recession of 2008 and 2009, noted Ed Abel, a hospital accountant at Indianapolis-based Blue & Co.

Those years also were a time the Indianapolis hospital systems grew significantly larger and more complex, as they acquired numerous smaller hospitals and physician practices.

In some cases, executives saw their compensation jump as they took on significant new responsibilities. For example, Dr. Tim Hobbs became chief physician executive at Community Health Network in 2011, which helped lift his 2012 compensation to $787,000, double where it was in 2010.

“We’ve got this huge infrastructure and a very complex business,” said Fischer, who received 2012 compensation of $868,000. In general, he said, “I don’t think people are being overpaid.”

But since 2012, Congress cut hospital reimbursement rates in the federal Medicare program, and a new Obamacare formula for Medicare took effect that will slow future reimbursement increases by tying them to inflation.

Meanwhile, Medicare and private insurers pushed hospitals to sign new contracts that reward them for performing fewer services—not more—on patients. In addition, patient visits to hospitals fell unexpectedly in 2013.

That prompted hospitals to cut employees, who account for about 60 percent of a typical hospital’s operations. Nearly all hospitals say they’re trying to cut overall expenses 20 percent.

“The financial pressures have not lessened; if anything, they’ve only increased. They don’t have any choice but to look at it and make some hard decisions,” said Abel, the hospital accountant, referring to overall executive compensation.

hospital-chart-for-web.gifIndeed, those difficult decisions already are starting to happen.

The clearest example came at St. Vincent Health last year, which let go of three of its highest-paid executives as it laid off about 865 employees. Two receiving pink slips were Dr. Jon Rahman, St. Vincent’s chief medical officer, and Dr. Alan Snell, chief medical informatics officer.

Rahman received $544,000 in 2012 compensation. Snell received nearly $362,000.

Also departing was St. Vincent CEO Vince Caponi, who moved into another job with St. Vincent’s parent organization, St. Louis-based Ascension Health. Caponi’s 2012 compensation topped $2.1 million.

“The C suite is not immune to it. It’s across the board,” said Paul Esselman, managing principal at St. Louis-based Cejka Executive Search, which recruits health care executives and physicians around the country.

Community has elevated some of its hospital presidents to instead be regional executives over a variety of operations, while letting other executives go. For example, Mike Blanchet, who formerly oversaw Community’s Indianapolis hospitals, retired in 2012. So did Dr. Bill VanNess, CEO of Community Hospital-Anderson, who is now Indiana’s health commissioner.

Both Blanchet and VanNess received annual compensation of more than $500,000.

Community CEO Bryan Mills’ compensation actually went down 4.6 percent from 2010 to 2012—the only CEO of an Indianapolis-area hospital system who saw a decline in that period. Mills, who declined an interview request, received nearly $1.3 million in compensation in 2012.

Indiana University Health let Jim Terwilliger go in March after less than two years running Methodist and University hospitals. He received 2012 compensation of $522,000.

Dr. Jeff Sperring, CEO of Riley Hospital for Children, is also overseeing those two hospitals, while IU Health seeks a permanent replacement.

IU Health also saw a number of high-paid executives retire in 2012, including Sam Odle, former chief operating officer; Norm Tabler, former general counsel who is now back to practicing at his former law firm; and Debra Uhl, former chief operating officer at University Hospital, who now teaches at Butler University. Also departing were Dr. Rich Graffis, former chief medical officer, and Jim Jorgenson, former chief pharmacy officer.

The annual compensation of those executives ranges from a low of $272,000 for Jorgenson to a high of $2 million for Odle.

IU Health provided $2.3 million in compensation in 2012 to its CEO, Dan Evans, as well as more than $1 million to Linda Everett, its chief nursing officer.

“IU Health needs to be able to attract and retain the best talent to lead the organization in providing the best care possible to our patients,” wrote IU Health spokeswoman Whitney Ertel in an email.

Doing more with less

The biggest compensation packages can be found at Franciscan Alliance, which is based in Mishawaka and operates three hospitals in the Indianapolis area.

Franciscan CEO Kevin Leahy received compensation of $2.5 million in 2012, while three of Franciscan’s regional CEOs—Eugene Diamond, Bob Brody and Terrance Wilson—received $1.6 million, $1.6 million and $1.1 million, respectively.

Each executive saw his compensation rise at least 22 percent from 2010 to 2012.

Franciscan executives declined to be interviewed for this story.

The large pay packages have been criticized by some hospital employees, especially those who lost their jobs in 2013. In addition to St. Vincent’s cuts, IU Health cut 935 people, Franciscan eliminated 925 jobs, and Community laid off more than 150 people.

Some hospital executives have said physicians may have to accept a pay cut soon.

“As third-party payers, such as Medicare and Medicaid, reduce physician payments, our system and all others will be forced to pass these cuts along to physicians, but also will do all we can to compensate physicians at current market levels,” Franciscan’s Leahy said in a 2013 statement.

But hospital boards are not talking about reducing their executives’ pay, said Esselman, the executive search consultant.

Instead, they are asking executives to take on more responsibilities—but are not raising their compensation the same proportion as their increase in duties.

Boards also have been tying larger portions of executive pay to performance-based metrics, such as quality, safety, patient satisfaction and physician engagement.

“Boards are saying, ‘We can’t cut [patient] services,’” Esselman said. “So boards are telling their executives, ‘You’re going to take on more responsibility, and you’re going to take on more accountability.’ That will continue.”•

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