Ethical Dilemmas Facing Non-Profit Hospital CEO Compensation

This essay deals with the unethical prevalence of excessive compensation packages granted to nonprofit hospital executives. Nonprofits are highly complex organizations and are vital to the community’s in which they serves. Therefore, it is essential for these organizations to appoint highly motivated individuals knowledgeable of the healthcare industry and capable of managing and leading a hospital during a national recession while health reform is changing the culture of the US healthcare system.

However, many nonprofit organization’s tax-exempt statuses should be rescinded for allocating leftover resources to hospital executives in the form of exorbitant salaries, benefits, and other incentives. It is these hefty salaries and benefits that are restricting hospitals from carrying out their priority mission as public charities. These CEO’s exorbitant compensation packages are further straining the hospital’s ability to provide a social benefit, suggestion that these tax-exempt organizations are acting unethically, in that financial gain is taking precedents over social responsibilities.

Ethical Dilemmas Facing Non-Profit Hospital CEO Compensation Communities across the nation have seen the coarse effects of the delicate financial status of our country and the effects it has on healthcare organization within their community. In a time difficult for nonprofit healthcare organizations to operate at a profit, many organizations are left with no choice but to cut essential departments, programs, and employees, leaving many patients that have relied on these organizations, out in the cold.

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Recently, because of these financial issues, the ethical principles of nonprofits regarding CEO compensation have been under heavy scrutiny by both the public, and the Internal Revenue Service for excessive salaries and benefits. Nonprofit hospitals are organization that are exempt from paying income, sales, and property taxes, and receive charitable donations and massive government subsidies with the understanding that these subsidies are issued in order for these hospitals to fulfill their duty as a community service and benefit.

Excessively high compensation for hospital executives is an unethical epidemic facing many organizations, particularly large and urban hospitals, that is restricting hospitals from carrying out its duties because of additional financial constraint. Salaries for nonprofit hospital executives should be capped as they limit and often restrict hospitals to better fulfill their charitable, social missions. Healthcare is beginning to mirror corporate businesses with many hospital CEO salaries competitively rivaling those of corporate executives.

However, organizational goals and missions are nearly completely diametrical. Healthcare organizations are unlike other corporations in that corporations are in existence with the ultimate goal of financial gain. Nonprofit hospitals carry missions such as to provide high-quality, cost-effective healthcare services to all patients regardless of ability to pay, to offer training, to conduct clinical research, to serve the community as a public health advocate, and to provide support and services which respond to the area's health care needs through health education, health promotion, and access to care.

Hospitals have the ethical responsibility to pursue a social mission, including providing uncompensated care and community outreach, but when their executives boast salaries with staggering seven figure salaries, the charitable work of the organization becomes obnubilated by an unmistakable pursuit of financial gain. The IRS reported that the average hospital CEO received $490,000 in total compensation in 2006, and top executives at twenty of the larger hospitals in the nation raked in an average of $1. 4 million a year, whereas uncompensated and free care expenditures as a percentage of hospital revenues averaged about 7 percent (Terry, K. 009). There is a large margin in executive compensation that is dependent on features such as geographical location and size. According to the “Charity Navigator,” in 2008, the median CEO salary in the Northeast was $351,000 for large hospitals, and $120,000 for small hospitals. In the Mountain West region of the US, the median salaries for a large hospital was $194,374, and only $80,790 for small hospitals (Charity Navigator 2010) Seven figure salaries are not a normal occurrence among hospital and health system executives.

However, according to the Chronicle of Philanthropy, which does an annual national survey of nonprofit salaries, found that the five top-paid nonprofit chief executives in 2003 all worked for hospitals. On top of these exaggerated salaries are the attractive benefits such as bonuses, deferred income, retirement plans, country club memberships, and countless other perks that are attracting the wrong kind of leaders to these organizations. Hospitals must provide their social responsibility to the community before spending outrageous salaries for chief executives.

It is an unethical practice to pay executive teams more than the total spending on the necessitous care of the community. For example, the survey identified 17 hospitals in California where the total compensation to CEO’s alone exceeded the total cost of charity care of their respective organizations. These excessive salaries could have easily paid hospital bills for uninsured individuals, or could have been used to fund educational programs for the community, provide free immunizations to the public, and or many other beneficial alternatives that could have had a big impact on the community’s health (Mahar, M. 011). It is unjustified for executives to be compensated in amounts greater than $1 million. By capping executive salary at this figure, funds can be reprioritized into community programs such as parenting support programs, screening programs, women, children and infant development clinics, which can be implemented to provide nutrition and educational information for new mothers, and social work programs that could assist individuals and families that face medical related problems, and those who need emotional support.

Instead, greed has played a big factor in CEO initiatives. It has not been of rare occurrence for Chief executives to siphon off millions of tax dollars that should be going towards access and quality care. It is unethical for executives at nonprofit organizations to exploit their federally granted nontaxable status to enrich themselves (Swiatek, J. , 2005) Attorney General Michael A. Delaney of New Hampshire announced in May of 2010 that he would review the compensation of CEO’s at more than twenty nonprofit hospitals throughout the state.

In a report that reviewed the proposed merger of two health systems, Mr. Delaney expressed his concern about the pay for Alyson Pitman Giles, President ; CEO of Catholic Medical Center, who earned $1. 4 million in 2009. He stated, "Nonprofit leaders must be aware that they are the stewards of the charitable assets they oversee, and those assets are held in trust for charitable purposes, not individual gain," (Gose, B. , 2010)

Non-profit hospitals must provide a minimum of charity care in order to receive its tax-free title and its federal grants. However, many hospitals, although they meet the minimum, make no effort to go above and beyond this threshold, instead rewarding these left over funds to be dispersed to the organization’s high-end executives in the form of company cars and country club memberships (Mahar, M. , 2011). These lavish executive benefits in no way benefit the organization. They are unethical and borderline unlawful.

Federal law states that non-profit, tax-exempt organizations cannot operate to the financial benefit of any individual. In the mid-1990s, Congress passed intermediate sanctions laws that have given the IRS authority to require individuals who make excessive compensation from a non-profit to pay the money back, plus a 25% fin. (Appleby, J. , 2004). It is a common suggestion to compensate executives to match their performance at the organization in which they lead. However there are different ways to measure hospital performance.

There is a measure of how well a CEO does in leading his or her hospital in providing beneficial programs to the community; for example, uncompensated care for the poor. Another way to measure or his or her success is by how well CEO’s implement new programs and services that will in hopes attract private pay customers like specialized surgery centers, imaging centers, and cardiac centers. Many healthcare organizations across the nation are expanding and adding unique services that are attracting private pay customers, giving hospitals the opportunity to increase profits.

This practice has its benefits in both providing a wider range of care for those who can pay, and offering the hospital more means of financial gain, however, in many organizations, this has established precedence over the social missions of nonprofit organizations. In a study conducted by Jeffrey Kramer, PHD, and Rexford E. Santerre, PhD, 30 hospitals in Connecticut were examined on how various measures of performance affect the compensation of CEO’s, which throughout the state, range from a modest $136,000 to an exorbitant $2 million plus salary.

The study shows that CEO compensation is directly related to organizational size, stating, “A 10 percent increase in the number of beds results in an 8 percent increase in CEO pay. ” Another 8% increase in pay is attributed to the CEO if the occupancy rate rises by 10%. “In contrast, providing more uncompensated care and admitting an additional public-pay patient lowers the compensation of hospital CEOs. The results of the study reveal that hospital CEO’s (certainly in the state of Connecticut) have financial incentive to increase the occupancy of privately insured patients rather than uncompensated care and public paid insurance patients, also suggesting that economic performance takes priority over charitable performance (Kramer, J. , ; Santerre, R. E). Notwithstanding, A non-distribution constraint on nonprofit organizations means that excessive profits cannot be distributed among those who make decisions within the organization; this includes employees, managers, and board members.

Hence, the nonprofit distinction ought to mean hospital executives are paid based upon their attainment at fulfilling the charitable and social mission of the organization. Nonprofit hospitals have ethical responsibilities and obligations to serve the community, even in times of financial struggle. It is important for these organizations to recruit professionals that demonstrate the same ideals and values of the organization. Healthcare leaders whose goal is to produce a healthier population through increased public programs and access to care is the type of leader that hospitals and health systems should strive to obtain.

Accomplished leaders can be found and appointed as a nonprofit CEO for a more reasonable (6 figure) salary if he or she is in the healthcare industry not for riches, but for offering a greater good. The American Red Cross for example, took in $3. 3 billion in revenue in 2009, however Red Cross CEO Gail McGovern took in only $456,000, according to the organization's IRS filing (Hancock, J. , 2011). McGovern is an example of a leader who recognizes the ethical financial dilemmas of her organization, and will willingly take a more appropriate salary in order to accomplish the organization’s goals.

There is no mention of executive compensation in the Patient Protection & Affordable Care Act besides the suggestion that compensation should be “reasonable”. Hospital executives should be paid based on their production within the organization and their contribution to their community. As a nonprofit organization, pursuing the charitable mission should take greatest importance in determining final executive compensation. This aspect of an organization’s mission should never be overshadowed by hospital expansion, financial well-being, or increased services and technology.

Although these elements are incredibly important for the organization, the insured population, and the advancement of medicine, it is unethical for charitable organizations to use government subsidies for anything other than charity care and social benefit. Budget cuts, along with a feeble economy has resulted in hospitals engaging in mass layoffs to conserve resources. According to the US Bureau of Labor Statistics, the month of August (2011) consisted of thirteen mass layoffs in hospitals, totaling in over 1,000 jobs lost. The month before consisted of ten mass layoffs with over 600 lost jobs.

This puts hospitals on pace for nearly 130 mass layoffs and over 8,000 jobs lost in 2011. To make matters seem worse, in an article posted by FierceHealthcare, a leading source of healthcare management news for healthcare industry executives, AMA data claims that a 2 percent cut in the Medicare program would lead to the loss of 195,000 jobs by 2021 (Caramenico, A. , 2011). These layoffs would be decreased immensely if hospital executives received more appropriate salaries. Excessive salaries are not only draining resources from the hospital, but are also threatening the jobs of nurses, administrators, and other hospital employees.

These staff members, who are on an opposite spectrum in terms of salary, face the possibility of layoffs at any time of financial vulnerability. The decision to cut jobs in non-profit hospitals while executives are still receiving Wall Street salaries is unethical of the board of trustees. In financially difficult times, executives have the ethical responsibility to take pay cuts in order to maintain the organization’s social reputation. Hospitals are extremely complex organizations that more often than not are the single largest employers in communities across the country.

Hospital executives are responsible for making important decisions that will ultimately affect thousands of people. Many CEO’s and members of boards of trustees argue that executive roles are far too important to not have competitive compensation packages. It is argued that million dollar salaries, added bonuses, hefty retirement plans, and other attractive perks are the only way to attract highly effective leaders capable of running a hospital in a time of economic struggle and health reform. Many hospitals have net revenues exceeding the billion-dollar mark, making it easier of Board members to justify seven-figure salaries for CEO’s.

President and CEO of New York-Presbyterian Hospital, Dr. Herbert Pardes inherited a $9. 8 million package in 2008 that included $6. 8 million of previously awarded retirement benefits, which he'll receive when he retires at the end of 2011. If Dr. Pardes worked at a public company of about the same size, his salary would be outrageously low. In 2009, Nasdaq CEO Robert Griefeld's total compensation exceeded $13 million while his company's revenues were only $3. 4 billion. New York-Presbyterian has 2,353 beds and pulled in $3 billion in revenue in 2008, up 3% from 2007. A The Greater New York Hospital Association spokesman defended Dr.

Pardes’ salary, stating, "Dr. Pardes' pay reflects his extraordinary success leading this large and complex organization, and exceeding objectives to enhance patient care, strengthen financial stability and promote community health in a very challenging environment. " (Benson, B. , 2010) The Greater New York Hospital Association stated that "CEO salaries reflect not only a national demand for their services, but also the skills and leadership necessary to operate large, extremely complex medical centers that are open 24/7, generate millions and sometimes billions in revenue, and are often the largest employer in the community. (Benson 2010) Leading one of these charities requires an individual that possesses an understanding of the issues that are unique to the charity’s mission as well as a high level of fundraising and management expertise. Attracting and retaining that type of talent requires a competitive level of compensation as dictated by the marketplace. It is important for donors to understand that since the average charity CEO earns roughly $150,000, a six-figure salary is not necessarily a sign of excessive pay for a mid to large sized charity. Charity Navigator 2010) Today, executives are being paid to keep their organizations afloat amid closings of many hospitals nationwide due to persistently poor financial performances. CEO’s face constant pressure to hire more staff, increase nurses’ salaries, implement more community programs, and invest in expensive technologies, while at the same time they are aware that insurers want to pay as little as possible. The CEO undoubtedly faces many challenges, and the responsibilities are incredibly complex.

Even with a nonprofit status, many oppose executive compensation cuts, arguing that these organizational leaders deserve salaries competitive to corporate pay. Trustees pay executives based on total revenues, as well as how effective they are in providing patient safety, clinical quality, attentive service, and cost effectiveness. Hospital executive compensation should be based on a number of elements, such as total revenue, the size of the organization, as well as the amount and effectiveness of community benefit.

Instead of offering company cars and extravagant country club memberships, executives should be entitled to financial incentives to implement more community benefit programs. Peter Baristone, President & CEO of Mission Hospital located in Laguna Beach, CA referred to his own compensation strategy stating: Collaborating with the community to identify, understand, and respond to community needs that have an impact on health and quality of life is a major goal for all CEO’s. We establish specific quantifiable targets for each goal.

One-seventh of my bonus depends on reaching the targets for community health and benefit. (Bogue, R, 1999). I recommend that all nonprofit Boards assemble an independent compensation committee, responsible for reviewing the CEO’s performance and ensuring that the CEO’s pay is appropriate. At its highest, CEO compensation should be capped at $1 million, thus allowing these large, urban hospitals to recycle resources back into the hospital and community programs, while at the same time offering executives a market competitive salary, fit for a CEO.

At a time where nearly 20% of adults are uninsured and community residents are in need of help in the form of various programs, it is more important than ever for nonprofit hospitals to perform its duty of being a “non-profit” organization and be of greater service to the community in which it serves. Nonprofits not only have the legal responsibility to implement such benefits, but also have the moral and ethical duty to carry out their social missions to the best of their ability, and as far as their recourses let them.

By capping executive compensation, these resources can be better allocated to provide more charity care, to implement more community programs and benefits to produce a healthier community, and ensure fairness among staff salaries. "Hospitals are unquestionably complex institutions that require skilled managers, but there's no place for Wall Street-level salaries if we want an affordable health care system. ” –Mark Scherzer (Benson, B. , 2010)

Works Cited:

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8. Kramer, J. , & Santerre, R. E. (2010). Not-for-Profit Hospital CEO Performance and Pay: Some Evidence from Connecticut. Inquiry, 47(3), 242-251
9. Hancock, J. (2011, August 28). For hospitals, 'nonprofit' stops with CEO's paycheck - Baltimore Sun. Featured Articles From The Baltimore Sun. Retrieved November 4, 2011, from http://articles. baltimoresun. com/2010-08-29/health/bs-bz-hancock-hospital-pay-20100829_1_hospitals-executive-compensation-ceos Caramenico, A. 2011, October 4).
10. More mass layoffs as hospitals face payment cuts - FierceHealthcare. Healthcare News, Hospital News, Healthcare Companies --- Fierce Healthcare. Retrieved October 26, 2011, from http://www. fiercehealthcare. com/story/more-mass-layoffs- hospitals-face-payment-cuts/2011-10-04
11. Benson, B. (2010). Hospital execs enjoy healthy paydays. (cover story). Crain's New York Business, 26(12), 1-15.
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