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What's fair pay at nonprofits? When it comes to hospitals, a proper diagnosis is difficult

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Million-dollar-plus salaries are fairly routine for CEOs and other top executives at New Jersey's nonprofit hospitals and health care systems.

Some experts question the sustainability of these paychecks, given the Affordable Care Act's drive to clamp down on the nation's medical bills, but there is also the widespread view that big money draws top talent to demanding jobs that get tougher every day — as the ACA pushes hospitals to keep people healthy and out of their beds.

This issue of NJBIZ includes our inaugural "Hospital CEO Compensation" list for 2012, the most recent figures available from the annual reports that nonprofit hospitals are required to file with the IRS. The list excludes pension and deferred compensation plans that tend to create wide swings in compensation, especially as executives near retirement.

Heading up the list is Robert C. Garrett, CEO of the Hackensack University Health Network at $2.12 million, followed by Richard P. Miller, Virtua Health ($1.99 million); John K. Lloyd, Meridian Health System ($1.68 million); Barry H. Ostrowsky, Barnabas Health ($1.67 million); and Stephen K. Jones, Robert Wood Johnson Health System ($1.55 million).

Several New Jersey multi-hospital systems paid several top executives more than $1 million in 2012. Hackensack, for instance, has two executives over the million-dollar mark.

Betsy Ryan, president of the New Jersey Hospital Association, said these salaries come with the territory.

"(These executives) have highly complex jobs: They run large institutions, there is a lot at stake at those institutions, they operate 24/ 7, 365 days a year — and these folks are on the clock all the time," she said.

Ryan said hospital compensation decisions are not made in a vacuum.

"Each institution has an executive compensation committee and each has to comport with IRS reasonableness standards," she said. "These things are vetted."

Ryan said New Jersey hospitals fish in a very competitive executive labor pool, wedged as we are between New York and Philadelphia.

Jeanne Otersen, policy director for the Health Professionals and Allied Employees union, whose members are nurses and other hospitals workers, has concerns about salaries.

"I think compensation ought to be fair and reasonable — and it ought to reflect the success of the hospital — and it does not appear to be that," she said. "The system is out of whack. I don't think we have a system that really makes sure that we are wisely spending what are scarce patient care dollars."

She noted that these hospitals receive public funds in the form of charity care, which are subsidies the state provides to defray the cost of hospital care for the poor and uninsured, as well as revenue from the taxpayer-funded Medicare and Medicaid programs.

"They are tax-exempt institutions, and I think some of them have forgotten that," she said.

Hackensack noted that its flagship hospital, Hackensack University Medical Center, is the largest provider of inpatient and outpatient services in the state and the largest employer in Bergen County with nearly 8,000 employees. The network has more than $1.7 billion in annual net revenue.

"The pay for HackensackUMC's executives reflects its complexity and is consistent with those levels paid to executives in other similarly situated not-for-profit academic and integrated health systems," Hackensack said in a statement. "The compensation philosophy is to provide market-competitive base salaries while increasing pay through pay-for-performance incentive plans based on outcomes."

Hackensack said its trustee board "takes very seriously its commitment to provide top-quality health care to the communities served and its obligation to be good stewards of the medical center's resources. Providing top-quality care in a fiscally and operationally sound manner in a world-class health care organization demands top leadership talent."

HackensackUMC, the top-ranked hospital in the state, said it has "managed to be financially strong while providing more than $225 million in charity care and other community benefits in 2012 alone."

Hackensack said its compensation committee "conducts its review and approval process in a manner that qualifies for an IRS 'safe harbor' (designation) — meaning the compensation is considered reasonable."

And pay-for-performance is built in.

"In the last several years, base salaries have increased slowly as the board has shifted more of the compensation into a pay-for-performance bonus plan — based on outstanding outcomes and performance."

Joel Cantor, director of the Center for State Health Policy at Rutgers University, said the issue of compensation is complex.

"The first responsibility of nonprofit hospital boards is to the charitable mission of their institution," he said. "If they are authorizing excessive compensation, they are not meeting their fiduciary duty.

"On the other hand, hospital systems are large, complex organizations. Ultimately, CEO compensation is driven by the market for senior talent. There is no place to look up the right pay scale, but public scrutiny of executive compensation is appropriate and hospital boards need to take their responsibility to set executive pay at the right level seriously."

Barnabas Health also addressed the issue in a prepared statement.

"Hospital and health system management is highly specialized due to the complexities of reimbursement, provision of clinical services and the regulatory environment," the statement said.

"Accordingly, there are a finite number of qualified executives. These executives operate within a national pool of both nonprofit and for-profit health care providers; therefore, Barnabas Health competes with hospitals and health systems not only in New Jersey but across the nation. Moreover, insurance and private industry seeks to hire hospital executives to address their own insured or employee health care costs, creating significant additional competition."

Barnabas said as a nonprofit system, it faces many "challenges" to attracting executives.

"We cannot offer stock options, creative equity opportunities and other for-profit industry incentives, yet at the same time, we are competing nationally with for-profit health systems and industry. Consequently, salaries of executives in nonprofits must be competitive on a national scale and we must compensate in base salaries and other models, such as a Supplemental Executive Retirement Plan, to compete with employers nationally for this limited group of executives."

Barnabas said New Jersey's high cost of living doesn't help it compete in this national labor pool.

"Furthermore, for an executive to be successful in the health care industry, he or she needs tenure in order to make meaningful change. Once located here, the executive has substantial opportunities to move to a competitor, prompting retention-type arrangements and other selective compensation programs, which strive to keep these executives in place. While these programs add to the overall compensation, the expectation of greater success through longer tenure is of immense benefit to the community."

David Knowlton, chief executive of the New Jersey Health Care Quality Institute, said hospital executive compensation is a "complicated" issue.

"We've got probably the most trying time we've ever had in health care, and so I guess at some level they're worth the money if they're going to solve the problems," he said.

"I think the thing that is most troubling is that we're getting compensation creep. The three most critical elements of health care reform are cost, cost and cost. So when does the escalating compensation package for CEOs become a cost element and we say, 'This has to give some here as well?'"

Knowlton said one idea might be applying zero-based budgeting to hospital compensation, where "you start at zero and say 'What skills set do we need, and are we paying the right amount for this service?'"

Knowlton said the salaries don't appear in all cases to be tied to performance.

"You have some hospitals that I think are in difficulties but the people are getting pretty good salaries," he said. "Now if they are getting (the hospital) out of trouble and that's part of the standard, well I think that's probably reasonable. Where is the standard that we are using to evaluate this?"

The needs of the hospital, not the salaries of others, is key, Knowlton said.

Knowlton said when hospitals do a CEO search, they look at salaries of comparable institutions.

This leads to "this stepwise escalation of the salary base," he said. "I think at some point it's got to be looked at as a cost center to say, 'Is this a reasonable amount of money?'"

"I don't think they've done that."

Raritan Bay Medical Center CEO Michael D'Agnes came in 23rd on the list at $823,283.

Joseph Jankowski, the hospital's board chairman, said D'Agnes' annual compensation "is below the median of the market for CEOs in similarly sized, not-for-profit hospitals and is consistent with the compensation paid to other long-service, high-performing CEOs in similar positions.

"In 2008, Mr. D'Agnes took a significant reduction in retirement benefits to ensure appropriate alignment with market practices. A portion of his pay is at risk and tied to performance."

D'Agnes is performing.

Jankowski said under D'Agnes' leadership, Raritan Bay "gained its initial designation and its re-designation as a national Magnet hospital for nursing excellence, one of only 393 in the country, a gold performance award in treating heart disease and a silver plus performance award in treating stroke, both from the American Heart and American Stroke Associations."

Ryan said leading a health care system is a different job from managing most other nonprofits.

"They literally are on call 24/7, 365 days a year and they are running an institution where lives are at stake," she said. "And with the passage of the ACA, these individuals are literally re-engineering health care to comport with changes in the marketplace driven by patients, consumers and insurers."

Knowlton agreed, saying the fact hospitals are not for profit is not an issue.

"(I'm) not sure I buy the argument that just because these are all not for profits that somehow there should be a lesser standard of compensation," he said. "If they are managing a multimillion-dollar corporation, then it's appropriate in a dangerous time that they get paid appropriately."

To maintain their tax-exempt status, nonprofit hospitals must allocate some resources to the community good.

"A good chief executive who makes sure that happens is worth the money that is paid to them, especially in these difficult times," he said.

Knowlton said hospital compensation needs to be examined in the light of changes sweeping the health care system — including the decline in length of stay for many hospital procedures, which increasingly are being performed as outpatient procedures.

"Length of stay in hospitals is going down, volume is going down," he said. "Would you expect then to see executive salaries increasing? If volume at General Motors decreases, you can count on the fact that the bonus structure there is going down as well."

E-mail to: beth@njbiz.com
On Twitter: @bethfitzgerald8

About the list

The list includes New Jersey nonprofit acute care hospitals, which report the salaries of their highest-paid executives to the IRS, as well as University Hospital in Newark, which is a state of New Jersey institution.

The list does not include for-profit hospitals, which aren't required by the IRS to make their finances public. The state legislature passed a bill requiring certain financial disclosures by for-profit hospitals; it was conditionally vetoed by Gov. Chris Christie and is now under review by his administration.

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