Do Healthcare CEOs Deserve More Money Than Doctors?

Leigh Page


July 02, 2014

In This Article

Nonprofits Are in the Crosshairs

However, concerns about excessive executive pay are not focusing on insurance companies, or even for-profit hospitals. They are focusing on nonprofit hospitals. It is felt that the nonprofits' tax exemption means they must be held to higher standards.

Ken Berger, Chief Executive of Charity Navigator, a service that helps donors choose charities, said that nonprofit hospitals as a group receive the lion's share of donations to charities and have the highest levels of CEO pay among nonprofits. Even the Red Cross, which is a $3.4 billion operation, pays its CEO less than $600,000. "Once you get higher than that level of pay, I start having a nosebleed," he said.

Internal Revenue Service (IRS) rules state that nonprofit organizations must pay employees no more than a "reasonable compensation" for their services. To determine that level, the IRS encourages nonprofits to hire outside firms to collect data on what CEOs at similar organizations make.

Berger said this data-gathering often has the opposite effect from which it was intended: Payments for hospital CEOs are constantly pushed to the limit. "There is a kind of logrolling, where the pay scales get ever larger," he said. "Now that it has started, it's hard to break the pattern."

He added that nonprofit hospitals compete for CEO talent with for-profits, which aren't subject to the IRS rules.

Terry Brown, Managing Director of the Los Angeles office of Pearl Meyer and Partners, one of the consultants that measure CEO compensation for hospitals, defended current pay levels. The rules of the game, he said, allow very large hospital systems to pay their CEOs much more than smaller organizations. He noted that a 2009 IRS study[7] confirmed that not-for-profit hospitals were following guidelines on CEO pay.

Brown added, however, that the study also indicated "that the IRS wasn't thrilled by the level of compensation." Specifically, the IRS observed, "For some, there may be a disconnect between what, as members of the public, they might consider reasonable, and what is permitted under the tax law."

But rather than clamp down on high earnings, the IRS' strategy seems to be to improve transparency so that hospitals with highly compensated CEOs will suffer public embarrassment. The agency has redesigned its Form 990, which nonprofits fill out to report executive salaries, to make it more readable. Completed forms can be accessed for free on a Website called GuideStar. In recent years, Brown said, he has noticed more media outlets using GuideStar to report on incomes of executives at local nonprofit hospitals.

Meanwhile, the Office of Inspector General (OIG) of the US Department of Health and Human Services is stepping up scrutiny of CEO pay. As part of its current Work Plan,[8] the OIG said it would be reviewing hospital reports "to identify salary amounts." In this regard, the Centers for Medicare & Medicaid Services Provider Reimbursement Manual[9] states, "Compensation may be included in allowable provider cost only to the extent that it represents reasonable remuneration for managerial, administrative, professional and other services related to the operation of the facility and furnished in connection with patient care."


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