What do hospital boards value in a chief executive? A new study of CEO pay at nonprofit hospitals finds that executives at institutions that have a lot of fancy medical technology and high patient satisfaction are paid more than their peers. But running a hospital that scores well on keeping more patients alive or providing extensive charity care does not translate into a compensation bump.
"The finding on quality is disappointing: It says that most boards are more focused on the fanciest technology around," said Dr. Ashish Jha, a professor at the Harvard School of Public Health and one of the study’s authors. "This paper suggests that maybe we need to pay a little more attention to other more important outcomes, such as whether your patients are dying at a high rate or not."
CEOs of technology-laden nonprofit hospitals earned on average $136,000 more than those with little advanced machinery, according to the study published Monday in the journal JAMA Internal Medicine. CEOs at places with high patient satisfaction scores earned on average $52,000 more than those with poor reviews.
The study found no difference in CEO compensation depending on publicly available measures of quality, including mortality rates, readmissions rates and how consistently hospitals followed a number of publicly reported guidelines for recommended care. This results are in line with a report last year that focused on New Hampshire hospitals and also found no relationship between CEO pay and quality of care.
For some time, nonprofit hospitals have been under scrutiny for paying lavish salaries to CEOs while giving little back to their communities. Dr. Karen Joynt, the study's lead author, said that since nonprofit hospitals do not have to pay any property taxes, the researchers wanted to see if there was any evidence hospital boards gave financial rewards to CEOs to provide more charity care, such as treating lots of low-income patients and discounting or waiving bills for those who had trouble paying. "We didn't see a signal at all," she said.
The study is the first to use federal tax returns of hospitals to assess CEO pay and the factors that are associated with it. The researchers examined records for 2,581 hospitals, more than 98 percent of private nonprofit hospitals. For-profit hospitals, which are a minority of America’s acute care hospitals, were not included in the analysis. The analysis identified 1,877 executives, with some running more than one hospital.
The researchers compared the highest performing hospitals with the lowest performing hospitals after adjusting for all other factors, such as the size, whether the hospital was located in an expensive part of the country and whether it was an academic medical center or community hospital. They also adjusted for CEOs who ran more than one hospital.
The average CEO compensation was $595,781 in 2009, the most recent year for which the tax returns were publicly available when the study began. As would be expected, the study found that CEOs who ran bigger hospitals were paid more -- an average of $550 more per bed. CEOs of academic medical centers were paid $425,000 more than CEOs running nonteaching hospitals.
The researchers employed a technology index that assessed the number of advanced machines such as MRIs and positron-emission technology, also called PET scans. The index also factored in whether the hospital performed complex operations such as transplants and open-heart surgery. The researchers divided the hospitals into four groups, based on this index. The average CEO compensation at hospitals in the group with the most technology—after all other factors were taken into account —was $664,000, while the average compensation for CEOs at hospitals in the group with least amount of sophisticated technology was $528,000, 26 percent lower.
Dr. Warren Browner, the CEO of the California Pacific Medical Center in San Francisco, questioned the paper’s conclusions in a commentary that the journal also published. He wrote: "Their conclusion that advanced technology drives CEO pay might be right, but an observational design cannot rule out alternatives, such as CEOs at fancier hospitals earn more because they are worth more, or because the members of the board compensation committees at glitzy hospitals are more accustomed to higher incomes."
Browner disputed the researchers' suggestion that hospital boards need to place more emphasis on quality when setting compensation, saying that already is a widespread practice. He suggested that hospital boards may be judging CEOs using internal metrics that are different than those available to the Harvard researchers.
The researchers acknowledged that possibility, but said that the public measures, such as mortality, should be relevant in assessing any hospital leader. "It's hard to argue that death rates after a heart attack don't matter," Jha said.
They found that on average, the group of hospitals with the highest patient satisfaction scores paid their CEOs nearly $626,000 while CEOs of hospitals in the group with the lowest scores earned $574,000. Patient satisfaction is considered one marker of quality, although there is disagreement about how much it is influenced by extraneous factors such as the lavishness of the hospital facilities.
Browner wrote that it would not be surprising if hospitals used the public patient satisfaction measures as a metric, but wrote that it was “unclear” whether those reflect medical quality. "Indeed, at our hospital, overall patient satisfaction is markedly higher among those who were in private rooms," he wrote. "So, too, is their satisfaction with the physicians, nurses, tests and treatments, and even the food! Talk about a halo effect."