Thursday, July 17, 2014

For Hospital CEOs, Retirement May Mean Never Having to Lose Your Paycheck

 Dr Herbert Pardes was once one of the best paid CEOs of a US non-profit hospital system.  A new New York Times article reported that the hospital system continued to pay him millions after his retirement. 

Introduction - the Best Paid Non-Profit Hospital System CEO in 2008

In 2009, we first discussed the compensation given to Dr Herbert Pardes, the CEO of New York - Presbyterian Healthcare System, which appeared to make him one of the best paid, if not the best paid non-profit hospital system CEO in the US.  His total compensation for 2008 was $9.8 million, according to the NY Post.  While his compensation was lower in 2007, approximately $5.1 million, 9 other executives made over $1 million, and the 10 together made over $26 million.  This amount was approximately 20% of the system's total surplus, and 1% of its total budget.

The Times reported that since then, Dr Padres continued to do very well financially,

Dr. Pardes’s compensation has consistently been among the highest of any New York hospital C.E.O. His compensation in 2011, his last year as chief executive, was $4.1 million, including base pay of $1.7 million and a bonus of $1.8 million.

Retirement Means Never Having to Lose Your Paycheck

According to the Times, after Dr Pardes retired in 2011,

The next year, Dr. Pardes earned $5.6 million, which included $1 million in base salary, a $1.8 million bonus for his final year as chief executive and more than $2 million in deferred compensation, according to hospital tax records. That exceeded the amount earned by Dr. Pardes’s successor, Dr. Steven Corwin, who made $3.6 million that year.

Three years after retirement, Dr. Pardes is still employed by the hospital as the executive vice chairman of its board of trustees, a position that compensation experts say is rare in the nonprofit world,...

So the year after Dr Pardes retired, he made as much from what most people might have thought was his former employer as he did in 2007 as CEO, when he was one of the best paid non-profit CEOs in the country, and more than he made in 2011, the year of his retirement.

Why Pay a Retired CEO Millions More?

At least one prominent US Senator interviewed by the Times suggested that Dr Pardes' remunerative (non)retirement was questionable,

 Senator Charles E. Grassley, Republican of Iowa, who has been pressing for tax-exempt hospitals to be more accountable for the salaries they pay, said on Tuesday that Dr. Pardes’s compensation was an example of how 'major nonprofit hospitals often are indistinguishable from for-profit hospitals in their operations.' The senator added: 'It’s not enough to say high compensation is necessary and leave it at that. A nonprofit hospital should show how that compensation benefits its patients.'

Of course, supposedly non-profit hospitals escape corporate income taxes, and can solicit donations which provide tax deductions to the donors.  Non-profit hospitals are supposed to be more charitable than for-profit hospitals to deserve these benefits, but it seems hard to square the compensation given to top executives at New York - Presbyterian with is nominally charitable nature.  

Furthermore, the Times article noted how Dr Pardes' new position as a highly paid leader of the board of trustees of the hospital system may have detrimental effects on the system's leadership and governance.

'To have a former C.E.O. on the board is actually a big no-no,' said Uwe Reinhardt, a Princeton University health care economist. 'It’s not considered good board manners. Inevitably they begin to meddle and micromanage.'

The Times reporter asked the chairman of the hospital system board to justify the continued payments of millions to former CEO Pardes, 

Frank A. Bennack Jr., the chairman of the hospital and former chief executive of the Hearst Corporation (and executive vice chairman of the Hearst board, in a role similar to Dr. Pardes’s), said in a statement that Dr. Pardes was 'extraordinary' and was kept on for 'urgent fund-raising activities and a range of other institutional needs with which he could assist his superb successor.'

Furthermore, the Times article suggested that Dr Pardes' pay was justified based on comparisons with other executives,

The hospital’s tax return, which is public because the organization is a nonprofit, said that in paying its executives, NewYork-Presbyterian looked at compensation patterns in nonprofit and for-profit health care systems. Michael L. Wyland, a partner in a consulting firm to health care and other nonprofits, said that was permissible, because 'the I.R.S. explicitly allows comparison with for-profit as well as nonprofit entities.'

In addition, despite his comments above, Prof Reinhardt also found justification for the amount paid someone who is apparently his friend,
But Dr. Reinhardt, who said he was friendly with Dr. Pardes, and Mr. Wyland agreed that while Dr. Pardes’s position was unusual, it might not be unjustified. They said that after 12 years as chief, he had presumably forged strong relationships with donors that the board would consider worth paying handsomely to maintain.

They said that running a hospital was as challenging as running many corporations, because doctors tended to resent authority and because the job required not only management skills but also an understanding of government reimbursements, the insurance industry and medical and malpractice issues. 

The Talking Points Again

In 2011, we noticed that justifications of sky high compensation given to health care executives (especially hospital CEOs) seemed to follow a pattern.  As we just summarized,

It seems nearly every attempt made to defend the outsize compensation given hospital and health system executives involves the same arguments, thus suggesting they are talking points, possibly crafted as a public relations ploy.   We first listed the talking points here, and then provided additional examples of their use here, here here, here, here, and here, and here

They are:
- We have to pay competitive rates
- We have to pay enough to retain at least competent executives, given how hard it is to be an executive
- Our executives are not merely competitive, but brilliant (and have to be to do such a difficult job).

The talking points are usually supplied by hospital public relations personnel, sometimes by hospital trustees or executives, sometime by various health care consultants.  The talking points are rarely questioned.

Furthermore, we just found evidence that these really are talking points.  A former public relations executive for a major for-profit health insurance company acknowledged using almost these exact justifications as talking points to justify his company's executive compensation.  

Now we have our first example of the compensation given to a retired hospital CEO justified with these talking points:

- Competitive rates - see the comments by the consultant, Mr Wayland
- How hard it is to be an executive -  see the comments by Prof Reinhardt, especially, "the job required not only management skills but also an understanding of government reimbursements, the insurance industry and medical and malpractice issues"
- Brilliance - see how the board chairman called Dr Pardes "extraordinary"

Finally, note that the apologia for Dr Pardes' extraordinary post-retirement compensation provide no new support for the talking points.  

In particular, consider the comments by Prof Reinhardt about all the sorts of expertise required of a hospital CEO.  What he did not acknowledge was that modern hospital systems have lots of people other than the CEO to deal with these issues.  Reporting to the CEO are numerous top executives who are themselves paid very well, and their pay is presumably justified by their own expertise.  For example, in 2011, in addition to Dr Pardes, New York - Presbyterian not only had a CEO, Dr Steven J Corwin, whose total compensation was over $3.5 million, but also 13 other executives who each received compensation over $1 million, and another 14 with compensation greater than $500,000  (see the system's 2012 990 form).  In turn, each of those must have had numerous senior managers reporting to them.  So why should Dr Pardes have to be an expert in, for example, "malpractice issues" when he had "Kathleen M Burke Esq, VP Board Ret, Secr & Counsel," with total compensation of $346,153, and "Maxine Frank Esq, exec SVP, CLO & Gen Counsel," with total compensation of $1,639,739 to advise him? 

Instead, the real reasons for ballooning executive compensation in health care appear to be cronyism on the boards of trustees who are supposed to be exercising stewardship over the hospital and supervision over the executives; the ratcheting up of compensation due to comparison with other executives, as opposed to other kinds of employees, when all boards want to think their executives are above average; and the dogma that CEOs must be "great men," or even have some divine endorsement. (See this post.)


The compensation given top executives of health care organizations gets ever more floridly exaggerated.  More and more this compensation seems to denote how these organizations have been taken over by insiders who make it a priority to benefit themselves.  Prof Reinhardt, who is himself on the board of directors of Boston Scientific (look here), suggested that such compensation should not be a worry because it "would not affect the bottom line," and that those who protest it are suffering from "social envy."  However, as we noted, current trends in executive compensation in health care could cause declining morale of other employees, increasing isolation of top executives, poor organizational performance, income equality and a declining economy, and ultimately social unrest.     

Although the transition of executives into a new aristocracy is a society wide, if not a global problem, we in health care cannot be complacent that someone else will solve it.  True health care reform would enable accountable leadership that puts the health care mission and patients' and the public's health ahead of personal gain.   


Anonymous said...

Pardes was the guy who said, in regard to his hospitals' dysfunction, that we will solve the problems by taking good care of patients. Brilliant for a multi million dollar man!

Steve Lucas said...

There is precedent for this in the academic world. Gordon Gee left Ohio State under a cloud due to statements about religion and other colleges. This was after receiving a $1M plus salary for a number of years and a fringe package that could never be defined, but included deferred comp, and tax preparation.

He was then given an office, staff, and funds to run this private office along with a professorship in the Law School.

Almost immediately he became the interim President of West Virginia, a university he had previously served. Questions were never answered about his salary status at Ohio State and his compensation from West Virginia during this time period, which he then went on to become President.

Ohio State offers a full range of medical degrees. As a land grant college its stated purpose is to provide educational opportunities to the residents of Ohio. Today, Ohio State, along with all public universities in the State boasts about their increasing international students.

Gordon Gee stated a number of years ago he wanted Ohio State to be the Harvard of the mid-west. Along with this came increases in tuition and the statement that if a student could not pay the tuition, or receive a scholarship, maybe they belonged in another institution, thus negating the charge to provide cost effective education to the State’s population.

HCR has noted the rise of the royal non-profit elite who are not measured by the standards of society as their “mission” precludes this type of scrutiny, all the while they take advantage of a system designed to serve others.

Steve Lucas