The rising cost of healthcare has been examined for many years. The cost of staffing is one common explanation given. While there are many contributing factors, this article attempts to explore one area healthcare leaders can take responsibility for contributing to these rising costs, that of C-Suite Executive Compensation.
Hiding behind statements indicating “we must all work together”; asking the public and healthcare workers to donate money; receiving large sums of government grants; purchasing naming rights to large sports stadiums along with large advertising campaigns that cost millions; while commanding outrageous compensation packages that typically increase annually far beyond cost-of-living increases, are despicable. Why are C-Suite healthcare leaders immune to doing their part? How are salary and compensation packages awarded? Who is responsible for this? Will we ever see this issue truly rectified?
Chief Executive Officers (CEOs), Chief Operating Officers (COOs), Chief Financial Officers (CFOs), and Top Management compensation packages most often surpass employee compensation by large percentages and being responsible for so much that is expected. Compensation packages for C-Suite healthcare executives include Base Salaries, Bonuses, Retirement Packages, potential Severance Pay and Benefits. These figures add up quickly to huge figures and are contributing to the increasing costs of healthcare within the United States.
Hospital organizational board members and compensation committees are responsible for hiring CEOs and negotiating compensation packages. Recruiting top talent and keeping pace with like CEO industry leaders pay is given as validation for such high total compensation packages. Shouldn’t recruiting place a higher importance on “Ethical Talent” and criteria for measuring that, and negotiate compensation with this in mind? The question is how much is fair and how this should be measured?
Organizations That Contribute to Increasing Costs of Healthcare
Let us not forget the association of, and trickle-down effect of, pharmaceutical company’s; insurance companies and reimbursement models; organizations associated with the manufacturing of, and supply chain of, healthcare products and devices. All these organizations have CEOs, COOs, CFOs, and top management, many of whom command outrageously high compensation packages. While for-profit organizations certainly contribute to the overall costs of healthcare, not much can be done to regulate them in a free market society without legislation in place. However, they are being taxed. But then… we have non-profit healthcare organizations.
Estimates state about half of US top non-profit healthcare organizations CEOs, since 2019, exceeded $2.5 million per year. And again, compensation packages for healthcare executives include Base Salaries, Bonuses, Retirement Packages, potential Severance Pay, Benefits, and other pay. One study in Clinical Orthopaedics and Related Research shows 2005 to 2015 non-profit CEO salaries increased up to 93%. Other data from the Economic Research Institute show that in 2016 the top ten CEOs compensation ranged from $7,751,857 to $13,627,686; in 2017 the range was $11,429,722 to $25,549,644; and in 2018 figures show $8,030,595 to $17,883,633. No, not every non-profit CEO is compensated this high, however many have exceeded 1 million annually. And these figures do not consider the entire individual C-Suite total compensation packages which also exceed 1 million annually.
When non-profit healthcare organizations avoid paying taxes, their community’s tax revenue is lost. The lost revenue could potentially be used for additional community health needs and other programs needed for the underprivileged of the community. The Lown Institutes Hospitals Index is a ranking system supporting this concept. It examines non-profit hospitals' charity spending and fair share spending against the value received compared to their tax exemption benefits. An estimated 72% of hospitals fail to meet their expected charitable commitments resulting in approximately 17 billion in unrealized community investment.
For-Profit vs Non-Profit Organizations
For-profit hospitals are run much like any other for-profit business enterprise in the US. They are taxed as such. They pay tax on property owned, state and federal income tax, and sales tax. Healthcare organizations with tax-exempt status, 501(c)(3), do not. According to the IRS to qualify for a 501(c)(3) a healthcare organization must show:
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No part of their net earnings is allowed to inure to the benefit of any private shareholder or individual. This specifically includes earnings by way of profit distribution or excessive salaries.
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No substantial part of their activities can consist of carrying on propaganda or otherwise attempting to influence legislation.
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One other criterion for a non-profit to qualify as a 501(c) (3) is that it must give back to its communities with charitable contributions.
The IRS requires a 990-tax form to be filed annually showing how much in charitable dollars were given back. A 990-tax form requires the organization to report, among other items, how much compensation was paid to their CEO, and the dollar amount given back in a charitable donation to their community. Since non-profits are in control of what is reported that they “gave back” they can inflate these numbers. This is known as “Chargemaster Prices,” which no one really pays, and are much higher than what private commercial insurance or Medicare would pay for the same procedure or service.
Due to a non-profit’s ability to declare how much charitable contribution they have made within the community they serve are we seeing the true costs, how transparent are they? Are these number’s being monitored for actual costs incurred or are they simply “Chargemaster Prices?” And by the way, how about organizations asking nursing to “volunteer” their time to perform charitable services their non-profit organization is providing for the local community, might things like this factor in?
The Long Road to Caps on CEO Compensation
Since 1991 there has been an effort to pass legislation to place caps on CEO compensation. For years the effort has failed to produce any effective law due to lobbying against it. Non-profit organizations alone spend millions toward lobbying to maintain the status quo. Lobbying on Capitol Hill continues to block such legislation.
In 2004 the IRS initiated The Executive Compensation Compliance Initiative, attempting to stop non-profits from taking advantage of their tax-exempt status. It has taken years, but finally, the IRS does have some authority in monitoring and regulating non-profits through laws recently put into effect. However, enforcing them strictly is another matter. On February 25, 2020, Senator Chuck Grassley (R-Iowa), chair of the Senate Finance Committee, wrote to IRS Commissioner Charles Rettig, asking for full disclosure of the agency’s audits for tax-exempt hospital systems.
What’s Fair? What’s Being Done? And, What Can We Do?
How do we answer the question of what is fair compensation and how should that be measured? As a capping point marker to what non-profit CEOs and C-Suite Executives' total compensation should be, the annual compensation of the President of the United States, $450,000 has been used. To date the only mechanism of control placed on outrageous non-profit C-Suite executives’ compensation has been through the IRS and that only began in 2018. But even that seems to have done little if anything to deter the problem to date.
On December 31, 2018, the IRS set forth guidance on section 4960, which penalizes exempt organizations who pay any “covered employee” over a million in total compensation. According to the IRS, “This strategy is to review the impact of the new Internal Revenue Code Section 4960 excise tax on excess compensation. IRC Section 4960 imposes a 21% excise tax on tax-exempt organizations that pay over $1 million in compensation to any “covered employee.” On-going review of filing data shows there continues to be a high volume of exempt organizations that paid compensation of over $1 million to at least one “covered employee” but did not report IRC Section 4960 excise tax on Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code. The approved workstreams for this strategy are compliance checks and examinations of Form 4720.”
This gets complicated. Even though tax-exempt organizations were required to start filing Form 4720 by May 15, 2019, to report and pay the excise tax if owed, due to final regulations not in place and effective until January 15, 2021, the 21% excise tax penalty on tax-exempt organizations will not apply until after December 31, 2021. The long road to rectifying this problem continues.
So, what can nurses, and healthcare workers do to contribute to seeing this long battle through? Some solutions could be:
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Healthcare Unions and Non-Union Hospital Employees Continue to Lobby on Capitol Hill.
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Being aware of how and when Board Members are placed, and what background and experience they have that qualify them to sit on the board.
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Petitioning Healthcare Organizations Board Members for Justification of Unsafe Staffing vs. C-Suite Total Compensation and unnecessary spending.
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When voting for “Most Influential People in Healthcare,” don’t give positive recognition to those who are part of the problem. Speak out and reward those who are making an “Ethical Effort” to resolve real issues.
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IRS could scrutinize 990-tax forms for real costs incurred by charitable acts within the healthcare organizations community and uphold tax laws already in place.
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Unions and Non-Union healthcare workers could band together and petition the IRS Commissioner, asking what is being done with each overpaid Non-Profit C-Suite Executive annually until positive results are shown. This should be public knowledge.
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Continue to closely monitor Non-Profit C-Suite executive compensation. Continue to question it.
Conclusion
The continued rise in healthcare costs must be shared. Rather than cutting staff to unsafe levels and doing away with positions that support patient care, C-Suite executive compensation packages need to be part of the solution to stabilize healthcare costs. We as nurses and frontline healthcare workers, standing together at both union and non-union organizations, could petition hospital board members for review of excessive compensation of C-Suite executives. And question how ethical this is when frontline workers are working without enough staff and proper equipment to safely care for patients.
Healthcare unions, hospital frontline workers, community leaders, and patients can continue to publicly pressure for reduction of excessive total compensation packages. Continued pressure could be publicly voiced by community leaders and patients asking for transparency and justification of those who entice and award outlandish compensation packages. And question how dollars are spent in unnecessary ways.
Getting involved doesn’t have to consume precious time for healthcare frontline providers, who are already stressed and stretched to their limit just trying to keep up with daily life. Simply signing petitions online or being part of a relay of information sharing with co-workers and the nursing community at large, to keep up to date on how to make a difference adds up. Nursing associations, nursing online forums and journals, and healthcare Unions could ban together to relay up-to-date healthcare issues being legislated on, and those that have passed. Collectively they could provide easy access to online data, information, and petition forms to be signed and sent to legislatures.
The easier organizers make information available and consistently drive action towards resolution, the stronger the impact will be to create change. Maybe it’s time nursing organizations, unions, nursing journals, and nursing online forums become more interoperable by relaying up-to-date information on issues and possible resolutions. By focusing on what we as individuals and groups are good at, the cumulative effort could pay off.
References
Andrzejewski, A., Smith, T. (2019, June). Top 82 U.S. non-profit hospitals: quantifying government payments and financial assets. OpenTheBooks.com/American Transparency.
Ashford, D.T. (n.d.). Executive compensation: A primer for establishing reasonable compensation. American College of Healthcare Executives and American Hospital Association.
Bryant, M. (2018, August 17). CEO salaries at nonprofit hospitals up 93% since 2005. Healthcare Dive.
Carey-Jameson, M. (2020, January 17). How nonprofit hospitals get away with the biggest rip off in America. Medical Economics.
Federal Register (2021, January 19). 2021 Rules and regulations.
IRS (2021, July 8). Tax Exempt & Government Entities – Compliance Program and Priorities.
Legislative Analyst’s Office (2015, December 18). A.G. File No. 2015-100.
Lown Institute Hospitals Index (2021). Community benefit: Hospitals say they want to be community partners…these hospitals are actually doing it.
Sherlock, J. (2021, April 8). Sentara CEO Kern among 10 highest paid nonprofit executives in America. Bacon’s Rebellion.
SHRM (2021, February 17). IRS clarifies tax on executive pay at nonprofit organizations: 21% excise tax applies to earnings that exceed $1 million.
Toleos, A. (2021, July 11). PRESS RELEASE: Most U.S. nonprofit hospitals neglect community investment obligation, analysis reveals. Lown Institute.
Urbaniec, J. (2021). Top 10 highest paid CEOs at nonprofits 2021. Economic Research Institute.
Essential Resources, Reading and Involvement (Please Read)
Andrzejewski, A., Smith, T. (2019, June). Top 82 U.S. non-profit hospitals: quantifying government payments and financial assets. OpenTheBooks.com/American Transparency.
Act like a real nonprofit or give the public back its $10 billion
Gabrintina, R. (2020, July 10). The basics of nonprofit petitions. Everyaction.
Johnson, C.Y. (2019, February 7). Giant hospital system’s charity status challenged. The Washington Post.
Meyer, H. (2021, July 14). Court affirms health workers’ rights to speak up on safety. Undark.
Nonprofit Risk Management Center (n.d.). How to lose your 501(c)(3) tax exempt status (without really trying).
Schwencke, K., et. al. (2021, June 28). Nonprofit explorer: Research tax-exempt organizations. ProPublica.
