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Nonprofit hospitals targeted on leader pay (DS)

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By Lisa Wangsness
Globe Staff / March 4, 2009

Nonprofit hospital presidents earned nearly $500,000 a year on average in salary and other benefits, according to a recent IRS survey of 485 hospitals, and a smaller group more closely reviewed by the IRS had an average salary of $1.4 million. In Boston, home to some of the country’s most prominent nonprofit teaching hospitals, executive pay at brand-name institutions typically tops $1 million.

Senator Charles Grassley of Iowa, the top Republican on the Senate Finance Committee, said yesterday that he is concerned that such salaries may be too high and that the hospitals’ boards of directors are not taking full responsibility for approving them. Grassley said he hopes to introduce legislation, possibly as part of a sweeping healthcare overhaul later this year, that would put more pressure on boards to keep salaries in check.

"It really concerns me, and something needs to be done about it," he said.
Grassley is considering whether hospital boards should rely on a consultant’s analysis comparing salaries for similar institutions, which may include for-profit hospitals, to justify executive pay. Under current IRS rules, the burden is on the agency to prove a salary is excessive. Grassley is considering whether to try to change the regulations to shift the responsibility to the hospital board to prove a salary is reasonable.

"I think that the process is self-serving; it has a multiplier effect – the higher some consultant says [an executive] has got to be paid, the more he’s in demand," Grassley said in an interview. "People ought to be paid for what they’re really doing."

But Lynn Nicholas, CEO of the Massachusetts Hospital Association, said most hospital boards already follow a thoughtful and transparent process to determine executive compensation. They need to compete to keep talented leaders with the skills required to deal with community concerns, government regulations, and complicated payment relationships with doctors, she said.
"I think the jobs are grossly underestimated in their complexity," Nicholas said in a telephone interview yesterday. "You want the best and brightest running these institutions."

Peter Slavin earned nearly $1.2 million in salary, deferred compensation, and benefits as president of Massachusetts General Hospital in the year that ended Sept. 30, 2007, the most recent figure available, an 11.6 percent increase from the previous year.

Officials at Mass. General were not available for comment yesterday, but officials at Partners HealthCare System, the nonprofit that includes Mass. General, have said salaries increased to keep pace with pay for senior executives at smaller hospitals in the Boston area.

"The salaries of high-performing healthcare executives in large institutions pale – all caps, bold – pale in comparison to the kinds of salaries these Wall Street tycoons are pulling down," Nicholas said.

Congress and President Obama have targeted criticism and pay restrictions to the CEOs of Wall Street firms, automakers, and others receiving federal help. Nonprofit hospitals aren’t receiving any bailouts, but they do receive federal, state, and local tax exemptions worth between $12.6 billion and $20 billion a year, according to the Finance Committee’s GOP staff.

Also, their earnings multiplied eightfold between 2001 and 2006, according to a Wall Street Journal analysis last year.

Grassley has been critical of executive compensation across the board; he supported the limits on executives of firms receiving federal rescue money, and he has raised concerns about the burgeoning pay for college presidents and other administrators at tax-exempt academic institutions, which could also be affected by any changes to the law.

Modifying the nonprofit hospital compensation rule is part of a broader set of changes Grassley is considering, either as part of the healthcare bill or as a standalone measure, to create more rigorous standards for the definition of nonprofit hospitals.

Grassley will play a key role in constructing healthcare legislation; Senate Finance Committee chairman Max Baucus, who has worked with Grassley closely over the years, considers his endorsement critical in developing a bipartisan bill.
The IRS report found that most hospitals surveyed were complying with regulations dictating how hospital boards should set compensation for executives, and that in cases where pay seemed unusually high, board decisions were generally justified.

"Amounts reported appear high but also appear supported under current law," the IRS report said. "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."

Alicia Mitchell, a spokeswoman for the American Hospital Association, said: "Hospitals are following the rules and are committed to transparency to the communities they serve. The boards represent members of the community, and there’s a rigorous process for setting executive compensation. . . . The boards take this responsibility very seriously."

But Grassley said he was disappointed the report did not compare the compensation of executives at nonprofit hospitals with their for-profit counterparts. Ron Schultz, a senior technical adviser to the IRS, said the agency plans to look at that in the future.

Nancy Ortmeyer Kuhn, a Washington, D.C., tax attorney who specializes in tax-exempt organizations, said placing a heavier share of responsibility on nonprofit hospital boards could do more than the existing regulations to limit executives’ salaries.

"I think it would certainly put them on notice that they really need to pay attention to this issue and make sure the compensation was reasonable for the duties that are performed by the executive," she said.

Lisa Wangsness can be reached at