Nonprofit hospitals skimp on charity while CEOs reap millions, report finds
arstechnica.com
arstechnica.com
The thesis is correct that a health-system CEO shouldn’t make $17m/yr. It’s a non-profit largely funded by tax payers and maintains its market share by government regulations. Just the charity care component is a bit misleading.
Is it actually government funded, or does it sell services which the government pays for?
I dont know if it is Baader–Meinhof phenomenon, but it seems like I increasingly see funded used to describe revenue for services rendered.
It seems like a bit of a bait and switch, because the word funded often carries come connotation of ownership, obligation, or charity.
Maybe indirectly. As a charity they get lots of benefits that allows them to save money.
Some of the impacts are identical, but they have other fundamental differences.
I pay less than 100% tax, but I wouldn't say that the government is funding my lifestyle
And for that matter, the former definitely doesn't hold, because nearly every entity gets some tax break. Every homeowner is "government funded".
How would margins be defining in this case? When I hear that the margins at gas at a gas station are x%, I understand that they are basically talking about how much I pay per gallon minus how much the gas station paid per gallon. However, it feels like defining margins in a health system would be much more complex. Is it just lookin at the raw materials (e.g. how much do medications, bandages, and scalpels cost the hospital)? Depreciation on expensive equipment like MRIs? Does pay factor in and if so is it just the salaries of people who actually do the work like managers, nurses, and doctors or also the compensation for people like CEOs?
A homeless alcoholic withdraws and gets seizures, spending a week in the ICU. He is not on Medicaid, but qualifies. After paying for all his care and applying for Medicaid on his behalf. The hospital might get 50 cents back for every dollar they spent. (They spent on doctors; nurses, medications; EMR bill, case management, etc.).
This guy will essentially come back 5-6 times per year. With negative margins every time because that’s how Medicaid is designed.
2nd scenario is a 70 year old with a knee replacement surgery and great insurance Medicare + supplemental. He spend a day and half in the hospital and the money that his insurance paid, would be ~130-150% cost of care.
Average everything out; and you end up with 3-6% margins.
Obviously, salaries are big part of the cost. So, perhaps the margins will be better if the CEO is paid less. But, overall its a low-margin business because the biggest payers are Medicaid and Medicare and they more or less pay whatever they want via legislative means.
I suspect they don't because it's not financially solvent to do so, given the number of patients who use those services. That on it's face seems to bring into question the claim that they are net-negative (whether that's due to legislation or other means).
[1]: https://en.m.wikipedia.org/wiki/Emergency_Medical_Treatment_...
So, to be generous, maybe there's a case that if a hospital gets a bulk of its revenue from the ER, it's a better business case to accept Medicare. But I don't believe that's the case for most hospitals, so it still leads me to question the premise that medicare is a net negative (or else we'd see a lot more 'non-participating' hospitals).
Example Form 990 (search inside for Schedule H): https://my.clevelandclinic.org/-/scassets/files/org/about/fi...
See also page 8 of this pdf: https://www.aha.org/system/files/media/file/2023/10/Results-...
My understanding is that medical billing is inflated so they can anchor a high value to help in their negotiations with medical insurance. I'm wondering if this is the medicare adjusted value (i.e., what medicare says the procedures are worth) or the artificially inflated value?
If the doctor is making an order of magnitude more for their time than the receptionist, it's far more effective to have more receptionists for the work either of them could do.
That may be a terrible decision, but it shows the extent of resources a CEO of a $6bn organization commands. This is one choice out of tens to hundreds of 8-figure choices that this “super manager” will make in a year.
If you’re on the board of an organization like that, settling for a second-best CEO to save a 7-figure sum just doesn’t make sense.
I raise this for two reasons:
1) I find that people have no concept of how to consider whether or not executive pay is reasonable. One of my neighbors was outraged that our Mayor makes $450k. “Could she really be working 6x harder than me?” But our mayor oversees thousands of employees and makes decisions that influence hundreds of millions of dollars of spending. I’d consider her quite underpaid in proportion to what she manages.
2) Shaming organizations into lowering exec comp probably won’t work: there’s a strong economic incentive to pay competitively. Just bend the income tax contribution curve so that individuals who make more continue to pay more.
The only reason you’d donate to this hospital or Harvard or any other such exploits is if you think it’ll get you something: earlier treatment, admissions for your kids and so on.
If you want that and you know the game and you want the CEO to be paid less I don’t know what to say.
https://www.sfchronicle.com/sf/article/CEO-of-S-F-nonprofit-...
I remember seeing a chart, though I don't remember whether the analysis was well done & researched or not
I think companies making a lot of money are in a world of trouble: sweet trouble, to be sure, but still trouble.
Sustaining the same percentage growth is incredibly difficult once you are big. So, what is there to do? Expand to new markets, create new products with the potential to destroy your existing ones, fire people you think are no longer needed? Decisions that will either make more money or destroy the company. And, no matter what anyone else would say, I think their decisions are worse than half chance.
In the end we praise the CEOs that made the "right" choice. But it was the right choice only in hindsight, it could easily have gone in the other direction, as many many examples of previously successful CEOs have shown.
Nobody stays on top forever and that's just how it is.
Now, as for the CEOs' salaries: they are the same regardless of their successful choices. So, when you average it out, it would look like it is inversely proportional, simply because more companies tank than stay on top.
But if you don't have them, you're locking yourself into a supermax contract for Russell Westbrook or John Wall and scuttled your franchises hopes of winning for at least the next decade until you get the balls to suck it up and blow up the entire organization and admit you were wrong.
A tiny number of elite individuals are legitimately worth all the damn money in the world, but they're nearly impossible to identify in advance. But that promise sucks in the money men to pay these ridiculous salaries out of sheer hope that maybe they'll strike gold even though they almost never do. Hell, it's even worse in business because someone can just get lucky for a really long time. Market conditions you didn't even see coming might nonetheless make you look like a genius just for making a correct guess. At least in sports the winners are actually the best at what they do.
The other factor is that when you’re on an exec search team, you just look at other executives in the same industry. There might only be 5-10 total that have similar qualifications and are in your comp range. The core issue is that power and relationships within a given industry are typically very concentrated so there’s a limited pool to draw from if you want an exec (and most boards do) who brings that.
Well I think you're right on the first half but I don't think you're correct on the second half.
Paying a CEO 5M vs 17M is a rounding error to a double-digit billion dollar company. Its like getting something on Amazon instead of Alibaba, sure Amazon is 3x the price but you obviously find the item cheap enough otherwise you'd be on Alibaba. Or perhaps you want the item now and don't want to spend months searching for a new CEO.
A company might take a 30k hit letting a 50k/yr employee walk away but they won't raise their salary to 56k to keep them from walking. But w.r.t. a CEO they will raise their salary from of 5M to 17M so that investor confidence won't tumble by them quitting.
The board has to guarantee above all else that the CEO is aligned to serving the board and shareholders above all others ESPECIALLY their employees
So every CEO is just stating what their soul is worth.
I mean I guess it’s good that it’s so high because psychopaths that can perform at that level without fucking over their masters or being unpredictable are rare.
Why? In every other case we’re told wages are set by how much it takes to get someone who can do the job to accept the position. What the company gets out of that person’s work sets a cap on potential compensation, but doesn’t set the actual amount paid.
The idea that boards can effectively determine between first-best and second-best just doesn't make sense to me. Ranking job candidates is hard enough in much simpler circumstances.
Is there any indication that the CEO was premier tier other than the size of his compensation package?
Chances are they engage with much less and obviously don't have interactions with thousands of people and are keeping all of that straight in their head, so this is not a good reason.
You don't get credit because you oversaw a public worker whom you've never engaged with.
>makes decisions that influence hundreds of millions of dollars of spending
They also have access to (sometimes) smart people to filter through information and distill it down for them which is honestly the hardest part, not the decision making. It is unlikely they are compensated compared to the work they put in.
I'm not saying the job is easy, but they aren't doing it all themselves and the core problem is that the people underneath them are probably making no where near $450k. Salary just doesn't correlate to actual effort these days.
That said, $450k for a mayor is fine. Someone who can become a mayor can easily be a corporate executive making millions.
It builds on exactly the reasoning you lay out, and goes something like this:
- "We need the best CEO we can find. We have to understand how to set compensation to attract them."
- So the board hires an executive compensation consultant.
- "If you want better than average, you have to pay above average." So they target something like 85th percentile compensation for their market.
- No board goes into an executive search saying "We want a mediocre CEO, so we'll pay below market." Over time, executive compensation ratchets upwards everywhere. <- YOU ARE HERE
But perhaps I'm wrong; if a similar confluence of policy and supply conspired to enable a similar scam that pushed programmer compensation ever upwards, would you say that the proper solution to that problem would also be tax policy?
Why?
Executive pay is supply and demand. The mayor is being paid $450k because a person with the necessary skills was willing to take that salary (after fighting off opponents) to become mayor. Mayor comes with prestige, so more people want to be mayor, and $450k is not a terrible incentive to go after. If the government paid $80k a year, no one would become mayor. If they paid $1m a year, too many qualified people might be interested, or – the right people might become interested.
Imagine you’re a CEO who successfully ran and sold a business for $250m. You now have at least $25m. Why would you ever want to work an intense job again? Being CEO is exhausting.
Executives are paid a lot of money because they’ve already made a lot of money: if you want to incentivize them there has to actually be something at stake.
That said, these decisions are usually made by a board, which is small and has limited knowledge.
There is plenty of room for them to miscalibrate, too, but paying too much for an executive is bad business. Paying too little is, too.
I very much doubt this. New Hampshire legislators get $100/year, since 1889. Still plenty interested in the job.
It’s an interesting filter to pay nothing, for sure! At that point, it is filtering for people who can afford their own lifestyles without a job
The board is usually made up of other executives or former executives. This group sets each others salaries unlike all other professional categories.
Now, here in the UK, the remuneration of University heads (Principal, Master, Dean, or whatever title) are having their pay determined by the going rate for CEOs. These are people who do the job for a couple of days a week; they aren't exactly struggling to get on top of the workload. Same for the bosses of the jungle of pseudo-companies that make up the modern NHS; they're all basically employed by the taxpayer. They've employed so many managers that their organizations are hopelessly top-heavy, and yet they need huge remuneration.
Can they not delegate? I thought the ability to delegate was an essential skill for any manager.
I don’t think I’ve seen a good coherent theory for this specifically
I do understand how it came to all of this and how the situation is justified but just posed that if we turned our back to completely free markets and imagined a structure based on "fairness" then things should probably be different.
Furthermore I disagree with the argument that nobody would want to work an intense job while being "underpaid". Plenty of labor is really intense and pays minimum wage or barely over.
This argument sounds a lot like it doesn't matter what decisions they make as long as they're in charge of a lot of capital.
> If you’re on the board of an organization like that, settling for a second-best CEO to save a 7-figure sum just doesn’t make sense.
If this is the only thing checking bad decisions, we have to consider that when there's a little oligarchy of buddies controlling an immense concentration of capital deciding each other's compensation, there are different market forces at work.
There was a bunch of complaining recently about GM CEO Mary Barra, whose annual compensation is around $30M. GM has around 167,000 employees, so this corresponds to about $180 per employee.
The average employee compensation at GM is around $100,000 per year.
I wonder, did each employee get more than $180 of value from Mary Barra’s leadership?
What I can say is that I’ve personally seen bad leadership teams cost employees much more than $180/year. As a board, it’s hard to look at that prospect and and go cheap on someone with the potential to destroy or create that much wealth.
CEOs are highly leveraged. One wrong bet could cost the company/employees/shareholders more than a CEO (even a multi-millionaire) could repay.
In reality this leaves the board with recouping maybe a few million from the CEO on a shortfall that may be orders of magnitude bigger. I think pragmatically most boards just move on, let the CEO take the reputations hit, and focus on trying to find someone better.
You're falsely associating higher pay with performance, when oftentimes they can be inversely correlated.
https://www.wsj.com/public/resources/documents/CEOperformanc...
https://www.gsb.stanford.edu/insights/when-ceos-are-paid-bad...
https://www.epi.org/blog/ceo-pay-still-not-related-to-perfor...
A board gains nothing from pointing to a 2005 Stanford GSB blog post if a CEO they hired runs the company into the ground.
Again, all this to say we should just tax CEOs more and let companies pay what they want.
Your performance comment is right there. What else is "second-best" other than a comment on performance?
Really? You expect the CEO to make all significant decisions, all on his own? No wonder you think the CEO of a billion-dollar company needs a 7-digit salary.
I think the main job of CEO is to appoint useful directors, and promote competent managers. That's certainly a challenging job; but it's a job you can learn, like any management job. I'd even agree that most people are unsuited to that work, as most people are unsuited to any kind of management.
But it doesn't call for some kind of superstar, a one-off snowflake "talent".
> But our mayor oversees thousands of employees and makes decisions that influence hundreds of millions of dollars of spending.
Right; arguably your Mayor might be worth $450K. I'd be upset about my representative being paid that much out of scarce public funds; but that's not even in the same ballpark as the going rate for the CEO of a billion-dollar company.
No, I do not expect a CEO to make those decisions on their own. They also usually bring a team (or make choices about who to keep/remove). So even if they’re not deciding directly, they’re only a step or two removed. Many of the multi-million dollar bets being placed might just be on who to hire to make a decision and execute.
Incidentally, those key hires are often why CEOs command such a price. Their price simply reflects that power in human networks is highly consolidated. CEOs absolutely leverage their position as gatekeepers here.
All this to say why I don’t think we’ll be successful in curbing CEO pay, and should instead just focus on taxation.
I had heard the opposite — from Steve Jobs no less. It was an interview I believe (sorry, no source) where he said executives at the top maybe made 6 decisions a year.
For Jobs, to be sure, these decisions are like, "Apple is going to start a chain of retail stores".
1. It's not a market, there is no job advertisement for the CEO role that the general population can apply for. If there were, and if it were to offer a fraction of "market", there would still be thousands of applications, and the top 1% of those candidates would absolutely do the job as well or better than the typical hand-picked candidate.
2. There are several roles in society that place enormous responsibility on those professionals and that only a handful of people in the world can do well, yet those jobs still pay low 6figures max. For example, nuclear engineer, aerospace engineer, state leader, and yes, ironically, most public hospital directors.
The sad reality is that executive pay is simply a result of incentives and the fact that corporate hierarchy gets very thin at the top. It has no relation to the competence or direct value-added of the executive.
That’s not to say those people guarantee success, but it is less of a risk than picking someone unknown and without the established network and direct relevant experience.
Again all this to say I don’t think shaming companies into paying less will work, we should just tax CEOs more and let companies pay what they want.
This is why it seems each locale is packed with care all from one central hospital. They have to keep growing to maintain "non-profit" status.
Do most hopspital non-profits channel their profit into growth or price discounts.
In my opinion, it is fairly common for non-profits to adopt growth as a goal in of itself, and try to extract as much value as possible from customers to further it
Non-profits are not obligated to hide/spend their profits. They're allowed to accumulate fabulous wealth if they want (see, for example, Harvard's $50B endowment).
Non-profits, in theory, serve a societal/community purpose rather than existing to make a profit for their shareholders. You're not wrong that some of these lose sight of these purposes in favor of a bunch of MBAs telling them "growth! growth! growth!" (and the CEO salaries that come from such growth), but it's not because the IRS requires them to.
The problem isn't tax law; it's the "everything must always grow or it's a failure" economy we've set up.
True of charities and certain other classes of non-profits, not true of other non-profits unless “societal/community purpose” is reduced to a meaningless phrase covering every possible purpose besides returning profits, including enabling a group of sppnsoring firms to earn bigger profits.
That there are all sorts of loopholes and tax fiddles possible doesn't change the underlying theoretical motivation.
Because otherwise I think that 501(c)6 Business Leagues would be a lot higher than Political Organizations on a list of things whose purpose is a lot less social/community than enabling private profit.
operating foundations have a stricter regulation that could fit that, based on where their money comes from that year
That doesn't make any sense; it seems to be based on the premise that “non-profit” means the firm can't make surplus income, but it just means they are structured so as not to return profits to investors or some other party.
it took me a while to parse when I was learning and setting up my own
I paid estate and non profit lawyers to give me relevant case law and journals to understand. Really powerful stuff to learn before you need it.
No, its not.
Nonprofits can retain unlimited surplus income. They are called nonprofit or not-for-profit because they don't return profits (either directly or through a claim on assets) to some set lf stakeholders.
The upthread post invented a false rule based on a wrong (if popular) interpretation of a name, and then invented a conspiracy theory about people gaming that rule which doesn't exist in the first place.
Expanding operations reduces scarcity.
More clinics reduces wait times and puts downward pressure on prices. Supply and demand.
I don't even understand what you're arguing for. Do you want them to limit the number of clinics and take profits instead of expanding?
I don't really think they were arguing for anything, but there's a clue what they'd argue for right there in the bit you quoted
"lowering costs for patients"
A simple example of this could be to hospitals engaged in a marketing battle for a fixed pool of customers.
A counter or example could be that over expansion in services leads to lower efficiency and higher prices. This could be the case when the service selector is a different party than the payer, so the pricing feedback is broken. A tragedy of the commons essentially.
https://medcitynews.com/2023/07/pandemic-nurse-labor-union-w... ("Nurse unions and labor experts agree that the pandemic was a turning point that catalyzed nurses to fight for improved working conditions and overall better treatment from their employers. By negotiating new contracts with their employers, unions are working hard to both uphold patient safety and mitigate the nursing field’s debilitating workforce shortage.")
https://www.incrediblehealth.com/blog/state-nurses-unions/ ("A Comprehensive Guide of State-by-State Nursing Unions")
This extends to even purchasing medical equipment.
Thus the whole non profit becomes a loss lead for other services to be pushed and offered. Its a good thing for them their cost center is not taxed.
And I daresay if you're a big enough donor you're going to get pretty darn good treatment.
Non-profits are required to provide community benefits to preserve their tax free status.
Community benefits for hospitals are about promoting community health.
https://www.irs.gov/charities-non-profits/charitable-hospita...
As for the CEO salary: it's probably shaped by competition for those few slick operators who really understand how to milk the system.
1. Churches, hospitals et al should all pay taxes just as do other corporations. They are built on the same social structure as other entities, have the same protection of government and benefit from the social system. I pay; so should they.
2. Campaign Finance Reform:
Secondly, laws should be changed so that corporations are no longer "persons". That is Citizens_United_v._FEC should be revoked.:
https://en.wikipedia.org/wiki/Citizens_United_v._FEC
Then only real people and not corporations could put money into campaigns/politics. Otherwise, in the near future (if not already) people will cease to be true participants.
I feel like that's oversimplifying the distinction between a non-profit and us?
If we donate all of our income to charity, we don't pay taxes. That's because taxes are used to incentivize and disincentivize specific behaviors. We, as a society, want cheaper healthcare for people -- especially those who can't afford it. That means incentivizing hospitals (via tax) to help those people.
I'm up for a removing non-profit status from hospitals if we otherwise pay for people's healthcare, but nobody really seems to be making progress there.
(I'm not addressing your comments on campaign finance because I agree with you that it's broken and I think it's off-topic for this thread.)
They don't pay and neither should you.
Why is it that when people are oppressed, their biggest desire is never to be free, but to see others suffer the same as them?
And given a choice between no government and government I would usually prefer a government.
I once knew a guy who worked in the field of providing services to non-profits, and he described to me the lavish retreats provided to people in the industry, the first-class air travel and five-star hotels provided for travel. He called it the charitable industrial complex.
Take a hard look at the tooth to tail ratio of the organization the next time you make a charitable contribution.
Whereas the non-profit that funnels excess into income for the insiders has that income taxed at income-tax levels.
So buying equipment or spending it on marketing, OK.
Saving millions in the bank or investing - not OK.
The CEO also reaps millions.
And I bet it is much harder running a health care system than it is running Mozilla.
But who said it was OK for Mozilla?
And even if someone does want to say it's OK for Mozilla, you could argue that Mozilla doesn't put anyone in the position of choosing destitution or death, and Mozilla's millions come from Google who gets it from advertisers, while the hospitals millions are practically blood diamonds.
Then you compare given hospitals to those numbers and where they exceed them, that is counted as "income" - if they're paying the CEO 2m vs the 1m expected, that's 1m of income.