Rising Executive Compensation May Impact Long Term Sustainability of Health Care Organizations

Wednesday, August 17, 2016
By Miles Indest, J.D./M.B.A; Law Clerk, The Health Law Firm

Health care executive compensation has increased over the past few years, raising several questions regarding its potential effect on the long term sustainability of these organizations.


Modern Healthcare Releases Annual Executive Compensation Survey.

This month, Modern Healthcare released its 36th annual Executive Compensation Survey, highlighting that the median increase in cash compensation for health care executives was 4.6% over the past year. The survey evaluated 1,213 organizations, discovering salary increases ranging from 13% for chief information officers at hospitals to 0.3% for chief medical officers at stand-alone hospitals.

Many corporate health organizations are linking executive compensation to factors beyond individual performance, such as organizational performance and overall revenue growth, according to Modern Healthcare. One health care executive noted that nearly 80% of his incentive compensation is significantly aligned with the organization’s overall success.

The study suggests that national health care organizations are getting even bigger as corporate agendas focus more on growth and consolidation. When health care systems integrate and revenues significantly increase, compensation increases as well, stated Tom Pavlik, managing principal at Sullivan, Cotter and Associates—the firm that supplied the data for Modern Healthcare's survey.

Another factor contributing to increased compensation is combatting turnover in hospital organizations, according to Pavlik: “If they want a seasoned person as chief financial officer, they may have to pay more.”


Industry-Wide and Company-Specific Implications of Survey.

High executive compensation is far from a shocking revelation in the American corporate boardroom. Nevertheless, in the health care industry, constantly growing compensation could lead to negative consequences for both the industry as a whole and the specific organization.

First, the industry as a whole may not be able to sustain it. According to Princeton University’s health economist Uwe Reinhardt, health care costs, including compensation, cannot rise indefinitely above patient income: “From 2002 to 2016, total healthcare costs for a household of four on average rose 7.6% every year, rising from $9,235 to $25,826.” Reinhardt fears that this trend is not sustainable: “At some point there will be a limit, when the bottom half of the nation’s income distribution will be cleaned out by the healthcare sector.”

Second, public health care companies will face scrutiny in the market by stakeholders, especially as federal regulations are emphasizing greater corporate disclosure. For example, the 2009 IRS rules required nonprofits to disclose information regarding executive compensation and possible conflicts of interest for board members. Further, effective in 2017, the Securities and Exchange Commission requires that publicly traded corporations publish a ratio of how much the chief executive officer makes compared with the median employee.

With these disclosures, stakeholders will have more information to challenge health care organizations that excessively compensate high-level employees, especially when the organization is underperforming. As demonstrated by the recent securities litigation against Express Scripts, health care companies must continue to strengthen its relationship with all stakeholders, including customers, creditors, and investors.

Contact Health Law Attorneys Experienced in Representing Health Care Professionals and Providers.

At The Health Law Firm we provide legal services for all health care providers and professionals. This includes physicians, nurses, dentists, psychologists, psychiatrists, mental health counselors, Durable Medical Equipment suppliers, medical students and interns, hospitals, ambulatory surgical centers, pain management clinics, nursing homes, and any other healthcare provider. We represent facilities, individuals, groups and institutions in contracts, sales, mergers and acquisitions.

The lawyers of The Health Law Firm are experienced in both formal and informal administrative hearings and in representing physicians in investigations and at Board of Medicine and Board of Osteopathic Medicine hearings. We represent physicians accused of wrongdoing, in patient complaints and in Department of Health investigations.

To contact The Health Law Firm, please call (407) 331-6620 and visit our website at www.ThehealthLawFirm.com.


About the Author: Miles Indest, J.D./M.B.A., graduated in May 2016 from Tulane University Law School and the Freeman School of Business. He has served three years as a member of Tulane Law Review and served one year as the Writing Skills Chair of Tulane Moot Court.


Source:

Joseph Conn. “Hospital Execs Earn Bigger Bonuses as Value Based Care Takes Hold.” Modern Healthcare. (Aug. 6, 2016). Web.


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“The Health Law Firm" is a registered fictitious business name of George F. Indest III, P.A. - The Health Law Firm, a Florida professional service corporation, since 1999. Copyright © 2016 The Health Law Firm. All rights reserved.
8/17/2016

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