High hospital costs? Look at the executive payroll

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Kaiser Health News did yeoman work last week examining California's hospital price trends.

Penned by Jordan Rau, a former Los Angeles Times veteran, the report concluded that hospital costs have gone up 8.5 percent per year since mid-decade, compared to a 4.9 percent average increase nationwide. So if you stay in a hospital in the Golden State, expect a tab north of $20,000.

Mary McClung's bill wasn't that high: just under $4,900. But it was for an outpatient colonoscopy performed at Pacific Medical Center in San Francisco and not covered by her high-deductible insurance plan. She was decidedly irritated at having to pay that amount for what is best described as routine preventative care.

Sacramento-based Sutter Health owns Pacific Medical Center. That McClung suffered such sticker shock isn't a surprise: Sutter is the priciest hospital chain in California, with costs 37 percent above the statewide average. Indeed, costs in the Bay Area, where Sutter predominates, were about double what they were in much of Southern California, and nearly 70 percent higher than the statewide average.

The report attributed such cost differentials to the clout accreted by formidable hospital networks that operate in the region, particularly Sutter and John Muir Health.

The Sutters and John Muirs of the world claim they have to keep their prices high in order to pay for new equipment, meet seismic mandates and other cost pressures. Such fiscal crises are a constant refrain.

I'm capable of doing some yeoman work of my own, including a report I compiled this year of the compensation of about 120 not-for-profit hospital CEOs in California. Both Sutter and John Muir's data suggest another reason prices are so high.

In 2008 (the most recent year for which available), Sutter had nine executives who were paid $1 million a year or more. There were five others whose compensation approached $1 million. With annual increases, those five have likely since joined the seven-figure club.

John Muir CEO J. Kendall Anderson was by far the highest-paid not-for-profit hospital executive in California--if not the nation--in 2008, with compensation totaling $7.45 million. John Muir officials told me about $6.5 million of Anderson's pay was a one-time payout from his retirement plan.

Legally, Anderson is entitled to every penny, even the additional $500,000 retirement payout he apparently received in 2009. However, his retirement package averages out to about $200,000 for each year of service, even though when he signed on with John Muir in the 1970s, $50,000 was considered an excellent salary. The notion of retirement compensation is to ensure autumn years are spent without great want, not accumulating a fortune that can be handed down through the generations.

Obviously, someone has to pay for such largesse. Patients--many of whom have high deductibles and cannot always grasp the complexity of a hospital bill--are the logical source. However, Rau's analysis suggested that lower-cost hospitals generate similar results in quality and outcomes, which means many of those executives are patting themselves on the wallet while the communities they serve receive nothing in return.

My reporting on hospital CEO salaries has generated some grumbling and reiterations that top pay is required to attract top talent. However, I remain adamant that these are non-profit organizations with a community-oriented mission, and are, therefore, inappropriate environments for seven-figure pay packages. By contrast, the University of California hospitals--some of the nation's largest and most sophisticated teaching facilities--pay their executives nearly half of the Sutter rates.

Moreover, in California about 60 percent of hospital revenue is derived from the Medicare and Medicaid programs. There's a reason hospital managers go into a mad scramble anytime CMS declares their institution is in violation of program guidelines: their doors would shut for good if they lost those payers. That makes them de facto taxpayer-funded organizations. Their leaders should operate with the kind of financial austerity being demanded of such operations these days.

Indeed, compensation experts say some of the big pay raises and bonuses have been culled due to the impact of the Great Recession. But those seven-figure salaries are going to remain, and no doubt proliferate further once federal healthcare reform increases the ranks of the insured.

There is a happy ending of sorts to McClung's saga: after four months of negotiating, she was able to get her bill reduced to $825. One would hope there are more patients out there like her. It might get those overcharging hospitals and their hard-charging execs to not only reduce their charges, but some of those pesky "ancillary costs" as well. - Ron